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Copyright © 2003 by Nelson, a division of Thomson Canada Limited.
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M A R K E T I N G
Channel and Distribution Strategy
15
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Chapter
Objectives1. Discuss channel strategy as one of the elements of the marketing mix.2. Relate channel strategy to the concept of total customer satisfaction. 3. Explain the role of distribution channels in marketing strategy.4. Describe the various types of channels in distribution.5. Outline the major strategy alternatives in using marketing channels.6. Identify the conditions under which a manufacturer is likely to assume wholesaling functions rather than use independents. 7. Distinguish among merchant wholesalers, agents, and brokers.8. Identify the major types of merchant wholesalers and instances in which each type might be used.9. Provide an overview of the many types of wholesaling intermediaries and their functions.10. Describe conflict and cooperation in the distribution channel.
11. Explain the issues involved in changing from the use of one channel intermediary type to a different type.
Channel and Distribution Strategy 15
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ChapterChannel and Distribution Strategy 15
Figure 15.1
Achieving Transaction Economy with Wholesaling Intermediaries (1 of 2)
15-2a
Manufacturer Manufacturer Manufacturer Manufacturer
Customer Customer Customer Customer
16 Transactions
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ChapterChannel and Distribution Strategy 15
Figure 15.1
Achieving Transaction Economy with Wholesaling Intermediaries (2 of 2)
15-2b
Manufacturer Manufacturer Manufacturer Manufacturer
Customer Customer Customer Customer
8 Transactions
Manufacturer
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Distribution Channels
• The paths that are goods -- and title to these goods -- follow from producer to consumer.
Channel and Distribution Strategy 15
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Marketing Intermediary
• A business firm operating between the producer and the consumer or business purchaser.
Channel and Distribution Strategy 15
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Wholesaling
• The activities of intermediaries who sell to retailers, other wholesalers, and business users but not in significant amounts to ultimate consumers.
Channel and Distribution Strategy 15
15-5
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Retailer
• A store that sells products purchased by individuals for their own use and not for resale.
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Distribution Channels Perform Important Functions• Facilitating the exchange process• Sorting to alleviate imbalances between
outputs and consumer needs• Standardizing transactions• Holding inventories• Assisting the search process• Transporting materials and products
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Sorting
• The process that alleviates discrepancies in assortment by reallocating the outputs of various producers into assortments desired by individual purchasers.
Channel and Distribution Strategy 15
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Alternative Distribution Channels (1 of 3)
Channel and Distribution Strategy 15Figure 15.3
15-9a
Producer Consumer
Producer Retailer Consumer
Producer Wholesaler Retailer Consumer
Producer Agent/broker Wholesaler Retailer Consumer
Directchannel
One-stepchannel
Two-stepchannel
Multistepchannel
ConsumerGoods
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Alternative Distribution Channels (2 of 3)
Channel and Distribution Strategy 15Figure 15.3
ProducerBusiness
user
Producer WholesalerBusiness
user
Producer Agent/brokerBusiness
user
Producer Agent/broker WholesalerBusiness
user
Directchannel
One-step(wholesaler)
channel
Two-step(agent)
channel
Multistepchannel
15-9b
BusinessGoods
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Chapter
Alternative Distribution Channels (3 of 3)
Channel and Distribution Strategy 15Figure 15.3
Serviceprovider
Consumer orBusiness user
Serviceprovider
Agent/brokerConsumer or
Business user
Directchannel
One-stepchannel
15-9c
Services
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Agent
• A wholesaling intermediary that differs from the typical wholesaler in that the agent does not take title to the goods.
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Merchant Wholesaler
• A wholesaler who takes title to the products carried.
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Industrial Distributor
• A wholesaler that operates in the business goods market and typically handles small accessory equipment and operating supplies.
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Reverse Channels
• The paths follow from consumer to manufacturer or to marketing intermediaries.
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Facilitating Agency
• An agency that provides specialized assistance for regular channel members (such as producers, wholesalers and retailers) in moving products from producer to consumer.
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Household consumers 5%
Foreign markets 10%
Retailers for resale 33%
Industrial commercial and other users 29%
Other wholesalers for resale 19%
Farmers for use in farm production 4%
Wholesale Customers Distribution
Channel and Distribution Strategy 15Figure 15.5
15-15
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Wholesalers
• Wholesaling intermediaries who take title to the products they handle.
Channel and Distribution Strategy 15
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Wholesaling Intermediaries
• Intermediaries who assume title, as well as agents and brokers who perform important wholesaling activities without taking title to the products.
Channel and Distribution Strategy 15
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Chapter
TransportingCustomers receive prompt deliveryin response to their demands, reducing their inventory investments. By "breaking bulk," (purchasing in carload or truckload lots, then reselling in smaller quantities), wholesalers reduce overall transportation costs.
Possible Wholesaling Functions for Customers and Producers-Suppliers (1 of 2)
Channel and Distribution Strategy 15Figure 15.6
15-18a
BuyingActs as purchasing agent for customers, anticipates customer demands, possesses knowledge of alternative supply sources.
SellingMaintains a sales force to call on customers, thus providing a low-cost method of serving smaller retailers and business buyers.
Risk TakingAids producers by evaluating credit risks of numerous distant retail customers and smaller business users. Extending credit to these customers is another form of risk taking. Risk of possible spoilage, theft, or obsolescence is assumed when the wholesaler is responsible for transporting and stocking goods in inventory.
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Possible Wholesaling Functions for Customers and Producers-Suppliers (2 of 2)
Channel and Distribution Strategy 15Figure 15.6
FinancingAids customers by granting credit that might not be available if they purchased directly from distant manufacturers. Provides financing assistance to producers by purchasing goods in advance of sale and through promptly paying bills.
StoringPerforms a warehousing function, reduces risk and cost of maintaining inventory for producers, and provides customers with prompt delivery service.
Providing Marketing InformationServes as key marketing research input for producers through regular contact with retail and business buyers. Provides customers with information about new products, technical information about product lines, information on competitive activities and industry trends, and advisory information concerning changes in such areas as pricing and legal rulings.
15-18b
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ChapterChannel and Distribution Strategy 15
Table 15.2
15-19a
Manufacturer-Owned Facilities (1 of 2)
Manufacturer-Owned Facilities DescriptionSales branch Manufacturer-owned facility
that carries inventory and processes orders to customers from available stock.
Public warehouses Independently owned storage facilities. Manufacturer rents
space to store inventory for shipment by the warehouse to customers in the area.
Warehouse will break bulk (divide a carload, package inventory, and
fill orders.
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ChapterChannel and Distribution Strategy 15
Table 15.2
15-19b
Manufacturer-Owned Facilities DescriptionTrade fairs Manufacturers in a particular
industry display their wares at some temporary venue
for visiting retail and wholesale buyers, e.g. Montreal Toy Show.
Merchandise mart Permanent exhibition at which manufacturers rent showcases
for product offerings, e.g. Taipei.
Manufacturer-Owned Facilities (2 of 2)
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Sales Branches and Offices
• Sales BranchManufacturer-owned facility that carries inventory and processes orders to customers from available stock.
• Sales OfficeManufacturer-owned facility that does not carry
stock but serves as a regional office for the firm’s sales personnel.
• Public WarehouseIndependently-owned storage facility.
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Trade Fairs
• Periodic shows at which manufacturers in a particular industry display their wares for visiting retail and wholesale buyers.
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Merchandise Mart
• Permanent exhibition at which manufacturers rent showcases for their product offerings.
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Classification of Independent Wholesaling Intermediaries
Channel and Distribution Strategy 15Figure 15.7
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Independentwholesaling
intermediaries
Agents andbrokers
Merchantwholesalers
• Brokers• Selling agents• Manufacturers’ agents
• Commission Merchants• Auction houses
Full-function
Limitedfunction
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Merchant Wholesalers (1 of 2)
Channel and Distribution Strategy 15Table 15.3
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Agents and Brokers (2 of 2)
Channel and Distribution Strategy 15Table 15.3
15-24b
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Vertical Marketing System
• A network of channel intermediaries organized and centrally managed to produce the maximum competitive impact.
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Three Types of Vertical Marketing Systems (1 of 2)
Channel and Distribution Strategy 15Table 15.4
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TYPE OF SYSTEM DESCRIPTION EXAMPLES Corporate Channel owned and Bata Shoes
operated by a single Firestoneorganization Sherwin-Williams
Singer
McDonald's (partial)
Administered Channel dominated by one Kodak powerful member that acts General Electric as channel captain Corning Glass
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Three Types of Vertical Marketing Systems (2 of 2)
Channel and Distribution Strategy 15Table 15.4
15-26b
TYPE OF SYSTEM DESCRIPTION EXAMPLES
Contractual Channel coordinated through Wholesaler-Sponsored contractual agreements among Voluntary Chainchannel members IGA
Canadian Tire Independent Druggists Alliance (IDA) Allied Hardware Retail Cooperative Associated GrocersFranchise Systems McDonald's (partial) Century 21 Real Estate AAMCO Transmissions Coca-Cola bottlers Ford dealers
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Franchise
• An agreement whereby one firm (franchisee) agrees to meet the operating requirements of a successful business (franchisor) in return for the right to carry the name and products of the franchisor.
Channel and Distribution Strategy 15
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Chapter
Channel Selection and Implementation Process
Channel and Distribution Strategy 15Figure 15.9
15-28
Select the appropriatetype of channelbased on• market factors• product factors• competitive factors
Determine distribution intensity• intensive distribution• selective distribution• exclusive distribution
Negotiate arrangements with channels
Supportchannels
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Chapter
Factors Affecting Choice of Distribution Channels (1 of 2)
Channel and Distribution Strategy 15Table 15.5
FACTOR
Market Factors
Consumer market or business market
Geographic location of target market
Customer service needs
Order size
Product Factors
Perishability
Technical complexity of productUnit value
CHANNELS TEND TO BE SHORTER WHEN
Users are in business market
Customers are geographically concentrated
Specialized knowledge, technical know-how,
and regular service needs are present
Customer places relatively small number of
large orders
Products are perishable, either because of
fashion changes or physical perishability
Products are highly technical
Products have high unit value
15-29a
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Chapter
Factors Affecting Choice of Distribution Channels (2 of 2)
Channel and Distribution Strategy 15Table 15.5
FACTOR
Producer Factors
Producer resources -- financial,managerial, and marketingProduct line
Need for control over the channel
Competitive Factors
Need for promotion to channel membersintermediaries
CHANNELS TEND TO BE SHORTER WHEN
Manufacturer possesses adequate resources to
perform channel functions
Manufacturer has broad product line to spread
distribution costs
Manufacturer wishes to control the channel
Manufacturer feels that independent
intermediaries are inadequately
promoting products
15-29b
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Determine Distribution Intensity
• Intensive• Selective• Exclusive
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Intensive Distribution
• A form of distribution that attempts to provide saturation coverage of the potential market.
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Selective Distribution
• The selection of a small number of retailers to handle the firm’s product line.
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Exclusive Distribution
• The granting of exclusive rights by manufacturers to a wholesaler or retailer to sell in a geographic region.
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Legal Problems of Exclusive Distribution• Exclusive dealing• Tied selling• Market restriction
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Exclusive Dealing
• An arrangement whereby a supplier prohibits a marketing intermediary (either a wholesaler or, more typically, a retailer) from handling competing products.
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Tied Selling
• An arrangement whereby a supplier forces a dealer who wishes to handle a product to also carry other products from the supplier or to refrain from using or distributing someone else’s product.
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Market Restriction
• An arrangement whereby suppliers restrict the geographic territories for each of their distributors.
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Channel Captain
• The most dominant member of the distribution channel.
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Channel Conflict
• Rivalry and conflict between channel members because of sometimes different objectives and needs.
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