Mm week 6 place

Marketing Management FREDY-ROBERTO VALENZUELA

Week 6 topic notes: Place (distribution) The last of the 4Ps (Place) to be discussed is marketing channel strategies and tactics. Marketing channel decisions are among the most complex and challenging decisions facing the company. Each channel system creates a different level of sales and costs. Once a channel has been chosen, an organisation usually must stick with it for a long time. The chosen channel strongly affects, and is affected by, the other elements in the marketing mix.

The major task of ‘place’ management is to select and manage marketing channels. Other important considerations are transport, market coverage (the number and quality of areas of product representation) and inventory policies.

Kotler et al. (2009) provide a definition of marketing channels in Chapter 13. Managerial decisions about the sets of organisations to use to get products to consumers are typically complex and numerous.

The role of intermediaries in marketing a product is one of the most commonly misunderstood among productive activities. You frequently hear the criticism that many intermediaries perform no useful purpose, and the consumer would be able to get products at lower prices if these people were removed from the marketing chain. These criticisms are usually misplaced, ignoring the valuable contributions that intermediaries make to efficient marketing management.

The existing distribution channels are not necessarily the most economically efficient set available. A complex set of historical forces have usually interacted to produce a particular set of channels which go well beyond concern with efficiency. Also, few channels are perfect, and imperfections lead to resistance to improvements in distribution over time. Hence, there is almost always some room for improvement in marketing distribution activities.

Logistics in managing distribution

Physical transfer of products is the essence of distribution. Physical distribution functions are costly. In the US, expenditure on business logistics is ten times as much as advertising, ranging from a low of 4.02 per cent of sales for firms shipping pharmaceuticals to a high of 13.06 per cent of sales for firms shipping hospital and medical goods (Stern, El-Ansary & Coughlan, 1996). For this reason, the physical distribution function offers great potential for profit improvement.

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To cut down physical distribution costs, there is a need for an integrated systems approach. The key logistical problems facing a firm are the location and number of production facilities and warehouses, and choices among modes of transport.

• Warehouse management performs the functions of reception and delivery, breaking of bulk, assembly and storage.

• Inventory management is concerned with ordering and inventory-carrying costs. • Transportation management requires that a variety of factors be taken into account,

including transport mode, component costs of transport, links to handling, service facilities, risk and control over transporters.

The role of marketing distribution channels

The need for distribution channels

In economic terms, distribution channels in marketing are justified by the need to satisfy the time, place and form preferences of the consumers of a product. That is, they demand the product but also have preferences about where and when they obtain it and the condition it is in at the time of purchasing.

Intermediaries enhance these attributes (Stern, El-Ansary & Coughlan, 1996, pp. 3–8) by:

• improving the efficiency of the product transaction process by reducing the number of necessary contact lines between manufacturers and customers;

• bridging the discrepancy between the assortment of goods and services generated by the producer and the assortment demanded by the consumer;

• reducing transaction costs because of standardisation of exchange relationships between buyers and sellers; and

• facilitating the searching process for both sellers and buyers.

Functions performed by marketing intermediaries in distribution channels

Distribution channels supply what economists term ‘place utility’. There is no doubting the central importance of place utility in distribution channels, but this is a much narrower interpretation of what channels supply than that given above.

The functions of channels clearly include both time utility (e.g., storage) and form utility (e.g., varieties of product lines and grades, and information provided with the sale). Depending on the nature of the price elasticities of demand and supply for the product and the marketing services provided through the distribution channels, the benefits from the provision of these services are divided up among consumers (greater satisfaction) and producers and marketing intermediaries (greater profits).

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Types of distribution channels We can identify four generic types of distribution channels:

• direct marketing; • sales force; • vertical marketing networks; and • horizontal marketing networks.

Some generalisations about distribution channels

Channel design should begin with the final customer and work backward to the producer, because channels of distribution should be determined by buying habits.

The channels finally selected must be totalled appropriate to the basic objectives of the firm’s marketing program. If management sets as its goal the widest possible distribution of its product line, then obviously an exclusive franchise strategy at the retail level is not appropriate.

The channels should provide a firm with access to a predetermined share of the market. A manufacturer of golfing equipment seeking the broadest possible market would make a mistake by using a channel that includes only large department stores at the retail level.

The channels must be flexible enough so that the use of one channel does not permanently close off another. A manufacturer of small appliances (irons, toasters), for example, distributed only through appliance wholesalers, which in turn distributed to appliance retailers. The company had an offer from an independent chain to buy the products directly from the manufacturer. The appliance retailers threatened to discontinue the line if the manufacturer placed it in chain outlets. The producer decided to turn down the chain’s offer. Subsequently, a competitive manufacturer accepted a similar offer and profited considerably.

There is a high degree of interdependence among all firms in the channel for any given product.

Channels of distribution and middlemen are always on trial, and changes occur constantly. Middlemen survive only when their existence is economically sound and socially desirable. Furthermore, new middlemen and channels arise to do new jobs or to do the existing jobs better.

Source: Stanton, Miller & Layton (1991, p. 391).

Evolution of distribution channels

It is sufficient to recognise that distribution channels go through a series of stages over time in a similar fashion to products but, as yet, there is little general knowledge of the forces bringing about these changes over time.

One force that we know does bring changes in distribution channels is technical change.

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Managing distribution channels

Strategic planning is more important in distribution channels than in other marketing mix variables because of the long-term implications involved and the major financial costs, risks, time and disruption imposed on marketing management by changing channels. Nevertheless, the strategic dimensions of managing the individual marketing mix variables can also be important. An example is provided by Rao and McLaughlin (1989, pp. 80–81) in respect of the strategic issue of new product development in product management:

Despite the critical role of new products in manufacturers’ marketing strategies, their proliferation imposes considerable costs on other channel members (e.g., distributors) and consumers. Retailers often are attracted to new products by the lure of additional profit opportunities, but substantial costs are associated with the addition of new products. Considerable human capital costs are incurred by retail firms for the evaluation of as many as several hundred new products each week . Further, the entry and maintenance of new data are costly in terms of both personnel time and computer storage space. Each new item also involves inventory control and handling, separate warehouse slots and codes, specialized retail shelf space requirements, and production of shelf signs and price tags.

To maximise both distributive efficiency and the probability of new product acceptance, manufacturers must have an intimate knowledge of buyers’ behaviour, not just at the consumer levels but also at the pivotal channel intermediary levels.

Another important alliance of marketing mix factors is that between marketing channel and communication strategies. Mohr and Nevin (1990) demonstrate the role of communication in marketing channels in moderating the impact of channel conditions (such as structure and power) on channel outcomes. According to Mohr and Nevin, when a communication strategy matches the channel conditions, channel outcomes will be enhanced.

Better market communication can reduce the degree of decision-making uncertainty in marketing channels. Environmental factors also influence decision-making uncertainty. Achrol and Stern (1988) examined various environmental factors and found that four environmental dimensions are important in affecting decision-making uncertainty:

• environmental diversity among consumers; • environmental dynamism—the frequency of change and turnover in the output

environment; • environmental concentration—the extent to which output market resources are

perceived as controlled by, or concentrated in, a few organisations; and • environmental capacity—the perceived ‘favourableness’ of demand conditions

characterising the output market’s capacity to absorb resources.

Greater capacity and concentration reduce the degree of channel conflict which improves communication, thereby indirectly reducing decision-making uncertainty. Increased capacity also directly reduces uncertainty. Diversity and dynamism directly increase decision-making uncertainty.

Choice of distribution channel is often closely aligned with the introduction of new technologies and innovation. Keegan (2002) observes that innovation occurs mainly in highly developed distribution channel systems and agents in less developed systems will tend to adapt developments that have already been tried and tested.

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The US firm, Dell Computer, provides the second example. This firm has maintained direct contact with its customers and used mail order distribution methods to sell its IBM-compatible computers.

It has been observed that the relationship between distribution and market share has become of increasing importance to firms marketing consumer goods (Farris, Olver & de Kluyver, 1989). Farris, Olver and de Kluyver review empirical evidence which shows that the most broadly-distributed consumer good brands gain market leverage. Counter to expectations, they found increasing returns (in market share) to level of distribution for convenience goods.

Once the target markets have been selected, the more appropriate second set of strategic planning processes are those required for selecting distribution channels. The firm must decide upon channel design, in particular the intensity of coverage and length of the marketing channel, and select and screen marketing intermediaries before setting about the management of channel relationships. These strategic decisions lead to continual modifications to the distribution channels.

Selection of distribution channels

Choosing distribution channels obviously sets the scene for channel management.

Intensity of coverage

Intensity of coverage in marketing distribution refers to channel breadth, or the number of intermediaries at a particular level of marketing between the business firm and the consumer (e.g., wholesale, retail). It is best measured as a continuum rather than as separate categories. We can identify relative degrees of focus, along the continuum, as follows:

Intensive distribution occurs with the establishment of a comprehensive set of channels in a given geographical area. It is used most commonly for consumer convenience goods at the retail level.

Selective distribution, as the name implies, relies on the choice of a limited number of distributors in a given geographical area. This choice depends primarily on the competitive environment and various marketing mix factors, such as product positioning. A lot of consumer specialty goods typically have selective distribution.

Exclusive distribution occurs when only one distributor is selected for a particular product in a given geographical area. It is commonly used for high-valued speciality goods, franchised products, and goods for which large stocks have to be carried.

Channel length

Determination of the length of a distribution channel depends on a variety of factors, including (Stanton, Miller & Layton, 1991, pp.391–393):

o organisational concerns of the producing firm, particularly those that influence the choice made between direct and indirect marketing;

o customer considerations, such as geographic concentration of consumers, consumer potential and size of marketing orders;

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o product considerations, particularly whether it is an industrial or consumer good or service, but also including the value of the product, and its physical attributes (e.g. perishability and technical complexity);

o intermediary activities, notably the types of services offered, availability of intermediaries and their attitudes towards the policies of the producer;

o trade-off between marketing costs (higher with shorter channel length) and control (less with longer channel length); and

o choice between the four generic types of distribution channels, mentioned earlier in this topic.

The choice between direct and indirect marketing by the firm is typically much clearer for industrial products than for consumer products. Bagozzi (1986, p. 587) provides six major factors influencing choice:

• complexity of the product • product cost • sales volume • service needs • support needs • transport costs

Note that these factors also directly affect channel length.

Relationships and conflict in distribution channels

Cooperation

Ideally, there should be close cooperation between a business firm and the marketing intermediaries, and between them and the consumer. However, cooperation is not guaranteed and firms using marketing intermediaries in distribution channels face four difficult issues relating to their control over the marketing activities. They require effective distribution tactics to:

• maximise motivation of intermediaries; • minimise conflict between various parties in the distribution channel; • facilitate communication between parties in the distribution channel; and • maximise control by the producing firm over the activities of the intermediaries.

Heide and John (1990, p. 24) report that buyers and sellers in industrial markets ‘are increasingly supplanting conventional “arm’s length” arrangements with “alliances” involving closer ties. These new relationships are marked by ‘more tightly integrated roles based on undertaking activities jointly’.

Motivation

Firms can motivate intermediaries by promotional exercises. E.g., point-of-purchase displays for retailers, promotional discounts for selling the firm’s products rather than those of the competitors and novel kickbacks for achieving sales volume targets for the firm’s products.

Other motivational ploys include: _______________________________________________________________________________________________________________________________________


• an attractive product design and brand image which confer competitive advantages; • provision of services to the intermediary; and • use of leadership and interpersonal skills.

Conflict

Conflicts can occur in three main dimensions:

• between marketing intermediaries at the same level of distribution; • between marketing intermediaries at different levels of distribution; and • between producers and marketing intermediaries.

They occur primarily because of competition between intermediaries in the first two cases and divergence of interests—especially profits, and ideas—especially about other marketing mix variables in the latter case.

Stanton, Miller and Layton (1991, p. 381) refer to the first dimension as horizontal conflicts. They regard scrambled merchandising as the main source of horizontal conflict. This is the practice of intermediaries diversifying product assortments by adding product lines and producers adding new market outlets.

The second and third dimensions are termed vertical conflicts. Examples of these conflicts are conflicting preferences over objectives, strategies and tactics, division of profits, use of coercion and warnings, neglect of interfirm relations, and poor interpersonal relations across organisational boundaries.

Conflict management has some clear guideposts to resolve some of these conflicts, namely, better interpersonal relations and more attention to interfirm relations. Other less obvious forms of conflict management include use of superordinate goals, channel diplomats, personnel exchange, co-optation, joint membership in trade associations, mediation, channel reorganisation, and the administration of power.

Communication

There are three functions that can facilitate communication between the producing firm and marketing intermediaries:

• provision of information; • research; and • influence.

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Control

The ability of the firm selling a product through a distribution channel to control the activities of the intermediaries in that channel will depend to a large extent on the above three areas of tactical management. The more successful the firm is in motivating intermediaries, keeping conflict to a minimum and easing communication among parties in the distribution channel, the more effective control will be.

Small marketing channel agents can face particular difficulties in maintaining control over channel relations that most affect them. A number of different institutional methods can be used to reinforce relationships with their customers in order to increase their control such as vertical integration and contracts (Heide & John, 1988). Transaction-specific investments are another means commonly used by channel agents to increase their control over channel relations. These investments are defined by Heide and John (p. 21) as:

those human and physical assets (tangible and intangible) required to support exchange and which are specialized to the exchange relationship. If the relationship were to be terminated, the value of these assets would be largely lost because their salvage value outside the relationship is very low. Such nonredeployable assets can be thought of as creating switching costs ...

Butaney and Wortzel (1988, p. 53) observe that considerable research has been carried out on channel power relations between manufacturers and distributors. However, they demonstrate that customer market power, as well as manufacturer market power, has a role in determining distributor power. As an illustrative example, they assume that a manufacturer occupies a powerful position in the marketing channel through concentration of industry structure. The customers serviced by the distributor are also powerful because, say, of bulk purchasing leverage. In these circumstances, the manufacturer would have both the need and capability to control the marketing program. However, when the manufacturer’s power is low it may not be able to exert much control relative to the customer. But if the customer lacks market information and also has low power, the distributor can influence the interbrand choice of the customer as well as exert power over the manufacturer.

Increasing attention is being given to the construction by channel members of long-term stable relationships. A basic requirement for this is an expectation by the channel members that the relationship will last (Anderson & Weitz, 1989). The development of such relationships enables channel members to (Anderson & Weitz, 1989, p. 310):

combine the advantages of vertically integrated distribution systems (control and coordination) with the advantages of systems utilizing independent channel members (flexibility, scale economies, efficiency, and low overhead).

Anderson and Weitz prepared a concise diagram showing the relations between factors that affect long-term channel relationships. This diagram, reproduced over, has three main elements: continuity, trust, and communication.

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Figure 1: Relations between factors that affect long-term Channel relationships Source: Anderson and Weitz (1989)

An increasingly popular means of constructing long-term stable relationships in marketing channels is franchising. It is basically a contractual agreement in which one party (the franchiser) sells the right to market goods and services to another party (the franchisee).

Because it is an element in a vertical marketing system, franchising is sometimes confused with vertical integration.

A study by Norton (1988) showed that franchising is positively and significantly related to three factors—principal-agent incentives (e.g., physically dispersed operations), information incentives (e.g., breadth of knowledge of brand name) and sales growth. Norton’s results in relation to principal-agent incentives are supported by those of Lal (1990). Lal also found that the incidence of franchising is related to the cost of monitoring and the importance of investment by the franchiser.

References

Achrol, R. S., & Stern, L. W. (1988). Environmental determinants of decision-making uncertainty in marketing channels. Journal of Marketing Research, 25(1), 36–50.

Anderson, E., & Weitz, B. (1989). Determinants of continuity in conventional industrial channel dyads. Marketing Science, 8(4), 310–323.

Bagozzi, R. P. (1986). Principles of marketing management. New York: Macmillan.

Butaney, G., & Wortzel, L. H. (1988). Distributor power versus manufacturer power: The customer role. Journal of Marketing, 52(1), 52–63.

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Farris, P., Olver, J., & de Kluyver, C. (1989). The relationship between distribution and market share. Marketing Science, 8(2), 107–128.

Heide, J. B., & John, G. (1988). The role of dependence balancing in safeguarding transaction-specific assets in conventional channels. Journal of Marketing, 52(1), 20–35.

Heide, J. B., & John, G. (1990). Alliances in industrial purchasing: The determinants of joint action in buyer-supplier relationships. Journal of Marketing Research, 27(1), 24–36.

Keegan, W. J. (2002). Global Marketing, (7th ed.). Upper Saddle River, New Jersey: Prentice-Hall.

Lal, R. (1990). Improving channel coordination through franchising. Marketing Science, 9(4), 299–318.

Mohr, J., & Nevin, J. R. (1990). Communication strategies in marketing channels: A theoretical perspective. Journal of Marketing, 54(4), 36–51.

Norton, S. W. (1988). An empirical look at franchising as an organizational form. Journal of Business, 61(2), 197–218.

Rao, V. R., & McLaughlin, E. W. (1989). Modeling the decision to add new products by channel intermediaries. Journal of Marketing, 53(1), 80–88.

Stanton, W. J., Miller, K. E., & Layton, R. A. (1991). Fundamentals of marketing, (2nd Australian ed.). New York: McGraw Hill.

Stern, L. W., El-Ansary, A. I., & Coughlan, A. T. (1996). Marketing channels. (5th ed.). Englewood Cliffs: Prentice-Hall.

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