Iimcalcutta Somnath Nag

8/8/2019 Iimcalcutta Somnath Nag

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CHANNEL

MANAGEMENTAND CHANNEL

RELATIONSHIPS


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Channel Management &

Relationships Designing a Distribution Channel.

Types of Intermediaries

Functions of Intermediaries

Identification & Selection of Channel Partners.

Appointment & Training of Channel Partners.

Evaluating & Motivating Channel Partners.

Causes of Channel Conflict.

Resolution of Channel Conflict.


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Designing a Distribution

Channel

Specifying the role of distribution

channel. Selecting type of distribution channel.

Determining the intensity of

distribution channel. Choosing specific channel members.


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Specifying the role of

distribution channel Channel strategy to be proportional to a Co.s

marketing objectives, and roles assigned to the rest

of the marketing mix. Co to decide whether distribution will be used

defensively or offensively.

Defensive approach Distribution as good as a

competitor. Offensive approach Gain competitive advantage

by having better distribution.


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Planning the distribution

Channel

To decide on:

Channel structure

Channel tiers


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Channel Structure

Direct, Indirect.

Vertical, Horizontal. Multi-channel


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Channel Structure

Direct: Producer Consumer

Indirect: Producer Intermediary Consumer

Vertical Marketing Systems (VMS)

- Corporate VMS : A firm at one level of channelowns firm at the next or subsequent levels. Highdegree of control for Producer.

- Administered VMS : Dominant brand owners are

able to secure strong trade support fromintermediaries.

- Contractual VMS : Producer exercises controlthrough contractual terms exclusive dealers.


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Channel Structure Horizontal Marketing Systems (HMS) 2 or more

unrelated Cos. join together, so as to have pooled

resources to exploit an emerging marketingopportunity. This system takes place when a Co.lacks financial resources or marketing know howand is afraid to take risks on its own.

Multi-channel Marketing Systems (MMS) MMSoccurs when a Co. uses different channels to reachsame/different market segments, to ensureavailability of right product at right time.


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Selecting type of Channel

Decision based on:

Market considerations. Product considerations.

Company considerations.

Middlemen considerations.


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Factors affecting choice of

distribution channelsMarket considerations:

Type of market Different distribution channels areused to reach different types of markets.

No. of potential customers - No. of customers low,direct distribution possible

Geographic concentration of the market Directdistribution practical when there is high concentration

of customers in few geographical areas. High market concentration Direct distribution

channel : low cost of serving market.

Low market concentration Indirect distribution

channel : high cost of reaching directly.


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distribution channelsMarket considerations:

Customer service level:

3 sub-factors delivery time, lot size, productavailability.

More the need for customer service : lower delivertime, lower lot size, lower product availability

Indirect distribution channel more desirable. Direct distribution economical when either size or

total volume of business is large.


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distribution channelsProduct considerations:

Unit value Direct distribution possible when unit

value is high.

Perishability Low shelf life products have to be

sold through short distribution channels.

Technical nature of product Highly technicalproducts require direct distribution.


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distribution channelsCompany considerations:

Desire for channel control Producers wanting

more control over their products distributionestablish direct distribution.

Ability of Management Marketing experience

and ability influences channel decisions .Inexperienced Companies would appointMarketing Agent.


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distribution channels

Company considerations:

Financial resources Financially strong Co.would go in for direct distribution.

Financially weak Co.s appoint middlemen.

Availability of Working Capital: High Directdistribution channel. Low Indirect distributionchannel.

Services provided by seller Highly promotedproducts would have wider retail coverage.


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distribution channelsMiddlemen considerations:

Services provided by middlemen Middlemenmust provide the service which the producers are

unable to provide. Availability of desired middlemen - The

middlemen desired by a Producer may not beavailable, so alternate channels would have to be

considered. Attitude of middlemen towards Producers

policies If middlemen are unwilling to join aproducers channel because of disagreement on

policies, then the producer has fewer options.


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Selecting type of ChannelTiers of distribution channel:

Zero Tier: Producer Consumer.

One Tier: Producer Retailer Consumer.

2 Tier: Producer Distributor RetailerConsumer.

3 Tier: Prod Super Dist/Con.Agt Distr Ret Cons.

4 Tier: Prod Mktg Agt S.D/C.A Dist Ret Cons.


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Selecting type of ChannelTiers of distribution channel:

More widely dispersed the customers Greater

the tiers.

Zero tier & 1 tier Specialised products,

technologically advanced products, industrial

products, consumer durables, branded garments. 2 Tier Consumer durables, branded FMCG.

3 & 4 tier Smaller/unbranded FMCG.


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Intensity of Distribution Intensive Distribution through every

reasonable outlet in the market.

Selective - Distribution through multiple,

but not all outlets. Lies midway between

extensive and exclusive distribution.

Exclusive Distribution through a singleoutlet in the market.


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Types of Intermediaries Marketing Agent.

C&F Agent/Consignee Agent/ Super Distributor.

Distributor/Stockist.

Wholesaler/Semi-wholesaler.

Retailer General Merchant, Chemists &

Druggist, Grocer, Dept. Store, Exclusive Outlet,Cooperative Stores, Food Products Store, Pan Bidi

Shop.


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Functions of intermediaries Physical possession function: Hold and distribute

stocks.

Retail function: Buy in large quantities and sell insmall quantities. Cover local market in absence ofProducers salesmen. Supply retail orders booked

by Co. salesman.

Promotion function: Help in carrying out localpromotion activities.

Information function: Provide feedbackinformation on Producers and competitiveproducts and activities.

Financing function: Could buy on advance orCOD terms from Producers and sell on credit to

retailers.


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Functions of IntermediariesMarketing Agent

Provides full function sales and local promotionsupport to Producer. Stocks received could bepurchased or on stock transfer basis. If stockspurchased, then income is on basis of commissionon sales, otherwise could be on cost plus basis.Producer does not employ own sales force.

C& F Agent

Acts on behalf of the Producer. Holds Producers

stock. Basically provides warehousing and stockdelivery facility in state where he is based.Distributes stock to market level distributors.Receives income on cost plus basis Is appointedto avoid payment of L.S.T. Producer deploys own

sales force.


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Functions of Intermediaries

Consignee Agent/ SuperDistributor

Functionally both are same. Super Distributorbuys stock on C Form by paying full CST.

Consignee Agent buys stock on F Form. Bothhold stocks bought from Producer and distribute itto area level distributors

Income from commission on sales.

Distributors/Stockists Purchases stock from CA/SD/C&FA or directly

from Co. In turn distributes stocks to area levelretailers. Income from commission on sales.


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Identification of Channel

PartnersProspecting for Agents/Distributors

Advertisements Newspapers/T.V/Cable.

Word of mouth publicity through retail trade

References from retail trade.

References from sales staff of other Companies.

References from friends and acquaintances.

Reference from tertiary sources Banks,

Suppliers, etc.


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Selection of Channel Partners

Criteria of selection for Agents/Distributors Management strength

Financial standing:

Whether overtrading.

Terms of business with other Cos.

Terms of business with retail trade

Infrastructure:

Office set up: location, space, computers,telephone/fax, etc.

Godown: Space, location, security, etc.

Delivery vehicles: mechanised 3,4 wheelers, manual.

No. of years in business, Reputation/goodwill.


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Selection of Channel PartnersCriteria of selection for Agents/Distributors

Manpower

Office staff, numbers and expertise.

Salesmen, number and expertise.

Market coverage and relations.

Other businesses, turnover. Reputation of other Agencies handled.

Willingness to work.


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Appointment of Intermediaries

Prospective appointees contacted by Co. salesmanwho does initial appraisal and also discusses Co.terms and conditions. Fills up Appraisal Form.

If initial appraisal is positive, and prospectiveappointee also agrees with terms, then a secondappraisal is carried out by a superior officer.

Both sides agreeing, an Appointment letter is thenissued by the Co.


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Training of Intermediaries

Channel members have to be trained at

the start and also from time to time

regarding:

Company policies and products.

Latest marketing strategies adopted byCo. and also competitors.

Changes in the environment.


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Training of IntermediariesTrainingMethods

If just one or two distributors are being

appointed at the time, then the training isprovided by senior Company personnel atthe place of business.

If more are being appointed at the sametime, then a separate training session isorganised by the Company.


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Training of Intermediaries

Training sessions:

Provide a platform to the parties involved tocommunicate and understand each others point of

view. A forum where a manufacturer can understand the

needs of the dealers and gather information aboutthe market.

Makes the intermediary feel valued.

Combined with a holiday package are used asreward motivators by the Cos.


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Evaluating Channel Members Evaluation is an on-going exercise.

Constant evaluation and fine tuning

required to keep abreast of changes inmarket place, nature of competition, etc.

Producers should also evaluate coherence

between product and channels, asrequirements may change over period oftime.


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Evaluating Channel MembersEvaluation Criteria:

Achievement of targeted sales and growth

generated.

Adherence to payment norms.

Maintenance of average inventory levels.

Treatment of damaged and returned goods Co-operation in promotional and training

programmes.


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Evaluating Channel Members

Channel member relationship life cycle:

Birth Exciting stage. Members work togethergetting to know each other, but if things are not

working out, they should get out immediately. Growth Dictates hard work for both parties.Energy should be directed towards solvingproblems.

Maturity Watch for trouble, as the only way togo is down. Parties required to communicate as itis the key to efficiency.

Death Too many problems kill efficiency. So getout fast.


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Motivating Channel Members Motivation is a continuous activity.

A Producer has to exert power to motivate themembers to take into consideration a macroperspective and work together.

Power is the ability of Producer or a channelmember to get another channel member to do whatotherwise they would not have done.


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Motivating Channel Members Power is an essential ingredient required to

motivate and direct efforts of non-identical

organisations and individuals.

A Producer uses power to elicit cooperation:coercive, reward. legitimate, expert and referent.

However, ultimate motivator is the creation of anatmosphere of mutual trust that understands themutual goals of network partnerships.


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Motivating Channel Members 2 types of motivation:

Monetary Reward motivator (positive

reinforcement). Non-monetary

Coercion (negative reinforcement).

Expert knowledge.

Identification basis

Legitimate power motivator


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Motivating Channel MembersMonetary motivators:

Reward motivator Based on channel members

belief that the other party has an ability to givesomething of value to him. This reward will be

available to him only if he adheres to the wishes of

the other party. Known as positive reinforcement

as reward is used to motivate the individual to

repeat the behaviour.


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Motivating Channel Members

Reward motivators:

Granting larger margins.

Higher promotional activities/allowances.

Functional discount schemes. Easier payment terms.

Faster settlement of claims.

Granting exclusive territories or large individualaccounts.

Sales force compensation/incentive schemes.

Lower inventory holding norms.


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Non monetary motivators: Coercive power Refers to power of one

intermediary over another, when a memberexpects punishment for his failure to comply with

the wishes of the former party. Opposite of rewardmotivators. Should be adopted only when all othertools fail to bring about the desired changes in thechannel member, as it can act as a de-motivator.

Main tools are: Reduction in margins. Withdrawal of rewards previously granted.

Slowing down of supplies.

Tougher operational norms.


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Non monetary motivators:

Expert knowledge When a channel memberperceives Producer to have some specialisedknowledge, it results in Producer having controlover the intermediary. Expert knowledge providesthe Producer with knowledge leverage tomanipulate behaviour of the intermediary. Toolsinclude:

Managerial counselling. Sales training for employees.

Sales promotion counsel.

Advice on sources of items not stocked by

intermediaries.


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Motivating Channel MembersNon monetary motivators:

Identification basis Whenever dealer

prides himself with dealing with a certain

Producer, this results in referent power for

the Producer. This can be used as a

motivator by those Producers who haveearned a high degree of customer loyalty.


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Motivating Channel MembersNon monetary motivators:

Legitimate power motivator When a Producer

uses its agreements to modulate the behaviour of achannel partner, it is called legitimate power. It is

usually used as a referent power avoiding a

channel member from behaving in a manner

which could be detrimental to the goodwill of theProducer.


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Channel Conflict Channel conflict occurs whenever channel

members have distinctly different opinions

or perceptions about distribution channelaffairs. If no interdependence exists, there

would be no basis for conflict. Mutual

dependence creates the basis for conflict.


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Types of Channel Conflict 3 types:

Horizontal conflict

Intertype conflict

Vertical conflict


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Types of Channel Conflict Horizontal Conflict Occurs amongst similar

firms at the same level in a distribution channel.

Intertype Occurs amongst differentintermediaries at the same level in a channel.

Differs from horizontal in that bit occurs among

dissimilar institutions.

Vertical - Occurs amongst different levels within a

channel of distribution.


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Causes of Channel Conflict Goal incompatibility Though channel members

share the common goal of maximising their joint

effectiveness, each is a separate legal entity. Each has its own employees, owners and interest

groups who help shape goals and strategies, some

of which may not be totally compatible with those

of other channel members.

This incompatibility may be the underlying cause

of stress, ultimately creating conflict.


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Causes of Channel Conflict Position, Role andDomain Incongruency

Changes in specification of position or poorly

defined roles may cause conflict. Incompatibility develops within channel

arrangements as roles and methods of operation

change.

Conflict also arises when there is lack of

agreement concerning appropriate domain of

members.


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Causes of Channel Conflict Communication Breakdown Often is the

reason for channel conflict. Could occur in

2 ways: 1) When a firm fails to exchange vital

information with other channel members.

2) Through noise and distortion


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Causes of Channel Conflict

DifferentPerceptions ofReality Conflict

occurs when different channel members

differ in methods of achieving mutual goalsor have different solutions to a mutual

problem.

Even when they have a strong desire tocooperate, conflict can result from different

perceptions of the facts.


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Causes of Channel Conflict

IdeologicalDifferences Are similar to

those resulting from differences in

perceived roles and expected behaviours.Can result from big-business and small-

business perceptions of the appropriate role

of management.


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Resolution of Channel Conflict

Various methods of resolving channel

conflict.

Problem Solving.

Persuasion

Negotiation

Politics Withdrawal


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Problem Solving: Two techniques

Superordinate Goals : Essentially a goal that all channelmembers desire but that cannot be achieved by anybody

acting alone.. Development of a superordinate goaloverrides individual member goals.

Communication Processes : Seeks to alleviatecommunication noise in distribution channels. More

efficient communications in the channel will permitchannel members to find solutions to their problems

based on common objectives. Meetings and tradepublications allow members to develop solutions tocommon problems and reinforce relationships.


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Persuasion Emphasis is on influencing

behaviour through persuasion rather than only

sharing information. Specifically, it seeks to

reduce conflict about domain.

Negotiation The objective is to halt a conflict, no

attempt is made to fully satisfy a channel member.

Could lead to a compromise, once basic reason forstress is arrested.


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Resolution of Channel Conflict Politics Refers to the resolution of conflict by

the involvement of new parties in the process ofreaching an agreement. 3 solutions exist:

Coalition formation : Refers to formation of tradebodies. This is an attempt to alter channel power

structure. Mediation & Arbitration : In mediation, the 3rdparty

may suggest a solution to the conflict but the channelmembers are not bound to accept that solution, whereasin arbitration the solution suggested is binding upon the

conflicting parties. Lobbying & Judicial Appeal : Channel members may

resort to the Govt. process to resolve conflicts.Attempts to influence the legislative process throughlobbying activities are frequent. Court litigation is

another means.


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Withdrawal If all other methods fail, then

the last option for the termination of conflict

is for one firm to withdraw from therelationship.

Iimcalcutta Somnath Nag

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