Chapter 7: Place and Development of Channel Systems

1. Chapter 7: Place and Development of Channel Systems

2. Main Points • What functions performed by marketing specialists to overcome discrepancies b/w P and C. • Understand why some firms use direct or indirect channel systems. • Understand how to develop co-operative relationships and avoid conflicts in channel systems • Know traditional and vertical marketing systems • Know intensive, selective and exclusive distribution. • New terms.

3. Definitions • Place(p318): making goods and services available in the right quantities and locations, when customers want them. • Channel of distribution(p319): any series of firms or individuals who participate in the flow of products from producer to final user or consumer.

4. 1 2 1 4 M M M C C C M D M C M C C 3 4 2 5 5 6 6 7 3 8 9 (a) number of contacts (b) number of contacts M×C=3×3=9 M+C=3+3=6 M=Manufacturer C=Customer D=Distributor Distributors simplifies trading

5. Marketing functions • Effective marketing(p321): getting products to the consumers at the right time, in the right place, and at a price they’re willing to pay; keeping consumers satisfied after the sale, and bringing them back to purchase again when they are ready.

6. Marketing functions(p322) • Buying function: looking for and evaluating goods and services. • Selling function: promoting the product. • Transporting function: the movement of goods from one place to another. • Standardization and grading: sorting products according to size and quality. • Financing: providing the necessary cash and credit to produce, transport, store, promote, sell, and buy products. • Risk taking: bearing the uncertainties that are part of the marketing process. • Market information function: the collection, analysis, and distribution of all the information needed to plan, carry out, and control marketing activities.

7. Who perform marketing functions? (p323) • Planned economy – government agencies, producers, consumers; • Market-directed economy – producers, consumers, marketing specialists. • Intermediaries (p321): someone who specializes in trade rather than production. • Facilitators (p323): firms that provide one or more of the marketing functions other than buying or selling (eg. advertising agencies, marketing research firms, independent product-testing laboratories, public warehouses, transporting firms, communications companies, and financial institutions).

8. Model of Market-DirectedMacro-Marketing System Many Individual Producers Middlemen intermediaries Facilitators Perform universal marketing functions Monitoring by government(s) and public interest groups To overcome discrepancies and separations To create utility and direct flow of need-satisfying goods and services Many Individual Consumers EXHIBIT 11-4

9. Production Sector Specialization and division of labour = heterogeneous supply capabilities Spatial Separation Discrepancies of Quantity Marketing needed to overcome discrepancies and separations Separation in Time Separation of Information Separation in Values Discrepancies of Assortment Separation of Ownership Consumption Sector Heterogeneous demand for form, task, time, place, and possession utility Marketing Facilitates Production and Consumption (P322)

10. There are discrepancies and separations between producers and consumers. • Discrepancy of quantity (p324): the difference between the quantity of products it is economical for a producer to make and the quantity final users or consumers normally want. • Discrepancy of assortment (p325): the difference between the lines a typical producer makes and the assortment final consumers or users want.

11. Spatial separation Producers tend to locate where it is economical to produce, while consumers are located in many scattered locations.

12. Separation in time Consumers may not want to consume goods and services at the time producers would prefer to produce them, and time may be required to transport goods from producer to consumer.

13. Separation of information Producers do not know who needs what, where, when, and at what price. Consumers do not know what is available from whom, where, when, and at what price.

14. Separation in values Producers value goods and services in terms of costs and competitive prices. Consumers value them in terms of economic utility and ability to pay.

15. Separation of ownership Producers hold the title to goods and services that they themselves do not want to consume. Consumers want goods and services that they do not own.

16. Bulk- Breaking Accumulating Sorting Assorting Regrouping Activities Adjusting Quantity discrepancies Adjusting assortment discrepancies

17. Specialists adjust discrepancies Regrouping activities (p325) : adjusting the quantities and/or assortment of products handled at each level in a channel of distribution. • Accumulating (p325) : collecting products from many small producers. • Bulk-breaking (p325) : dividing larger quantities into smaller quantities as products get closer to the final market. • Sorting (p325) : separating products into grades and qualities desired by different target market. • Assorting (p325) : putting together a variety of products to give a target market what it wants.

18. Place objectives Customer service level desired Type of channel Direct Indirect Type of physical distribution facilities needed Degree of market exposure desired Intermediaries/ facilitators needed How to manage channels Strategic Decision Areas in Place (p319)

19. Place objectives • To consider place objective in relation to product classes (p261, p265). • Staples – maximum exposure with widespread, low-cost distribution; • Impulse – widespread distribution with display at point of purchase; • Emergency – widespread distribution near probable point of need; • Homogeneous shopping – enough exposure to facilitate price comparison; • Heterogeneous shopping – distribution near similar products; • Specialty products – limited distribution • Unsought products – available in places where similar products are sought.

20. Place objectives • To consider place objective in relation to product life cycle.(p299, exhibit 10-3) • Introduction – specialist channels ( hobbyist shops, boutiques ) • Growth – higher-volume channels ( department stores ) • Maturity – lower-cost channels (mass merchandisers ) • Decline – even lower-cost channels (mail order houses )

21. Direct or indirect channels (p329) • Direct channels: producers distribute directly to final customers. • Indirect channels: producers use wholesaler, retailers, and other specialists to distribute indirectly to final customers.

22. 0-level (M-C) M C 1-level (M-R-C) retailer 2-level (M-W-R-C) wholesaler retailer 3-level (M-W-R-J-C) wholesaler jobber retailer Industrial distributors C M representatives Sales branch Number of Channel levels

23. Greater Control Why a Firm May Want to Use Direct Channels (p330) Lower Cost Some Reasons for Choosing Direct Channels More effective work than intermediaries Direct Contact with Customer Needs Quicker Response or Change in Marketing Mix Suitable Intermediaries Not Available

24. Reasons for using indirect channels (p331) • Customers have established buying patterns through specialists. • Consumers are spread throughout many areas and prefer to shop at specific places. • To avoid a significant investment in direct distribution. • Some intermediaries provide credits to customers. • Intermediaries can often help producers serve customer needs better and at lower cost.

25. Whole-Channel Product-Market Commitment Choosing the Type of Relationship Key Issues in Channel Management Conflict Handling Common Objectives Role of Channel Captain Managing Channel Relationships

26. Product-market commitment sharing • All members focusing on the same target market at the end of the channel and share the various marketing functions in appropriate ways.

27. Channel relationship types • Traditional channel systems(p336): systems in which the various channel members make little or no effort to co-operate with each other. • Vertical marketing systems (p336): channel systems in which the whole channel focuses on the same target market at the end of the channel. • Corporate channel systems • Contractual channel systems • Administered channel systems Traditional vs vertical

28. Corporate channel systems • Corporate ownership all along the channel (p336)

29. Contractual channel systems • Various channel members agree by contract to co-operate with one another. (p337)

30. Administered channel systems • Various channel members informally agree to co-operate with one another. (p337)

31. Characteristics Type of channel Traditional Vertical marketing systems Administered Contractual Corporate Amount of cooperation Little or none Some to good Fairly good to good Complete Control maintained by None Economic power and leadership Contracts One company ownership Examples Typical channel of “inde-pendents” General Electric McDonald’s Florsheim shoes Vertical Marketing Systems compete well(p336 Exhibit11-5)

32. Conflicts handling • Reason – different objectives • Vertical conflicts – occur between firms at different levels of the channel. ( a conflict between the producer and the retailer about shelf space) • Horizontal conflicts – occur between firms at the same level in the channel. (Different stores offer different prices.)

33. Channel captain • A manager who helps direct the activities of a whole channel and tries to avoid, or solve channel conflicts. • Some producers lead their channels. • Some intermediaries are channel captains.( Wal-Mart)

34. Intensive Selective Exclusive Market Exposure What Market Exposure Fits the Marketing Objectives = number of outlets

35. Ideal market exposure: when a product is available widely enough to satisfy target customers’ needs but not exceed them. • Excessive coverage increases the total cost of marketing and can remove the incentive for individual retailers to aggressively promote a brand. • Intensive distribution: selling through all responsible and suitable wholesalers and retailers who will stock and /or sell the product. • Selective distribution: selling through only those intermediaries who will give the product special attention. • Exclusive distribution: selling through only one intermediary in a particular geographic area.