Marketing Channels

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					           Marketing 324
Channels Of Distribution Management
             Overview Lecture


   Marketing Channels
      A Strategic Tool of Growing
    Importance for the Next Millennium

          by Dr. Bert Rosenbloom
  Rauth Professor of Marketing Management
        Marketing Concept
 Underlying Philosophy of Modern Marketing
 Management (since the 1960’s) Stressing an
Outward Focus on Customers as the “Center of
  the Universe” Captured in Terms Such as:
              Customer Orientation
              Customer Focused
              Customer Driven
              Customer Centered
              Customer Satisfaction
              Market Driven
              Exceed Customer
             Expectations
     Operational Model for
Implementing the Philosophy of
 the Marketing Concept is the:

     Marketing Mix
The Marketing Mix Consists of
Four Basic Strategic Variables
      (the four “P’s”)


        Product Strategy
        Price Strategy
        Promotional
        Strategy
        Place Strategy
        (Channels of
        Distribution)
The Role of Marketing Management is to Mix
 or Blend These Four Strategic Variables in
Such a Way as to Achieve a Higher Level of
  Customer Satisfaction Than Competitors
            Customer Focus

        Optimized Marketing Mix

         Competitive Advantage

            High Profitability

           Shareholder Value
        Question



But what is different about the
 Marketing Mix model as we
 move into this millennium?
             Answer


Over the past three decades, the overwhelming
 emphasis in the Marketing Mix has been on:
            Product Strategy with
               Pricing Strategy
          and Promotional Strategy
             also being stressed.

                   But.....
Marketing Channel Strategy


 (Place); the fourth “P” in the
     Marketing Mix has
   been largely neglected

   But this is changing....
 Marketing Channel Strategy is
 Growing in Importance. Why?




            Five Reasons
(1) Search for Sustainable Competitive Advantage
(2) Growing Power of Retailers in Marketing
       Channels
(3) The Need to Reduce Distribution Costs
(4) The Increased Role and Power of Technology
(5) The New Stress on Growth
   I. The Search for
Sustainable Competitive
       Advantage
Sustainable Competitive Advantage:




      A competitive advantage that
       cannot be quickly and easily
          copied by competitors
  A sustainable competitive
 advantage is becoming more
  difficult to attain through:

Product Strategy- rapid technology transfer
enables competitors to quickly produce similar
products
Pricing Strategy- global economy allows
competitors to find low cost production to match
prices
Promotion Strategy- high cost, clutter, and short
life promotional campaigns limit competitive
advantage
Competitive Advantage Based on




Superior Marketing Channel
Strategy is More Difficult for
    Competitors to Copy
          Because:
   Channel Strategy is
   Long Term
   Requires a Channel
   Structure
   Depends on
   Relationships and
   People
   Requires Effective
   Interorganizational
   Management
http://www.youtube.com/watch?v=1IyLWkkjMtk
II. Growing Power of Retailers
     in Marketing Channels
                 Retailers
         Retailers....



           Are Growing Larger
     Enjoy Substantial Channel Power
Act as Buying Agents for Customers Rather
     than Selling Agents for Suppliers
Often Operate on Low Price / Low Margin
                   Model
Operate in Saturated Markets and Fight for
               Market Share
Retailers Are Growing
        Larger
Concentration of Sales Among the
      Top 50 Retail Firms


     24%




                       76%




              Top 50
              Rest
Kinds of Retailers Where Largest Four Firms
  Account for At Least 50% of Total Sales
   Warehouse Clubs and Superstores   Hobby, Toy and Game Stores

                    10%

                                                           30%




                                          70%
            90%
                                                Variety Stores

         Home Centers                      Office Supply Stores




                       25%                                22%




        75%                                78%                    4 Largest

                                                                  Rest
Percentage Distribution of Retail Firms and
                  Sales
             by Size of Firms

 100
  90                Sales as a
                    Percentage of the
  80 75.90          T otal                      69.5
  70                Firms as a
  60                percentage of the
                    T otal
  50
  40
  30                                23.5
  20                          12.2
  10       4.00 5.4 3                        6.5
   0 $10,000,000 $5,000,000 to $1,000,000 to Less than
          or more   $9,999,999   $4,999,999   $1,000,000
•Enjoy Substantial Channel
          Power

             Retailer
Retailers Act as Buying Agents
 for Customers Rather than as
 Selling Agents for Suppliers
Retailers Often Operate on
 Low Price / Low Margin
           Model
 Retailers Operate in
Saturated Markets and
Fight for Market Share
  Power or Dominant Retailers
       are therefore the
    “Gatekeepers” into the
     Consumer Marketplace


Thus, Effective Channel Strategy
         for Dealing with
   Power Retailers is Crucial
III. The Need to Reduce
    Distribution Costs


              Distribution
                 Costs
  Distribution Costs Often Account
 for a Significant Percentage of the
        Final Price of Products

 Sometimes Distribution Costs
     are Higher than the
         Manufacturing
   Cost or the Costs of Raw
Materials and Component Parts
                   Some Examples...



                Autos   Software   Gasoline   Fax Machines   Packaged Foods

 Distribution   15%       25%       28%          30%             41%

Manufacturing
                40%       65%       19%          30%             33%

Raw Materials
    and       45%         10%       53%          40%             26%
 Components
    While terms such as “restructuring”,
      “flattening out”, “downsizing”, and
“rightsizing” have usually been mentioned
 in the context of corporate organizations,
  they also apply to Marketing Channels.
                The latest term....


     Disintermediation
 IV. Increasing Role and
Usefulness of Technology
  Technology has the power to
greatly enhance the effectiveness
   and efficiency of Marketing
 Channels and could potentially
  change the entire structure of
  distribution around the world.
  Some Examples...


E-commerce
M (mobile)-commerce
F (facebook)-commerce
Wireless Communications
Smart phones
Global Telecommunications (Skype)
Robotics & Automated Warehousing
Computerized “Salespeople”
Firms that make effective
use of these technologies
in their channel strategy
  can gain a substantial
 competitive advantage



      Competition
V. The New Stress on
   Growth Strategy
   In American Business Circles
     “Growth” has Overtaken
“Restructuring” as the #1 Buzzword
       Out                  In
   Reengineering          Growth
   Restructuring         Expansion
    Downsizing          New Markets
 Flat Organizations     Market Share
  Lean and Mean       Top Line Revenue
            QUESTION




 In a relatively slow growth economy,
how can an individual company selling
  mature products in mature markets
                  grow?
              ANSWER
   Share of Mind = Share of
            Market

            Translation
By getting channel members to focus on your
   products to a greater extent than your
  competitors, you gain market share and
                   growth
           Summary


(1) Search For Competitive Advantage
(2) Growing Size and Power of
    Retailers
(3) Need to Reduce Distribution Costs
(4) Power and Potential of Technology
(5) Stress on Growth Instead of
    Downsizing
       Bottom Line




 Marketing Channel Strategy
   Has Become Critically
Important For Most Businesses
Strategy in Marketing
      Channels
  Channel Strategy



The broad principles by which a
   firm expects to achieve its
   distribution objectives for
     satisfying its customers
     Basic Strategic Questions
(1) What role should distribution play in the firm’s
  overall objectives and strategies?
(2) What role should distribution play in the
  marketing mix?
(3) How should the firm’s marketing channels be
  designed to achieve its distribution objectives?
(4) What kinds of channel members should be
  selected to meet the firm’s distribution objectives?
(5) How can the marketing channel be managed to
  implement the firm’s channel design effectively
  and efficiently on a continuing basis?
  The Relationship between customer
    satisfaction and the company’s
   marketing mix can be represented
                   as:
            Cs = f (P1, P2, P3, P4)
where:
Cs= degree of customer satisfaction
P1= product strategy
P2= pricing strategy
P3= promotional strategy
P4= place (channel strategy)
Distribution Channel Strategy should
receive especially heavy emphasis if
    one or more of the following
         conditions prevails:
Distribution appears to be the most relevant
variable for satisfying customers
Parity exists among competitors in the other
three marketing mix variables
High degree of vulnerability exists because of
competitors’ neglect of distribution
Distribution channel strategy can foster
synergies
  Classic Marketing Channel
Strategies Still Relevant Today

         Dual Distribution
         Exclusive Dealing
         Full-Line Forcing
        Price Differentiation
         Price Maintenance
          Refusal to Deal
         Resale Restrictions
         Tying Agreements
The Most Basic Questions in the
 Design of Marketing Channels



When Do Customers Buy?
Where Do Customers Buy?
How Do Customers Buy?
Who Buys?
   Who makes the actual purchase?
   Who uses the product?
   Who takes part in the buying decision?
Supply Chain Management
             QUESTION



    Is this just another “buzzword” for
  logistics - getting the right product in
 the right quantity, at the right time and
                 right place?
                      OR
Is there something more substantive to
                  this term?
           ANSWER



  There is something more than
          semantics here:
Supply Chain Management takes a
  broader perspective by viewing
 logistics as an integral part of the
  marketing channel relationship
 Supply Chain Management Can
    Therefore be Defined as:




 A long-term “partnership” among
marketing channel participants aimed
at reducing inefficiencies, costs, and
redundancies in the logistical system
  in order to provide high levels of
          customer service
Contrasts Between a Traditional Logistics System and Supply Chain Based System
          Factor                   Traditional         Supply Chain Mgmt. System
  Inventory Management           Logistics System          Joint Effort to Reduce
                                                            Channel Inventories
    Total Cost Approach        Independent Effort      Channel-Wide Cost Efficiencies
                               Minimize Firm Costs
      Time Horizon                Short-Term                    Long-Term
 Information Sharing and       Limited to Needs of          Continuous Effort to
        Monitoring             Current Transaction          Gather and Monitor
      Joint Planning           Transaction Based                  Ongoing
 Compatibility of Corporate       Not Relevant         Important for Major Initiatives
        Philosophies
   Channel Leadership              Not Needed                   Required for
                                                          Coordination and Focus
    Sharing of Risks and      Each Channel Member        Risks and Rewards Shared
          Rewards                  on Their Own                over Long-range
                              “Warehouse” Mentality        “Distribution Center”
      Inventory Flow           Storage Safety Stocks      Orientation-JIT, Quick
                                                          Response, Cross Docking
      Common Issues in Supply Chain Management
1. Order Processing Time          14. Claims Response
2. Order Assembly Time            15. Billing Procedures
3. Delivery Time                  16. Average Order Cycle Time
4. Inventory Reliability          17. Order Cycle Time Variability
5. Order Size Constraints         18. Rush Service
6. Consolidation Stipulation      19. Product Availability
7. Consistency of Delivery        20. Competent Technical Reps
8. Frequency of Sales Visits      21. Equipment Demonstrations
9. Ordering Convenience           22. Availability of Literature
10. Order Progress Information    23. Accuracy in Filling Orders
11. Inventory Backup During       24. Terms of Sale
   Promotion                      25. Protective Packaging
12. Invoice Formats               26. Degree of Cooperation
13. Physical Condition of Goods
   The Internet and
Electronic Distribution
       Examples...




 Shopping via Personal Computer on
the Internet
 Wireless Access from Remote
Locations
 Electronic Shopping in a “Virtual
Store”
       Some Predictions....


  Nearly 5 million new US households will shop
  online in each of the next five years, with the
  total number of US online shopping households
  expected to reach 63 million by 2008 - Forrester
  Research (2003)


Online retail sales will account for 10 percent of
 total US retail sales by 2008 - Forrester Research
                                 (2003)
   Some Current Facts and
          Figures




Total U.S. Retail Sales = $3.25 trillion
Catalog, T.V., Mail Order = $1.26 billion
(.38%)
Internet Shopping = $43.5 billion (1.3%)
 How About Potential?




45% of Americans Purchase from Catalogs
7% of Americans buy via television
90 million PCs in U.S. homes
60 million Internet users
20,000 new users added daily
        Electronic Home Shopping-
          Customer Perspectives


           Advantages                Disadvantages
   Global access to multitude   Delayed gratification
    of products and times        No real product contact
   Speed relative to physical
    shopping
                                 No shopping
                                 atmosphere
   Information and screening
    enhanced                     Personal and social
   Lower costs in long run      motives for shopping
                                 not satisfied
 Personal Motives for
Personal Motivesfor       Social Motives for
                        Social Motives for
       Shopping
       Shopping               Shopping
                              Shopping
 Role playing           Social expression
 Diversion              outside the home
 Self-gratification     Communication
 Learning about new     with others holding
 trends                 similar interests
 Physical activity      Peer group
                        attraction
 Sensory stimulation
                        Status and power
        B2C Electronic Commerce-
          Company Perspective
         Advantages                   Disadvantages
   Expanded geographical         Company must pick, pack,
    coverage                       and deliver products usually
   Centralized inventories        one at a time
                                  Limited opportunity to
   Lower transaction costs
                                   demonstrate products
   Complete customer             High return rates (25% for
    database                       QVC & HSN)
   Better targeted products      Reduced impulse purchasing
    and promotions                Limited opportunity to use
   Superior performance           atmospherics & entertainment
    measurement
 Strategic Alliances and
Partnerships in Marketing
        Channels
           Definition:



 Continuing and mutually supportive
 relationship between the manufacturer
 and its channel members in an effort to
 provide a more highly motivated team,
network, and alliance of channel partners
   Traditional “us-against-them”
  mentality is replaced with a new
cooperative perception of “us” in an
  effective channel partnership or
          strategic alliance

    Thus, partnerships or strategic
alliances go well beyond the ad-hoc,
   on-again / off-again interactions
 typical of traditional relationships
      among channel members
    Requirements for Partnerships
       or Strategic Alliances in
         Marketing Channels



(1) Recognition of interdependence of channel
       members
(2) Close cooperation between channel members
(3) Careful specification of roles, rights, and
       responsibilities in the relationship
(4) Coordinated effort focused on common goals
(5) Good communications and trust between channel
   members
Relationship Marketing
  via the Marketing
       Channel
 Relationship Marketing

The practice of building long-term relations
   with key parties - customers, suppliers,
 distributors- in order to retain their long-
        term preference and business

 Because of the importance of channels of
 distribution, building good relationships in
 the marketing channel is key to successful
           relationship marketing
 Building Relationships
 with Channel Members


Find Out the Needs and Problems of Channel
Members
    -informal information system
(“grapevine”)
    -research studies of channel members
    -research studies by outside parties
    -marketing channel audit
    -distributor advisory councils
 Building Relationships with
 Channel Members Cont’d…
Offer Support to Channel Members that is
Consistent with Their Needs and Helps Solve their
Problems
   -cooperative arrangements
   -partnerships and strategic alliances
   -distribution programming
Provide Leadership to Motivate Channel Members
   -use power effectively
   -recognize causes of conflict
   -resolve conflicts
    Bases of Power in the
     Marketing Channel
           Reward Power
           Coercive Power
           Legitimate Power
           Referent Power
           Expert Power

Effective Channel Management Depends
  on How Well These Power Bases are
          Combined and Used
Causes of Marketing Channel
          Conflict


   Role Incongruities
   Resource Scarcities
   Perceptual Divergencies
   Expectational Differences
   Decision Domain Disagreements
   Goal Incompatabilities
   Communication Difficulties
   Ten Trends in Marketing
 Channels as We Move into the
      Next Millennium

1. Growing Emphasis on Marketing Channel
   Strategy
2. More and More Stress on Technology
3. Focus on Efficiency and Reducing
   Distribution     Costs
4. Shortening and Flattening of Distribution
       Channels (Disintermediation)
5. Development of New Types of Intermediaries
   in Channels (Reintermediation)
       Trends Continued...

6. Continued Growth in Partnerships and
  Alliances (Relationship Marketing)
7. Increasing Power for Retailers and
      Wholesalers (Gatekeepers)
8. Mergers and Acquisitions to Gain
      Distribution Clout
9. Flexible and Focused Distribution to Match
      Micro, Niche, and Database Marketing
10. Attention to the Behavioral Dimensions of
  Distribution to Augment Technology

				
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