Chapter 10

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Explain why companies use marketing channels and discuss the functions these channels perform. Discuss how channel members interact and how they organize to perform the work of the channel. Identify the major channel alternatives open to a company. Explain how companies select, motivate, and evaluate channel members. Discuss the nature and importance of marketing logistics and integrated supply chain management.
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Enterprise Leaves Competitors in the Dust!

Competitive Market

Growth at Enterprise

Background: Hertz and Avis were historically #1 and #2 in car rental market. In the late 1990s Enterprise became #1 in revenues, profits, locations and cars, and is currently 50% larger than Hertz. How Did They Do It? Enterprise catered to the home-city market via rental sites in neighborhood areas. Enterprises offer to pick customers up at repair shops, accident sites, etc., became the theme of its value proposition.

Tapping New Markets: Enterprise expanded distribution to the airport market, and acquired Vanguard Car Rental group in 2007. More recently, Enterprise has ventured into the car-sharing and hourly rental market, called WeCar, in densely populated areas where many dont own vehicles. Customer Satisfaction is Key: Enterprise uses the ESQi (Enterprise Service Quality index) to measure satisfaction; Copyright 2011, Pearson Education Inc. Publishing as Prentice-Hall managers arent promoted 3 10-

Producing and making products available to buyers requires building relationships with upstream and downstream supply chain partners.

Upstream: Firms that supply the raw materials, components, parts, and other elements necessary to create a good. Downstream: Marketing channel partners that link the firm to the customer.

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Value delivery network:

The network made up of the company, suppliers, distributors, and ultimately customers who partner with each other to improve the performance of the entire system in delivering customer value.

Marketing channels represent the downstream side of the value delivery network.

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Marketing channel:

A set of interdependent organizations that help make a product or service available for use or consumption by the consumer or business users.
Channel decisions affect other marketing decisions. Channel decisions can lead to competitive advantage.

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How channel members add value:

The use of intermediaries results from their greater efficiency in making goods available to target markets. Channel members offer the firm more than it can achieve on its own in terms of:

Contacts. Experience. Specialization. Scale of operation.

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Key functions performed by channel members:

Transaction completion:

Transaction fulfillment:
Physical distribution Financing Risk taking

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Information Promotion Contact Matching Negotiation

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Number of channel levels:

The number of intermediary levels indicates the length of a channel.

Direct marketing channels Have no intermediary levels between the manufacturer and the customer. Indirect marketing channels Contains one or more intermediaries.

All channel institutions are connected by several types of flows.

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The channel will be most effective when:

Each member is assigned tasks it can do best. All members cooperate to attain overall channel goals.
Horizontal conflict occurs among firms at the same level of the channel (e.g., retailer to retailer). Vertical conflict occurs between different levels of the same channel (e.g., wholesaler to retailer).

If this does not happen, channel conflict occurs:

Some conflict can be healthy competition.

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Conventional distribution channel:

Vertical marketing system (VMS):

Consists of one or more independent producers, wholesalers, and retailers, each a separate business seeking to maximize its own profits even at the expense of profits for the system as a whole.
A distribution channel structure in which producers, wholesalers, and retailers act as a unified system. One channel member owns the other, has contracts with them, or has so much power that they all cooperate.
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Types of vertical marketing systems:

Corporate VMS. Contractual VMS. Franchise organization. Administered VMS.

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Corporate VMS:

Contractual VMS:

Vertical marketing system that combines successive stages of production and distribution under single ownership. Channel leadership is established via common ownership. Vertical marketing system in which independent firms at different levels of production/distribution join together through contracts to obtain more economies of scale than they could alone.
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Franchise organizations are a common form of contractual vertical marketing system in which a franchisor links several stages in the product-distribution process. Types of franchise organizations:
Manufacturer-sponsored retailer franchise. Manufacturer-sponsored wholesaler franchise. Service-firm sponsored retailer franchise.

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Horizontal marketing systems:

Two or more companies at one level join together to follow a new marketing opportunity. Occurs when a single firm sets up two or more marketing channels to reach one or more customer segments. Also called hybrid marketing channel system. Offers many advantages.
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Multichannel distribution system:

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Changing channel organization:

Disintermediation occurs when product and service producers cut out traditional intermediaries or displace resellers with radical new types of intermediaries.
Example: Airline firms sell tickets directly to

consumers via the Internet.

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Changing channel organization:

Disintermediation presents both problems and opportunities for both producers and resellers.
Resellers and intermediaries must innovate to

survive. Producers must seek additional direct channels to remain competitive, though channel conflict often results.

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Firms often struggle between what is ideal and what is practical. Marketing channel design:

Designing effective marketing channels by analyzing consumer needs, setting channel objectives, identifying major alternatives, and evaluating them.

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Analyzing consumer needs:

Do consumers want to buy from nearby locations or are they willing to travel? Do they want to buy-in person, by phone, or online? Do they value breadth of assortment or do they prefer specialization? Do consumers want many add-on services?

Firm must balance needs against costs and consumer price preferences.
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Setting channel objectives:

Objectives are stated in terms of targeted levels of customer service. Cost of customer-service requirements. Nature of the company. The firms products. Marketing intermediaries. Competitors. Environment.
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Channel objectives are influenced by:

Identifying major alternatives:

Types of intermediaries:
Retailers, value-added retailers, independent

distributors, dealers, etc.

Number of marketing intermediaries:

Intensive, selective, or exclusive distribution.

Responsibilities of channel members:

Price policies, conditions of sale, territories and services

to be performed.

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Evaluating the major alternatives involves comparing each alternative to:

Economic criteria:
A company compares the likely sales, costs, and

profitability of different channel alternatives.

Control issues:
How and to whom should control be given?

Adaptive criteria:
Consideration of long-term channel commitment

vs. channel flexibility.

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Channel design decisions can be very challenging:

Each country has its own unique distribution system. Distribution systems can be complex with many layers and a large number of intermediaries. Distribution systems in developing countries may be scattered or inefficient. Customs and government regulation can restrict distribution in global markets.
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Marketing channel management:

Selecting channel members. Managing and motivating channel members:

Partner relationship management.

Evaluating channel members.

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Laws affecting channel decisions seek to prevent the exclusionary tactics that some firms might use to keep another from using a desired channel. Situations with the potential to violate Clayton Act include:

Exclusive distribution. Exclusive dealing. Exclusive territorial agreements. Tying agreements.

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Marketing logistics (physical distribution):

Involves supply chain management:

Planning, implementing, and controlling the physical flow of materials, final goods, and related information from points of origin to points of consumption to meet customer requirements at a profit.

Outbound distribution. Inbound distribution. Reverse distribution.

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Greater emphasis has been placed on logistics recently because:

Firms can gain a competitive advantage when logistics result in better service or lower prices. Improved logistics can lower costs. Increased product variety has created a need for improved logistics management. Improvements in information technology have created the means for major gains in distribution efficiency. Logistics affect the environment as well as the firms environmental sustainability efforts.
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Goals of the logistics system:

Deliver a targeted level of customer service at the least cost.

Warehousing. Inventory management. Transportation. Logistics information management.

Major logistics functions:

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Warehousing:
How many, what types, and where? Storage warehouses Distribution centers

Inventory management:
Balance between too much and too little inventory Just-in-time logistics systems RFID or smart tag technology

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Transportation alternatives:

Trucks Railroads Water carriers Pipelines Air carriers

Internet Intermodal transportation

Piggyback, fishyback, trainship, airtruck

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Integrated logistics management:

Requires:

The logistics concept that emphasizes teamwork, both inside the company and among all the marketing channel organizations, to maximize the performance of the entire distribution system.

Cross-functional teamwork inside the company. Building logistics partnerships. Outsourcing to third-party logistics providers.
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1. 2. 3. 4. 5.

Explain why companies use marketing channels and discuss the functions these channels perform. Discuss how channel members interact and how they organize to perform the work of the channel. Identify the major channel alternatives open to a company. Explain how companies select, motivate, and evaluate channel members. Discuss the nature and importance of marketing logistics and integrated supply chain management.
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All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.

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