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Marketing

Channels
A Relationship Management
Approach
Lou E. Pelton
David Strutton
James R. Lumpkin

MC-A3-engb 1/2014 (1019)

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Marketing Channels
Dr Lou E. Pelton is an award-winning teacher and researcher in the College of Business Administration
at The University of North Texas. Dr Peltons principal research interests include marketing channels,
relationship marketing and international distribution. Dr Pelton currently serves as coordinator of two
American Marketing Association special interest groups and track chairperson for the Academy of
Marketing Sciences World Marketing Congress. He has served as officer in a number of national and
regional marketing associations as well. Dr Pelton has headlined many professional education and training
seminars in the US and abroad. He currently manages a global electronic bulletin board addressing
relationship marketing theory and practice.
Dr David Strutton is the Acadiana Bottling and J. Wesley Steen Regents Professor in Business Administration at the University of Southwestern Louisiana. Dr Struttons principal research interests include
business-to-business marketing, personal selling and sales management. Dr Strutton is treasurer of the
Southwestern Marketing Association and an active member of the Academy of Marketing Science and the
American Marketing Association.
Dr James R. Lumpkin is the Dean of the Foster College of Business Administration, Bradley University.
Dr Lumpkin is a past president of the Academy of Marketing Science and was named Distinguished
Fellow of the Academy in 1992. He is a past marketing editor of the Journal of Business Research. Dr
Lumpkins primary research interests include retail patronage theory, health-care marketing and research
methodology. His recent research has focused on the elderly consumer. He has received a number of
research grants to study the marketplace behaviour and long-term health-care decisions for the elderly
consumer. Before entering academe, Dr Lumpkin worked as a chemist and in marketing research for
Phillips Petroleum Company. In addition to his corporate experience, he has directed two consumer
research panels.

First Published in Great Britain in 2001.


Pelton, Strutton and Lumpkin 2001
The rights of Lou E. Pelton, David Strutton and James R. Lumpkin to be identified as Authors of this
Work has been asserted in accordance with the Copyright, Designs and Patents Act 1988.
Original edition 2002 The McGraw-Hill Companies, Inc. All rights reserved.
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 Publishers. This book may not be lent, resold, hired out or
otherwise disposed of by way of trade in any form of binding or cover other than that in which it is
published, without the prior consent of the Publishers.

With love and respect to my Mom and Dad, Beverly and Sam Pelton, and their three daughters.
Lou E. Pelton

With love to my wife Dita and my daughter Ariadne, my parents Jack and Becky Strutton, my mother-inlaw Spyros Kavyas.
David Strutton

With love to my wife Linda, and daughters Kristi and Kelli.


James R. Lumpkin

Contents
Introduction

xiii
xiii
xiv

Instructions on Using Study Programme Materials


Conclusion
Preface

xv
A Course for Exploring the Nature and Scope of Exchange Relationships in
Marketing Channel Settings
A Model-Driven Approach, the CRM Provides Direction for the Entire Course

xv
xv

Acknowledgments

PART 1

MARKETING CHANNELS FRAMEWORK

Module 1

Where Mission Meets Market


1.1 The Elements of Successful Marketing Channels
1.2
What Is a Marketing Channel?
1.3
Evolution of Marketing Channels
1.4
Channel Intermediaries: The Customer Value Mediators
1.5
Channel Relationship Model (CRM)
1.6
The CRM: Compass Points
1.7
Key Terms
Learning Summary
Review Questions

Module 2

xvii
1/1
1/1
1/4
1/5
1/9
1/15
1/18
1/19
1/19
1/20

Channel Roles in a Dynamic Marketplace


2.1 Channel Behaviours in Competitive Environments
2.2
Channel Roles in the Exchange System
2.3
Supplier Relationships
2.4
Customer Relationships
2.5
Lateral Relationships
2.6
Establishing Channel Role Identities
2.7
Key Terms
Learning Summary
Review Questions

Marketing Channels Edinburgh Business School

2/1
2/2
2/5
2/7
2/11
2/14
2/15
2/18
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2/19

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Contents

Module 3

Conventional Marketing Systems


3.1 Conventional Marketing Channels as Organisational Teams
3.2
Conventional Marketing Channels: Issues and Answers
3.3
Making the Channel Design Decision
3.4
Selecting the Best Channel Design
3.5
Evaluating Channel Structure Performance
3.6
Modifying Existing Channels
3.7
Designing Channels to Capture Channel Positions
3.8
Real-World Channel Design
3.9
Key Terms
Learning Summary
Review Questions

Module 4

3/2
3/2
3/7
3/15
3/19
3/19
3/23
3/25
3/25
3/25
3/27

Marketing Mix and Relationship Marketing


4.1 The Marketing Mix
4.2
The Product Ingredient
4.3
The Pricing Ingredient
4.4
The Promotions Ingredient
4.5
The Place Ingredient
4.6
Strategy Formulation: Role of the Marketing Concept
4.7
Key Terms
Learning Summary
Review Questions

PART 2

EXTERNAL CHANNEL ENVIRONMENT

Module 5

Environmental Scanning: Managing Uncertainty


5.1 Entropy and Environmental Scanning
5.2
Decision Support Systems
5.3
The External Channel Environment
5.4
Internal and External Political Economies: An Environmental Framework
5.5
Key Terms
Learning Summary
Review Questions

Module 6

3/1

4/1
4/1
4/2
4/7
4/13
4/20
4/22
4/24
4/24
4/26

5/1
5/2
5/8
5/10
5/19
5/20
5/20
5/22

Legal Developments in Marketing Channels


6.1
6.2
6.3

A Historical Overview of Federal Legislation Affecting Channel Practices


Traditional Legal Issues in Channel Relationships
Emerging Legal Issues in Channel Relationships

Marketing Channels Edinburgh Business School

6/1
6/2
6/6
6/14
vii

Contents

6.4
Moving Beyond Legality: Toward Ethical Channel Management
6.5
Key Terms
Learning Summary
Review Questions
Module 7

Ethical Issues in Relationship Marketing


7.1 Personal Conviction and Exchange Conviction
7.2
Social Tact and Relationship Ethics
7.3
The Ethics Continuum
7.4
Ethical Dilemmas in Relationship Management
7.5
Moral Codes in Channel Relationships
7.6
Model of Relationship Ethics
7.7
The Components of an Ethical Exchange Process
7.8
Key Terms
Learning Summary
Review Questions

Module 8

Global Challenges and Opportunities

PART 3

INTERNAL CHANNEL ENVIRONMENT

Module 9

Channel Climate

viii

7/1
7/2
7/5
7/6
7/11
7/14
7/17
7/21
7/22
7/23
7/24
8/1

8.1 Reasons for International Exchange Relationships


8.2
Typology of International Exchange Relationships
8.3
Direct and Indirect International Marketing Channels
8.4
Interface between International Marketing Channels and the Environment
8.5
Selecting International Exchange Partners
8.6
International Exchange Relationships: Successes and Failures
8.7
International versus Domestic Channel Relationships: Some Perspective
8.8
Key Terms
Learning Summary
Review Questions

9.1
9.2
9.3
9.4
9.5
9.6
9.7
9.8

6/19
6/22
6/22
6/23

8/2
8/4
8/9
8/11
8/18
8/21
8/21
8/22
8/22
8/24

9/1

Channel Climate: When Relationships Get Heated


Important Channel Climate Behaviours
Achieving Cooperative Channel Climates
Conflict Resolution and Channel Climate
Compliance Techniques
Relationship Building in Marketing Channels
Nurturing Channel Relationships
Improving Channel Performance through Cooperation

9/1
9/3
9/9
9/10
9/12
9/16
9/18
9/19

Edinburgh Business School Marketing Channels

Contents

Module 10

9.9
Key Terms
Learning Summary
Review Questions

9/21
9/21
9/22

Conflict Resolution Strategies

10/1

10.1
10.2
10.3
10.4
10.5

Negotiation: The Art of Give and Take


10/2
Problem-Solving Strategies
10/11
Persuasive Mechanisms
10/13
Legalistic Strategies
10/14
Taking the Long View: Managing Conflict through Managing Channel Climate
10/15
10.6 Interdependence: Tying It All Together
10/17
10.7 Key Terms
10/18
Learning Summary
10/18
Review Questions
10/19
Module 11

Information Systems and Relationship Logistics


11.1 Logistics
11.2 Logistics and Channel Management
11.3 Relationship Logistics Model
11.4 Logistics Inputs
11.5 Logistics Mediators
11.6 Logistics Outputs
11.7 Key Terms
Learning Summary
Review Questions

Module 12

Cultivating Positive Channel Relationships


12.1 Recruiting and Screening New Prospects
12.2 Selecting the Right Channel Partners
12.3 Motivating New Channel Members
12.4 Securing Recruits for the Long Term
12.5 Appendix 12 Managing Impressions in Channel Relationships
12.6 Key Terms
Learning Summary
Review Questions

Marketing Channels Edinburgh Business School

11/1
11/2
11/6
11/8
11/11
11/12
11/21
11/22
11/22
11/24
12/1
12/2
12/6
12/8
12/9
12/14
12/26
12/26
12/27

ix

Contents

PART 4

ECONOMIES OF EXCHANGE

Module 13

Transaction Costs in Marketing Channels


13.1 Conditions for Exchange
13.2 Factors in Deriving Economic Value
13.3 Cooperation versus Opportunity Costs
13.4 Transaction Cost Analysis
13.5 Transaction Cost Analysis: Problems and Limitations
13.6 Economic Exchange Relationships
13.7 Key Terms
Learning Summary
Review Questions

Module 14

Vertical Marketing Systems

Franchising: A Global Trend

14/1
14/11
14/15
14/20
14/20
14/22
15/1

15.1 Franchising Systems


15.2 Relevant Trends in the Franchising Environment
15.3 Internal Environmental Factors
15.4 Conflict in Franchising
15.5 Current Legal Standards in Franchising
15.6 Making Franchise Relationships Work
15.7 Whats in Franchisings Future?
15.8 Key Terms
Learning Summary
Review Questions

PART 5

RELATIONSHIPS AND THE INTERACTION PROCESS

Module 16

Long-Term Interfirm Relationships

15/2
15/7
15/11
15/12
15/14
15/17
15/23
15/25
15/25
15/27

16/1

16.1 Exchange Relationships: Bridging Transactions


16.2 Exchange Episodes
16.3 The Discrete-Relational Exchange Continuum
x

13/2
13/3
13/7
13/8
13/12
13/19
13/22
13/22
13/24
14/1

14.1 Building Channels


14.2 When Should Organisations Vertically Integrate?
14.3 Value-Adding Partnerships: Beyond Vertical Marketing Systems
14.4 Key Terms
Learning Summary
Review Questions
Module 15

13/1

16/2
16/4
16/10

Edinburgh Business School Marketing Channels

Contents

16.4 Stages of Channel Relationships


16.5 Exchange Governance Norms
16.6 Relationship Selling
16.7 Key Terms
Learning Summary
Review Questions
Module 17

The Role of Strategic Alliances


17.1 Strategic Alliances: Definition and Characteristics
17.2 The Nature and Scope of Strategic Alliances
17.3 Types of Strategic Alliances
17.4 Developing Strategic Alliances
17.5 The Downside of Strategic Alliances
17.6 Key Terms
Learning Summary
Review Questions

Module 18

Appendix 1

16/13
16/16
16/20
16/21
16/21
16/22
17/1
17/1
17/6
17/11
17/15
17/22
17/23
17/23
17/24

Strategic Implications for the New Millennium

18/1

18.1 Channel Management: Practitioners Insights


Review Questions

18/2
18/9

Practice Final Examination

A1/1

Practice Final Examination 1


Practice Final Examination 2
Appendix 2

Answers to Review Questions


Module 1
Module 2
Module 3
Module 4
Module 5
Module 6
Module 7
Module 8
Module 9
Module 10
Module 11
Module 12
Module 13

Marketing Channels Edinburgh Business School

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1/3
A2/1
2/1
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2/5
2/8
2/10
2/14
2/16
2/19
2/21
2/24
2/26
2/29
2/31
xi

Contents

Module 14
Module 15
Module 16
Module 17
Module 18
Index

xii

2/33
2/36
2/39
2/41
2/43
I/1

Edinburgh Business School Marketing Channels

Introduction
This marketing channels distance learning programme is based on the published
(1997) book Marketing Channels: A Relationship Management Approach* and was updated
in 2013. The programme has the following objectives:
1. To explore the nature and scope of exchange relationships in marketing channels
settings.
2. To integrate the various marketing channels perspectives and pedagogies from
around the world.
3. To marry existing marketing channels theory to cutting-edge channels practice.
4. To pay special attention to legal and ethical issues in marketing channels.
5. To connect marketing channels to trends in the marketplace.
The contents of this publication are organised around the above objectives on a
sequential basis. It contains 18 modules which are divided into five parts as follows:
One Marketing Channels Framework
Two External Channel Environment
Three Internal Channel Environment
Four Economies of Exchange
Five Relationships and the Interaction Process
Each module contains six sections: (1) a statement of module objectives; (2) the
main text; (3) short answer and essay questions; (4) multiple choice questions; (5)
discussion questions; (6) references.

Instructions on Using Study Programme Materials


Before studying any of the module materials, read the Preface which discusses the
authors rationale in writing the text component of this study programmes materials, in particular their use of a Channel Relationship Model (CRM) to provide
direction throughout the text.
Following your reading of the Preface, you should prepare yourself for studying
Module 1 and each successive module by reading the module objectives. In the
process of doing so, try to relate the content of these to how they interact with
other marketing activities as well as with other functional areas in your company
such as finance and production.
When you finish this brief exercise, read the main text carefully and thoroughly.
Some students find it desirable to read the text material twice once through
quickly followed by a second, more careful reading. Some find it helpful to take
notes or even outline the contents of this section. You should do whatever you feel
provides the best results. Upon completion of your study of the main text in the
module, you should proceed to the summary outline that follows the text of the
*

Written by Lou E. Pelton, David Strutton, and James R. Lumpkin, published by and copyright Richard
D. Irwin, a Times Mirror Higher Education Group, Inc., Company, Chicago, IL (1997).

Marketing Channels Edinburgh Business School

xiii

Introduction

module. Pay particular attention to the definition of key words/terms. If you find
any difficulty in understanding any part of this outline, you should refer to that part
of the text.
You are now ready to be examined on how well you understand the module and
can apply its content to the real world. Four types of questions are used to test your
effort. The answers to all four sets of questions are contained in Appendix 2. The
first three sets are essentially concerned with the modules content and how well you
can recall and discuss it. You should write your answers and then compare them
with the answers given in Appendix 2.

Conclusion
The time required to complete a module will, of course, vary between students
and even for the same student with regard to different modules. On average, we
would expect you to spend at least two to three hours studying each modules
content. Some of this time will be spent in relating what you are reading to your
own job situation. The self-examination part of the learning procedure (the four
batteries of questions at the end of each module) will take probably another two
hours or more, depending upon how much reviewing is necessary.
As you proceed through the modules, you may find it desirable, even necessary,
to review certain parts of earlier modules. Thus, some of the later modules may well
require additional study time. If you continuously try to apply what you are learning
to your own organisation, you will find yourself learning a great deal more not only
about marketing, but about your organisation as well. We would hope that you will
involve, where you feel it is appropriate, knowledgeable business people (including
those in the organisation where you are employed) in your pursuit of an understanding of marketing channels. We also hope that at the conclusion of the course you
will be satisfied with what you have learned about this subject and feel confident in
your ability to apply the basic concepts included in the text.
After completing your study of the 18 modules, you are now ready to take the
two practice examinations (Appendix 1). A word of caution be sure you thoroughly
review all modules, including the answers to review questions, before taking these
exams.
For those of you wanting more exposure to certain marketing subjects, each
modules references represent a major resource. These not only identify a large
number of useful articles from a wide range of academic journals and business
publications, but also refer to the best specialised textbooks which are concerned
with the subjects different components.

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Edinburgh Business School Marketing Channels

Preface
Nestled in Atlanta, Georgias Stone Mountain park which is just a stones throw
from Emory Universitys Center for Relationship Marketing, the father of contemporary marketing channels, Louis W. Stern, delivered a telling address to an
assembly of marketing scholars. In his address, he shaped a contemporary view of
marketing channels. His view championed the shift toward long-term, win-win
channel relationships. Why begin our book by mentioning Professor Sterns discourse
at the Second Research Conference on relationship marketing? The simple reason is
that our book is all about channel relationships. Marketing Channels: A Relationship
Management Approach addresses the real-world connection between marketing
channels and relationship marketing. Small wonder that our book is inspired by two
pioneers in marketing channels and relationship marketing theory, Professors Louis
W. Stern and Jagdish N. Sheth. In the spirit of their scholarly contributions, our
book highlights the growing importance of channel relationships in creating
sustainable market value and sustainable competitive advantage.

A Course for Exploring the Nature and Scope of Exchange


Relationships in Marketing Channel Settings
The door to sustainable market value hinges on channel relationships. Market giants
like General Electric, IBM, Microsoft, Mitsubishi, Motorola, and Siemens forge
collaborative channel relationships to improve their global market competitiveness.
In fact, management guru Peter Drucker cites marketing channels as the last frontier
on the road to building sustainable market value. Simply put, as markets change, so
too must marketing channels. Yet, marketing channels pedagogy has remained
virtually unchanged for decades. Marketing Channels: A Relationship Management
Approach charts a new course for exploring the nature and scope of channel relationships.

A Model-Driven Approach, the CRM Provides Direction for the Entire


Course
This course takes a marked detour from the traditional Four Ps map of marketing
channels. Marketing Channels: A Relationship Management Approach pioneers a modeldriven approach to marketing channels pedagogy. The Channel Relationship Model
(CRM) is introduced in the first module, and it provides direction for the entire
course.
The first part of the course, called the Marketing Channels Framework, introduces students to a relationship perspective of marketing channels. It describes how an
organisations mission should drive channel systems in the competitive marketplace.
The interface between marketing channels and the marketing mix elements is also
explored in this part. Our book then proceeds to address each of the other fundamental components of the CRM:
Marketing Channels Edinburgh Business School

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Preface

External Channel Environment. This component of the CRM investigates external


challenges and opportunities that impact channel systems. The part demonstrates
that channel relationships are important mechanisms to more effectively manage
uncertainty in the macroenvironment.
Internal Channel Environment. The next part investigates the behavioural issues that
beset the channel relationship process, including coordination, conflict and cooperation. The importance of information systems and logistics in creating and
sustaining coordinated channel relationships is highlighted there, as well.
Economies of Exchange. The third component of the CRM critically assesses the
economic basis for the exchange process. It extends the notion of economic
exchange to address vertical integration decisions faced by marketing organisations. In this part, a special emphasis is placed on franchising as a vertical
integration option.
Relationships and the Interaction Process. The final part of the course explores the
relational exchange approach in marketing channels practice. The concepts of
relational exchange are related to the development of strategic partnering, and
the implications of strategic partnering for future marketing channels practice are
addressed.

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Edinburgh Business School Marketing Channels

Acknowledgments
We sincerely thank the students and educators too numerous to individually
mention whose insights and suggestions provided a general direction for our
efforts. We also thank Gilbert A. Churchill, Jr, the first reviewer of our efforts, for
his encouragement and advice on how to develop this project. As a result of their
efforts, this is truly a market-driven channels text.
A host of reviewers made sure that our text preparation adhered precisely to the
letter and spirit of the Eight Imperatives. We extend our sincere gratitude to them.
Without the following reviewers, this project could not have been successfully
completed: Moshen Bagnied, University of the District of Columbia; Dan Bello, Georgia
State University; David Bloomberg, Western Illinois University; James R. Brown, Virginia
Polytechnic Institute and State University; Chris Cox, Nicholls State University; Robert F.
Dwyer, University of Cincinnati; Samuel Gillespie, Texas A&M University; James C.
Johnson, St. Cloud State University; Alma Minu-Wimsatt, East Texas State University;
Rammonhan Pisharodi, Oakland University; David J. Urban, Virginia Commonwealth
University; Joyce A. Young, Indiana State University; Brent Wren, University of AlabamaHuntsville; Ronald Zallocco, University of Toledo.
Channel relationships do not just happen, they evolve over time. Accordingly,
there are a number of individuals who provided training and support that culminated in Marketing Channels: A Relationship Management Approach. We appreciate their
contributions, and we recognise them here: Marwan Aridi, Aridi Computer Graphics;
Stephanie Armbruster, University of Southwestern Louisiana; David Ballantyne, Monash
University; Barbara Brickley, University of Southwestern Louisiana; Rajiv Dant, Boston
University; William R. Darden, Louisiana State University; O.C. Ferrell, University of
Memphis; Barnett A. Greenberg, Florida International University; Ronald W. Hasty,
University of North Texas; Neil C. Herndon, City University of Hong Kong; Subhash
Mehta, National University of Singapore; Mary F. Mobley, Augusta College; Atul Parvatiyar, Emory University; Jennifer Romero, University of Southwestern Louisiana; Mickey C.
Smith, University of Mississippi; James H. Underwood, University of Southwestern Louisiana; Scott J. Vitell, Jr, University of Mississippi; David Wilson, Pennsylvania State
University.
We would like to especially thank Mary Domingue who tirelessly deciphered and
organised our writings through the many versions of the text.
Margaret Carty once wrote, The nice thing about teamwork is that you always
have others on your side. This project extended beyond the authors contribution.
In fact, this book is a joint effort with our editor, Stephen Patterson. Steve was an
enthusiastic supporter of the books pedagogy, from its conception to its production. Steve championed and challenged our pedagogical perspectives, thus ensuring
a true match between this books mission, its content and the needs of the market it
serves.
Stephen Patterson was the nucleus of a dedicated and conscientious team of
Richard D. Irwin professionals. Having heard anecdotes of developmental channel
Marketing Channels Edinburgh Business School

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Acknowledgments/ Marketing Channels Framework

conflicts from other authors, we expected to practice some of the conflict resolution
strategies (addressed in Module 10) in our dealings with the publisher. This was not
the case. The following members of the Irwin team epitomised the sort of cooperation, coordination and specialised contributions that lead to long-term, successful
exchange relationships: Rob Zwettler, publisher; Colleen Suljic, marketing manager;
Eleanore Snow and Lynn Mooney, developmental editors; Andrea Hlavacek,
editorial coordinator; Jean Lou Hess, project supervisor; Liz McDonald, copyeditor;
Michael J. Hruby, picture researcher; and Crispin Prebys, designer.
Like channel relationships, Marketing Channels: A Relationship Management Approach
is an ongoing process. So we look forward to hearing your suggestions for improvements and your experiences using our book.
We agree with Professor Drucker marketing channels will be the route to sustainable market value. We sincerely hope that Marketing Channels: A Relationship
Management Approach is a worthy vehicle for providing market value to students.
Lou E. Pelton
David Strutton
James R. Lumpkin

xviii

Edinburgh Business School Marketing Channels

PART 1

Marketing Channels Framework


Module 1 Where Mission Meets Market
Module 2 Channel Roles in a Dynamic Marketplace
Module 3 Conventional Marketing Systems
Module 4 Marketing Mix and Relationship Marketing

Marketing Channels Edinburgh Business School

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Part 1/ Marketing Channels Framework

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Edinburgh Business School Marketing Channels

Module 1

Where Mission Meets Market


Contents
1.1 The Elements of Successful Marketing Channels ................................1/1
1.2 What Is a Marketing Channel? ..............................................................1/4
1.3 Evolution of Marketing Channels ..........................................................1/5
1.4 Channel Intermediaries: The Customer Value Mediators.................1/9
1.5 Channel Relationship Model (CRM) .................................................. 1/15
1.6 The CRM: Compass Points ................................................................. 1/18
1.7 Key Terms ............................................................................................ 1/19
Learning Summary ......................................................................................... 1/19
Review Questions ........................................................................................... 1/20
Learning Objectives
After reading this module, you should be able to:
Discuss how pooled resources, collective goals, connected systems, and flexibility relate to successful marketing channels.
Defend the association between a marketing organisations mission statement
and the market(s) that it serves.
Define a marketing channel, and explain how marketing channels create exchange utility.
Trace the evolution of marketing channels from a production to a relationship
orientation.
Define channel intermediaries and explain how they create customer value.
Describe how the definition of marketing channels relates to the Channel
Relationship Model (CRM).

1.1

The Elements of Successful Marketing Channels


For marketing channels to succeed in a competitive marketplace, independent
marketing organisations must pool individual resources to achieve collective goals
through a connected system. In addition, this connected system must be flexible enough
to accommodate changes in the environment. By combining their strengths,
organisations hope to achieve global success which they would be unable to achieve
individually. Lets take a look at the four key elements of success in channels.

Marketing Channels Edinburgh Business School

1/1

Module 1 / Where Mission Meets Market

1.1.1

Pooled Resources
A marketing channel operates as a team, sharing resources and risks to move
products and resources from their point of origin to their point of final consumption. Consider how the US beer industry operates, for example.
The US has a three-tier beer distribution system, which consists of brewers,
distributors and retailers. Over 3000 beer distributors, with over 130000 employees,
manage the multibillion-dollar business of delivering brew to retailers..1 From
Anaheim (California) to Zanesville (Ohio), these wholesale distributors make sure
that beer flows from brewers to a variety of retail outlets ranging from neighbourhood taverns to local convenience stores. In the US, the basic system is that brewers
must sell to distributors, distributors sell to retail outlets and only retail outlets can
sell beer to consumers. So, for a consumer to quaff a beer, a literal give and take
has to unfold between breweries, wholesale distributors, and retailers.
Beer distributors do more than pool resources for retailers. It is not unusual to
see distributors acting as field operatives, talking with customers, straightening up
cases of beer on retail floors, and cleaning draft-beer lines. Not only do distributors
provide retailers with merchandising and promotional assistance, they also gather
market information for the breweries marketing staffs.2

1.1.2

Collective Goals
A sense of shared purpose helps unite organisations within marketing channels,
particularly when the organisations sense a chance to win a critical competition for
market share. While at times these connections are short in duration, they sometimes last for decades.
The purpose shared by members of an organisation is reflected in the organisations mission statement. A mission statement is an organisations strategic charter
a public declaration of why it exists. A mission statement proclaims: (1) an
organisations goals, (2) the procedures to be employed in pursuit of those goals,
and (3) how the organisation intends to satisfy the needs of its internal and external
customers.
The mission statement of FedEx in 2013 was: FedEx Corporation will produce
superior financial returns for its shareowners by providing high value-added
logistics, transportation and related business services through focused operating
companies. Customer requirements will be met in the highest quality manner
appropriate to each market segment served. FedEx will strive to develop mutually
rewarding relationships with its employees, partners and suppliers... Three critical
marketing principles are inherent within FedExs mission. First, FedExs mission
describes who the firm intends to serve: anyone having transportation, distribution and
related business service needs. The mission then explains how the firm intends to serve its
market: by developing mutually rewarding relationships with its employees, partners
and suppliers. Finally, the statement discloses the criteria that FedEx must meet or exceed
to establish a competitive advantage: by offering customers a high-quality service.3

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1.1.3

Connected System
Organisations cannot exist without markets. All business competition emerges
within marketing channels, and the success or failure of all individual enterprise is
ultimately decided there.4 Channel members regulate the flows of goods and
services in the marketplace. The degree to which channel members regulate these
flows has never been more significant than it is today, as illustrated in Time Out 1.1.
The influence of marketing channels is likely to grow every year into the foreseeable
future.

Time Out 1.1 ______________________________________________


Working Together through Marketing Channels
US companies are bringing planes, cars, and even household appliances to
market quicker and less expensively. The key to this revolution? Manufacturers
have decided to lean on their suppliers players within their marketing channels
to help engineer and bankroll their new projects.
This is really an extension of changes that began in the 1980s, when manufacturers first began to attack their high labour expenses by shifting production to
suppliers, who had lower labour costs. Now manufacturers are shaving costs
further by farming out many of the tasks associated with new product development to suppliers. In fact, many manufacturers are no longer manufacturers,
but rather orchestrators who harmonise their suppliers work. Meanwhile,
manufacturers suppliers, who for decades did little more than pound out parts
as cheaply as possible, are staffing their own research and development departments in response to these changing market needs.
McDonnell-Douglas Corp. trimmed 60 per cent of its cost of developing a new
100-seat passenger plane by having suppliers provide start-up tooling costs and
by sub-contracting assembly of the plane. Chrysler exploited its parts suppliers
ability to design everything from car seats to drive shafts. Whirlpool cooked up
its first range without hiring a single engineer. Instead, design work was done by
Eaton Corp., a supplier that already made gas valves for other appliance manufacturers.
Where all this will end is far from clear. But one thing is certain: This change in
the role of marketing channels and channel partnerships will surely increase the
international competitiveness of American companies well into the future.
Question
Despite this glowing report, can you envision any problems that might
emerge from these closer channel member associations?
Adapted from: Remich, Norman C., Jr (1994), The Power of Partnering, Appliance Manufacturer,
42(8), A1A4, and Templin, Neal and Jeff Cole (1994), Working Together: Manufacturers Use
Suppliers to Help Them Develop New Products, The Wall Street Journal, (19 December), A1.
__________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

The next time you sip a cup of coffee, consider the connected forces that impact
its distribution. For one, there is a good chance that those brewed coffee beans were
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grown in Colombia, one of the worlds largest producers of premium-grade coffees.


When Mother Nature abuses Colombias coffee crop with tropical rainfalls or frost,
prices skyrocket on New Yorks Coffee, Sugar & Cocoa Exchange. On the other
hand, coffee prices plummet when word of a good crop spreads across the trading
floor. In turn, these price fluctuations surely affect the behaviour of the companies
that purchase green coffee beans to roast and resell to wholesalers. Ultimately, the
success or failure of Colombias coffee crop affects the price you pay for roasted
beans at your local grocery store or coffee house.5

1.1.4

Flexibility
Marketing channels must be flexible systems in order to be successful. Wroe
Alderson, a prominent marketing theorist of the twentieth century, described
marketing channels as ecological systems. Alderson offered this description because of
the unique, ecological-like connections that exist among the participants within a
marketing channel. As Alderson put it, the organisations and persons involved in
channel flows must be sufficiently connected to permit the system to operate as a
whole, but the bond they share must be loose enough to allow for components to
be replaced or added.6
Whether you prefer cold beer or hot coffee, you probably dont consider how the
barley or beans arrive in a consumable form at your favourite watering hole or
coffee house. Your lack of concern is exactly what this team is striving to create: a
seamless flow from farm to mug. In this book, we discuss how independent
organisations form marketing relationships to create satisfied customers.

1.2

What Is a Marketing Channel?


For many of you, the word channel may conjure up images of a waterway. You
may imagine Mark Twains vivid descriptions of the everchanging Mississippi River
channel in Huckleberry Finn. Or you might envision the English Channel a formidable geographic barrier that has kept England secure from foreign invasion since
the year 1066. On the other hand, the term may remind you of the mechanical
device that allows you to flip from one football game to another on an autumn
weekend.
Regardless of the image, each implies the presence of a passageway, a real or
imaginary conduit allowing certain processes to occur. Such imagery offers a
surprisingly accurate description. The term marketing channel was first used to
describe the existence of a trade channel bridging producers and users.7 Early
writers compared marketing channels to paths through which goods or materials
could move from producers to users. This description makes it easy to understand
how the term middleman came into being as a way to explain product flows.8 Since
then, a whole lot of other flows have been made possible by marketing channels.
Try to instil a sense of movement in your understanding of marketing channels.
This movement of products and services is only made possible through the exchange process. Recall that marketing is an exchange process. In fact, the concept of
exchange lies at the core of marketing. Exchange occurs whenever something

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tangible (e.g., a meal) or intangible (e.g., a political concept) is transferred between


two or more social actors. In fact, marketing is generally studied as an exchange
process.9 Marketing is a social process by which individuals and groups obtain what
they need and want through creating and exchanging products and value with
others.10
Now consider that marketing channels facilitate the exchange process. Since marketing
focuses on the activities and behaviours necessary for exchange to occur, channels
should be thought of as exchange facilitators. Thus, any connection between individuals and/or organisations that allows or contributes to the occurrence of an exchange
is a marketing channel.
So, a marketing channel can be defined as an array of exchange relationships
that create customer value in the acquisition, consumption, and disposition of
products and services. This definition implies that exchange relationships emerge
from market needs as a way of serving market needs. Channel members must come to the
marketplace well equipped to address changing market needs and wants.
On your next trip to the supermarket, consider the variety of prepared foods in
and around the deli case. Consumers are increasingly opting for fast, convenient,
ready-to-serve meals. With supermarket managers pressured to compete in the
prepared foods market, restaurant equipment manufacturers are lending a helping
hand by partnering with other suppliers to offer turnkey food preparation programmes. These turnkey programmes offer grocery retailers a ready-to-serve
package that includes equipment, training, and in-store promotional support. One
such programme was Hobart Corporations Pizza-To-Go, which offered retailers
(and their customers) a variety of pizza options. Hobarts Pizza Planning Guide
covered everything from cheese suppliers to triple cheese pizza recipes. Turnkey
programmes like Pizza-To-Go offer retail grocers big returns on small space
investments, and the programmes ultimately help supermarkets create satisfied
customers.11
By definition, activities or behaviours that contribute to exchange cannot exist
without first having markets. In market settings, it is understood that no individual
or organisation can operate for long in complete isolation from other individuals or
organisations. The interaction between Hobart (equipment producers), cheese
suppliers (wholesale distributors), supermarkets (retailers), and hungry patrons
(consumers) demonstrates how exchange relationships emerge from market needs as a
way of serving market needs. In each case, some interaction must exist for marketing to
occur. In the next section, we investigate how, as a result of such interactions,
marketing channels have evolved from a distribution to a relationship orientation.

1.3

Evolution of Marketing Channels


Marketing channels always emerge out of a demand that marketplace needs be
better served. However, markets and their needs never stop changing; therefore,
marketing channels operate in a state of continuous change and must constantly
adapt to confront those changes. From its inception to its contemporary standing,
the evolution of marketing channels thought can be divided into four stages.

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1.3.1

The Production Era and Distributive Practices


The origins of marketing as an area of study are inextricably tied to distributive
practices. The earliest marketing courses, in fact, were essentially distribution
courses. Course titles like Distributive and Regulative Industries of US Distribution
of Agricultural Products and Techniques of Trade and Commerce abounded at
Schools of Commerce during the early 1900s. These courses addressed the ways in
which marketing channels spawned middlemen who, in turn, facilitated more
efficient movements of goods and services from producers to users.12 As American
productivity and urbanisation increased with each passing decade of the twentieth
century, the demand for a variety of production resources to be used as manufacturing inputs naturally followed suit. Rapidly growing urban centres demanded larger
and more diverse bundles of goods than had previously been available. By 1929,
retailing accounted for nearly $50 billion of US trade.13 Modern-looking market
channels emerged in response to the need for more cost-effective ways of moving
goods and raw resources.14
One description of marketing channels taken from this era stated, Transportation and storage are concerned with those activities which are necessary for the
movement of goods through space and the carrying of goods through time.15
Increasingly, facilitating devices were needed to transport, assemble, and reship goods.
Thus, the origins of the modern marketing channel cannot be separated from purely
distributive practices.

1.3.2

The Institutional Period and Selling Orientation


The Gross National Product of the US grew at an extraordinary rate during the
1940s and this industrial expansion contributed to the emergence of sizeable
inventory stockpiles. The cost of managing these inventories grew rapidly as well.16
Production techniques and marketing channel processes each became more sophisticated during this period. Issues pertaining to distribution primarily revolved
around cost containment, controlling inventory, and managing assets. Marketers
were shifting from a production to a sales orientation. The attitude that a good
product will sell itself receded as marketers encountered the need to expand sales
and advertising expenditures to convince individual consumers and organisations to
buy their specific brands.17 The classic marketing mix, or Four Ps typology
product, price, promotion, and place emerged as a guiding marketing principle.
Issues relating to distribution were relegated to the place domain.18 The idea that
relationships between buyers and sellers could be managed did not yet exist as a
topic of study.
Many new types of channel intermediaries surfaced during this period. For example, industrial distributors emerged in the channel of distribution for most
industrial products and consumer durables. And by the late 1950s, sales by merchant
wholesalers reached $100 billion.19 Producers were continuously seeking new ways
to expand their market coverage and distributive structures. Several giant retailers
had emerged by this time, and small retailers were increasingly formalising and
specialising their operations to meet the needs of a more refined marketplace.20

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1.3.3

The Marketing Concept


In 1951, Robert Keith, vice president of marketing at Pillsbury, introduced a seminal
marketing principle to the business world: the marketing concept. According to the
marketing concept, the customer is the nucleus of all marketing mix decisions.
As such, organisations should only make what they can market instead of trying
to market what they have made.
The marketing concept is intuitively appealing because its focus is on the customer. In this sense, however, the marketing concept paints a very one-sided
approach to reconciling a firms mission with the markets it serves because it
positions marketers as reactive exchange partners adapting channels of distribution to meet market needs.21 A few of the ways that Coke is applying the marketing
concept through its marketing channels are described in Time Out 1.2.

Time Out 1.2 ______________________________________________


Coca-Cola Bottler Assures Customer Satisfaction through Its Intermediaries
Coca-Cola Bottling Company United, Inc. is one of the largest independent
bottlers of Coca-Cola products in the United States. Headquartered in Birmingham, Alabama, Uniteds territory covers part of Alabama, Mississippi, Georgia,
South Carolina, and Tennessee. The company supplies Coca-Cola products to
many different intermediaries including supermarkets, drugstores, mass merchandisers, convenience/oil stores, restaurants, and vending machines. It is also
present at special events such as the Masters Golf Tournament and local events
such as county fairs. Its customers satisfaction depends on quality delivery.
United assures that quality by maintaining regular delivery schedules, prompt
and accurate invoicing, and proper maintenance of its customers inventory.
Question
Often, the flows of seemingly simple products are not simple at all. Why?

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Coca-Cola USA

Coca-Cola Bottling Company United, Inc.


Eastern Region Bottling

Supermarkets

Convenience/
Oil stores

Cold drink

Mass
merchandisers

Kroger, Bi-Lo,
Winn Dixie, etc.

Texaco,
BP

Applebees
Outback Steaks

Wal-Mart
Kmart

Special Events
Masters Golf

Coke machines

Consumers

Time Out is based on author conversation with Tom Smillie, Marketing Analyst, Eastern Region,
Coca-Cola Bottling Company United, Inc.
__________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

1.3.4

Relationship Marketing Era


The marketing concept proved a logical precursor to the Total Quality Management
(TQM) philosophy espoused by the late W. Edwards Deming. TQM suggests a
highly interactive approach in which customers become active partners with
producers, wholesalers, or retailers (channel members) to solve marketplace
problems. The TQM philosophy initiated a mindset among managers that a firms
relationship with its customers fosters market-share gain and customer retention.
This mindset developed alongside an era in marketing theory and practice known as
relationship marketing.
The relationship marketing era is characterised by a fundamental shift from a
customer voice to a customer dialogue. Rather than just reacting to customer-initiated
feedback, the channel member proactively initiates and maintains a participative
exchange with its customers. The concept of participation infers a high degree of
cooperation and coordination between customers and their suppliers. Close

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relationships between customers and their suppliers have revolutionised marketing


channels in two ways:
Close relationships emphasise a long-term, win-win exchange relationship based
on mutual trust between customers and their suppliers.22
They reinforce the relationship dimension of exchange that is at the heart of
marketing.
The progression through these four stages from a production to a relationship
approach in marketing channels has been fostered by the evolving contributions
channel intermediaries have made toward the creation of customer value.

1.4

Channel Intermediaries: The Customer Value Mediators


The relationship perspective introduced above is a far cry from the traditional view
of markets as physical places where people gathered to engage in trade. A glimpse at
ancient Romes economy will help you understand the progression of marketing
channels from a distribution to a relationship orientation:
At one end of the busy process of exchange were peddlers hawking through
the countryside; daily markets and periodical fairs; shopkeepers haggling
with customers A little higher in the commercial hierarchy were shops that
manufactured their own merchandise At or near ports were wholesalers
who sold goods recently brought in from abroad.23

This passage shows how a logical channel structure emerged very early in the
history of institutionalised markets. An established channel structure is clearly
reflected within the organised behavioural system of peddlers, auctioneers, merchant
wholesalers, and shopkeepers who directed the flow of goods and services in Rome.
Each market player described above performed a role fulfilled by entities now
known as channel intermediaries.
Channel intermediaries are individuals or organisations who mediate exchange
utility in relationships involving two or more partners. Intermediaries generate form,
place, time, and/or ownership values by bringing together buyers and sellers. While
the names of the players have changed, the functions performed by channel
intermediaries remain essentially the same. Intermediaries have always helped
channels to CRAM it: create utility by contributing to Contactual efficiency,
facilitating Routinisation, simplifying Assortment, and Minimising uncertainty
within marketing channels.

1.4.1

Contactual Efficiency
Channels consist of sets of marketing relationships that emerge from the exchange
process. An important function performed by intermediaries is their role in optimising the number of exchange relationships needed to complete transactions.
Contactual efficiency describes this movement toward a point of equilibrium
between the quantity and quality of exchange relationships between channel

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members. Without channel intermediaries, each buyer would have to interact


directly with each seller, making for an extremely inefficient state of affairs.
When only two parties are involved in an exchange, the relationship is said to be
a dyadic relationship. The process of exchange in a dyadic relationship is fairly
simple, but it becomes far more complicated as the number of channel participants
increases. Consider the following formula to understand how quickly the exchange
process within a given channel can become complicated. The number of exchange
relationships that can potentially develop within a channel is equivalent to (3n - 2n +
1)/2, where n is the number of organisations in a channel. When n is 2, only one
relationship is possible. However, when n increases to 4, up to 25 relationships can
unfold. Increase n to 6, and the number of potential relationships leaps to 301. The
number of relationships unfolding within a channel would quickly become too
complicated to efficiently manage if each channel member had to deal with all other
members. In this context, the value of channel intermediaries as producers of
contactual efficiency becomes obvious. Still, having too many intermediaries in a
marketing channel likewise leads to inefficiencies. As the number of intermediaries
approaches the number of organisations in the channel, the law of diminishing
returns kicks in. At that point, additional intermediaries add little to no incremental
value within the channel. These relationships are illustrated in Exhibit 1.1.

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Exhibit 1.1

Contactual efficiency

No Intermediary
M1

M2

M3

M4

C1

C2

C3

C4

M3

M4

C3

C4

Single Intermediary
M1

M2

INTER

C1

C2

Four Intermediaries
Law of Diminishing Returns
M1

M2

M3

M4

I1

I2

I3

I4

C1

C2

C3

C4

Marketing Channels Edinburgh Business School

C = Customer
I = Intermediary
M = Manufacturer

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The pharmaceutical drug industry illustrates how contactual efficiency shapes up


in the marketplace. McKesson Corporation, an American drug and personal care
products wholesaler, acts as an intermediary between drug manufacturers and retail
pharmacies. Millions of transactions would be necessary to satisfy the needs of the
some 40000 pharmacies in the US if these pharmacies had to order on a monthly
basis from the 1500 US pharmaceutical drug manufacturers. When our example is
broadened to the possibility of daily orders from these pharmacies, the total number
of monthly transactions required would be nearly impossible to consummate.
However, introducing wholesale distributors into the pharmaceutical channel
reduces the number of annual transactions illustrating the essence of contactual
efficiency..24

1.4.2

Routinisation
The costs associated with generating purchase orders, handling invoices, and
maintaining inventory are considerable. Now imagine the amount of order processing that would be necessary to complete millions upon millions of
pharmaceutical transactions. In recognition of this, McKesson Corporation offered
Economost, a computer-networked ordering system for pharmacies that provided fast,
reliable, and cost-effective order processing. The system processed each order
within one hour and routed the order to the closest distribution system for delivery.
Economost relieved retailers of many of the administrative costs associated with
routine orders and, not coincidentally, made it more likely that McKesson would get
their business as a result of the savings.25 Nowadays this approach is commonly
adopted with many organisations turning to enterprise software to manage business
operations such as that offered by SAP AG.
The Economost system represented the state of the art in routinisation. Routinisation refers to the means by which transaction processes are standardised to improve
the flow of goods and services through marketing channels. Routinisation itself
delivers several advantages to all channel participants. First, as transaction processes
become routine, the expectations of exchange partners become institutionalised.
There is then no need to negotiate terms of sale or delivery on a transaction-bytransaction basis. Second, routinisation permits channel partners to concentrate
more attention on their own core business concerns. Furthermore, routinisation
provides a basis for strengthening the relationship between channel participants.

1.4.3

Sorting
Organisations strive to ensure that all market offerings they produce are eventually
converted into goods and services consumed by those in their target market. The
process by which this market progression unfolds is called sorting. In a channels
context, sorting is often described as a smoothing function. This function entails the
conversion of raw materials to increasingly more refined forms until the goods are
acceptable for use by the final consumer. The next time you purchase a soda,
consider the role intermediaries played in converting the original syrup (often
produced in powdered form) to a conveniently consumed form. Coca-Cola USA
ships syrup and other materials to bottlers throughout the world. Independent

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bottlers carbonate and add purified water to the syrup. The product is then packaged and distributed to retailers.
Two principal tasks are associated with the sorting function. They are:26
Categorising. At some point in every channel, large amounts of heterogeneous
supplies have to be converted into smaller homogeneous subsets. Returning to
our pharmaceutical example, the number of drugs or drug combinations available through retail outlets is huge. Over 10000 drugs or drug combinations
currently exist. In performing the categorisation task, intermediaries first arrange
this vast product portfolio into manageable therapeutic categories. The items
within these categories are then categorised further to satisfy the specific needs
of individual consumers.
Breaking Bulk. Producers try to produce in bulk (i.e., large) quantities. Thus, it
is often necessary for intermediaries to break homogeneous lots into smaller
units. How does this apply to distribution of drug products? Over 60 per cent of
the typical retail pharmacys capital is tied to the purchase and resale of inventory. The opportunity to acquire smaller lots means smaller capital outflows are
necessary at a single time. Consequently, pharmaceutical distributors must continuously break bulk to satisfy the retailers lot size requirements.
The sorting functions contributions to profit are astounding, helping to convert
billions of dollars of unproductive inventory into sales.

1.4.4

Minimising Uncertainty
The role that intermediaries play in reducing uncertainty is perhaps their most
overlooked function. Several types of uncertainty develop naturally in all market
settings.27
Need Uncertainty
Need uncertainty refers to the doubts that sellers often have regarding whether they
actually understand the needs of their customers. Most of the time neither sellers
nor buyers understand the exact machines, tools, or services required to reach
optimal levels of productivity. Since intermediaries function as bridges linking sellers
to buyers, they can become much closer to both producers and users than producers and users are to each other. As a result, the intermediary is in the best position to
understand each of their needs and reduce sellers uncertainty by carefully reconciling what is available with what is needed.
Few members within any channel are able to accurately state and rank their
needs. Instead, most channel members have needs they perceive only dimly, while
still other firms and persons have needs of which they are not yet aware.28 In
channels where there is a lot of need uncertainty, intermediaries generally evolve
into specialists. The ranks of intermediaries must then increase, while the roles they
play become more complex. Conversely, the number of intermediaries generally
declines as need uncertainty decreases.
Market Uncertainty
Market uncertainty depends on the number of sources available for a product or
service. Market uncertainty is generally difficult to manage because it often results

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from uncontrollable environment factors i.e., social, economic, and competitive


factors. One means by which organisations can reduce their market uncertainty is by
broadening their view of what marketing channels can, and perhaps should, do for
them.
Transaction Uncertainty
Transaction uncertainty relates to imperfect channel flows between buyers and
sellers. When we consider product flows, we typically think of the delivery or
distribution function. Intermediaries play the key role in ensuring that goods flow
smoothly through the channel. The delivery of materials frequently must be timed
to precisely coincide with the use of those goods in the production processes of
other products or services. Problems arising at any point during these channel flows
can lead to higher transaction uncertainty. Such difficulties could arise from legal,
cultural, or technological sources. When transaction uncertainty is high, buyers
attempt to secure parallel suppliers, although this option is not always available.
Uncertainty within marketing channels can be minimised through careful actions
taken over a prolonged period of exchange. Naturally, as exchange processes
become standardised, need, market, and transaction uncertainty is lessened. Furthermore, as exchange relationships develop, uncertainty decreases because exchange
partners have got to know one another better and are communicating their needs
and capabilities.
The functions performed by marketing intermediaries concurrently satisfy the
needs of channel members in several ways.29
Facilitating Strategic Aims. The most basic way that the needs of market
channels can be assessed and then satisfied centres on the role channel intermediaries can perform in helping channel members reach the goals mapped out in
their strategic plans.
Fulfilling Interaction Requirements. This refers to the degree of coordination
and on-site service required by members of a marketing channel. Coordination
provides the means by which harmony in ordering systems, delivery timing, and
merchandising is achieved between buyers and sellers.
Satisfying Delivery and Handling Requirements. How often do customers
need deliveries? What are their order quantities? To what extent will demand
fluctuate? These questions typify the processes involved in matching channel
functions to the need for efficient resource management within marketing channels. Channel members are often unaware of their precise delivery and handling
requirement needs. By minimising transaction uncertainty, channel intermediaries help clarify these processes.
Managing Inventory Requirements. The costs of financing and carrying
inventory differ across product categories and channel members. The proficiency, with which they determine and ultimately satisfy warehousing, stock-out, and
product substitutability needs, sets intermediaries apart from each other.
To summarise, channel intermediaries, by bridging producers and their customers, are instrumental in aligning an independent organisations mission with the
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market(s) it serves. Channel intermediaries foster relationship-building by providing


these fundamental functions in the marketing channel.

1.5

Channel Relationship Model (CRM)


Earlier in this module, we defined a marketing channel as an array of exchange
relationships that create customer value in the acquisition, consumption, and
disposition of products and services. Each component of this definition is embedded in the Channel Relationship Model (CRM) pictured here as Exhibit 1.2. While
the marketing channel participants will likely change over time, the CRM provides a
structure for examining marketing channels, exchange relationships and the creation
of customer value.
Exhibit 1.2

Channel Relationship Model (CRM)

er n

al
C

En

nn

rs
le
ai

et

a tio

e
ts

ke

ar

lC
ha

nt

rc

Relationship
Interaction

Cooperation

er
s
uc
Pr
od

rs

Economic
Exchange

le
sa
le

ho

a
orm
Inf

tion

Conflict

m
for
In

me

ou

es

Int er na

ha
nn
el
on

vi

on

me

nt

vir

En

E xt
Impressions
I n t er n al C

Coordination

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1.5.1

Array of Exchange Relationships


The term array refers to the assortment of human (social) interactions that occur
within and between marketing channels. In the CRM, there are three fundamental
human interactions. The first interaction is within the marketing organisation
(intraorganisational). The second interaction is between marketing organisations
(interorganisational). Finally, the last set of exchange relationships is between
marketing organisations and their environments. How do these exchange relationships play out in the marketplace?
In the 1990s Table Toys, Inc., a small Texas-based toymaker, rose to compete with
market giants in the $17 billion toy industry. But it wasnt easy. The flagship table
product itself was developed as a result of an internal exchange relationship: a
marriage. The companys founder, Donna Buske, asked her husband to build a table
to organise the Lego blocks typically scattered on the floor at the Houston day care
centre where she worked. Her husband, a furniture maker, returned with a wooden
table equipped with a recessed basket for the loose blocks. That table eventually
became the prototype for the popular Fun Tables and Play Tables that accommodate
Lego blocks at doctors offices, day care centres, and homes throughout the US.
In spite of their creativity, however, the Buskes found it difficult to get their
product on retail store shelves. For example, Toys R Us initially told them, We
dont talk to manufacturers and we dont look at prototypes. So the Buskes
connected with a toy industry veteran who introduced the Buskes to a manufacturers sales representative (intermediary). He, in turn, successfully forged relationships
with other organisations, including Target, an American discount retailer, and Toys
R Us! Upon getting the orders, the Buskes then had to develop relationships with
plastic moulders to fill market demand.30
Later, the Buskes faced another problem: copycats in the competitive environment. Many manufacturers produce similar tables at lower cost. Organisations have
to interact with the external environment to maintain their competitive position in
the marketplace just as they have to develop relationships between other organisations.
Fundamental changes are currently unfolding in nearly all industries and these
changes are redefining the nature of the marketplace. The needs of industrial users
and consumers are becoming increasingly sophisticated, to the point where many
now insist on consultative and value-added partnerships rather than impersonal and
brief encounters.31 The array of exchange relationships is critical to the development
of customer value.

1.5.2

Creating Customer Value


Organisations take part in marketing channels because they receive a certain value,
known as exchange utility, from their participation. Exchange utility is the sum of
all costs and benefits realised separately or jointly by all the persons or organisations
participating in an exchange relationship.

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Four Components of Customer Value


For customers, marketing channels create form, place, possession, and time utilities.
To illustrate how channels create utility, consider the seemingly routine purchase of
a litre of milk. Because of the value added by marketing channels, milk is available
for immediate consumption in the form sought by consumers (e.g., skimmed, lowfat, or whole; white or chocolate; one or two litres). This creates form utility. Place
utility saves buyers from having to go to the farm and find a cow when they need
milk. Possession utility offers consumers a convenient way to take ownership of the
product. Retail outlets usually have clearly established prices, eliminating the need to
negotiate terms of sale. The presence of time utility implies that goods and services
will be available when they are needed. Milk shortages are thankfully rare. Consequently, few of us think about the complicated system of flows that are responsible
for bringing milk from farms to kitchens.
Maintaining Customer Relationships
Investing in efforts to maintain existing customers is far more cost efficient than
investing in attracting new customers. In fact, businesses spend six times more
money to attract new customers than they do to keep existing ones. This is one
reason why companies take customer service so seriously.
Complaining customers are much more likely to continue doing business with an
organisation if they perceive the problem has been resolved in their favour. Typically, the newly satisfied customer is also likely to spread the good word to other
people. Given such word-of-mouth communication, it is obvious that the way
problems within the customersupplier relationship are resolved has far-reaching
ramifications. And the opportunity to develop long-term customer relations is not
limited to product manufacturers or suppliers. For instance, American and United
Airlines have each developed their own ticketing and reservation systems. These
systems generate information that they subsequently use to fashion unique customer
alliances within the highly price-competitive air travel industry.

1.5.3

Products and Services Flows


In the past, channel management almost exclusively focused on the activities
necessary to acquire goods and services.32 However, the activities associated with
the other two stages of exchange between producers and consuming organisations
in marketing channels consumption and disposition should not be overlooked.
Acquisition
Acquisition involves the acts by which channel entities obtain products and
services. Professional contract-purchasing (PCP) organisations are an emerging
force in marketing channels. These organisations provide their customers with
increased purchasing power by connecting them to established networks featuring,
in some industries, thousands of suppliers. Teams of PCP specialists save clients
time and money by eliminating costly details associated with order processing and
price shopping. As a result, their clients can often free up capital and labour
resources which they can then redirect to more profitable operations.33 Marketing

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channels are also changing in response to the increasing number of alliances that
have emerged between purchasing firms and their suppliers. These alliances are
becoming popular as tools for carving out competitive advantages.34
In marketing channels, the act of consumption involves the utilisation of resource inputs (goods and services) in the production of resource outputs.
Consumption in marketing channels is typically evaluated as a function of materials
management. That is, consumption activities relate to how materials and information flow from the point of production to the final user. Increasingly in
marketing channels, products and services are being consumed in new and different
ways.
A practice known as outsourcing lies behind many of these changes. Outsourcing occurs when companies hire outside providers to assist them in any of a variety
of business practices. The use of outsourcing has grown as manufacturers and
suppliers face the need to replace outdated technologies while maintaining customer
satisfaction. Organisations who use outsourcing gain updated technological links to
customers without a significant upfront investment.35
Disposition
At some point, all entities who have participated in channel relationships must
engage in the act of disposition. Disposition refers to all behaviours or activities
associated with channel members efforts to detach themselves from tangible and
intangible goods.36 Many firms have developed relationships with specialists who
understand environmental regulations, hazardous waste treatment, and physical
plant safety. These responses have been prompted by what is either a genuine
concern for the environment or a logical concern for what may happen to firms
who appear unconcerned with the environment.
When recycling products, consumers become de facto producers, supplying manufacturers with presorted materials that re-enter production systems as inputs in the
creation of new products. This process has become known as reverse logistics.
Have you ever taken aluminium cans to a recycling centre? By doing so, you took
part in one of the many marketing channels for recycled goods.

1.6

The CRM: Compass Points


This textbook takes you on a journey through marketing channels principles and
practices from a relationship marketing perspective. Each of the major ideas and
themes examined in the rest of this book is grounded either directly or indirectly in
the Channel Relationship Model (CRM). The CRM is illustrated in Exhibit 1.2. The
CRM captures four classes of exchange relationships in marketing channels:
The relationship between a channel member and its external environment is shown
in the CRM and is addressed in Part 2 of the textbook. Part 2 investigates how
various macroenvironmental forces such as economic, technological, political,
legal, ethical, and sociocultural dynamics affect channel members goal-oriented
activities.

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The relationship between a channel member and its internal environment is shown
in the model and is addressed in Part 3. In Part 3, we critically assess the setting
(atmosphere) in which social and economic interactions between channel members take place. Part 3 also considers the social issues and problems which beset
the relationship process: coordination, conflict, and cooperation.
In Part 4, the relationship between channel systems is discussed. Part 4 also
discusses vertical integration in marketing channels, and the role of franchising in
the global marketplace.
Finally, long-term relationships between channel members and their channel
systems are shown in Part 5 of the CRM. Part 5 describes how strategic partnering can foster superior system performance.
Before we proceed, however, we need to develop a framework for this discussion
by considering the individual channel member and the marketplace in which it
operates. We will do this in the remainder of Part 1.
Channel members must be equipped to contend in a fiercely competitive marketplace. In Module 2, we will discuss how channel members strive for a competitive
advantage in a dynamic marketplace.

1.7

Key Terms
acquisition
channel intermediary
consumption
contactual efficiency
disposition
dyadic relationship

exchange utility
marketing channel
mission statement
outsourcing
routinisation

Learning Summary
Marketing channels have traditionally been viewed as a bridge between producers
and users. However, this perspective fails to capture the complex network of
relationships that facilitate marketing flows: the movement of goods, service,
information, and so forth between channel members. Marketing and distribution
were inextricably intertwined at the beginning of the twentieth century. As the
production era of marketing emerged, the demand for middlemen increased. In a
historical sense, these middlemen contributed substantially to the movement of
goods and people from rural area to new industrialised urban centres. By the 1940s,
when the selling era in marketing began, new sort of middlemen now known as
intermediaries had surfaced in the marketplace. Large retailers expanded further,
while smaller retailers generally settled into unserved or underserved market niches.
The selling era rather quickly gave way to the marketing concept era. The increasingly widespread recognition of the importance of the marketing concept during the
latter half of this century has been paralleled by an emerging behavioural thrust in
marketing channels.

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Since the core of marketing is the exchange process, marketing channels can be
viewed as exchange facilitators. This allows marketing channels to be defined as an
array of exchange relationships that create customer value in the acquisition,
consumption, or disposition of goods and services. Exchange relationships, and
thus marketing channels themselves, emerge from market needs as a way of more
efficiently serving market needs. Exchange utility is the sum of all costs and benefits
recognised by the exchange parties. Utility can feature form, place, possession, and
time dimensions.
This broadened definition of marketing channels offers several advantages: (1) it
allows marketing channels to be studied as behavioural systems, (2) it extends the
scope of the functions performed within marketing channels to include those
involved with usage and disposition, and (3) it illustrates the trade-off of costs and
benefits that inevitably occur in exchange relationships.
A sense of shared purpose connects organisations and individuals in the marketplace. This is also true of marketing channels. For this reason, the activity known as
channel management can be viewed as the point at which an organisations mission
and the market(s) it serves come together. An organisations mission is its strategic
charter that describes the ways the firm will seize market opportunities while
satisfying the needs of internal and external customers. A mission statement also
describes who the firm intends to serve, how it intends to serve them, and what means
will be used to establish competitive advantages in the market(s) of interest. Toward
this end, the overriding mission of channel intermediaries is to serve as middlemen.
But this role should be broadly defined for any organisation or individual who
mediates exchange is a middleman. Channel intermediaries serve four key functions:
to promote contactual efficiency and routinisation, to provide assortment, and to
minimise uncertainty.
A contemporary relationship-oriented approach to the study of marketing channels
is adopted in this book. A Channel Relationship Model (CRM) serves as a framework
for presenting the material addressed throughout the text. Three fundamental
interactions are shown in the CRM. The first occurs within the marketing organisation. The second develops between marketing organisations. The last interaction
unfolds between marketing organisations and their environments. Through the CRM,
the role of channel environments, channel climates, and interaction processes in
fostering business relationships is investigated. The CRM perspective will ultimately
enable you to better understand how exchange partners can achieve their strategic
aims through interacting in marketing channels and dynamic marketplaces.

Review Questions
Short-Answer and Essay Questions

1/20

1.1

List the four elements needed for a successful marketing channel.

1.2

During which era did the classic marketing mix, or Four Ps typology product, price,
promotion, and place emerge as a guiding marketing principle?
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1.3

In a channels context, what is another term for sorting?

1.4

Generally speaking, what happens to the number of intermediaries in a channel as need


uncertainty decreases?

1.5

How would a typical buyer react to high transaction uncertainty?

1.6

What structure is used to show how an array of exchange relationships can create
customer value in the distribution of products and services?

1.7

List the three activities associated with the flow of products and services through
marketing channels.

1.8

According to your text, what is a marketing channel?

1.9

How has the relationship marketing era revolutionised marketing channels?

1.10 H. E. Kimmel, a twentieth-century admiral, wrote, Efficiency produces more with less
effort. How does his statement support the concept of contactual efficiency?
1.11 How does routinisation positively affect channel members?

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Multiple Choice Questions


1.12 According to the text, which of the following is an element needed for a successful
marketing channel?
A. Flexibility.
B. Connected systems.
C. Pooled resources.
D. Collective goals.
E. All of the above.
1.13 As Bernie looked at a folder from the New Mexico Department of Health, he read, We
administer all provisions of laws relating to public health laws and regulations of the
State Board of Health, supervising and assisting county and regional boards and departments of health, and doing all other things reasonably necessary to protect and improve
the health of the people. Bernie was reading an example of a(n):
A. organisational strategy.
B. departmental goal.
C. mission statement.
D. focused objective.
E. integrated statement of purpose.
1.14 A(n) ____ is an organisations strategic charter a public declaration of why it exists.
A. logistical purpose
B. corporate objective
C. justification
D. organisational logistics
E. mission statement
1.15 It is 1940 manufacturers have a selling orientation. Which of the following statements
is Jack most likely to have overheard while he eavesdropped on a group of manufacturers discussing business?
A. I am trying to develop long-term relationships with my retailers.
B. The cost of managing my inventory is going to drive me to bankruptcy.
C. Distribution getting it from Point A to Point B thats the only thing I worry
about.
D. Someone please explain the place domain in this new Four Ps typology.
E. If you want to be a success, focus on the customer.
1.16 What is the fundamental difference between relationship marketing and the sales,
production, and marketing eras?
A. The marketing concept is being totally abandoned in the relationship marketing
era.
B. The idea of exchange is becoming less important in the relationship marketing
era.
C. The length of the channels is becoming shorter in the relationship marketing
era.
D. The relationship marketing era supports centralised management, downsizing,
and increased computerisation of distribution activities.
E. The relationship marketing era is characterised by a customer dialogue.
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1.17 Contactual efficiency describes:


A. how large amounts of heterogeneous supplies are converted into smaller
homogeneous subsets.
B. the structure needed for examining how an array of exchange relationships can
create customer value in the distribution of products and services.
C. the degree of coordination and on-site service required by members of a
marketing channel.
D. the movement toward a point of equilibrium between the quantity and quality
of exchange relationships between channel members.
E. the means by which transaction processes are standardised to improve the
flow of goods and services through marketing channels.
1.18 When Mike mows his yard, he collects the lawn clippings and gives them to his
neighbour Eilene, who uses them to mulch around her roses. In return for the mulch,
she gives Mike roses for his hall table. Since Eilene and Mike are the only two people
involved in this exchange, they can be said to have a ____ relationship.
A. need-certainty
B. single-level
C. dyadic
D. bi-level
E. dual-exchange
1.19 Routinisation refers to:
A. how large amounts of heterogeneous supplies are converted into smaller
homogeneous subsets.
B. the structure needed for examining how an array of exchange relationships can
create customer value in the distribution of products and services.
C. the degree of coordination and on-site service required by members of a
marketing channel.
D. the movement toward a point of equilibrium between the quantity and quality
of exchange relationships between channel members.
E. the means by which transaction processes are standardised to improve the
flow of goods and services through marketing channels.
1.20 ____ refers to the means by which transaction processes are standardised to improve
the flow of goods and services through a marketing channel.
A. Flow standardisation
B. Routinisation
C. Channel efficiency
D. Channel standardisation
E. Equable flow
1.21 What does it mean when a channel intermediary talks about a smoothing function?
A. The intermediary wants to equalise the tasks performed by each member of
the channel.
B. The intermediary wants to remove redundant members from the channel.
C. The intermediary wants to make sure no channel member has to hold the
product or service an inordinately long time.
D. The intermediary is hoping to maintain channel harmony through coordination
and cooperation.
E. The intermediary is referring to the tasks of categorising and breaking bulk.
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1.22 Two principal tasks are associated with the sorting function. They are:
A. dyadic and monolithic exchanges.
B. categorising and breaking bulk.
C. inventory management and customer relationships.
D. inventory distribution and inventory handling.
E. acquisition and diversification.
1.23 Konceptual Design Wholesalers carries over 45000 different doorknobs, latches,
cabinet handles, and door plates made from brass, bronze, and 24-karat gold plate. Even
though it has over 200 identical bronze cabinet latches, interior designers, who it
markets to, might only want two or three of those latches. Within its channel, Konceptual Design engages in ____ for its retailers.
A. diversification
B. divestment
C. downloading
D. breaking bulk
E. product separation
1.24 Country Herbs in New Jersey sells seven different mixes of herbs that can be used to
make dips, flavour meat, or season a casserole. Arlene Yannece, its owner, thinks that
customers might like some more flavours, and she is considering changing the recipes
currently used in the mix. She is very unsure as to what her customers want; she is
experiencing ____ uncertainty.
A. exchange
B. product
C. demand
D. market
E. need
1.25 How can an organisation reduce its market uncertainty?
A. By offering more products and services.
B. By reducing the number of products and services it offers.
C. By broadening its view of what marketing channels can and should do for it.
D. By forming dyadic relationships with intermediaries.
E. There is no way an organisation can reduce its market uncertainty.
1.26 ____ is the sum of all costs and benefits realised separately or jointly by all the persons
or organisations participating in an exchange relationship.
A. Economic equilibrium
B. Cost-benefit equilibrium
C. Channel utility
D. Exchange utility
E. Contractual efficiency

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1.27 Farmer John drives a van to north Georgia each morning, picks up a load of apples, and
sells them to the people who live in middle Tennessee each afternoon. By bringing the
apples to the people who consume them, Farmer John creates ____ utility.
A. form
B. psychological
C. time
D. possession
E. place
1.28 ____ involves the acts by which channel entities obtain products and services.
A. Procurement
B. Requisition
C. Solicitation
D. Acquisition
E. Annexation
1.29 In marketing channels, the act of ____ involves the utilisation of resource inputs (goods
and services) to produce resource outputs.
A. dissipation
B. consumption
C. depletion
D. deployment
E. divestment
1.30 Consumption in marketing channels is typically evaluated as a function of:
A. inventory control.
B. channel selection.
C. channel efficiency.
D. sorting.
E. materials management.
1.31 ____ occurs when companies hire outside providers to assist them in any of a variety of
business practices, including database processing.
A. Job divestment
B. Outsourcing
C. Job deployment
D. Disposition
E. Job redirection
1.32 ____ refers to all behaviours or activities associated with channel members efforts to
detach themselves from tangible and intangible goods.
A. Disposition
B. Deployment
C. Outsourcing
D. Divestment
E. Reverse acquisition

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1.33 Firms that use recycling as part of their ____ activities are showing either real or
pretend concern about the environment.
A. disposition
B. deployment
C. outsourcing
D. divestment
E. reverse acquisition

Discussion Questions
1.34 What unites individual organisations in a successful marketing channel?
1.35 How is the role of an organisational mission critical for marketing channel management?
1.36 Describe the broadened concept of a marketing channel. What are three advantages of
defining marketing channels in this manner?
1.37 Describe the exchange processes of acquisition, consumption, and disposition as they
relate to a marketing channel.
1.38 How do the four characteristics of marketing channels relate to the exchange process?
1.39 Discuss the difference between form utility, place utility, possession utility, and time
utility as they relate to marketing channels.
1.40 Discuss how marketing channels functionally relate to real-world market settings.
1.41 How do marketing channels develop?
1.42 Describe the three stages of the historical evolution of marketing channels in the United
States.
1.43 Discuss the CRM model of marketing channel transactions.

References
1. NBWA (2013), Americas Beer Distributors: Fueling Jobs, Generating Economic
Growth & Delivering Value to Local Communities, Center for Applied Business &
Economic Research, Alfred Lerner College of Business & Economics, University of
Delaware, [pdf] available at: http://nbwa.org/sites/default/files/NBWA-EconomicReport-2013.pdf [Accessed 30 August 2013].
2. Charlier, Marj (1995), Beer Brouhaha: Existing Distributors Are Being Squeezed By
Brewers, Retailers; Biggest Discounters, Chains Seek Ways to Eliminate Middlemen
Wholesalers Trend Worries Little Guys, The Wall Street Journal, (22 November), A1.
3. FedEx
(2013),
Mission,
Strategy,
Values,
[online]
available
at:
http://about.van.fedex.com/mission-strategy-values [Accessed 30 August 2013].
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4. Bowersox, Donald J. and M. Bixby Cooper (1992), Strategic Marketing Channel Management,
New York: McGraw-Hill.
5. Adapted from McGee, Suzanne (1995), Commodities: Colombian Price Floor Rumors
Lift Coffee Prices, The Wall Street Journal, (9 February), C14 and McGee, Suzanne (1995),
Commodities: Coffee Prices Plunge to Lowest Levels Since June, The Wall Street Journal,
C14. Montville, Leigh (1992), Different Strokes, Sports Illustrated, (22 July), 108110.
6. Alderson, Wroe (1957), Marketing Behavior and Executive Action, Burr Ridge, IL: Richard D.
Irwin.
7. Lewis, Edwin E. (1968), Marketing Channels: Structure and Strategy, Perspectives in Marketing Series, Robert D. Buzzell and Frank M. Bass, eds, New York: McGrawHill.
8. McCammon, Bert C. and Robert W. Little (1965), Marketing Channels: Analytical
Systems and Approaches, an excerpt in Marketing Channels & Institutions: Readings on
Distribution Concepts & Practices, Bruce J. Walker and Joel B. Haynes, eds, Columbus, OH:
Grid, Inc.
9. Alderson, Wroe (1957), Marketing Behavior and Executive Action, Homewood, IL: Richard
D. Irwin; Bagozzi, Richard P. (1975), Marketing as Exchange, Journal of Marketing,
50(April), 8187; Blau, Peter M. (1967), Exchange and Power in Social Life, New York: John
Wiley & Sons, Inc.; and Weber, Max (1974), The Theory of Social and Economic Organization,
New York: Oxford University Press.
10. Bagozzi, Richard P. (1979), Toward a Formal Theory of Marketing Exchange, Conceptual
and Theoretical Developments in Marketing, O. C. Ferrell, Stephen W. Brown, and Charles W.
Lamb, Jr, eds, Chicago, IL: American Marketing Association.
11. Just Turn the Key, Supermarket Business, 50(6), 101111.
12. Bartels, Robert (1988), The Development of Marketing Thought, Third Edition, Columbus,
OH: Publishing Horizons, and Stock, James R. and Kathleen R. Whitney (1989), A
Historical Assessment of the Development of the Discipline of Logistics: An Appraisal
and a Critique, in Proceedings of the Fourth Conference on Historical Research in Marketing: The
Emerging Discipline, Terence Nevitt, Kathleen R. Whitney and Stanley C. Hollander, eds,
Lansing, MI: Michigan State University, 5473.
13. Many large retailing establishments emerged prior to the twentieth century. R. H. Macy
& Company (1858), John Wanamaker (1861), and F. W. Woolworth (1879), to name a
few, were a response to the shifts in population to urban centers. The problems of the
flows of goods and services (between rural and urban areas) is demonstrated by the
formation of two general-mail houses, Montgomery Ward (1872) and Sears Roebuck
(1886). For a more in-depth discussion, refer to Brisco, Norris A. (1947), Retailing, New
York: Prentice-Hall.
14. Duddy, Edward A. and David A. Revzan (1947), Marketing: An Institutional Approach, New
York: McGraw-Hill.
15. Shaw, Arch (1915), Some Problems in Market Distribution, Quarterly Journal of Economics
(August), 706765.
16. Harris, William D. and James R. Stock (1985), Reintegration of Marketing and Distribution: A Historical and Future Perspective, in Proceedings of the Second Conference on Historical
Research in Marketing, (April), Lansing, MI: Michigan State University, 420440.
17. Boone, Louis E. and David L. Kurtz (1992), Contemporary Marketing, Seventh Edition,
Fort Worth, TX: Dryden Press.
18. McCarthy, E. Jerome (1971), Basic Marketing: A Managerial Approach, Fourth Edition, Burr
Ridge, IL: Richard D. Irwin.

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19. Brion, John M. (1965), Marketing through the WholesalerDistributor Channel, Marketing for
Executives Series #10, Chicago, IL: American Marketing Association, 53.
20. For an interesting account of the evolution of the retailing trade industries, see Bucklin,
Louis P. (1972), Competition and Evolution in the Distributive Trades, Englewood Cliffs, NJ:
Prentice Hall; Dean, James W. Jr and James R. Evans (1994), Total Quality: Management,
Organization and Strategy, St Paul, MN: West Publishing Company.
21. Iacobucci, Dawn (1994), Toward Defining Relationship Marketing, in Relationship
Marketing: Theory, Methods and Applications, 1994 Research Conference Proceedings, Jagdish N. Sheth and Atul Parvatiyar, eds, Center for Relationship Marketing, Robert C.
Goizueta Business School, Emory University.
22. Gronroos, Christan (1990), Relationship Approach to Marketing in Service Contexts:
The Marketing and Organizational Behavior Interface, in Journal of Business Research,
20(January), 311.
23. Durant, Will (1944), The Story of Civilization: Part III, Caesar and Christ, New York: Simon
and Schuster, 328.
24. United States Census Bureau (2010), Number of Establishments, Employment, and
Annual Payroll by Enterprise Employment Size for the United States, All Industries:
2011,
[online]
available
at:
http://www2.census.gov/econ/susb/data/2011/us_6digitnaics_2011.xls [Accessed 12
March 2014]; Smith, Mickey C. (1991) Pharmaceutical Marketing: Strategy and Cases, Binghamton, NY: Pharmaceutical Products Press, 252264.
25. Adapted from Cook, Kathleen and Glenn L. Habern (1987), In-Store Systems Improving Profitability, Retail Control, 55(December), 1113; Gebhart, Fred (1992), Harder
Times Hit California Wholesale/Retail Leaders, Drug Topics, 136(20 January), 58; and
Clemons, Eric K. and Michael Row (1988), A Strategic Information System: McKesson
Drug Companys Economost, Planning Review, 16(September/October), 1419. 28.
26. Adapted from Stern, Louis W. and Adel El-Ansary (1992), Marketing Channels, Fourth
Edition, Englewood Cliffs, NJ: Prentice-Hall.
27. Adapted from Hakansson, Hakan, J. Johanson and B. Wootz (1976), Influence Tactics
in BuyerSeller Processes, Industrial Marketing Management, 4(6), 319322.
28. Fuller, Joseph B., James OConor, and Richard Rawlinson (1993), Tailored Logistics:
The Next Advantage, Harvard Business Review, (May/June).
29. Fuller, Joseph B., James OConor, and Richard Rawlinson (1993), Tailored Logistics:
The Next Advantage, Harvard Business Review, (May/June), 92. While the article largely
concentrates on logistics, the position is taken that these criteria are generalisable to all
marketing channel functions.
30. Johannes, Laura (1993), Texas Journal: Babes in Toyland: A Tale of a Start-Up, The Wall
Street Journal, (22 December), T3.
31. Anderson, David (1986), Case Studies and Implementations of LDI Arrangements (Part
II), Data Communications, 15(February), 173182 and Short, James E. and N. Venkatraman (1992), Beyond Business Process Redesign: Redefining Baxters Business Network,
Sloan Management Review, 34(Fall), 720.
32. This conclusion is based on the definitions of marketing channels. One example is the
definition proffered by Stern, Louis W. and Adel El-Ansary (1992): sets of interdependent organizations involved in the process of making a product or service available for use
or consumption, in Marketing Channels, Englewood Cliffs, NJ: Prentice-Hall.
33. Pupis, Patricia M. (1991), Purchasing Firms Handle Myriad Details of Design, Hotel &
Motel Management, 206(4 November), D6.
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34. Gentry, Julie J. (1993), Strategic Alliances in Purchasing: Transportation Is the Vital
Link, International Journal of Purchasing & Materials Management, 29(Summer), 1117.
35. Verity, John W. (1992), They Make a Killing Minding Other Peoples Business, Business
Week, (30 November), 96.
36. Young, Melissa Martin and Melanie Wallendorf (1989), Ashes to Ashes, Dust to Dust:
Conceptualizing Consumer Disposition of Possessions, in Marketing Theory and Practice,
Terry Childers et al., eds, Chicago, IL: American Marketing Association, 3339.

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Module 2

Channel Roles in a Dynamic


Marketplace
Contents
2.1 Channel Behaviours in Competitive Environments ...........................2/2
2.2 Channel Roles in the Exchange System ...............................................2/5
2.3 Supplier Relationships ............................................................................2/7
2.4 Customer Relationships ...................................................................... 2/11
2.5 Lateral Relationships ........................................................................... 2/14
2.6 Establishing Channel Role Identities ................................................. 2/15
2.7 Key Terms ............................................................................................ 2/18
Learning Summary ......................................................................................... 2/18
Review Questions ........................................................................................... 2/19
Learning Objectives
After reading this module, you should be able to:

Relate role identity to channel member performance.


Compare and contrast the wholesaling and retailing channel functions.
Discuss major trends in the wholesaling and retailing sectors.
Demonstrate how SIFTing can be used to establish differential advantage in the
marketplace.
In ecology, the principle of interspecific competition maintains that when similar species
compete for scarce resources, less-fit competitors usually perish.1 This concept can
also be applied to the complex environments in which channel members compete.
In business, all successful channel members have evolved to meet the particular
demands of their competitive environments. This evolutionary process is never
ending.
The Channel Relationship Model (CRM) illustrates the complex environments in
which channel members operate. The principle of interspecific competition suggests
that channel members must also fight to achieve competitive advantages. Three
outcomes are possible as a result of interspecific competition. They are:
Competitive Superiority. A particular channel member may emerge as competitively superior. This superiority can force rival organisations into extinction as
competitors for limited resources are eliminated. This is the essence of the Darwinian concept called survival of the fittest. Transportation industry channels

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are littered with the carcasses of companies, such as Pan American Airlines, who
failed to change as their competitive environments changed.
Restrictive Ranges. The competitive advantages of channel members may
differ across distinctive environmental conditions. Thus, another possible outcome is that some organisations prosper in one place while others flourish in
different domains. This process is known as range restriction. Ideally, each organisation recognises its limitations in any environment, and then chooses to
compete in the setting most conducive to its well-being. For instance, Sears recognised that its expertise (and future) lay in retailing, and pulled out of the
financial services industry. Realistically, however, many organisations fail to recognise the perils of their current environment until after it is too late to act.
Character Displacement. The final possible result is that channel members
rapidly evolve in diverse ways, taking on different properties to minimise direct
competition. This process is called character displacement. It suggests that each corporate species must continuously adapt to dynamic channel environments.
Harried grocery shoppers are increasingly turning toward online grocery shopping as a convenient alternative to physically visiting a store, for example.
These outcomes of interspecific competition promote role specialisation in competitive channel environments. In this module, we will discuss the types of roles that
develop out of interspecific competition. First, however, we need to look at the
behaviours that channel members must develop in response to the strengths and
weaknesses of other firms. They must also respond to opportunities and threats in
the environment itself. Over time, these adaptive behaviours may become nearly
instinctive.

2.1

Channel Behaviours in Competitive Environments


Children know lions as kings of the jungle, predators activated by instinct to eat
their prey. However, a lions behaviour is neither static nor mindless. For example,
circus lions quickly adapt to their environment, recognising that good performances
bring more food. Even apparently disadvantaged animals survive the literal jungles
of the animal kingdom. By anyones standards, giraffes are awkward. Yet evolution
has enabled them to obtain food tree leaves available only to them. Giraffes
long necks also provide them with an enhanced sensory system that warns them of
predators.2
Distinguishing features allow animals to survive so long as their environments do
not change too drastically. However, it is not always enough just to be equipped
with tools for survival. Most higher-order organisms also must rely on other animals
to exist. They live together with others of their species because cooperation can
prevent extinction.3
The advantages of cooperation are embedded in the CRM. In the CRM, the
arrow connecting channel members to one another suggests that coexistence, or
partnering, is necessary to successfully meet the challenges of channel environments,
as are shared concern and diversity. Consider the following assessment (italics added
for emphasis):

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Business life, unlike life in the mythological jungle, is first of all fundamentally
cooperative. It is only within the bounds of mutually shared concerns that competition is possible.4

2.1.1

Interspecific Competition in Marketing Channels


Bruce Henderson, founder of the Boston Consulting Group, advises that the
principle of interspecific competition explains how different businesses can exist in
the same economic community by occupying different niches. Like any living
organism, each business must set itself apart in some meaningful way to endure and
prosper in competitive markets. Henderson suggests: Consider Sears, Kmart,
Walmart, and Radio Shack. These stores overlap in the merchandise they sell, the
customers they serve, and the areas where they operate. But to survive, each of
these retailers has had to differentiate itself in important ways.5
Walmart and Kmart have certainly differentiated their operations from other
retail competitors. In lieu of traditional promotional sale pricing, both adopted an
everyday low price strategy. The character of their businesses also evolved in
response to changing environments. Walmart and Kmart each extended their
product mix to better satisfy new or anticipated customer needs. Both chains
aggressively introduced grocery items to their product mixes as a means of generating additional customer traffic. Consumers today can buy everything from clothing
to canned beans from these retailers. For instance, Kmart has already opened
numerous Super Centers, combining traditional Kmart formats with food stores.
What impact have these non-traditional food retailers had on the marketplace?
Billions of dollars in food sales now channel through non-traditional food outlets
such as warehouse clubs, mass merchandise stores, and drug chain discounters.
Many traditional grocery chains have had to lower prices to combat the megadiscounters strategies. Others are re-emphasising the quality of supermarket
services. For example, the Whole Foods market competes head-to-head with lowerpriced supermarkets by positioning itself as a retailer of quality natural, organic
foods and wholefoods. As you can see, the concept of interspecific competition is
clearly unfolding in the retail food sector. New channel life forms are emerging to
meet changing marketplace needs and in response to competitive pressures. Below,
we explore the ways in which these life forms take shape.

2.1.2

Changing Environments: A Shared Concern


In the global ecosystem, each species has evolved in reaction to changing environmental conditions to achieve its current position. Channel members likewise must
adapt to attain or maintain desirable positions in increasingly competitive markets.6
In this process of adaptation, each channel member attempts to differentiate itself
from other members operating at the same level. Manufacturers attempt to distinguish themselves from other producers, wholesalers from other wholesalers, and
retailers from other retailers. Each is pursuing a differential advantage. Differential advantages emerge from an organisations distinctive characteristics, if these

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properties set it apart from competitors in ways that prove enticing to customers.
Consider the following:
Gitman Brothers, a major retailer of private-label shirts in the US, distinguished
itself from other retailers by assuming an unprecedented commitment to quality.
Gitmans prompt, reliable delivery permits the retailer to stand out in the crowded clothing industry.
Timberland differentiated itself by responding directly to increased domestic
demand for high-quality, US-made products. The outdoor footwear retailers
success bucks the trend toward imported, low-cost footwear.
The Whole Foods Market differentiates itself from competition by positioning
itself as a grocery store that is concerned with environmental sustainability and
healthy lifestyles, by focusing on natural and organic produce.
At the same time they are pursuing these differential advantages, Gitman, Timberland, and the Whole Foods Market strove to develop more cooperative
arrangements with selected manufacturers and wholesalers. Manufacturers and
wholesalers are interested in attaining precisely the same outcome with these and
other retailers. As a result, channel systems are formed. Such channel systems will
then compete against other like systems. Channel-level competition is also based on
each systems ability to develop and sustain differential advantages in the face of
changing environmental circumstances.
Recall that in the preceding module, marketing channels were described as organised behavioural systems. The next section discusses how these networks of channel
members emerge in the diverse marketplace.

2.1.3

Diversity in Complex Environments


Environmental diversity refers to the variety of environmental forces facing a
channel member. Because of environmental diversity, even mundane products often
require complex channel systems. For instance, not so long ago womens hosiery was
sold exclusively through department stores and speciality retailers. Then Leggs
Products, Inc. came along with a creative channels strategy. Packaged in its trademark
egg-shaped package, Leggs was the first supermarket panty hose success. Today,
Leggs is sold in a variety of outlets ranging from convenience stores to supermarkets.
Spontaneous creativity? Not quite. Sara Lee Corporation, parent company of Leggs
and Hanes, and the largest US apparel company, had already developed long-term
relationships in these outlets because of its food lines. As a result, Sara Lee was
uniquely positioned to develop new market outlets for its hosiery products.
More recently, Leggs has had to overcome a significant culturally induced problem in the US market. As American women increasingly opted for bare legs,
trousers with socks, or spandex tights, domestic sales of Leggs dipped by over 20
per cent. Leggs was forced to seek new markets. One new market was achieved
through Marks & Spencer, a dominant retail chain in the United Kingdom. To gain
entry into the UK, Leggs used the Howard Marlboro Group to bridge a relationship with Marks & Spencer. But problems quickly surfaced. For instance, all Marks
& Spencer products were sold under a proprietary brand name, St Michaels. Leggs
had a policy of selling only under its own brand name. Moreover, cultural differ-

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ences between the US and the UK required some product redesign. With the help
of Howard Marlboro Group, however, the two channel partners forged a compromise. In it, Leggs agreed to modify the product while Marks & Spencer agreed to
carry Leggs in a slightly modified package featuring the Leggs logo and a for St
Michael inscription.7
Leggs Products reaction to declining domestic market potential for womens
hosiery illustrates how shifting environmental conditions can create the need for
new channels. As the CRM shows, environmental changes may emerge from a
variety of sources outside of the channel itself. These actions allowed Leggs to
outflank the competition and expand its worldwide market share. Marks & Spencer
increased sales, as well. In this instance, each channel member needed to perform
specific tasks and assume certain responsibilities to ensure the new channels
success. As this example illustrates, the interests of any single channel member are
wrapped up with the interests of all other members of the channel. The ways in
which channel member roles are usually developed are discussed below.

2.2

Channel Roles in the Exchange System


Module 1 described how individual channel members function as a part of a
marketing exchange system. How the relationship perspective differs from the
conventional view of marketing channels was also discussed. The relationship
perspective, as illustrated in the CRM, suggests that channel members evolve and
prosper as a result of their interactions with one another. Channel roles also emerge
through this interaction. Three types of channel relationships exist:8
Supplier Relationships. In supplier relationships, firms provide products or
services to other firms. These are then either used in manufacturing processes or
resold. For example, as a global supplier of copper, Freeport-McMoRan provides
copper for a variety of products and customers, ranging from copper wire (for
use in manufacturing) to copper sulphate (for use in agriculture). Supplier relationships always involve a negotiatory role. The negotiatory role refers to the ways
in which intermediaries arrive at acceptable exchange terms in channel systems.
Customer Relationships. Customer relationships involve the sale and service
of products to individuals and organisations for final consumption. Customer
relationships largely involve retailers selling to consumers. Office Max sells a
wide variety of office and school supplies to business and non-business consumers.
Lateral Relationships. Not so long ago, firms operating at the same channel
level in the same industry barely acknowledged one anothers existence. Today
such firms are increasingly going into business with one another. Lateral relationships occur between two channel members who occupy a relatively
equivalent position in the channel system. These channel members may even
perform similar functions in the channel system. Partnerships developed between channel members often strengthen their mutual competitive position. For
example, in 2013 two biopharmaceutical organisations, Bristol-Myers Squibb
(BMS) and Samsung Biologics, entered into a partnership in which Samsung
would manufacture a commercial cancer drug for BMS.9

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Each type of interaction supplier, customer and lateral relationships demands


different behaviours of the participating channel members. Channel roles are the
sets of activities or behaviours assigned to each intermediary in a channel system.
To understand how these roles work, lets return to our Leggs example. Leggs
Products, Inc. was expected to have the capability to design products appealing to
women in the United Kingdom. This was the role it was expected to bring to the
channel system. Howard Marlboro Groups role was to negotiate the details of the
contract between Leggs and Marks & Spencer, design the packaging and provide
point-of-purchase displays. The channel role assigned to Marks & Spencer included
the provision of personal selling efforts, quicker entree to choice UK markets, and its
merchandising skills. In short, each member was doing what it did best.
Over time, each channel member should attain a special role identity. Role identity specifies the traits of an individual or organisation that are considered
appropriate to and consistent with the performance of a given channel role. A
channel members role identity is basically akin to its reputation. Within established
channels, role identity allows suppliers to easily recognise the means by which their
products can be distributed. Role identity also allows buyers to routinely seek out
sources for products or the information necessary to satisfy their needs. The home
improvement sector provides an example. Do-it-yourselfers and building contractors alike are increasingly patronising large warehouse building supply centres.
Home Depot and Lowes have capitalised on the tremendous growth in the home
improvement market. In each case, these giant home centres have established a role
identity distinguished by more inventory, wider assortment, better service, and lower
prices. Consumers and contractors are confident that they will find what they need
at these stores.10
The building supply industry once consisted exclusively of independently owned
speciality stores. But new channel role expectations have emerged over time. Role
expectations encompass the exchange attributes and benefits expected by customers when they interact within a marketing channel. Changing consumer role
expectations prompted new marketing approaches you might call them a new
species of retail outlets within building supply channels.
Changing role expectations have affected suppliers as well as buyers. For example, Armstrong World Industries, a major producer of vinyl flooring, ceiling panels,
and other building products, had to reconsider its traditional channel strategy. No
longer could Armstrong rely upon speciality flooring retailers to deliver it sufficient
market share. Instead, Armstrong had to adapt its operations to the changing
expectations of flooring and ceiling end-users. In response to its changing customer
needs, Armstrong has cultivated relationships with these warehouse home centre
outlets.11 As buyers increasingly acquire building supplies from non-traditional
outlets, suppliers must modify their channel strategy to satisfy their markets needs.
Suppliers must also adapt for purposes of self-preservation. Whether the role
expectations of suppliers or buyers are met affects relationships among all channel
members, from producers to ultimate users.12
Channel members clearly play a variety of roles in the flow of goods and services
from producer to ultimate user. Supplier, customer, and lateral relationships provide
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a framework for discussing the most important roles in marketing channels. This
framework, and the principal channel roles performed within it, are illustrated in
Exhibit 2.1.
Exhibit 2.1

2.3

Key channel relationships and channel roles

Channel relationships
Supplier
relationships

Channel roles performed within the relationship


Source
Producer
Wholesalers

Customer
relationships

Retailers (store and non-store)


Consumers (organisational and individual)

Lateral
relationships

Source
Manufacturer
Wholesaler
Retailer

Source
Manufacturer
Wholesaler
Retailer

Supplier Relationships
Supplier relationships involve three principal channel roles: source, producer, and
wholesaler. Source firms supply raw materials that enter the production process.
Freeport-McMoRan is a source firm that supplies copper for a variety of manufacturing uses, ranging from refrigerators to telephone equipment. Its role is to sell copper
as raw material to producers.
Producers generate component parts, process materials, or finished goods. Producer firms include agricultural, forestry, fishing, mining, construction, and
manufacturing entities, as well as a host of service industries. Producers range from
cotton farmers to textile mills. Producers can also sell to other producers, meaning
producers perform in both buyer and seller roles. Ultimately, producers outputs are
marketed to final consumers. Consumers are individuals who purchase goods and
services for their household or personal use.
The third type of supplier is the wholesaler. Wholesalers are organisations that
market products and services for resale or institutional use. Wholesalers typically sell
goods to retail, industrial, governmental, and agricultural concerns. Products distributed by wholesalers are generally obtained from the manufacturing sector, but
wholesalers can market products or services to other wholesalers. Wholesalers are
particularly important because they connect producers (upstream) with retailers
(downstream). Because of the importance of this intermediary role, we devote the
remainder of this section to an in-depth discussion of wholesalers.
The wholesaling industry has a major impact on the US economy; in 2013 it
employed just under six million people..13 Wholesale sales have been slowly climbing
since the last decade or so.14 As the industry has undergone a relatively large number

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of mergers, acquisitions, and business failures, it is now mainly characterised by a


few large firms and many very small firms.

2.3.1

The Changing Role of Wholesalers


The role identity of wholesalers has traditionally been based on the branded
products they carried. However, as the wholesale industry changes, the role of
wholesalers must change with it. The large numbers of similar-quality branded
products introduced over recent years have made it difficult to establish a productline wholesaler role identity. When coupled with the extensive geographic expansion
of some wholesalers, this has led to a glut of look-alike competitors in the wholesaling sector (although in business-to-business markets wholesalers tend to be fewer so
there is not such a glut as in the consumer arena). To combat this trend, wholesalers are offering proprietary services as a way to differentiate themselves. Wholesalers
are also performing sales and marketing functions that had been previously assigned
to producers. These new functions are reshaping the wholesalers role identity.15
Manufacturers are turning to wholesalers as a means of decreasing their sales and
marketing costs. An example of changes affecting wholesalers is discussed in Time
Out 2.1.

Time Out 2.1 ______________________________________________


Tesco Express
Tesco, the UKs largest food retailer and general merchandiser, has changed
considerably from its founding in 1919 in Hackney, London. It is now the
worlds third largest retailer by revenues (behind Wal-Mart and Carrefour) and
operates in more than 14 countries globally. Its changing character has been
driven, arguably, by changes in the environment. The Tesco store concept now
embraces Tesco Superstores, Tesco Extra, Tesco Express, Tesco Metro, Tesco
Homeplus, One Stop and Dobbies.
Its original superstore concept now numbers about 481 stores across the UK,
but its foray into Tesco Express, neighbourhood convenience stores averaging
200 sq. metres in size, is a reflection of the times catering to those for whom
venturing to the supermarket is not time convenient. Hence they are located in
busy city centre areas, small shopping precincts in residential areas, small towns
and villages and in petrol station forecourts. The shops stock mainly food, with
an emphasis on higher margin products due to small store size and the need to
maximise revenue alongside everyday essentials. The 1000th Tesco Express site
was opened in 2009, but by 2013 it had 1547, with plans to open another 830
stores, surpassing its other outlets by far.
Tesco Express is not Tescos smallest outlet venture. Its even smaller One Stop
shops (under the One Stop name) are in similar or even smaller locations, but
sell goods priced to match its nearest competitor.
Tesco Express is not alone in this type of venture. Marks & Spencer, The Cooperative and many others have followed the trend.

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Questions
Do you think this approach to channel management in the grocery and mass
merchandising markets will prove successful? Why or why not?
Adapted from www.tescoplc.com; Hawkes, S. (2013), National Express, The Sun, [online]
available at: www.thesun.co.uk/sol/homepage/news/money/489258 [Accessed 24 September
2013].
__________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

Wholesalers role identities are largely based on the success with which they engage in relationship-building efforts with upstream and downstream channel
participants. Building these relationships requires that wholesalers know their
customers needs, anticipate changes in those needs, and be willing to adopt new
technologies to better satisfy those specialised needs. Such efforts generally include
the use of electronic data interaction for expediting deliveries, product-lot tracking,
and intelligent inventory control systems.
In marketing channels, wholesalers create exchange utility by reducing discrepancies in assortments of goods. Essentially, this means that wholesalers allow a
supplying firm to produce large, homogeneous product lots. These lots are then
broken down by wholesalers into smaller shipments to accommodate consuming
firms need for relatively small quantities of a broad variety of products. This sorting
process describes the classic function performed by wholesalers as intermediaries
between supplying and consuming firms. In their intermediary roles, wholesalers
provide a fundamental link between producers and retailers. It is important to
realise, however, that either the producing or retailing firm could also perform some
or all of this intermediary function for itself. This would effectively eliminate the
wholesaler from the channel, although the functions are still performed. This latter
issue is discussed in greater detail in the third and fourth parts of this book.
Beyond the sorting function, how do wholesalers add value to channel relationships? Consider the following additional advantages that wholesalers can offer
producers:
Wholesalers enhance customer relationships by providing more frequent and
customised attention to customers needs. Wholesaling agents are conveniently
located near buyers. They can be more receptive to customer inquiries.
By inventorying stocks, wholesalers help producers convert finished inventories
into monetary assets. Cash flows are freed up, allowing manufacturers to invest
more in research and product development.
Wholesalers give manufacturers sales and marketing assistance.
The functions performed by wholesalers also benefit retailers. For instance:
Wholesalers assist retailers by performing merchandising activities. They may
provide point-of-purchase displays and cooperative advertising.
Wholesalers often assist retailers in building and floor plan designs. They offer
retailers advice on how to develop atmospherics those physical elements in a
stores design that strike a positive chord with buyers emotions and encourage
purchase.

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Wholesalers often help retailers with accounting and inventory management


procedures.

2.3.2

Wholesaler Classification
As summarised in Exhibit 2.2, wholesaler roles can be classified into merchant
wholesaler, manufacturers sales organisation, agent/broker, and commission
merchant categories. Merchant wholesalers are independently owned businesses
that take ownership or title to goods. Accounting for approximately 60 per cent of
all US wholesale sales each year, merchant wholesalers represent the principal form
of wholesaling. Functions of merchant wholesalers relating to their physical possession of products include receiving, inventorying, and transporting goods. Merchant
wholesalers also perform several negotiatory functions. These include acting as unit
buyers and sellers, exchanging information, and consummating transactions.
Exhibit 2.2

Wholesaler role classifications

Wholesaler classification

Take physical
possession

Take title to
goods
Yes
Yes

Negotiation
function
performed
Yes
Yes

Promotional
function
performed
Yes
Yes

Merchant wholesaler
Manufacturers sales
organisation
Agents/brokers
Commission merchants

Yes
No
No
Yes

No
No

Yes
Yes

Yes
Yes

Value-added services are increasingly being offered by other wholesalers in their


efforts to build customer relationships. For instance, merchant wholesalers may
assort and grade bulk goods. To differentiate themselves in the marketplace,
merchant wholesalers often use proprietary packaging and labelling, as well. The
channel functions featured in merchant wholesalers role set is still expanding as
alternative channels of distribution emerge. Types of merchant wholesaler roles can
range from industrial distributors to wholesale cooperatives, such as those found in
the agricultural and petroleum industries.
Manufacturers sales organisations (MSOs) are producer-owned firms that
are physically detached from the manufacturing location. Generally speaking, MSOs
distribute their parent manufacturers goods. For example, Black & Decker has sales
offices dispersed throughout the country. Black & Decker has been able to
strengthen customer relationships through the use of its manufacturers sales
organisations.16 MSOs often engage in autonomous negotiatory functions that are
entirely separate from the producer role. This is why MSOs are viewed as marketing
channel intermediaries.
Agents (also known as brokers) represent a variety of manufacturers and product lines. They differ from other wholesaler types in that they do not take title to or
physical possession of the goods they market. Also, wholesaling agents are generally
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compensated on a commission basis. Agents may assume various forms, ranging


from auction houses to manufacturer representatives, from export agents to
merchandise brokers. Regardless of their form, agents will be actively engaged in
negotiating relationships.
Agents prove useful to producers for several reasons. For one thing, agents typically cover their own costs. For another, they generally do not get paid until they
have made a sale. Most significantly, agents already have established customer
relationships and can provide immediate ties to those customers. Wholesaling
agency relationships are most popular in the motor vehicles and parts industries.
They are playing an increasingly important role for small- to mid-sized manufacturers.
Commission merchants take physical possession of the goods they market, but
they do not assume ownership. Commission merchants are likely to perform
promotional, negotiating, financing, and ordering functions for the producers they
represent. Commission merchants, who handle a limited range of products, have
generally experienced more market success than MSDs.
Each wholesaler type faces its own unique environmental challenges.17 There are,
for example, competitive threats from new wholesaling forms like catalogues or
warehouse chains. Wholesalers also face threats from the increase in merger
activities. Mergers have allowed many producer and retailer firms to achieve more
diversification and the economies of scale necessary to perform many traditional
wholesaling functions themselves. Wholesalers gross margins have generally
declined in the face of rising customer service requirements. But the most significant
threat to traditional wholesalers lies in the growth of alternative channels of distribution. Without question, direct manufacturer-to-retailer relationships most seriously
threaten the growth of wholesaling. Producer alliances with warehouse clubs,
discount stores, and home centre stores also promise to scramble traditional
wholesaling role identities. The availability of consumer direct ordering through
electronic media and direct mail poses another potential difficulty for traditional
wholesalers.
Despite these environmental threats, wholesalers can look forward to several
opportunities. The North American Free Trade Agreement (NAFTA) and other
multilateral trade agreements suggest wholesalers will have more opportunity to
enter global markets in the future. Furthermore, continuing consolidation within the
wholesaling sector suggests that value-added services, new product lines, and new
geographic penetration will foster market expansion. Wholesale distributors who
transform themselves in response to changes in their CRM environments should be
better able to satisfy their customer needs through performing their trademark
intermediary functions.18

2.4

Customer Relationships
The second type of channel role is customer relationships. The principal channel
role in customer relationships involves retailers. Retailers are individuals or
organisations who sell products or services to the ultimate consumer. The roles of

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retailers are much more complex than those of wholesalers. Retailers must manage
supplier relationships as well. And, like wholesalers, retailers are also intermediaries
in channel systems. Most importantly, in traditional marketing flows retailers
provide the final link in channels of distribution: they obtain goods from producers
and/or wholesalers, and then resell those same products to final consumers. The
retailing role thus performs dual functions within marketing channels. First, they act
as selling agents for their suppliers either manufacturers or wholesalers. Retailers
provide the buying function for their customers. They also provide the closest link
to consumers. Retailers relationships with wholesalers and producers shape the
effectiveness with which each function will be performed.
Marketers have devised many different ways of classifying retailers. We will simply divide retailers into store and non-store retailing classifications. Store retailing
classifications include:
Department stores are large retail units featuring extensive assortments of
products that are categorised into departments. They include stores such as J. C.
Penneys, Macys, and Sears.
Speciality stores are retailers that concentrate on one merchandise or service
line. Many speciality stores are parts of large retail conglomerates. For example,
Arcadia owns several well-known retail brands in the UK, including Burton
(mens clothing and fashion), and Dorothy Perkins, Miss Selfridge and Topshop
(womens clothing and fashion).
Convenience stores, like 7-Eleven and Circle K, are fairly small (less than 8000
square feet) and provide a limited assortment of products and services at a convenient location. Convenience stores generally are open 24 hours.
Discount stores are varied, ranging from full-line discounters such as Walmart
and Kmart to off-price retailers like T.J. Maxx and Marshalls, and manufacturers
outlets that can include well-known brands such as Gap. They also include speciality discounters like Best Buy. Costco membership club is a warehouse form
of discount retailers. In general, discount stores offer a wide variety of merchandise at low prices.

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In any language, Always the Lowest Price, Always captures Walmarts retail positioning strategy. This sign
dons customer value in a Walmart located in a working-class neighbourhood in Mexico City. Could this
store be in your neighbourhood?

Variety stores deal with a wide assortment of inexpensive and popularly priced
goods and services. These might include gift items, health and beauty aids, toys,
shoe repair, or womens accessories. Such stores usually feature open displays
and few salespeople. Woolworth was a well-known variety store (it went out of
business in the UK in 2009). As a retail category, variety stores have performed
poorly for some time now.
A supermarket category also exists. Supermarkets like Kroger or Tesco are selfservice stores with groceries, meats, and/or produce departments. To qualify as a
supermarket, this type of outlet must exceed a minimum of $2 million in annual
sales.
Supermarkets that have expanded to carry a huge selection of products, making
them similar to a supermarket and department store combined, are known as
hypermarkets.
Non-store retailers are equally diverse. The rapid emergence of non-store retailing is due to the growth of the Internet and information technologies, and the
typical consumers increasingly busy lifestyle.
In-home retailing allows consumers to shop by Internet or television and place
orders (online or by phone) for a vast assortment of products. Direct marketing
outlets such as mail-order catalogues, direct mail and telephone selling are also types
of non-store retailing, as are vending machines.
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The influence of changing demographics and lifestyles more older consumers,


ethnic diversity, longer work hours is reflected in the emergence of new channels
and the resurgence of some traditional channels. Increasingly, a demand for
convenience, rather than lower prices, underlies the growth of non-store retailing.
Cultivating customer relationships in non-store retailing presents new challenges
because of the consumers physical detachment from the shopping experience.
Despite substantial differences in the structure of these retail channel members,
each must forge relationships with the ultimate consumer. One way to create those
relationships is through the use of expert systems and other technological advances.
New technologies have created a number of innovative modes and intense competition in the retailing sector. In response to this competition, retailers are using
customer-oriented service strategies to build consumer loyalty. Toward this end,
many retailers have, in recent years, downsized and restructured and new online
offline hybrids are emerging. Traditional merchandising mixes have, in many cases,
been tossed aside. Moreover, retailers are constantly augmenting their operations
with new customer services.

2.5

Lateral Relationships
The third and final type of channel role in channel systems is lateral relationships.
Lateral relationships involve partnerships between firms operating at the same
channel level that is, between manufacturers, wholesalers, or retailers. For
instance, automobile dealers who engage in cooperative advertising with one
another have entered a lateral relationship at the retail level. Sometimes lateral
relationships emerge between retailers such as Marks & Spencer food retailers
operating from petrol stations in the UK. Lateral relationships must be based on
cooperation and trust. Channel partners should have shared goals and must work
together to improve the design, quality, delivery, promotional, or manufacturing
aspects of their products and operations. Firms involved in lateral relationships will
only gain sustainable competitive advantages if this sense of shared goals exists.
Lateral relationships are increasingly important in todays global marketplace.
Lateral relationships feature a sort of co-opetition note how the term blends
cooperation with competition. The trend toward joint ventures underscores big
changes in how American companies view their world, and in the business environment itself. Many American firms so dominated their industries in the 1950s and
1960s that they had little need for outside help. But as foreign competitors gained
increasingly larger shares of US markets, these firms needed help to obtain new
technology quickly and/or hold down the costs of producing and distributing new
products. In the early 1980s, Detroits Big Three automakers led the way, teaming
with Japanese partners to produce and distribute the smaller cars customers sought
at the time.
Lateral relationships are not successful by accident. Hewlett-Packard Co. has kept
its many strategic alliances running smoothly by designating one employee as a
relationship manager for each. This person ensures that each partner remembers
they are in the relationship for good business reasons. Since Hewlett-Packard and its

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channel partners still compete in other places, the relationship managers have the
responsibility of separating areas of cooperation from areas of competition.19
Virtually all channel intermediaries will be facing increasingly competitive marketplaces in the years ahead. The formation of lateral relationships is a natural and
logical reaction to these competitive circumstances. But channel intermediaries will
also need to differentiate themselves in the marketplace to survive. Differentiation
should be initiated only after the opportunities and threats present within an
intermediarys economic, social, and technological environments have been identified.

2.6

Establishing Channel Role Identities


The overriding purpose of channels is to serve consumer and end-user needs. For
this to happen, each channel member must perform the tasks appropriate to its own
particular role. How do channel members establish role identities? Several divergent
perspectives on how channel members differentiate themselves are summarised
within the term SIFTing: providing value-added Services, pioneering market
Innovation, offering Flexibility, and demonstrating Timely delivery of products and
services. Successful performance of the channel functions embodied within the
SIFTing acronym allow channel members to differentiate themselves and establish
unique role identities. Lets look at each dimension.

2.6.1

Services
The first component of the SIFTing process involves the provision of value-added
services. Such services may include special delivery, credit terms, or a variety of
supplemental utilities beyond the basic market offering. For instance, British
department store John Lewis offers a free nursery advice service. The customer
teams up with a personal nursery advisor who spends up to two hours offering
expert, impartial baby product advice.
Value-added services also lie near the heart of what todays warehouse consumers
seek. Atlantic Distribution, a public warehousing affiliate, offers services such
electronic design and assembly as well as storage and other inventory solutions
benefits which can translate into major savings for producers. In the beverage
industry, warehouses frequently provide value-added services such as hydrating and
carbonating soft-drink syrups or cutting high-proof imported alcoholic beverages.
These services reduce transportation costs by limiting the distance that non-essential
ingredients like air and water must be moved between producers and consumers.20

2.6.2

Innovation
Innovation is another dimension of role identity. Innovation involves the introduction of new methods or technologies to strengthen exchange relationships within
channels. An example of channel innovation is the virtual elimination of physical
inventory. In many industrial sectors, significant advances in information-transfer
technology have led to virtual inventory systems. Virtual inventory systems use

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telecommunications technology to deliver products and services with precision,


eliminating much of the need for a standing physical inventory.
Channel innovations are sometimes evident in the imaginative forms of new
retail outlets. Market phenomena like in-home television and Internet shopping
have compelled in-store retailers to move beyond tradition. For example, US sports
industry conglomerate Nike opened several retail sports museums, called Nike
Towns, to help products stand out in a cluttered sneaker environment. Consumers
are dazzled by each sports pavilions innovative fixtures, video backdrops, and
sound effects customised to regional allegiances Tar Heels in North Carolina,
Ragin Cajuns in Louisiana, Rebels in Mississippi. In these showcase stores, all goods
are sold at the full retail price. But regardless of whether or not customers buy at
Nike Town, Nike intends to impart a lasting impression.21 Time Out 2.2 sheds more
light on the Nike Town story.

Time Out 2.2 ______________________________________________


Nike Town: Stores That Dont Sell (Art for Shoes Sake)
New York Citys Museum of Natural Art displays one of its priceless Rodin
sculptures by hanging it from the ceiling. At Chicagos Nike Town, a life-size
model of a cyclist dangles from the rafters. To make its product stand out in
todays cluttered sneaker retailing environment, Nike is opening stores across
the country that are half art galleries, half walk-in advertisements.
Every item is displayed at full retail price. The idea is not to attract customers
with discounts but with glamour. Nikes intent is to compensate for the lack of
time and attention most retailers give to their products and/or customers. In
many other shoe stores, sales help is often rude or inattentive, and boxes are
stacked high or haphazardly. But in these new gallery stores manufacturers
showcase their wares with pride and pizzazz under the assumption that even if
visitors do not buy, they will leave with an impression that persists when they
actually go shopping for similar products elsewhere.
The 68000-square foot Chicago Nike Town store is an ode to athletic footwear
and its myriad uses. Nike wants, and usually gets, the customers to ooh and ahh;
Nike also wants them to reach for their wallet. Each Nike product line is fully
represented shoes are retrieved from inventory in less than 60 seconds via a
computerised shoe tube and all salespersons work on full commission. These
stores are, to put it succinctly, a raging financial success. Which of course means
that in the world of business, where imitation is indeed the sincerest form of
flattery, the trend away from the traditional and mundane will undoubtedly spill
over to other manufacturers. Doc Martens? Just below the Picasso.
Question
Where do you think other opportunities for creative retailing distribution
and presentation packages lie?
Adapted from Comte, Elizabeth (1992), Art for Shoes Sake, Forbes, (28 September), 128130
and Fitzgerald, Kate (1992), Marketers Learn to Just Do It, Advertising Age, (27 January), S7S8.
__________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

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2.6.3

Flexibility
Firms can also differentiate themselves in the marketplace by exhibiting flexibility in
their channel relationships. Flexibility reflects an ability to successfully accommodate
exchange partners needs as environmental and process conditions change. Flexibility can assume many forms. It is, for instance, shown in a firms willingness to adjust
delivery schedules, transportation modes, or credit terms. Firms often employ
flexible ways of settling payments for goods, particularly in international settings.
For example, several years ago, Indonesia sorely needed a steelmaking facility but
lacked the fiscal capability to support the development of such a facility through
traditional financial channels. In response, the South East Asian nation engineered a
flexible channel arrangement wherein it exchanged oil for access to Germanys
engineering technology.
Many producers and retailers have adopted flexible processes because they recognise that customers needs are always changing. These processes can quickly shift
product lines to meet market needs. Supermarkets are one example where this
happens. Supermarket retailers monitor trends such as weather patterns, and adjust
stock accordingly. In the UK warm weather signals increased demand for beef
burgers, while in cold weather demand for beef mince increases, and supermarkets
use data to predict sales and adjust stock at strikingly short notice. Suppliers are also
embracing the concept of flexible production. At meat processing sites, the touch of
a button can switch processing lines from burgers to mince!.22

2.6.4

Timing
Timely delivery, a key component of channel efficiency, is a primary part of role
identity. From our discussion of intermediaries in Module 1, you will recall the
importance of getting the right products and services to the right place at the right
time. The apparel and textiles industries are making fast delivery the cornerstone of
their re-emerging global competitiveness. Technological breakthroughs in sewing
machinery are reducing turnaround time, and data processing directly links retail
purchases with designers and fabric suppliers. In reaction, many Asian and European apparel producers are actually setting up shops in the higher-cost US labour
markets to reduce lead times.23
In addition, support service intermediaries such as FedEx have made it possible
to receive almost anything overnight. Firms across sectors are now competing on
fast delivery, with customers able to receive anything from a tablet computer to
photographs by next-day delivery.
The attributes and benefits featured within the SIFTing function provide channel
members an opportunity to carve out distinctive role identities in competitive
markets. However, some structure must underlie this process. Channel structure
refers to the patterned behaviours and attitudes associated with a set producer
wholesalerretailer of channel members. Channel structure is discussed in the next
module.

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2.7

Key Terms
agents
brokers
channel roles
consumer
commission merchants
differential advantage
intermediary
interspecific competition

manufacturers sales organisation


merchant wholesaler
producer
retailers
role expectations
role identity
source
wholesaler

Learning Summary
Marketing channel members have to adapt to attain or maintain their positions in
increasingly competitive markets. In this process of adaptation, each channel
member attempts to differentiate itself from any other member. This process
describes the pursuit of a differential advantage. A differential advantage may be
viewed as the marketplaces perception of an organisations distinctive characteristics that set it apart from competitors in ways enticing to customers. Each business
entity must distinguish itself in some way to persist and/or prosper in a competitive
marketplace.
Channels are not formed through an arbitrary process. Instead, an underlying
structure shapes members behaviours. This structure makes it possible to explain
and predict how channel members will perform in market settings. The basis for
this structure is referred to as channel roles. Channel roles are sets of activities or
behaviours assigned to each intermediary operating in a channel system. Over time,
each channel member will attain a special role identity. Role identity specifies the
characteristics of an individual or organisation that are considered appropriate to
and consistent with the performance of a given channel role. New channel role
expectations encompass the exchange attributes and benefits expected by customers. Role expectations capture the potential of alternative channel intermediaries to
satisfy the consumption decision criteria.
All intermediaries play a negotiatory function within marketing channels. The
negotiatory function can take different forms and extends beyond assembling,
grading, and sorting products. Intermediaries may intercede in the distribution,
merchandising, and/or service processes associated with marketing flows. Some
intermediaries simply provide a means for transportation and logistics management,
while others supply merchandising assistance to sellers. Still others offer a variety of
intermediary services to the channels they serve, ranging from the warehousing of
goods to the provision of consumer services.
It is clear that channel members play a variety of roles in the flows of goods and
services from producer to ultimate user. These channel roles emanate from the
nature of channel member interactions or relationships and can be categorised into
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supplier, customer, and lateral relationships. Supplier relationships include source


firms, producers, and wholesalers. Each of these channel members sells goods for
input into production processes or for resale. Wholesalers market products and
services for resale or institutional use. Customer relationships are handled by
another type of intermediary: retailers. Retailers sell products or services to the
ultimate consumer. Lateral relationships occur between channel members at
relatively equivalent positions in the channel system.

Review Questions
Short-Answer and Essay Questions
2.1

What three principal channel roles are involved in supplier relationships?

2.2

Which type of wholesaler does not take title to or physical possession of the goods it
markets?

2.3

What is the most serious threat to the continued growth of traditional wholesaling?

2.4

What type of intermediary is involved in the principal channel role in customer


relationships?

2.5

Several divergent perspectives on how channel members differentiate themselves are


summarised in the acronym SIFTing. What components does each of the letters
represent?

2.6

Three outcomes are possible as a result of interspecific competition. List them.

2.7

During the last 20 years, the role of intermediaries in the womens clothing industry has
changed with the growth of the direct sales industry, online retailing, catalogue retailing,
shopping on television, and the decline of the traditional department stores. Do these
changes support or refute the principle of interspecific competition?

2.8

In an effort to target brides, Macys department stores formed a joint venture with
Martha Stewart and her publication Martha Stewart Living to produce Martha Stewart
Living Weddings. Macys is the exclusive sponsor of the registry section of the wedding
magazine. Is this a type of channel relationship? Why or why not?

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Module 2 / Channel Roles in a Dynamic Marketplace

Multiple Choice Questions


2.9

As a result of interspecific competition:


A. no one species ever emerges as superior.
B. the struggle for survival becomes less competitive.
C. each species in a system has to share equally.
D. when similar species compete for scarce resources, the less fit competitors
usually perish.
E. a win-win situation results so both can live.

2.10 During the 1970s, Hardees fast-food restaurants flourished in communities with
populations of 10000 or less while many other fast-food franchises scrambled for
success in large urban areas or on interstate highways. Hardees realisation that their
success lay in the smaller market areas is called:
A. range restriction.
B. environmental selection.
C. character displacement.
D. selective competition.
E. market constriction.
2.11 Xerox used to call itself the information company because it created products for the
office of the future. Xerox went on to call itself the document company because it
focuses on copying and printing products. This ____ makes direct competition easier to
deal with.
A. character displacement
B. offensive marketing
C. range restriction
D. environmental responsiveness
E. defensive marketing
2.12 Harry & David, a catalogue retailer, ostensibly sells fruit and flower gift baskets. This
company uses a guarantee to create a(n) ____ over others who sell essentially the same
products. Harry & David is actually in the business of selling customer satisfaction. Every
time you order a gift from Harry & David, the company promises to exceed your
expectations.
A. customer value
B. organisational alliance
C. differential advantage
D. organisational advantage
E. environmental advantage

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2.13 Milliken, a large textile mill, sells towels to industrial laundries, which in turn supplies the
towels to factories. Although Milliken towels are similar to those of other companies,
the laundries are willing to pay 10 to 15 per cent more for them. The reason why
laundries willingly pay more for Milliken towels is Millikens ____. It provides laundries
with software to route laundry trucks, accounting assistance, sales force training, and
customer leads.
A. customer allegiance
B. organisational alliance
C. differential advantage
D. organisational advantage
E. environmental advantage
2.14 General Composites, a design firm that needed to move away from the declining
military supply industry, decided to move into the sporting goods business. It decided to
build kayaks from recycled plastics, so as to appeal to environmentalists. The firm then
had to find a source for the plastic and hire a plastics mould manufacturer. Once the
kayaks were made, it had to find a national distributor with expertise in promoting
sporting goods. The complexity of the channel system in which General Composites had
to operate is called:
A. environmental incongruity.
B. situational disparity.
C. environmental disparity.
D. situational diversity.
E. environmental diversity.
2.15 Siemens Medical Systems sells medical equipment to health-care institutions. This is an
example of a ____ relationship.
A. supplier
B. lateral
C. customer
D. manufacturer
E. wholesaler
2.16 Shoups Country Store sells barbecue sauces and seasonings to people who stop by the
Indiana store. This is an example of a ____ relationship.
A. supplier
B. lateral
C. customer
D. manufacturer
E. wholesaler

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2.17 US consumers are attracted to sports memorabilia stores that carry uniforms just like
the players wear as well as sports gear with team logos. Certain retail outlets with their
high prices and specialised salespeople allow suppliers to easily identify the means by
which their products can be distributed. Within the marketing channel, stores such as
the Atlanta Braves store have:
A. identity compatibility.
B. compatible congruity.
C. role congruity.
D. situational distinctiveness.
E. role identity.
2.18 The restaurant trade was eating into Krogers profits, so Kroger decided to open minigrocery stores laden with gourmet food and staffed by chefs. Changing consumer ____
prompted these changes by Kroger supermarkets.
A. role expectations
B. value expectations
C. value distinctions
D. role congruity
E. identity compatibility
2.19 Which of the following products would be produced by a source firm?
A. Microchips.
B. Automobile transmissions.
C. Aluminium.
D. Ceiling tile.
E. Paper.
2.20 Alabama Paper Company is an independently owned business that takes title to and
physical possession of the products it sells for resale or institutional use. It performs
negotiation functions and promotional functions for its customers. Alabama Paper
Company is an example of a:
A. commission merchant.
B. wholesaling agent.
C. merchant wholesaler.
D. manufacturers sales organisation (MSO).
E. broker.
2.21 Manufacturers sales organisations (MSOs):
A. are producer-owned firms.
B. are physically detached from the manufacturing location.
C. do perform the negotiation function.
D. take title, but not physical possession, of the products they market.
E. are accurately described by all of the above.

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2.22 FoodMatch is an independently owned wholesaler that serves the produce market
within a 200-mile radius of Memphis, Tennessee. Growers pay FoodMatch a 3 per cent
commission to find grocery store buyers. Since FoodMatch does not take title or have
physical possession of the produce it sells, it is classified as a:
A. wholesaling agent.
B. wholesaling intermodal facilitator.
C. commission merchant.
D. manufacturers sales organisation.
E. merchant wholesaler.
2.23 Which of the following statements about agents is true?
A. Agents are seldom involved in negotiating relationships.
B. Agents typically cover their own costs and do not get paid until they have made
a sale.
C. Agents take title to the merchandise they market.
D. Industrial distributors and wholesale cooperatives are types of agent wholesaling.
E. Agents are typically owned by the company that produced the product being
marketed.
2.24 Which of the following is an example of a retailing activity?
A. Bob vends a case of cloth napkins to an Italian restaurant.
B. Bernice sells a role of masking tape to a kindergarten teacher who will use the
tape to hang childrens drawings in her classroom.
C. Sami sells a bushel of lima beans to a supermarket produce manager.
D. Arturo markets a line of fishing lures to amateur fishermen.
E. Li markets office cleaning supplies to the heads of housekeeping at various
Midwestern universities.
2.25 Which of the following is the BEST example of a department store?
A. The Shirt Store carries about 1200 dozen shirts in its stock and no other
products.
B. The Happy Store is a fairly small store where a limited number of products can
be purchased 24 hours a day.
C. Maison Blanche is a New Orleans-based store that features extensive assortments of merchandise that are categorised into departments.
D. Safeway is a self-service store that features groceries, meats, and produce
departments.
E. Movie rental stores also sell fizzy drinks, popcorn and confectionery.
2.26 Which of the following statements about lateral relationships is true?
A. Lateral relationships involve firms that are targeting similar but different
markets.
B. Firms involved in lateral relationships should not expect to achieve a sustainable competitive advantage.
C. To be successful, lateral relationships must involve firms of the same country.
D. The concept of lateral relationships is based on cooperation and trust.
E. The principal channel role in lateral relationships is played by retailers.
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2.27 Several divergent perspectives on how channel members differentiate themselves are
summarised within the term SIFTing. The acronym stands for:
A. service, information, focus, and targeting.
B. suppliers, intermediaries, forecasting, and testing.
C. service, innovation, flexibility, and timing.
D. sales, innovation, focus, and technology.
E. sales, information, focus, and technology.
2.28 Nabisco expedites its just-in-time delivery system by running what it calls a direct store
delivery operation. There are no dropped shipments at central warehouses for retailers
to pick up. Instead Nabiscos 105000 trucks visit each retailer carrying its products
about three times a week. In terms of the SIFTing acronym which allows channel
members to differentiate themselves and establish a unique role identity, which components is Nabisco using with its customers?
A. Service, innovation and timing.
B. Sales and information.
C. Innovation, focus, and technology.
D. Feedback and timing.
E. Suppliers and intermediaries.

Discussion Questions
2.29 Explain the principle of interspecific competition.
2.30 How does role identity relate to channel member performance?
2.31 What are role expectations? How do changes in role expectations affect channel
members?
2.32 Define and explain the purpose of channel SIFTing.
2.33 Discuss the two levels of channel roles.
2.34 Describe the role of intermediaries in the marketing channel.
2.35 Compare the roles of wholesalers and retailers. What are some of the advantages
provided to producers by these intermediaries?

References
1. Keeton, William T. (1972), Biological Science, Second Edition, New York: Norton &
Company, 666668; Rubinow, Sol I. (1975), Introduction to Mathematical Biology, New York:
John Wiley & Sons, Inc.; and Henderson, Bruce D. (1989), The Origin of Strategy,
Harvard Business Review, (NovemberDecember), 139153.
2. Lipper, Arthur III and George Ryan (1991), Thriving Up and Down the Free Market Food
Chain, New York: HarperCollins Publishers.

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3. Kevles, Betty Ann (1986), Females of the Species: Sex and Survival in the Animal Kingdom,
Cambridge, MA: Harvard University Press.
4. Solomon, Robert C. (1992), Ethics and Excellence, Oxford: Oxford University Press.
5. Henderson, Bruce D. (1989), The Origin of Strategy, Harvard Business Review, (November/December), 140.
6. Trachtenberg, Jeffrey (1986), Marketing: The Not-So-Ugly Americans, Forbes, 138(1
December), 212214.
7. Adapted from Wahl, Michael (1993), Pushing Yankee Products in Lord Rayners Court,
Brandweek, 34(12 July), 2629 and Slutsker, Gary (1993), The Naked Truth, Forbes,
152(16 August), 94.
8. Morgan, Robert M. and Shelby D. Hunt (1994), The Commitment-Trust Theory of
Relationship Marketing, Journal of Marketing, 58(July), 2038.
9. Genetic Engineering and Biotechnology News (2013), Samsung Biologics, BMS in
Manufacturing Partnership, [online] available at: http://www.genengnews.com/gennews-highlights/samsung-biologics-bms-in-manufacturing-partnership/81248655/ [Accessed 19 August 2013].
10. David, Gregory E. (1993), Stomping Elephant, Financial World, 162(28 September), 40
41 and Drummond, James (1989), Trial By Fire, Forbes, 144(11 December), 148, 152.
11. Henkoff, Ronald (1994), Floored? You Can Come Back, Fortune, 129(21 February), 53
54.
12. Cronin, J. Joseph Jr and Michael H. Morris (1989), Satisfying Customer Expectations:
The Effect on Conflict and Repurchase Intentions in Industrial Marketing Channels,
Journal of the Academy of Marketing Science, 17(1), 4149.
13. Bureau of Labor Statistics US Department of Labor (2013), The Employment Situation
August 2013, [online] available at: http://www.bls.gov/news.release/pdf/empsit.pdf
[Accessed 30 August 2013].
14. United States Census Bureau (2013), Monthly & Annual Wholesale Trade, [online]
available at: http://www.census.gov/wholesale/index.html [Accessed 30 August 2013].
15. Michman, Ronald D. (1990), Managing Structural Changes in Marketing Channels,
Journal of Consumer Marketing, 7(Fall), 3342.
16. Kelley, Bill (1987), Americas Best Sales Forces: Industrial & Farm Equipment Black
& Decker Rebuilds, Sales & Marketing Management, 138(June), 49.
17. Narus, James A. and James C. Anderson (1986), Industrial Distributor Selling: The
Roles of Outside and Inside Sales, Industrial Marketing Management, 15, 5562.
18. Melcher, Richard A. (1994), Cut Out the Middleman? Never, Business Week, (10
January), 96.
19. Templin, Neal (1995), More and More Firms Enter Joint Ventures With Big Competitors, The Wall Street Journal, (1 November), A1A12.24.
20. Ettorre, John J. (1988), Value In, Value Out, Transportation & Distribution, 29(March),
3233.
21. Adapted from Gold, Jacqueline S. (1993), The Marathon Man? Financial World, 162(16
February), 3233; Comte, Elizabeth (1992), Art for Shoes Sake, Forbes, 150(28 September), 128130; Fitzgerald, Kate (1992), Marketers Learn to Just Do It, Advertising Age,
63(27 January), S7S8.
22. Human Swarm (2006), [TV programme] Channel 4, 30 May 2013 21.00.
23. Weiner, Elizabeth and Dean Foust (1988), Why Made-in-America is Back in Style,
Business Week, (7 November), 11620.
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Module 3

Conventional Marketing Systems


Contents
3.1 Conventional Marketing Channels as Organisational Teams ............3/2
3.2 Conventional Marketing Channels: Issues and Answers ....................3/2
3.3 Making the Channel Design Decision ...................................................3/7
3.4 Selecting the Best Channel Design .................................................... 3/15
3.5 Evaluating Channel Structure Performance .................................... 3/19
3.6 Modifying Existing Channels ............................................................... 3/19
3.7 Designing Channels to Capture Channel Positions ......................... 3/23
3.8 Real-World Channel Design ............................................................... 3/25
3.9 Key Terms ............................................................................................ 3/25
Learning Summary ......................................................................................... 3/25
Review Questions ........................................................................................... 3/27
Learning Objectives
After reading this module, you should be able to:
Discuss how conventional marketing channels are like business teams.
Explain conventional channel design.
Discuss why channel design decisions are critical to the success of marketing
organisations and marketing channels.
Discuss the various channel design options.
Describe how to identify the best channel design.
Explain how to evaluate the performance of channel structures and how to
modify existing channel arrangements.
Discuss the growth of multichannel marketing systems and how to design
channels to capture channel positions.
Design issues are critical in marketing channels. Issues such as selecting the right
members, assigning them the proper functions, and having everyone fulfil their
responsibilities can mean the difference between success and failure. In the Channel
Relationship Model, market coverage, efficiency, effectiveness, and service levels are
issues which must be confronted in channel design. In this module, we will discuss
these issues.

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Module 3 / Conventional Marketing Systems

3.1

Conventional Marketing Channels as Organisational


Teams
There is a great deal of talk these days about team building. Whats new about this
concept? Most marketers have always worked in teams. Shoemakers, blacksmiths,
and woodworkers worked with their wives as their teammates. While husbands took
care of production, wives took care of customers, apprentices, and the books. In
fact, until the early part of this century, such teams were the most important
marketing dyads and business systems.1
Until recently, individual organisations have received more attention than organisational teams. Now, with knowledge- and information-based workgroups growing
in significance and effectiveness, conventional channel teams are emerging as the
most important work units.2 Conventional channel teams are loosely aligned
teams of organisations designed to bridge gaps between producers and consumers.
They are perhaps the most difficult type of marketing team to assemble and make
work effectively. But this is a difficulty that simply has to be faced in todays
marketplace. To achieve success, marketing organisations must learn to use different
types of channel designs (teams) for different purposes.
Each organisation in a conventional organisational team is something of a functional specialist. But, for conventional channels to succeed, each member still must
perform as part of a system. These systems must be properly designed to achieve
the continuity that channel members need to convert their special skills into a
successful team performance. For this to happen, channel organisations have to
agree on what results are being sought through the channel. Channel members must
also define their purpose, core competencies, system of rewards and punishments,
devices of conflict resolution, and behavioural norms. Good channel structure often
paves the way to market leadership and overall business success. Without the
benefits of solid market channels, even superior products can fail in the marketplace. Because they require years of continuous attention to develop, sound
manufacturer intermediary end-user linkages are often barriers to competitive
entry. The topic of this module is the development of sound and successful channels. Before we begin discussing the specifics of channel design, we need to address
a few general issues and questions concerning conventional marketing channels.

3.2

Conventional Marketing Channels: Issues and Answers


Producers, wholesalers, other intermediaries such as agents or support servicers, and
retailers all face channel design decisions.3 Retailers look upstream, that is, back up the
channel, in their efforts to secure suppliers. Retailers like Toys R Us and Home
Depot have flourished in large part because of their ability to design and then
successfully lead channels. Wholesalers look upstream and downstream. McKesson
Corporation and American Hospital Supply, for example, have emerged as dominant
players in their respective industries through effective channel design decisions. Each
has achieved its dominance while occupying classic intermediary positions. As you
might expect, producers look downstream toward the market. It might surprise you

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Module 3 / Conventional Marketing Systems

to learn that they also look upstream toward their own supply sources. Read Time
Out 3.1 to unravel a few other myths about how channels of distribution operate.
The perspective employed in this module reflects the traditional view that channel flows begin with a producer-manufacturer and end with a user-consumer. Thus,
our discussion of channel design and related processes generally will be conducted
from the producers perspective. This perspective is adopted to simplify the
discussion that follows; however, the principles discussed here are equally applicable
to wholesalers or retailers.

Time Out 3.1 ______________________________________________


Some Distribution Myths
Often times, manufacturers decisions about their distribution channel are based
on conventional wisdom. Unfortunately, conventional wisdom is often flawed.
Witness the timely demise of the following four bits of conventional wisdom
(C.W.) as it relates to marketing channels:
C.W. A channel of distribution is the movement of a product from the
manufacturer to the ultimate user.
Reality. No product is ever bought strictly as a physical entity. Instead, it is
always sold with some added service or value. Even the shady street merchant who pulls up his sleeve to offer you a choice from among a dozen
watches on his arm provides you some service along with your selection.
After all, you receive immediate delivery and a killer price. Return policies,
however, are usually a little dicey.
C.W. A firm sells to or buys from another firm.
Reality. Manufacturers never simply sell their products to intermediaries. At
that point, the manufacturers job has just begun. After the sale, the manufacturer should strive to do everything possible for the intermediary so the
inventory will move quickly and the product will be reordered. In consumer
markets, the distribution burden of the manufacturer should almost certainly
extend to retailers (in the form of cooperative advertising, point-of-purchase
displays, demonstrations, missionary sales calls, and the like) and consumers
themselves (in the form of product warranties, instructions, information,
coupons, and national advertising). In reality, manufacturers do not sell to
middlemen, they sell through middlemen.
C.W. Distribution channels are managed by manufacturers.
Reality. If so, then someone had better tell Sears, Walmart, and Kmart,
among numerous other retailing and wholesaling behemoths. They manage
their channels by deciding what to buy, whether to make their own products, which manufacturers to purchase from, and so on. Manufacturers are
no different. They are also involved in planning and managing channels by
addressing such questions as: should we use exclusive, selective, or intensive
distribution? Should we distribute through our own salespeople or through
manufacturers representatives? Should we own our retailers?
C.W. Planning distribution strategy is the responsibility of the distribution
manager.
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Reality. Most distribution managers deal with distribution purely in a physical context. Distribution strategy is so significant and all-encompassing that it
has a profound influence on all other areas within the firm (i.e., personnel,
finance, and production, not to mention the other areas of the marketing
mix). The producers decision to open its own retail outlets has so many
implications that it can only be made at the highest decision-making levels of
the firm.
Questions
Did you have any other misconceptions about marketing channels prior to
taking this course? What were they?
Adapted from Pearson, Daniel M. (1981), Ten Distribution Myths, Business Horizons, 24(May
June), 1723; Anonymous (1993), Expo Educates Shippers, Transportation & Distribution, 34(6);
1516 and Focht, William L. (1992), Brokerage Marketing Today, Broker World, 12(10), 1830.
__________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

3.2.1

What Is Channel Design?


The concept of a design can be used in a descriptive way to indicate a pattern,
arrangement, or structure of parts,4 as in the sense of the pattern or arrangement
that exists between organisations in marketing systems. Design reflects the rules and
regulations that system members use to create and sustain the system. Channel
design refers to those decisions associated with the formation of new marketing
channel or the alteration of existing channels. Channel design should be viewed as a
strategic decision because a properly executed design can provide a differential
advantage in the marketplace. Differential advantages, which we defined in Module
2, are also called sustainable competitive advantages (SCAs). SCAs allow firms
to gain long-term market advantages relative to their competitors.5 It is no less
important for firms to seek SCAs through their channel design decisions than
through product, promotional, or pricing decisions. In fact, pursuing SCAs through
channel design makes more sense. Why? Because a superior channel design yields
long-term advantages that cannot be easily imitated by competitors.

3.2.2

Why Are Channel Design Decisions Critical?


The type of channel a producer chooses directly influences all of its other marketing
decisions. For instance, producers prices vary substantially according to whether
they use mass merchandisers or high-quality boutiques to distribute their goods to
final users. Promotional decisions depend, in part, on how much training or
motivation their intermediaries or retailers need. Channel design decisions typically
involve relatively long-term commitments to other organisations and to the particular markets those channel members serve. Once Toyota contracts with an
independent dealer in Memphis to sell its vehicles, for example, that dealer cannot
easily be replaced with company-owned outlets.
Channel design discussions are also critical because a channel system is the key
external resource of many manufacturers.6 Successful channels often take years to
build and, once established, are not easily changed. Channel design decisions
represent a commitment to a set of policies and procedures. Because channel

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designs are sometimes easier to get into than they are to get out of, channel managers should design channels with a forward view based on the likely shape of
tomorrows market environment.

3.2.3

How Do Marketing Functions Factor into the Channel Design


Decision?
Marketing channels perform the task of moving goods from producers to consumers. In doing so, the channels close time, place, and possession gaps that separate
goods and services from consumers. To achieve these outcomes, channel members
must perform several marketing functions. These marketing functions are listed
below in the order in which they would normally arise in an automotive distribution
channel:7
Information. The accumulation and distribution of information about current
and potential customers, competitors, and others in the marketing environment.
Promotion. The construction and distribution of persuasive and/or informative
communications designed to attract buyers.
Negotiation. The means by which final agreement on price and other terms
(financing, features, etc.) is reached so that transfer of ownership and possession
can be completed.
Ordering. The communication of an intention to purchase by end-users
through the channel members to producers.
Financing. The procurement and allocation of funds required to finance
automotive inventories at the channels differing levels.
Risk-Taking. The bearing of the risks associated with carrying out channelrelated work.
Possession. The successive stages by which the storage and movement of
physical products from the raw materials to final customers occurs.
Billing. The forward movement of a detailed list of goods sold or services
provided, together with the charges and terms.
Payment. In response to invoices received, payment involves the means by
which buyers pay their bills through financial institutions to sellers.
Title. The actual transfer of automobile ownership from one organisation to
another, or to the final consumer.
Certain channel functions flow forward (promotion, possession, billing, and title).
Other functions flow backward (ordering and payment). Still others flow up and down
the channel (information, negotiation, financing, and risk-taking). Typically, several
different channel members are involved in the performance of these functions. Five
of these functions and their flows are shown in Exhibit 3.1. The 10 functions listed
above share three characteristics: 1) they can be performed better through specialisation, 2) they can be shifted among channel members, and 3) they invariably use
someones resources. If the performance of functions is shifted, some or all of their
associated costs are also shifted. To the extent that producers perform these functions
themselves, their costs and prices increase. As functions are shifted to intermediaries,
producers costs and prices decrease, but the intermediaries must add a charge to
account for their efforts. However, since intermediaries are typically specialised and

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more proficient in their functional area(s) than producers, end-user prices may actually
decrease. Moreover, the final users may perform some of these functions themselves,
in which case they should benefit from lower prices. Regardless, the total costs and
profit margins demanded by each channel member are reflected in the final buyers
cost (price).
Exhibit 3.1

Five different marketing functions in an automobile channel

1. Physical Function

Suppliers

Transporters,
warehouses

Manufacturer

Transporters,
warehouses

Dealers

Transporters

Customers

2. Title Function

Suppliers

Manufacturer

Dealers

Customers

3. Payment Function

Suppliers

Dealers

Banks

Manufacturer

Banks

Transporters,
warehouses,
banks

Manufacturer

Transporters,
warehouses,
banks

Dealers

Manufacturer

Advertising
agency

Dealers

Banks

Customers

4. Information Function

Suppliers

Transporters,
banks

Customers

5. Promotion Function

Suppliers

Advertising
agency

Customers

Adapted from Kotler, Phillip (1994), Marketing Management: Analysis, Planning, Implementation and Control,
Englewood Cliffs, NJ: Prentice Hall.

Whether these or similar functions need to be performed in marketing channels is


never at issue. The functions cannot be eliminated; they can only be shifted from one
channel member to another. Therefore, the key question asked in the process of
channel design is: who will perform these functions? The answer to this question
turns on two issues: relative efficiency and relative effectiveness. The process by which
alternative channel designs are evaluated in terms of their ability to perform a function
with a minimum expenditure of effort or expense is called a channel efficiency
analysis. Similarly, a channel effectiveness analysis considers the strategic fit of a
channel design with the channel members overall marketing strategy. Effectiveness
relates to a channel designs ability to perform competently.8 The evaluation of
channel effectiveness requires a longer time horizon than does efficiency analysis.
Two basic types of intermediaries those who take title to goods (resellers) and
those who do not (agents) are available to perform channel functions. Some
intermediaries are specialists who perform one or a limited number of functions.
Others are generalists who perform multiple functions. All intermediaries charge
either upstream or downstream channel members for all functions performed. The
total costs and profit margins demanded by each channel member are reflected in
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the final buyers cost (price). Whether the final buyer actually purchases the product
or service depends in part on alternative choices available or, possibly, the decision
to do without or solve the need without the purchase.

3.2.4

When Is It Time to Design (or Redesign) a Channel?


When a new firm is established, either as a start-up or from a merger or acquisition,
the need to design new channel arrangements is clear. When the nature of markets
change, the need for channel redesign may arise. For instance, the increase in
discount megaretailers in the US prompted high-prestige home furnishing manufacturers, such as Dakota, Inc., to seek out these retail settings.9 In the past, Dakota
had shunned such outlets out of concern for its image as a high-quality supplier.
A variety of other circumstances might indicate the need to design or redesign
the channel. Such circumstances include the organisations development of a new
product or product line, or a decision to target new markets. For example, when
General Motors introduced Saturn automobiles, a radically different distribution
system had to be developed to minimise competition with existing General Motors
products. Additionally, the need for channel design could be precipitated by existing
channel members changing their policies, failing to perform as expected, or engaging in practices that cause conflict. External environmental changes (e.g., economic,
competitive, sociocultural, technological, legal) might also trigger the need to design
or redesign a channel.

3.3

Making the Channel Design Decision


When designing marketing channels, organisations should reach a workable compromise between what is ideal, what is adequate, and what is obtainable. To
illustrate, consider that new manufacturers often feature small operations within a
limited market area. Because smaller firms generally have restricted capital resources,
they usually use existing intermediaries. Further, the number of intermediaries
available in a given local market is frequently small, possibly consisting of a few
manufacturers sales representatives, a couple of wholesalers, several established
retailers, and a trucking company or two. Deciding on the best channel design in
such an environment may be no problem at all. Few to none of the potential
intermediaries may actually be available. In this case, the small firms channel design
decisions may be easier than they would prefer they may be forced to perform
many channel functions themselves.
Larger firms, on the other hand, tend to use different types of channels in different markets. A producer might market through wholesale distributors in its larger
markets, while in smaller markets it might sell directly to retailers. In one part of the
country, the firm might sell through all of the retail outlets willing to handle its
goods; in another, the firm may grant exclusive arrangements to a few retailers. In
rural areas, manufacturers might distribute to consumers through full-line merchandisers; in more heavily populated areas distributors may be limited-line retailers.
Large or small, an organisations channel designs should evolve in response to a
SWOT analysis, an evaluation of the firms Strengths and Weaknesses and the
Opportunities and Threats present in the relevant market environment. Information
relating to a channel members profitability, sales volume, brand associations,

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product portfolio and life cycles, and relative costs should be evaluated in a SWOT
analysis. This analysis should likewise consider an organisations employee/managerial attitudes, performance, and capabilities, along with its past and
current marketing strategies. In addition, a SWOT analysis should consider key
market success factors, and the markets attractiveness to new entrants, cost
structures, and barriers to entry. Finally, technological issues, key societal/cultural
trends and developments, and competitors strengths and limitations should be
evaluated. Channel members must continually consider the external channel
environment when designing channels, as is shown in the CRM (Exhibit 1.2).

3.3.1

Channel Design Options


In making channel design decisions, a number of conventional channel systems are
available. These designs can vary along three dimensions: (1) number of levels
present in the channel, (2) number of intermediaries operating at the various levels,
and (3) types of intermediaries used at each level. Each dimension, along with its
consequences for channel design and management, is discussed below.
Number of Levels in the Channel
Each intermediary that performs a function necessary to convey a good or service
closer to final users represents a channel level. Since the producer and the final
user also perform certain functions, they are part of any channel design. A channels length is described by the number of intermediary levels other than the
producer and user that it contains.
A zero-level channel or direct marketing channel exists when a producer sells
directly to the final user. In consumer channels, door-to-door selling, mail-order
catalogues, telemarketing, or manufacturer-owned retail outlets each illustrate zerolevel channels. One-level channel designs feature one selling intermediary, such as a
retailer who buys directly from the producer. Two-level channels feature two selling
intermediaries, such as a wholesaler and a retailer. Three-level channels feature some
combination of three intermediaries, such as a wholesaler, agent, and retailer.
Consumer channel lengths rarely extend beyond four levels.
Industrial marketing channel designs usually differ only slightly from consumer
channels. In zero-level industrial channels, producers use their salesforce to market
directly to industrial customers. However, that same salesforce might also market to
industrial distributors who then sell the final industrial users. Or, producers can sell
directly to industrial users through manufacturers representatives or use those reps
to market to industrial distributors. Industrial channel levels often prove more
extensive than the channel relationships depicted in Exhibit 3.2.10

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Exhibit 3.2

Number of levels: consumer and industrial channel design


Consumer Channel Design

Zero-level

Retailer

One-level

Producer

Consumer

Two-level

Wholesaler

Three-level

Wholesaler

Retailer

Agent

Retailer

Industrial Channel Design

Industrial
distributor
Manufacturer

Industrial
user
Manufacturers
representative

Manufacturers
salesforce

It is also important to point out that while channels normally describe a forward
movement of goods, backward-flowing channels also exist.11 Waste recycling has
emerged as both a major ecological goal and an ongoing need in many countries. To
accommodate this need, several intermediaries have emerged who play a role in
backward-flowing channels. These intermediaries include manufacturers redemption
centres, community recycling groups, and trash-collection specialists. In these reverse
channels, goods and materials flow from end-users backward to production sectors
for use as cost-effective inputs.12 Reverse channels accommodate backward flows for
used goods such as homes, computers, automobiles, and commercial aircraft.
Number of Intermediaries at Each Level
Organisations must next determine the number of intermediaries to be used at each
channel level. Three basic choices are available:
Intensive Distribution. In this design, producers distribute through as many
outlets as possible. The decision of whether to use intensive distribution depends on the nature of product and consumer characteristics, and the level of
control desired by the channel designer. When consumers demand location
convenience or when a product is low involvement, producers offer a greater
intensity of distribution. Convenience-oriented consumer goods such as snack
foods, petrol, or razors are usually distributed in this fashion.
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Exclusive Distribution. On the other end of this spectrum, exclusive distribution places limits on the number of intermediaries operating at any given channel
level. Exclusive distribution is used when producers want to retain control over
the quality of service levels provided and involves dealers agreeing to not carry
competing brands. Intermediaries who enter exclusive distribution agreements
are likely to be relationship-oriented. By entering exclusive arrangements, producers hope to secure more aggressive and knowledgeable sales efforts. The
image of products distributed in this manner is typically enhanced. Higher
markups follow. Most new automobiles, certain major appliances, and a few
clothing lines are distributed through exclusive channels.
Selective Distribution. This distribution strategy lies between the two extremes. In this case, more than one but fewer than all available intermediaries are
used. Manufacturers do not have to spread their limited resources over too many
outlets, including many that are possibly marginal. Better relationships with intermediaries who are selected can be developed and producers can logically
expect better-than-average marketing efforts. Manufacturers can also gain sufficient market coverage with more control and less cost than with intensive
distribution. Downstream intermediaries benefit from the opportunity to market
somewhat more exclusive offerings.
Manufacturers often face a decision of whether to move from exclusive or selective distribution to intensive distribution to increase market coverage and sales. Such
a move may help short-term performance while actually diminishing long-term
prospects. Consider what might happen if a prestigious fashion manufacturer like
Herms moved toward intensive distribution. As the firm expanded from high-end
retailers to mid-level merchandisers, it would likely give up control over its display
arrangements, service levels, and pricing policies. Further, as its wares entered
outlets with lower overheads, retailers might begin undercutting competitors with
lower prices. If a price war ensued, buyers would attach less prestige or value to
Herms apparel and the designers ability to command premium prices would
disappear.
Types of Intermediaries at Each Level
In channel design decisions, firms must also identify the types of intermediaries that
are available at each channel level. Suppose that a hypothetical test equipment
manufacturer called PSL Inc. perfected a measurement tool that was useful for
detecting poor mechanical connections in equipment with moving parts. PSLs
marketing managers believe that the product will be well received in all industrial
markets where electric- or combustion-powered engines are used. Such markets
include the automotive, aviation, railroad, and construction industries.
Unfortunately, the companys salesforce is small and incapable of making significant inroads into these sectors in the near term. PSL is also undercapitalised. Its
problem is how best to effectively reach these diverse industrial markets in a timely
and cost-efficient fashion. PSL also needs to exploit its technological advantage
while it lasts. In a scenario such as this, several intermediary options are available:

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Manufacturers Salesforce. Despite PSLs relative undercapitalisation, the


firms unique device might be sufficiently attractive to induce outside investment. The companys salesforce could then be expanded. At that point,
salespeople could be assigned to exclusive territories and charged with the responsibility of contacting all prospects in that geographic area. Or the firm could
develop separate salesforces that specialise in calling on different industry sectors. Members of a manufacturers salesforce perform the promotion function.
They are employees and are paid a salary/commission plus benefits for performing this function.
Manufacturers Representatives. PSL could enter a contractual agreement
with existing manufacturers representatives who currently do business in the
targeted geographic regions or with the targeted industries. These reps would be
assigned responsibility and control over the marketing of PSLs measurement
tool. Manufacturers representatives are intermediaries who primarily perform
the promotion function. They act as agents for manufacturers, and receive a
commission for their services.
Industrial Distributors. Lastly, PSL could seek out prominent distributors that
operate in the different regions or end-user industries. The distributors would
buy the product for resell. In turn, PSL would probably have to grant these industrial distributors exclusive territorial distribution rights and provide them with
acceptable margins. PSL would also be expected to provide these distributors
with product training and promotional support. Industrial distributors are intermediaries who take title to product, and who typically perform promotional,
informational, negotiation, risk-taking and possession functions. They recover
the costs for performing these functions by making profits on whatever price the
market will bear and the unit volumes that can be sold to downstream buyers.
Companies often seek out innovative intermediaries. For instance, an in-ground
swimming pool manufacturer might consider merchandising its products and
services through department and discount stores. At the very least, such an approach would attract more consistent attention than through typical, stand-alone
outlets. Sometimes firms pursue unconventional channels because of problems
associated with more traditional channels. Avon became master of its own universe
that way. Originally unable to break into regular department stores, the cosmetics
maker opted for and mastered door-to-door selling. For years, it made more money
than most of its in-store competitors.13 Grey markets are another unconventional
channel that often arise in international markets, as discussed in Time Out 3.2.

Time Out 3.2 ______________________________________________


Starting a Company Salesforce from Scratch
The experiences of manufacturers who have gone through the process of
starting their own salesforces from scratch suggest that the key to success lies
in careful preparation. It is essential that the entire sales programme, including
hiring, policies, training, operating procedures, and compensation, be mapped
out before the first recruit is contacted. Otherwise, too much indecision can
arise during the transition stage.

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Pilot Pen Corporations Ronald G. Shaw established a direct salesforce primarily


because he felt he lacked control over the companys long-standing network of
manufacturers representatives. Shaws chief concern during the transition
period was how to ease out the manufacturers representatives without
suffering any economic retaliation from them. Lotus Development Corporation
avoided this problem by building its salesforce from the beginning; the company
concluded from the start of product development that only a highly trained and
company-oriented salesforce could handle its new Notes software.
In the past, bringing company-owned salesforces on line has often proved to be
the pivotal factor in reversing the sagging fortunes of struggling smaller companies. Consider, for example, the case of Mama Tish Italian Specialties, Inc. The
companys owner, Andrew Zahn, says that knowing and having control over the
direction of the sales effort was the change most responsible for turning Mamas
good products into successful products.
Questions
What trade-offs are typically associated with a firms choice of whether to
use its own salesforce or industrial distributors? When would a firm be better off using its own salesforce? Industrial distributors?
Adapted from Anonymous (1995), Supply Manager or Industrial Distributor? Industrial Distribution,
84(3), 42 and Murray, Tom (1991), Starting a Sales Force from Scratch, Sales and Marketing
Management, 143(April), 5058.
__________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

3.3.2

Evaluating Channel Design Alternatives


Knowing their options (based on the dimensions discussed above), most organisations can generally identify several intermediary alternatives from which to choose.
Before the best channel design can be selected, these alternatives must be evaluated
on three criteria: (1) expected sales and costs, (2) control and resources, and (3) flexibility. To
illustrate this process, lets look at the example of a hypothetical company called Tall
Texan, a Texas-based boot manufacturer that wants to begin marketing its womens
line on the East Coast. The company is deciding between the following intermediary
alternatives:
Hiring 10 new sales representatives who would operate out of a sales office
located in Fort Lee, New Jersey. They would receive a base salary plus commission.
Using a New Jersey-based manufacturers sales agency by the name of Jersey
Girls. Jersey Girls representatives have far-reaching contacts with shoe and boot
retailers up and down the East Coast. Jersey Girls has 30 representatives who
would receive a commission based on sales.
Expected Sales and Costs Criteria
Tall Texans two distribution options will yield differing levels of sales and costs.
The first question to be answered is: Which intermediary option will produce more

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sales? For a number of reasons, most marketers believe corporate salesforces usually
sell more. Company salespeople must rely entirely on their own products to
succeed. Naturally, they should be better trained to sell those products. Moreover,
company salesforces should be more service-oriented because their success ultimately depends on their companys success. Finally, customers may prefer to deal
directly with manufacturers.
Still, the sales agency might sell more. Jersey Girls has 30 sales reps, 20 more than
Tall Texan could afford to hire. Depending on the commission structure involved,
Jersey Girls representatives may well be as aggressive as a company direct
salesforce. Also, customers may prefer dealing with sales agents who represent
several bootmakers, rather than corporate salespeople who represent only one.
Finally, Jersey Girls reps presumably have extensive, long-standing relationships
with and knowledge of the target market. Tall Texans salespeople would very likely
have to build these relationships from scratch.
There is a third factor to consider as well: often, resellers like Jersey Girls have
little interest in selling unknown products and therefore Tall Texan may have no
choice but to use a company-owned salesforce.
Once expected sales from each intermediary have been estimated, the next question to be answered is: What are the relative costs of selling different amounts
through the two intermediaries? These cost schedules are illustrated by the graph
shown in Exhibit 3.3. Notice that the costs of using a manufacturers sales agency
rise more quickly than the company salesforces. This is because, while the fixed
costs of using a sales agency are always lower, costs increase faster because sales
agents get higher commissions than corporate reps. At one sales level (Se), selling
costs are the same for each alternative. At that sales level, the manufacturer would
be indifferent to using one or the other salesforce type if it were acting strictly on an
economic basis. Below that sales level, a manufacturers sales agency like Jersey Girls
provides the preferred option. Above it, a company-based salesforce is preferable.
Not surprisingly, sales agencies tend to be used by smaller firms, by bigger firms
when they enter smaller territories, or when sales volume is too small to warrant an
internal salesforce.

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Exhibit 3.3

Break-even cost analysis: company salesforce and a manufacturers sales agency

Manufacturers
sales agency

Sales costs

Company salesforce

Se

Level of sales

It is important to note that distributors like Jersey Girls sometimes act opportunistically by limiting market development. Sales volume then remains below the level
needed to support Tall Texans use of direct sales channels. Thats bad enough, but
a distributor might then demand slotting or promotional allowances, exclusive
dealing agreements, or inordinately high margins as a levy for continuing to carry
the product. For this reason alone, other criteria must be weighed when evaluating
channel design alternatives.
Control and Resources Criteria
Why might two companies manufacturing similar products that are sold to the same
end-users use different intermediaries? Two reasons relate to the relative control
sought and resources possessed by the two firms.14 Organisations are generally not
self-sufficient. This is certainly true of Tall Texan, which requires resources such as
Jersey Girls in order to survive, but wants to retain as much control over its product
and resources as possible. As Exhibit 3.4 illustrates, the fewer its intermediaries and
the higher its financial resources, the more control Tall Texan retains; conversely,
the more Tall Texan depends on resources such as Jersey Girls and less on its own,
the less control it retains.

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Exhibit 3.4

High

Issues of control vs resources in channel design

Manufacturers
financial resources

Few
Fewer financial
resources required.
Less control given up.

Manufacturers
financial resources

Low

Number of
intermediaries

More financial
resources required.
More control given up.

Many
Intermediarys control over
channel functions

Adapted from E. W. Lambert (1966), Financial Considerations in Choosing a Marketing Channel, MSU
Business Topics.

Thus, in Tall Texans channel design decisions, a need exists to control important
channel functions directly while leveraging limited resources. Intermediary selection
often requires a compromise between the desire to control key functions and the
need to develop maximum market coverage for a given expenditure level. Control
often proves the deciding factor in this intermediary selection decision.
Flexibility Criteria
The final criteria is flexibility. Before an intermediary can be selected, channel
members must reach some degree of commitment to the proposed relationship.
This commitment inevitably lessens the channel members ability to respond to
changing environmental opportunities or threats. In highly volatile or uncertain
markets, manufacturers seek channel structures that allow them to rapidly shift their
channel strategy. If the East Coast womens boot market was steady, and maintaining control was important to Tall Texan, the manufacturer would likely opt for a
company salesforce.
On the other hand, if control were not so important to Tall Texan, the company
would likely use Jersey Girls when facing a volatile market. Thats because the latter
arrangement would give Tall Texan more flexibility to exit if the market declined.
Most manufacturers representative agreements can be terminated in 30 days by
either party. Moreover, Tall Texan would not have to absorb the fixed costs
associated with having a company salesforce. Other relevant aspects associated with
having a company-owned salesforce are discussed in Time Out 3.2.

3.4

Selecting the Best Channel Design


The best channel design is one that offers the highest performance effectiveness, at
the lowest possible cost. To select an optimal structure, the channel manager would
have to calculate the expected revenues and costs associated with each alternative
structure.15 However, most marketers are incapable of precisely specifying all the

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possible design alternatives. And even when they are, calculating the exact revenues
and costs associated with each alternative would be impossible. Still, several criteria
can be used to estimate an optimal allocation of key marketing functions.

3.4.1

Analysing Desired Channel Output Utilities


To select the best channel design, the organisation first needs to understand why its
targeted customers buy. Customers purchase decisions can be divided into four
basic categories, called channel output utilities. Different marketing channels provide
more or less of these utilities:
Convenience (Temporal and Spatial) Utility. Waiting time the time that
customers must wait to receive goods is a direct indicator of temporal convenience.
Customers normally prefer fast delivery channels. In turn, faster delivery requires
higher service levels. Spatial convenience reflects the ease with which a product or
service may be acquired. Ford Motor Company, for example, offers greater spatial convenience through its marketing channels than does Bentley. Because of
the number of intermediaries it has available at the retail level, Fords customers
can save on search costs when buying and servicing cars.
Lot Size Utility. The number of product units that a typical customer acquires
during a transaction is the lot size. When securing cars for their rental fleets,
companies such as Hertz or Avis demand channels through which they can acquire a large lot size. You, on the other hand, probably prefer automotive
channels that allow you to purchase a lot size of one. In response, Ford has established different distribution channels for fleet and household car buyers. The
smaller the lot size, the greater the service utility that the channel design must
provide.
Selection Utility. Selection is the product assortment breadth (variety) provided
by the marketing channel. Business and household consumers normally prefer
greater selection because the chances of their needs being exactly satisfied are
then improved. For that reason, car buyers often prefer doing business with
dealerships that carry a variety of manufacturer brands.
Service Utility. Service utility is the value-added dimensions of a market offering
(e.g., easy credit, free delivery, installation, repairs) provided by a channel. The
greater the service, the higher the number of marketing functions provided by
the channel.
As we said, marketing channels can be designed to provide more or less of these
four basic channel output utilities. When organisations channel designs provide
more of an output desired by end-users, they will enjoy a competitive advantage.
But providing increased levels of an output means increased channel costs and,
usually, higher prices for end-users. The success of discount stores such as Target,
Walmart, or Kmart suggests that many consumers are happy to forgo higher
channel output utilities in exchange for lower prices. Remember, though, this means
consumers must provide more utilities themselves. When a mother buys her eightyear-old son a bike at Kmart, she receives no promise of additional service. In other
words, if the bikes chain breaks, Kmart will not repair it.

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The trade-off between prices charged and channel utilities received is an important competitive weapon. Many consumers place little importance on some
channel outputs and, therefore, will not pay for them. That price discounters are so
successful is no surprise. But certain outputs (e.g., the deep product assortments or
personalised attention available at speciality clothing stores) are highly valued by
consumers, and they are willing to pay for them. When important outputs are
delivered at little or no expense through a channel design, customers receive extra
value. Competitors then feel pressure to follow suit through their own channel
design.

3.4.2

Analysing Channel Objectives and Product Characteristics


Naturally, channels should be fashioned in ways that help firms achieve their
distribution goals outcomes toward which distribution efforts are directed.
These goals should be consistent with the firms overall marketing strategy. To
achieve these goals, many marketing functions have to be performed and channels
must be designed so that they are capable of performing these necessary functions.
Distribution goals should be expressed in terms of the channel output utilities
sought. In competitive markets, organisations should arrange their functional tasks
in ways that minimise total costs while achieving the desired channel output
utilities.16 Usually, several end-user segments who seek different levels of output
utilities can be identified (recall the Hertz and individual car buyer example).
Effective channel design dictates identification of which segments to pursue and the
best channel structures for each segment.
Distribution goals change depending on several product characteristics. These
include:
Unit Value. Generally, the lower the products unit value, the longer its distribution channel will be. The products lower value leaves only a small margin to
cover each intermediarys costs. High-value products are often sold directly
through a company salesforce rather than through intermediaries.
Standardisation. Non-standardised products, such as custom-built machinery,
are usually sold directly because intermediaries often lack the necessary specialised knowledge. Products requiring installation and/or heavy maintenance
service are also sold directly to end-users. Standardised products, such as office
supplies, are typically sold through channels featuring more than one intermediary.
Bulkiness. Bulky or heavy products often have high handling and shipping
costs relative to their value. Such products demand channels that minimise
distance and the amount of handling that occurs on the path between producers
and consumers. Basic cola drinks are bulky, suggesting that their channels should
be as short as possible. Channels for perishable products should also be shortened
to accommodate the need for timely delivery.
Complexity. Highly complex products are usually distributed to consumer and
industrial markets through direct channels. Complex products need salespeople

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who are capable of conveying the products technical features to potential users,
and service people who provide continuing value after the sale.
Stage of Product Life Cycle. Many new products require extensive and
aggressive promotional efforts during their introductory stage to establish primary demand. The longer the channel, the more difficult it is to attain this type of
effort from each intermediary. As products progress through their life cycles,
their channels are generally lengthened.

3.4.3

Analysing Market Behaviours and Segments


Current and potential buyer behaviours also need to be evaluated. In fact, evaluating
buyer behaviours is the primary job of many key employees in conventional
marketing systems.
The question of who is doing the buying is particularly crucial. For example, if
spouses or other life partners each have significant input into a purchasing decision,
the product in question should be distributed through intermediaries that successfully service the needs of both. The distribution channels through which homes are
sold illustrate this point. Conversely, individuals are likely to influence the outcome
of important industrial purchases. This implies that direct distribution is preferable,
since it allows for greater control of the salesforce. The use of a company salesperson can ensure that all parties who have input in buying decision are contacted.
Other questions pertaining to when, where and how end-users buy also need to
be answered. For example, if buying patterns are seasonal, intermediaries that can
perform a storage function should be added to the channel. The storage function
flattens what are otherwise peaks and valleys in production. Consumers are increasingly shopping for products from their homes. This trend implies that producers
should eliminate intermediaries such as wholesalers and retailers and sell direct. By
contrast, for those products that consumers typically buy in small quantities, long
channels involving several intermediaries are usually needed.
Many manufacturers think primarily in terms of geographic coverage before
considering the coverage of distinct market segments.17 Large portions of Americas
fishery and forest industries operate in the same Pacific Northwest region. Customers in these two industries frequently purchase the same item in the same region
from different distributors. Fishery-based customers buy primarily from marine
supply distributors while forest-products customers buy the same items from their
own network of distributors.

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Finally, customers prefer to deal with intermediaries that know their industrys
language. Tennecos Navistar employs different distributors to serve the agriculture
and construction equipment market segments. Caterpillar uses three different
channels to serve the construction equipment, light truck, and diesel truck engine
markets located in the same geographic region. In short, wise manufacturers design
different types of marketing channels to serve specialised market segments.

3.5

Evaluating Channel Structure Performance


Once a channel arrangement has been established, firms should periodically review
the performance of their intermediaries. Channel systems inevitably require changes
to meet new or changing conditions in the marketplace. Channel members should
first review the sales growth that the intermediaries allow them to achieve and
consider eliminating intermediaries whose sales fall below expectations. Such
decisions are not as cut and dried as they may appear. For example, Navistar once
observed that several of its dealers were selling fewer than five trucks a year. The
cost to Navistar of servicing these particular dealers actually totalled more than their
truck sales. Still, after it concluded that dropping the dealers would have negative
ramifications for the distribution system as a whole, Navistar elected to retain the
dealers. Dropping the dealers would have required that some employees be terminated and equipment be shut down, and end-user business in the affected markets
would have been lost. When it looked at the whole picture, Navistar realised that
dropping the low-selling dealers would actually have a greater cost than keeping
them.18
By performing a thorough evaluation, firms occasionally discover that they are
paying channel members too much in relation to what they receive in return.
Underperforming intermediaries should be counselled, retrained, or remotivated.
Channel members should terminate their dealings with intermediaries who do not
perform satisfactorily if they do not respond favourably to recommended modifications. These and related issues will be discussed in later modules.

3.6

Modifying Existing Channels


Organisations must do more than construct a good channel design, set it in motion,
and then sit back and watch. Channel adjustments purposeful modifications to
intermediary relationships become necessary when consumer buying patterns
change, markets expand, new competition arises, or as newer, innovative distribution channel options become available. The relationship marketing approach
championed by the CRM counsels channel members to consider how changes in
channel structure will impact relationships at every level of the distribution system.
Channel adjustments generally involve one of three possible moves:
Add or drop individual intermediaries.
Add or drop particular marketing channels.
Develop a totally new way of distributing and selling goods within a particular
market.

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The most difficult adjustments are those whose implementation necessitates


revising the overall channel strategy.19 For instance, a heavy truck manufacturer
might elect to replace independent dealers with company-owned dealers, or a cola
manufacturer might replace locally operated franchised bottlers with a centralised
bottling and marketing system. Such decisions would require changes in at least
three of the four marketing mix decision areas; that is, product, promotion, and, of
course, distribution. Price will probably be changed, as well. The consequences
associated with each channel adjustment would also be significant.
Three specific types of channel modification are those associated with product
life cycles, customer-driven refinement, and the need for multichannel systems.

3.6.1

Product Life Cycle Changes


Many companies either fail to recognise or do not act on the fact that the distribution and selling requirements for a product change over its life cycle.20 No single
channel design will be appropriate during the entire product life cycle. Products that
are new to the world require a specialised channel design that can provide technical
assistance as bugs are worked out and missionary efforts as new users are developed
within the marketplace. To justify all these educational efforts, distributors may
demand an exclusive arrangement. As a product matures, becoming more standardised and better known, less specialised knowledge and efforts are needed to sell it.
Manufacturers can then expand the number of intermediaries distributing the item,
as buyers invariably switch to lower-cost channels.
The matrix shown in Exhibit 3.5 illustrates how the preferred marketing channels
for individual pieces of designer apparel change across time and the items life cycle.
The products market growth rate and value added by channel intermediaries (e.g.,
type and level) drive preferred channel design. In the introductory stage, new
fashions usually enter markets through speciality channels such as boutiques that
spot trends, attract early adopters, and add substantial value to the apparel item. As
market interest grows and demand takes off, the fashion item is distributed through
better department stores that provide specialised services, but not as many as the
previous channel. As the product matures and demand flattens, the garment will
appear in lower-cost, mass-merchandising venues. Less value is added there. When
decline sets in, lower cost channels like low-end mail-order houses, off-price
discounters, or outlet stores dominate designer apparels distribution.

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Exhibit 3.5

Changes in life cycle and channels: the case of fashion apparel

Value added by channel


High

Low

Introductory stage

Declining/Death

Boutique
(e.g., service utility)

Offprice outlets
(e.g., convenience utility)

Growth stage

Mature stage

Better department stores


(e.g., selection utility)

Merchandisers
(e.g., lot size utility)

Low

Market
growth
rate

High

Adapted from James D. Hlavacek and Tommy J. McCuistion (1983), Industrial Distributors When, Who and
When, Harvard Business Review, (MarchApril), 61(2), 96101.

3.6.2

Customer-Driven Refinement of Existing Channels


The capability of any channel that is not modified decreases as time passes. Gaps
inevitably arise between an existing channel and an ideal system. Eventually,
customers will switch to those distribution systems that deliver the sought-after
benefits and services. For example, in the search for low prices and convenience,
many consumers today are opting for Internet shopping over traditional bricks-andmortar shops, and retailers have reacted by now offering both online and offline
shopping options. To be successful, marketing organisations must be aware of these
customer-driven changes and be willing to switch as well.
Yet, channels of distribution are difficult to change. Proposed changes often
meet resistance and implemented changes sometimes encounter outright subversion. With this in mind, Exhibit 3.6 offers an eight-step process by which outmoded
distribution channels can be moved closer to the customers ideal.21

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Exhibit 3.6
Step 1:

Step 2:
Step 3:
Step 4:

Step 5:
Step 6:

Step 7:

Step 8:

A customer-driven approach to channels system modification

Determine what target customers would like to have in the way of channel
services (e.g., lot size, convenience, service backup) if no constraints
existed.
Conceptualise alternative channel structures (designs) that would provide
the types of channel services referred to in Step 1.
Measure and classify the feasibility and cost of these alternative channel
designs.
Collect the manufacturing firms executives objectives for the firms
distribution system. At this point, it is likely that certain principles which
must be observed will be brought to attention.
Compare the available channel design options given managements criteria
on the one hand and customers ideal system on the other.
Have selected outside experts review managements key assumptions. This
step allows management to understand the costs of their assumptions and
constraints as well the gains and risks of changing them.
Close the gaps between the ideal system, the management-bound system,
and the current system so that the channel will be more customer-driven.
This task is on management, which has to agree on what changes it is
willing to make.
Develop a plan describing how the agreed-upon changes will be implemented.

This process may not lead to any changes in the companys existing system. It may, in
fact, convince management that the existing system and set of management constraints
are appropriate and desirable. But pursuing this process should generally move the
existing channel closer to the ideal.
Adapted from Stern, Louis W. and Frederick D. Sturdivant (1987), Customer-Driven Distribution Systems,
Harvard Business Review, (JulyAugust), 3441.

3.6.3

Growth of Multichannel Marketing Systems


The third type of channels modification relates to the recent growth of multichannel
marketing systems. In the past, many manufacturers sold through a single channel.
Today, with the growth of more precise segmentation methods, many firms are
adopting multichannel marketing. Multichannel marketing occurs when a single
firm uses two or more marketing channels to reach one or more market segments.22
This practice is also known as dual distribution.
By pursuing more segments, firms usually achieve increased market coverage,
lower distribution cost, and more specialised marketing efforts. Firms often add a
channel to reach customer segments that their current channel cannot reach. On
other occasions, organisations add distribution channels to reduce their costs of
goods sold. For example, an intermediary may specialise in telemarketing rather than
regular field sales calls. Or, channels may be added because the intermediarys
marketing strengths (e.g., a technically adroit, up-and-running salesforce that can

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effectively market complex equipment) fit the firms needs (e.g., a small, start-up
manufacturer).
Companies also establish different channels to sell to different-sized customers.
Direct sales may be best for handling larger customers. By contrast, a telemarketing
company that features a field salesforce supplement on an as-needed basis may
prove best for dealing with smaller customers and prospects. Such a solution is
often attractive because the producing firm can contact and service more customers
at a cost and customisation level that is appropriate to each.
But the gains from adding new channels may come at a price. New channels
typically introduce more conflict and control problems into the distribution system.
Conflicts can arise when two or more channels end up vying for the same customers, and control problems can arise when new channels are more independent than
older ones.

3.7

Designing Channels to Capture Channel Positions


Meeting customer needs is a necessary but insufficient condition for success in the
marketplace. Marketers must also battle competitors for each consumer. In marketers attempts to gain an edge through channel design, the concept of a channel
position should not be overlooked. A channel position is reflected in the reputation a channel member earns among its current and potential intermediaries for
supplying market offerings, financial returns, programmes, and systems that are
better than those offered by competing channel members.23 For example, a supplier
that provides distributors the most exhaustive, productive, and state-of-the-art
merchandising assistance is likely to cultivate and earn a reputation as the industrys
promotional leader. On the other hand, a supplier that sometimes delivers products
late or sells defective products is likely to be thought of as shoddy or over-priced.
To succeed in todays markets, marketers must gain a reputation for providing their
customers superior value. A reputation for furnishing such value is reflected in the
position firms enjoy in the marketplace.
Intermediaries may easily carry more than a hundred lines, sometimes even those
of direct competitors. Therefore, manufacturers and wholesalers should strive to
provide intermediaries with superior value relative to outcomes offered by competing channel members. Value may come from the resale of products, from support
programmes and incentives, or, perhaps, from the channel relationship itself. This is
known as the pursuit of a sustainable partnership advantage. Over time, channel
partnership advantages make intermediaries more dependent on their channel
partner. In turn, intermediaries themselves will be more willing to contribute to a
partnership/relationship orientation through improved marketing efforts on the
producers behalf. Time Out 3.3 presents several key partner-building practices.

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Time Out 3.3 ______________________________________________


Turning Industrial Channel Intermediaries into Channel Partners
After the channel is designed and working relationships have been established
between manufacturers and their distributors, certain attitudes and behavioural
practices have been shown to contribute to successful, long-standing relationships. Here are several key partner-building practices:
Making Multilevel Calls. Timken Corporation, a producer of roller
bearings, has its sales representatives make multilevel calls on its distributors,
including general managers, purchasing managers, and salespeople.
Working the Counter. Square D, a manufacturer of circuit breakers and
switchboards, has its sales representatives spend an entire day with each
distributor, working behind the counter in order to understand the distributors concerns, problems, and opportunities.
Distributor Marketing Steering Committee. DuPont established a
Distributor Marketing Steering Committee. This group meets on a regular basis
to discuss problems, trends, and opportunities.
Annual Retreats. Dayco Corporation, which produces engineered plastics
and rubber products, conducts an annual retreat. Twenty young or relatively
inexperienced distributor managers and a similar group of Dayco salespeople
are chosen to attend and interact together in educational seminars and social
outings.
Annual Mail Surveys. Parker Hannifan Corporation sends out an annual
mail survey to each of its distributors. In this survey, the distributors are
asked to rate the corporations performance on key dimensions. Feedback is
provided to the distributor respondents.
Newsletters. Parker Hannifan also informs its distributors about new
products and new product applications through newsletters. Copies of distributor invoices are also collected and analysed. From this analysis,
customised advice on how the various distributors might improve their sales
is provided.
Formal Distributor Marketing Plans. Cherry Electrical Products, a
maker of electrical switches and electric keyboards, appointed a distributor
marketing manager who works with distributors to produce formal distributor marketing plans.
Questions
What does a manufacturer gain when it changes intermediaries into channel
partners? Are there situations or circumstances where a manufacturer would
not want to partner up with intermediaries? When? Why?
Adapted from Narus, James A. and James C. Anderson, (1987), Turn Your Industrial Distributors
into Partners, Harvard Business Review, (MarchApril), 6671 and Joseph, W. Benoy, John T.
Gardner, and Sharon Francis (1995), How Partnership Distributors View DistributorSupplier
Partnership Arrangements, Industrial Marketing Management, 24(1), 2736.
__________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

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3.8

Real-World Channel Design


The typical channel institutions owner or manager makes decisions and evaluates
options in a much narrower context and shorter time frame than most channel
design theories would allow. Such circumstances, in fact, reinforce the reasons why
channel managers should carefully weigh and continuously evaluate their channel
design.
Better-designed channels invariably enjoy advantages. Less intensive and more
harmonious contacts among channel members, fewer duplications of efforts, greater
standardisation of those activities performed at different market levels, less reliance
on fewer product lines, faster and better communications, lower-risk operations,
more introductions of advanced technologies, and higher productivity all emerge
from effective design. Each advantage leads directly to greater efficiency and
profitability for the better-designed and more effectively coordinated channel.
Channel design issues really do matter. Selecting the right intermediaries, assigning them the proper functions, and formulating the channel structures necessary to
ensure that everyone fulfils their responsibilities will go a long way toward allowing
a firm to capture and hold onto its intended channel position.

3.9

Key Terms
channel adjustments
channel design
channel effectiveness analysis
channel efficiency analysis
channel length
channel level
channel output utilities
channel position

conventional channel team


distribution goals
dual distribution
marketing functions
multichannel marketing
sustainable partnership advantage
sustainable competitive advantages (SCAs)
SWOT

Learning Summary
Good channel design is often the key to market leadership and overall business
success. Because they generally require years of continuous attention to develop,
sound manufacturerintermediaryend-users linkages are often barriers to competitive entry. Without the benefits that accrue from solid market channels, even
marketers with superior products can fail in the marketplace.
Using channel design as a strategic weapon creates sustainable competitive advantages (SCAs). SCAs refer to skills that a firm does exceptionally well which also
have strategic importance to that business. SCAs allow firms to gain an advantageous position in the market relative to their competitors on a long-term basis.
Channel design decisions are among the most critical facing marketing managers.

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The type of channel chosen directly influences each of the other marketing decisions.
Marketing channels essentially perform the task of moving goods from producers
to consumers. In doing so, they overcome the time, place, and possession gaps that
separate goods and services from the consumers. To achieve these critical outcomes, channel members must perform several key marketing functions, including
information, promotion, negotiation, risk-taking, and billing, among others.
The process by which various channel design alternatives are evaluated in terms
of their performance competencies is known as channel efficiency analysis. This
assessment centres on the relative performance of alternative channel designs.
Channel effectiveness analysis on the other hand, considers the strategic fit with the
overall marketing strategy of potential changes in the channel design. When
compared to efficiency analysis, the evaluation of effectiveness factors in a marketing channel requires that the evaluator assume a longer time horizon.
A variety of circumstances can indicate that a marketing organisation needs to
design or redesign its channel. Such circumstances would include the organisations
development of a new product or entire product line, its decision to target existing
products or product lines to new consumer/business markets or geographic areas,
or an awareness that significant changes have been or are about to be introduced to
some other aspect of the organisations marketing mix. Moreover, such circumstances could arise when existing channel members change their policies,
consistently fail to perform as expected, or are engaging in practices that cause
conflict. When a new firm is established, either from scratch or as the result of
merger or acquisition, the need to establish new channel arrangements is clear.
The various channel structural alternatives available to a producer firm can be
identified in terms of the following three dimensions: (1) the number of levels in the
channel, (2) the number of intermediaries operating at the various levels, and (3) the
types of intermediaries used at each level. Each intermediary that performs a
function necessary to convey the market offering closer toward the final user
represents a channel level. A channels length is described by the number of its
intermediary levels. Second, companies must determine the number of intermediaries to be used at each channel level within a given market area. Three basic designs
are available: intensive, exclusive or selective distribution.
Finally, firms must identify the types of intermediaries that are available at each
channel level. The following distribution alternatives are generally available: manufacturers salesforce, manufacturers representatives, or industrial suppliers. In most
instances, producers will be able to identify several intermediary alternatives. The
intermediary alternatives need to be evaluated against expected sales and costs,
control and resources, and flexibility criteria.
The best channel structure is reflected in the design that offers the desired performance effectiveness, at the lowest possible cost, along each marketing function
to be executed. Unfortunately, reality dictates that the selection of the optimal
channel design will often prove impossible. Therefore, managers should strive for
the best possible design alternative by evaluating the various design options along
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the following criteria: service output levels desired by customers, channel objectives
and product characteristics and market behaviours and segments.
Once they have entered into a channel arrangement, channel members should
periodically review their intermediaries performance. Channels or intermediaries
can be evaluated on the: quality of their customer service, competence with which
they manage the marketing functions assigned to them, share of the market they
have achieved in the assigned area and their potential for additional share gains, and
the level of attention they pay to the manufacturers product(s).
Channel adjustments purposeful modifications to intermediary relationships
become necessary when conditions in the marketplace change. Three specific types
of channel modification are those associated with product life cycles, customerdriven refinement, and the need for multichannel systems. The most difficult
adjustments are those whose implementation necessitates revising overall channel
strategies.
Meeting customer needs is a necessary but insufficient condition for success in
the marketplace. In marketers attempts to foster every edge possible through
channel design, the concept of a channel position should not be overlooked. A
channel position is reflected in the status a channel member earns among intermediaries for supplying market offerings, financial returns, programmes, and systems that
are better than those offered by competing manufacturers. An enticing channel
position can be achieved by treating each relationship with ones fellow channel
members as partnerships that should provide desired benefits to the partner on a
long-term basis. Channel members should strive to provide their intermediaries with
superior value from the resale of products, support programmes and incentives, or
the channel relationship itself, relative to those outcomes offered by other producers. This is known as the pursuit of a sustainable partnership advantage and, in their
channel design efforts, marketers should also be guided by this goal.

Review Questions
Short-Answer and Essay Questions
3.1

What is the most important question to ask when designing a channel?

3.2

An organisations channel designs should evolve in response to a SWOT analysis. What


do the letters SWOT represent?

3.3

Which kind of distribution would be most appropriate for convenience oriented


consumer goods like tissues, confectionery, and nail clippers?

3.4

List the three criteria used as the basis for evaluating channel design alternatives.

3.5

Consumers purchase decisions are controlled by channel output utilities. List the two
subcategories of convenience utility.

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3.6

What typically happens to the channel of a product as it moves from the introductory
stage of its product life cycle to the maturity stage?

3.7

What is another name for the practice of multichannel marketing?

3.8

Nu Skin International sells high quality skin and hair care products through distributors
who buy their products directly from Nu Skin. It operates a state-of-the-art physical
distribution system in Utah that can process around 50000 orders each day in the
200000-square-foot facility. In addition, a $20 million computer system allows it to
remain in constant communications with its distributors shipping orders almost as
soon as they are received. Does Nu Skin have a sustainable competitive advantage
(SCA)?

3.9

The text lists 10 functions that are typically preformed in the task of moving goods from
producers to consumers. These 10 functions are similar in four different ways. List the
four ways.

3.10 While there are a number of conventional channel systems for making channel design
decisions, channels have only three dimensions. List those three dimensions.
3.11 While trying to solve a local mussel farms costly waste problem, Carlos Quijano
realised that Maines salmon and blueberry industries did not have an economical way to
get rid of their wastes either. As a result Quijano developed Penobscot Blend designer
compost using the wastes from the three industries plus peat. He sees the market for
the compost to be people who are concerned about what goes into their garden soil. In
designing a channel for the product, Quijano is trying to determine the number of
intermediaries the compost needs at each level. What is your recommendation?
3.12 Why would two companies both manufacturing organic baby food sold to the same endusers use different intermediaries?
3.13 How would the channel used for selling childrens building blocks that are made with a
new form of plastic called Microban (a substance that kills germs on contact) differ from
the channel used for Lego building blocks that have been around since the 1930s?

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Multiple Choice Questions


3.14 ____ refers to those decisions associated with the formation of a new marketing
channel or the alteration of existing channels.
A. Channel design
B. Sustainable channel advantage (SCA)
C. A channel adjustment
D. Channel identity
E. Channel configuration
3.15 Which of the following marketing functions would normally need to be performed in a
pharmaceutical distribution channel?
A. The construction and distribution of promotional literature.
B. Storage and movement of drugs.
C. Information about new treatments for life-threatening diseases.
D. The health-care facilitys communication of an intention to purchase.
E. All of the above.
3.16 Which of the following marketing functions would NOT normally need to be performed
in a distribution channel for fresh produce?
A. Refrigeration of produce.
B. Decisions on what to grow, when to fertilise, and how to harvest.
C. The bearing of the possible risk of produce perishability while in transit or
storage.
D. The development and distribution of recipe booklets using the produce.
E. The communication of a supermarket chains intent to purchase.
3.17 As a channel is being designed, a channel efficiency analysis will help to answer which of
the following questions?
A. Is there a strategic fit between the channel members overall marketing
strategy and the channel design?
B. Which channel member will make the greatest profit?
C. Who will perform the acquisition functions?
D. What will be the mission statement for the channel?
E. Can the channel be downsized?
3.18 As a channel is being designed, a channel effectiveness analysis will help to answer which
of the following questions?
A. Is each channel member performing an equal number of functions?
B. Is the design of the channel able to perform competently?
C. Who will perform the consumption functions?
D. Is the product or service passing through the channel as quickly as possible?
E. Can the channel be downsized?

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3.19 An organisations channel designs should evolve in response to a SWOT analysis. In an


evaluation of a potential channel members S component as a part of its SWOT
analysis, you would be examining:
A. social and cultural trends.
B. local, state, and national economic forecasts.
C. the high morale of its employees.
D. the activities of its competition.
E. All of the above.
3.20 Each intermediary that performs a function necessary to convey a good or service
closer to the final consumer represents a ____.
A. channel link
B. channel structure
C. level of intermediary
D. channel level
E. distribution level
3.21 Paco Rabanne placed vending machines in trendy places in New York City to sell its
citrus-y, unisex fragrance. Put in $40, and get a bottle of the scent called Paco! The
perfume vending machine is an example of a ____ channel.
A. reverse
B. one-level
C. two-level
D. vending
E. zero-level
3.22 Which of the following is an example of a three-level channel?
A. Copier paper made by Georgia Pacific is bought by Alco Standard, a distributor
of paper and office products; Alco sells the paper to Denver Office Supply, a
chain of office supply retailers.
B. Gulfstream sells jets to an airplane charter company that will rent the planes to
busy executives.
C. Woods End Research Laboratories buys discarded mussel shells from mussel
growers to try to develop a new recipe for compost.
D. Levi sells its jeans in company-owned vending machines.
E. Peaches that were sold by a commission merchant to a cannery in Gray,
Georgia, are bought by Nash Finch food wholesaler; it sells the canned peaches
to Kroger supermarkets.
3.23 With ____ distribution, the producers distribute through as many outlets as possible.
A. selective
B. non-restrictive
C. exclusive
D. integrated
E. intensive

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3.24 Unlike the other forms of distribution, ____ distribution places limits on the number of
intermediaries operating at any given channel level.
A. exclusive
B. inflexible
C. intensive
D. restrictive
E. regressive
3.25 The only places you can buy a Champ! premium ice cream bar made by Champs
Products is at Chicagos Wrigley Field and Lincoln Park Zoo. Champs Products uses
____ distribution.
A. selective
B. restrictive
C. exclusive
D. integrated
E. intensive
3.26 Cat owners really love their cats. They purchase cat carriers so they can safely
transport their cats from Point A to Point B. These carriers can only be purchased at
veterinarian offices, pet stores, and mass-merchandisers. In terms of the number of
intermediaries at the retail level, cat carriers would have a(n) ____ distribution.
A. intensive
B. non-restrictive
C. exclusive
D. selective
E. restrictive
3.27 For which of the following products is the producer most likely to use selective
distribution?
A. Fizzy drinks.
B. Paper clips.
C. Luggage.
D. Nail polish remover.
E. Nail clippers.
3.28 The four basic utilities that determine why customers make the purchase decisions that
they make are:
A. convenience, selection, price, and source.
B. price, promotion, convenience, and warranty.
C. source, service, seller, and selection.
D. service, price, presentation, and promotion.
E. convenience, lot size, selection, and service.

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3.29 A channel that excels in temporal convenience utility:


A. has short customer waiting time.
B. offers free installation and product service.
C. provides customers with easy credit terms and free delivery.
D. has a wide product assortment.
E. can handle large sales.
3.30 In terms of channel output utility, a channel that performs the greatest number of
marketing functions has greatest ____ utility.
A. customer
B. selection
C. value-added
D. lot size
E. service
3.31 Which of the following is NOT listed in the text as one of the product characteristics
that affect distribution goals?
A. Standardisation.
B. Unit value.
C. Stage in product life cycle.
D. Bulkiness.
E. Customer service.
3.32 When should a firm engage in channel adjustments?
A. When consumer buying behaviour changes.
B. When its market expands.
C. When new competition arises.
D. When newer, more innovative distribution channel options become available.
E. When any or all of the above occur.
3.33 Design, Inc. is a Massachusetts-based chain of speciality stores. To take advantage of
preferential treatment and lower costs, it only buys from one jeans supplier Levi
Strauss & Co. The decision to go from multiple suppliers to just one supplier is an
example of a:
A. distribution modification.
B. channel strategy utilisation.
C. channel adjustment.
D. channel concentration.
E. channel consolidation.

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3.34 In which stage of its product life cycle will the product be distributed in channels that
excel in convenience utility?
A. Introductory.
B. Growth.
C. Maturity.
D. Decline.
E. Convenience utility is not exceptionally important in any of the product lifecycle stages.
3.35 The practice of multichannel marketing is also known as:
A. dual distribution.
B. supplemental channelling.
C. bimodal channelisation.
D. dual channelisation.
E. split distribution.
3.36 ____ is reflected in the reputation a channel member earns among its current and
potential intermediaries for supplying marketing offerings, financial returns, programmes,
and systems that are better than those offered by competing channel members.
A. Channel power
B. Intermediary strength
C. Channel alliance
D. Channel position
E. Intermediary power
3.37 Which of the following is NOT a sustainable competitive advantage (SCA) to be gained
from the better-designed channel?
A. Faster and better communications.
B. Lower-risk operations.
C. Fewer duplications of effort.
D. Channel member autonomy.
E. Less reliance on fewer product lines.

Discussion Questions
3.38 Discuss some of the reasons behind the development of marketing channels as
organisational teams.
3.39 What is channel design?
3.40 Why are marketing channel design decisions critical to the success of marketing
organisations? How are marketing functions taken into consideration in channel design?
3.41 Discuss the circumstances which indicate a need for channel design or redesign. What
market features should be considered in channel design?
3.42 Discuss the three dimensions of channel structure.
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3.43 Describe the criteria used to evaluate intermediary alternatives.


3.44 How does a firm select the best channel structure?
3.45 What criteria are used to evaluate marketing channel structure? How is a desired
channel structure maintained?
3.46 What is channel position? Why is channel position important in marketing channels?

References
1. Drucker, Peter (1994), The Age of Social Transformation, Atlantic Monthly, (November),
5380.
2. Revesz, Therese R. and De La Sierra, Mimi Cauley de (1987), Competitive Alliances:
Forging Ties Abroad, Management Review, (March), 57.
3. Aspinwall, Leo (1958), The Characteristics of Goods and Parellel Systems Theories, in
Managerial Marketing, Eugene Kelley and William Lazer, eds, Homewood, IL: Richard D.
Irwin, 434450.
4. Giddens, Anthony (1977), Studies in Social and Political Theory, New York: Basic Books,
Inc.
5. Aaker, David A. (1992), Strategic Market Management, New York: John Wiley & Sons, Inc.
6. Corey, E. Raymond (1976), Industrial Marketing: Cases and Concepts, Englewood Cliffs, NJ:
Prentice-Hall, 263.
7. Kotler, Philip (1994), Marketing Management: Analysis, Planning, Implementation & Control,
Englewood Cliffs, NJ: Prentice-Hall, 527.
8. Hutt, Michael and Thomas W. Speh (1983), Realigning Industrial Marketing Channels,
Industrial Marketing Management, 12, 171177.
9. Ferrell, O.C., George H. Lucas, Jr, and David Luck (1994), Strategic Marketing Management,
Cincinnati, OH: Southwestern, 221.
10. Jackson, Donald M., Robert F. Krampf and Leonard J. Konopa (1982), Factors that
Influence the Length of Industrial Channels, Industrial Marketing Management, 11, 263
268.
11. McVey, Phillip (1960), Are Channels of Distribution What the Textbooks Say?, Journal
of Marketing, (January), 6164.
12. Pelton, Lou E., David Strutton, James H. Barnes, Jr, and Sheb L. True (1993), The
Relationship Among Referents, Opportunity, Rewards, and Punishments in Consumer
Attitudes Toward Recycling: A Structural Equations Approach, Journal of Macromarketing,
13(1), 6074.
13. Adler, Lee (1966), Symbiotic Marketing, Harvard Business Review, (November
December), 5971.
14. Cespedes, Frank V. (1988), Control versus Resources in Channel Design: Distribution
Differences in One Industry, Industrial Marketing Management, 17, 215227.
15. Walker, Bruce J., Janet E. Keith and Donald W. Jackson (1985), The Channels Manager:
Now, Soon or Never?, Journal of the Academy of Marketing Science, 13(3), 8286.
16. Bucklin, Louis P. (1966), A Theory of Distribution Channel Structure, Berkeley, CA: Institute
of Business and Economic Research, and Bucklin, Louis P. (1972), Competition and Evolution in the Distributive Trades, Englewood Cliffs, NJ: Prentice-Hall.
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17. Hlavacek, James D. and Tommy J. McCuistion (1983), Industrial Distributors When,
Who and When, Harvard Business Review, 96101.
18. Mele, Jim (1993), Straight Trucks Take to the Air, Fleet Owner, 88(12), 3841.
19. McCammon, Bert C. (1963), Alternative Explanations of Institutional Change and
Channel Evolution, in Toward Scientific Marketing, Stephen A. Greyser, ed., Chicago:
American Marketing Association, 477490.
20. Hlavacek, James D. and Tommy J. McCuistion (1983), Industrial Distributors When,
Who and When, Harvard Business Review, (MarchApril), 61(2), 96101.
21. Stern, Louis W. and Frederick D. Sturdivant (1987), Customer-Driven Distribution
Systems, Harvard Business Review, (JulyAugust), 3441.
22. Moriaty, Rowland T. and Ursula Moran (1990), Marketing Hybrid Marketing Systems,
Harvard Business Review, (NovemberDecember), 150157.
23. Narus, James A. and James C. Anderson (1988), Strengthen Distributor Performance
through Channel Positioning, Sloan Management Review, (Winter), 3140.

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Module 4

Marketing Mix and Relationship


Marketing
Contents
4.1 The Marketing Mix .................................................................................4/1
4.2 The Product Ingredient ...........................................................................4/2
4.3 The Pricing Ingredient ............................................................................4/7
4.4 The Promotions Ingredient .................................................................. 4/13
4.5 The Place Ingredient ............................................................................ 4/20
4.6 Strategy Formulation: Role of the Marketing Concept................... 4/22
4.7 Key Terms ............................................................................................ 4/24
Learning Summary ......................................................................................... 4/24
Review Questions ........................................................................................... 4/26
Learning Objectives
After reading this module, you should be able to:
Describe why the marketing mix variables are ingredients in successful channel
relationships.
Define the concept of product and the interface between product and relationship
marketing.
Relate agile competitive environments to the notion of products-in-process.
Explain the general approaches to marketing channels pricing, and identify the
relative advantage of the relationship pricing approach.
Distinguish between push and pull promotion strategies and relate these
strategies to relationship building.
Demonstrate an understanding of the link between place and marketing channel
management.
Explain how relationship building may ultimately attain the marketing concept.

4.1

The Marketing Mix


In the kitchen, a recipe is a catalogue of carefully measured ingredients that are to be
assembled in a given order to produce a given dish. The concept we know as the
marketing mix can be defined in much the same way. The marketing mix offers a
means by which product, price, promotion, and place variables can be assembled to
meet channel needs. But just as the ingredients of a recipe are not thrown together
in an arbitrary way, marketing mix variables are not combined haphazardly. Instead,

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Module 4 / Marketing Mix and Relationship Marketing

successful marketers must carefully consider how to combine these elements to


achieve the desired strategic outcome.
Recall that in the Channel Relationship Model channel members are connected
by the exchange process discussed in Module 1. The relationship perspective
emphasises each channel members need to be sensitive to the other partys needs
and wants. One set of tools that can be used to address customers needs and wants
is the marketing mix. These mix elements represent the manageable components by
which the terms, norms, behaviours, and outcomes (i.e., sales, profits, market
shares) of channel relationships can be developed. As manageable components, the
product, price, promotion, and place activities must be aligned to match up with the
expectations present in various channel relationships. In this module, we discuss
each of the marketing mix elements in connection to the Channel Relationship
Model.

4.2

The Product Ingredient


A product is a unique bundle of intangible and tangible attributes offered en masse
to customers. Recall from Module 3 that marketing channels create value via the
acquisition, usage, and disposition of products and services. Products are the
vehicles through which exchanges of value concurrently satisfy both buyers and
sellers needs.1 The total product concept is illustrated in Exhibit 4.1, which shows
how a simple mobile telephone (core product) can be transformed into a computer
terminal (potential product). This progression suggests that a continuously evolving
blending of intangible and tangible characteristics can enhance exchanges of value
between buyers and sellers. Our attention now turns to this blending, or fusion, of
product attributes.
Exhibit 4.1 highlights several important characteristics of the interface between
product and channel. These include:
Fusion of Attributes. A telephone is not merely a collection of transmitters,
speakers, and microprocessors. It is a bundled system that connects signals between senders and receivers. Likewise, products are bundled attributes.
Marketing channels provide the conduit that allows these bundles of attributes to
be connected between buyers and sellers.
Product Evolution. Did Alexander Graham Bell envision speed-dialling, caller
identification, voicemail or, indeed, the multiple functions of modern
smartphones? Not likely! As Exhibit 4.1 shows, the telephone has evolved into a
virtual computer. As products evolve to meet marketplace needs, marketing
channels must adapt to accommodate the new requirements of emerging products and services.
Value Satisfaction. A telephone may satisfy a wide variety of communication
needs. For example, the telephone satisfies the need for relatives separated by
long distances to share experiences and emotions. (You may recall AT&Ts
promotional message, Reach Out and Touch Someone or Nokias Connecting
People.) Products are need-satisfying goods and messages, and marketing channels add value to those goods and services.

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Exhibit 4.1
Product level

The total product concept


Buyers view

Core product Customers generic


need which must be
met.
Expected
product

Customers minimal
set of expectations.

Augmented
product

Sellers offering over


and above what
customer expects or
is accustomed to.

Potential
product

Everything that
potentially can be
done with the
product that is of
utility to the
customer.

Sellers view

From mobile telephone to


smartphone
Basic benefits which A simple mobile
telephone that connects
make product of
interest.
callers to friends and
family.
Marketers product
A brand-name mobile
decisions on tangible telephone that offers
and intangible
voicemail, an address
components.
book, text messaging, a
camera.
Marketers other mix A brand-name mobile
telephone that includes
decisions on price,
Internet access and
distribution, and
promotion.
associated features such
as email, GPS and apps.
Marketers actions to A smartphone with, for
example, remote
attract and hold
customers regarding operation of household
appliances.
changed conditions
or new applications.

Connecting to channel members


Producer Wholesalers and Retailers
Consumers

Producer

Wholesalers and Retailers

Consumers
Producer Producer

Wholesalers and Retailers

Consumers
Producer Producer

Wholesalers and Retailers

Consumers

Adapted from Collin, B. (1989), Chapter 11: Marketing for Engineers, Management for Engineers, D. Sampson, ed., Melbourne, AU: Longman Cheshire, p. 372.

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4.2.1

Fusion of Attributes
Tangibility is the extent to which something is capable of being touched. The concept
typically refers to the physical characteristics of a product. Tangible attributes
possess substance; they actually exist in some physical form. An automobile, for
instance, has a number of tangible components that are bundled together and
offered as a package you can kick a cars tyres, ease into the drivers seat, and start
the engine. However, any number of non-physical considerations are also associated
with an automobile. A car may evoke a sense of excitement (e.g., a Nissan Juke, a
small SUV), a feeling of fulfilment (e.g., a Nissan Leaf, an electric car), or a sense
that success has been attained (e.g., a Nissan GT-R, sports car). All of these automobiles are branded under the Nissan family and each has essentially the same
tangible components, but each model produces very different sensory outcomes.
When it comes to satisfying customers, a products intangible aspects those
properties that cannot be easily defined or grasped by human hands are often
more important than its tangible characteristics. The value of exchange relationships
is gauged on the basis of both tangible attributes such as, for example, an electricversus a diesel-powered car, and intangible attributes such as sales and after sales
service, safety ratings, consumer satisfaction ratings, advertising messages, etc.
Products have traditionally been portrayed along an attribute-based scale ranging
from purely tangible goods to purely intangible services, but, it is often difficult to
separate intangible and tangible product attributes. Time Out 4.1 illustrates how a
bundle of tangible and intangible attributes may be represented by a products brand
name.
The growing complexity of product offerings has been linked to increasingly agile
competitive environments.2 An agile competitive environment is a marketplace in
which channel members constantly modify and improve their product offerings to
better satisfy changing customer needs. In a traditional production-orientated
economy, the market environment generally features autonomous manufacturers
producing mass quantities of long-lifetime generic products. Naturally, there is a low
level of product differentiation. Within these traditional market settings, efficiency is
based on the movement of goods. By contrast, todays dynamic market environments
are characterised by high levels of product customisation. Because of this customisation, product life cycles are usually shorter.
In agile competitive environments, a combination of physical and non-physical
attributes is aimed at meeting distinctive challenges in the exchange relationship.
Differences between goods and services become blurred. As a result, there is a
greater reliance on the interaction among channel members. In fact, management
guru Peter Drucker contends that this interaction or relationship among channel
members is the last frontier of sustainable advantage in the global marketplace.
Agile competitive environments demonstrate how the marketing mix must be
adapted to the dynamics of both internal and external environments. The CRM
embodies the implicit relationship between the marketing mix and the channel
environment.

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Time Out 4.1 ______________________________________________


Childrens clothing: a fashion statement
Infants, toddlers and young children grow too quickly to wear out their clothes.
Thats why, traditionally, parents made do with handmade clothes or hand-medowns (clothes passed on from older brothers, sisters, cousins and friends).
But over the last 30 years or so there has been a considerable increase in young
childrens fashion design, particularly in parts of Europe and the US. Many high
profile fashion brands are flourishing with their miniature versions of adult
designs.
There are several reasons for this trend towards trendy tots, such as greater
disposable incomes, more double income earning families, increasing exposure
to various media and more high-value gift buying. Even parents who balk at
spending large sums of money on designer kids wear, but are still allured by its
fashionable appeal, have options. Wearhop.com, for example, is an online
service that allows parents to browse and select childrens clothing, rent it for
one to six months, and then return it. The aim is to help parents save money
while still dressing their kids in top brands, as well as promote sustainable
fashion.
Questions
How would you describe the bundle of attributes offered by Wearhop?
What needs is Wearhop satisfying? What are some of the implications for
distribution channels?
Adapted from PR (2011), Global Childrens Wear Market to Reach US$156.8 Billion by 2015,
According to a New Report by Global Industry Analysts, Inc. (13 January), [online] available at:
http://www.prweb.com/releases/childrens_wear/infant_toddler_kids_wear/prweb8061559.htm
[Accessed 16 September 2013]; http://wearhop.com/ [Accessed 16 September 2013].
__________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

4.2.2

Product-in-Process
The concept of agile competition requires that products continually evolve. Therefore, each market offering is really a product-in-process. In some instances, this
evolution is governed by constraints of the exchange relationship itself. For example, Volvo lets customers customise their car online by selecting different options
for the engine, equipment, exterior and interior. American companies such as the
Campbells Soup Company now customise products to account for regional
preferences. Campbells hopes these product-in-process efforts will contribute to
new and stronger customer relationships and increase brand loyalty.3
Product evolutions may also result from good relationships gone bad. Consider
Coca-Colas entry into the Gatorade-controlled sports drink market. After failed
attempts to form a distribution relationship with Quaker Oats Company, Gatorades
parent, Coke USA, introduced its own product. Coke USAs entry, called
PowerAde, offered 33 per cent more carbohydrates than Gatorade. But PowerAde
also had to battle PepsiCos All Sport and Dr Peppers Nautilus for market share in

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the sports drink category (although Coke had a wide assortment of outlets and
distribution channels to help it gain market share).4 Clearly, successful products of
the future will have to evolve in response to the needs associated with exchange
relationships.

4.2.3

Value Satisfaction
A products capacity for value satisfaction is perhaps its most difficult characteristic
to describe. Value satisfaction is a channel members perception of the benefits
derived from owning or consuming the product. Each product should deliver some
measure of value satisfaction to both the buyer and seller. Still, different exchange
partners will have different assessments of the worth of a product.
The concept of products as value satisfiers suggests channel members should
transform themselves from functions delivery to value delivery systems. In a
functions delivery system, attention is typically focused inward. For instance,
channel partners might attempt to develop superior physical processes for moving
products from the factory to the market. While nothing is inherently wrong with
such an objective, it is limiting. The view of a functions delivery system is that
products begin within the organisation.
In a value delivery system, attention first focuses on external concerns. Channel
partners look outward to identify customer needs, and products originate from a
desire to satisfy these needs. The value delivery sequence involves three stages:5
Assess customer value. Channel members identify customer needs and
translate those needs into a value-producing product concept. One example of
this is British technology company Dyson, which came up with the first bagless
vacuum cleaner to reduce clogging, and continues to innovate thanks to a commitment to refining and improving models.
Provide customer value. This stage involves converting the value-producing
concept into a product offering. Here, product design, service development,
pricing, sourcing, and distribution are considered. Each function is evaluated
with respect to how it can be used to maximise customer value.
Communicate customer value. In this stage the channel member communicates the benefits of the product offering in solving customer problems to the
intended market audience.
Value satisfaction is especially important in building channel relationships. Value
satisfaction suggests that exchange partners are matching their market offerings to
customer needs. By doing this, the relationship evolves along with the evolution of
the product itself. For example, some medical centres ask patients to evaluate the
quality of the food, service and facility environment. This helps the hospital strive to
provide better customer value. In fact, sometimes the continuance of a contract
with, for example, the food vendor is based strictly on the survey outcomes. This
partnering arrangement ensures a mutual commitment to patient satisfaction and
focuses attention right where it belongs: on customer needs.6

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4.3

The Pricing Ingredient


The concept of value satisfaction through exchange lays the foundation for a
discussion of the next ingredient in the marketing mix, price. Price is the ultimate
measure of a goods or services exchange value as agreed upon by the seller and
buyer. Price is important because it directly affects the channel members profitability.
Any discussion of pricing in marketing channels must begin with the notion of
valuation. Valuation, or perceived value, is the simultaneous appraisal by buyers
and sellers of the economic and psychological worth of a market offering. The
valuation of a good or service is implicitly linked to the exchange relationship. In
marketing channels, each exchange partner provides some added value to the
offering. Channel members expect and must receive some compensation in exchange for their role in enhancing the value of the market offering. Often,
intermediaries willingness to carry a product is based on the margins available to
them. The price should allocate compensation among channel members proportionate to each members contribution to the exchange relationship. Conflicts often
arise in how to make this allocation.
Valuation of a product or service is related to the type of buyer. The personal
computer market is, to some degree, a commodity market. But while there has been a
proliferation of discount, direct marketing channels in the industry, not all buyers are
looking for the lowest price. Corporate buyers are most likely to buy personal
computers from resellers. Why? Because brand name and value-added services, such
as on-site service of computer problems, are highly valued by institutional buyers.7
Putting a price on such intangible factors is difficult. Yet, intangible attributes like
brand names or service commitments significantly impact purchasers valuation of
product offerings.8 In some cases, channel members are willing to pay a price premium to a preferred exchange partner. A price premium is a price level in excess of the
normal market or industry value. Channel members may justify price premiums for a
number of reasons including:9
Building a Relationship. A channel member may willingly pay a price premium
in order to develop a long-term relationship with a prospective exchange partner.
Preserving a Relationship. A channel member may willingly pay a premium
because it has a long history of association with an exchange partner. A past
shared among true channel partners may contribute to feelings of trust or dependency that outweigh more traditional market-based valuations of the product
offering.
Reducing Risk Factors. In risky situations, channel members may willingly pay
a premium to secure the intangible attributes associated with the good reputation
of another channel member. Similarly, consumers often pay more for an established brand name product in exchange for a reduction in their perceptions of
risk.
Obtaining Perceived Quality. Channel members can rationalise that the price
premium is related to higher quality exchange performance such as on-time delivery.

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Possessing Limited Information. Channel members may pay a price premium


because they do not have sufficient information with regard to market pricing.
Product valuation is, by its nature, unique to each channel partner. Accordingly, it
is difficult to formulate a true price for many market offerings because channel
members will derive varying benefits from any exchange relationship. How much is
a prescription drug product worth if it merely relieves discomfort? Would the drugs
valuation change if it was life-saving? Of course. These situational considerations
affect a products price elasticity. Price elasticity of demand refers to the percentage
change in the amount of a good demanded in response to a percentage change in
price. Changes in the price elasticity of demand can occur at any channel level (e.g.,
producer, distributor, seller, ultimate user), and these changes affect demand at
other channel levels. Each level of a marketing channel may also be affected by
price sensitivity. Pricing is clearly important to the entire marketing channel.
Prices have traditionally been established through either algorithmic or marketorientated methods. The algorithmic pricing method may be viewed as an inside-out
approach, in which price is derived from the channel members forecasts of their
own costs and revenues. Market-orientated pricing methods represent an outside-in
approach to valuation, in which pricing cues are generated from an evaluation of the
threats and opportunities in the marketplace, that is, outside the organisation. In
addition to these two traditional methods, a third perspective on how to derive
prices in marketing channel relationships is now emerging: relationship pricing.
Relationship-orientated pricing requires a broader, more encompassing orientation.
Before a price is established, internal and external cues are simultaneously evaluated
in an effort to build and maintain exchange relationships. Each pricing method is
summarised in Exhibit 4.2. Lets look at each pricing method in detail.
Exhibit 4.2

Pricing methods

Pricing
Orientation
method
Algorithmic Inside-out

Types
Cost-plus
Break-even
Modified break-even

Simplicity

Marketorientated

Competitive
Market-entry
Penetration
Skimming-thecream

Sensitivity to
Reactive, not
customer needs
proactive
Good entry strategy Attracts new market
in elastic market
entrants
Generates quick cash
flow; good in inelastic
markets

4/8

Outside-in

Positives, plusses

Negatives, deficits
Ignores effects of
legal and regulatory
conditions, influences
of competition and
changing market
needs

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Module 4 / Marketing Mix and Relationship Marketing

Pricing
Orientation
method
Relationship Both

Types
Volume pricing
Functional
allowances
Promotional
allowances

4.3.1

Positives, plusses

Cooperative and
collaborative
Goal-orientated
pricing shared
Consideration for
fostering
communication
through channel

Negatives, deficits
Cooperation is a
must
Requires ongoing and
consistent
communication
between channel
members

Algorithmic Pricing Methods


A firms long-term survival is contingent on its profitability. Consequently, unit
profits must exceed unit operating costs. Algorithmic pricing methods are based
on the association between profits, revenues, and expenses. While by no means
exhaustive, the three techniques shown below are often used by sellers as pricesetting algorithms:
Cost-Plus Pricing. In cost-plus pricing, a percentage or fixed mark-up is added
to the cost to establish a price. Cost-plus can lead to poor pricing decisions because of its simplicity: cost reductions lead to price reductions and cost increases
lead to price increases. But in either scenario, cost-plus pricing ignores the effects of market factors such as consumer preferences, brand loyalty, the
competition, and the price elasticity of demand.
Break-Even Analysis. Break-even analysis is based on the convergence
between the costs associated with making a product and the revenues realised
from selling it. On the surface, a break-even pricing approach appears perfectly
rational. But buyers do not always behave rationally in the marketplace. Furthermore, revenues depend on demand, which has proven difficult to estimate in
most industries.
Modified Break-Even Pricing. Modified break-even pricing attempts to
overcome the difficulties of elasticity by extending the break-even analysis across
several estimations of quantity and price. Again, this approach provides little
predictive value to channel members because of the opportunity costs associated
with uncertain demand.
In sum, each algorithmic method of pricing described above is limited in some
ways. By and large, each approach ignores the effects of legal or regulatory market
conditions as well as the influences of competition and changing market needs.

4.3.2

Market-Orientated Pricing Methods


Prices can also be established by considering market forces. That is, marketorientated pricing methods allow prices to be sensitive to customer needs. This
sensitivity reinforces the presence of agile competition in the marketplace.

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The supermarket sector illustrates how market-orientated approaches to pricing


are implemented. Many supermarkets now offer, alongside their everyday ownbrand product ranges, a cheaper value range for cost-conscious customers, as well
as a quality range for those who are prepared to pay high prices for betterperceived quality. Due to increased competition, supermarkets have to adjust their
pricing strategies in response to market changes.
While there are several market-orientated pricing methods, the most common is
competitive pricing. With competitive pricing, channel members match competitors pricing. The use of competitive pricing strategies often provides a means of
market entry for new channel members. For example, in the grocery sector the
emergence of cheaper, own-brand alternatives to well-known household brands
presented a new challenge. Competitive pricing took a new turn in the UK supermarket sector in 2013, with supermarkets promising to check shoppers baskets
against prices at rival stores. If the basket would have been cheaper elsewhere,
shoppers receive a voucher for the difference.10
In general, competitive pricing is reactive rather than proactive. Moreover, competitive
pricing provides no assurance that meet or beat prices will increase market share or
sustain profit objectives. A more likely outcome is that competitive pricing leads to
price wars that, in turn, hurt the entire channel. Channel members can effectively
counter competitive pricing by differentiating their offerings.11 Price is almost always
the worst aspect on which to compete.
Market-entry pricing offers two strategies for pricing goods and services that
are new to the marketplace. The first strategy is called penetration pricing. Penetration pricing features a low entry price aimed at capturing market share. Priced
below the existing competition, penetration pricing can be particularly effective as
an entry strategy in markets where demand is highly elastic. Pricing at penetration
levels can also be used as a pre-emptive strike against potential market entrants by
firms already operating in a market. New firm entry is usually blocked because its
costs are generally higher. Also, because firms usually hope to avoid price wars,
existing competitors often are disinclined to match penetration strategies.
The other market-entry pricing strategy is known as skimming-the-cream
pricing, or price skimming. Here, high initial prices are established to attract those
willing to pay. Naturally, profit margins for each unit sold are high. Accordingly,
price skimming is often employed in an attempt to quickly generate positive cash
flows to recoup research and development costs. Price skimming is often used in
the pharmaceutical industry due to high research and development costs. However,
the practice has also exposed the industry to widespread accusations of price
gouging, that is, price levels that are deemed unfairly high and exploitative to
consumers.
A price skimming strategy is more likely to prove successful in relatively inelastic
markets. The problem with price skimming is that the high entry price frequently
attracts new market entrants, who see opportunities for profits.

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4.3.3

Relationship-Orientated Pricing Methods


Pricing strategies do not always have to be combative, especially within channel
settings. The relationship-orientated pricing approach is grounded in a cooperative
and collaborative orientation. Relationship pricing may assume many forms;
however, the practice generally involves volume, functional, and promotional
allowances.
Volume Pricing. Volume pricing provides quantity discounts to channel members based on purchasing economies and rewards buyers for large lot size
purchases. Volume pricing is commonly used in industries with little product customisation, such as the paper industry. Volume pricing simultaneously helps
several exchange partners: producers gain the opportunity to more fully utilise
their production capacity because longer and more cost-efficient production runs
are made possible; resellers gain better cash flow; and buyers gain the opportunity
to establish consistent and routine procurement procedures. There are downsides,
however. Volume pricing can damage buyerseller relationships when the smaller
volumes demanded by smaller customers effectively preclude their opportunity to
receive such discounts. This problem can be overcome when cumulative volume
discounts are made available to exchange partners for ongoing, consistent orders.
Volume pricing levels may also be made available to smaller channel members
through negative option contracts. Negative option contracts are agreements in
which buyers accept an ongoing flow of goods from vendors. Buyers continue to
receive those goods until they tell their vendor to halt supply. Negative option
contracts are established based on a sense of confidence regarding the continuity
of their exchange relationship.12
Functional Allowances. Functional allowances involve reductions in the list
price in exchange for the buyers agreement to perform specific functions. These
allowances involve the performance of logistic functions such as transportation,
warehousing, or order processing. Or, they may involve the performance of
customer service or personal selling functions. Functional allowances account
for the value one channel member receives by shifting various functions to another channel member.
Promotional Allowance. Promotional allowances are considerations given to
channel partners in exchange for their agreement to provide promotions to current and prospective customers. These considerations may take the form of free
goods, cash payments, or support services. For example, Coca-Cola increased its
promotional allowances to retailers in markets where it was losing market share
to private-label soft drinks. Bar soap and laundry detergent maker Unilever provides retailers with cash payments and free goods.13 Promotional allowances may
also assume the form of service provisions. Any number of manufacturers now
provide cutting-edge information technologies to their exchange partners. For
example, some manufacturers give wholesalers software that helps the exchange
of information on pricing changes, inventory positions, and promotions. There
is a common misconception that promotional allowances are exchanged exclusively between producers and retailers. This is not necessarily so. Promotional

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allowances may be provided at any channel level. For instance, consumers often
take advantage of trade-in allowances or rebates.
Regardless of the approach used, pricing is a powerful ingredient in relationship
building. But price itself is not the only factor in relationship-orientated policy. Each
of these relationship pricing forms involves volume or functional discounts, as well
as an adjustment to the list price. Also, each relationship pricing form can be either
company policy or negotiated. The spirit in which the negotiation unfolds is actually
more critical to the relationship-building process.
An underlying factor influencing any channel pricing decision, but in particular
relationship-orientated pricing decisions, is the notion of price legitimacy.14 Price
legitimacy exists whenever a buyers and sellers perceptions of a market offerings
value converge or come together. Research has found that the single issue making
consumers feel most exploited in America today is the idea of a list price. Consumers simply dont believe the list price is the real price. They view a list price as an
artificially inflated price.
Customers are increasingly aware of presumed pricequality relationships for
goods and services. For example, customers expect higher prices to result in better
service but do not view low prices as a justification for poor service. Moreover,
increases in consumer knowledge have led to increases in their demands for value.15
Such trends are prompting manufacturers, wholesalers, and retailers to re-examine
their pricing policies. Resellers now use several techniques to justify their pricing
levels:16
Price Guarantees. With price guarantees, channel members communicate
assurances to buyers or prospects that their posted prices are the lowest available
in a given market. If a buyer finds a lower price, a refund or reimbursement for the
price difference will be paid.
Price Posting. Prices are prominently displayed by retailers. This technique
reflects the fact that increased information is now generally available to those
customers who seek it. For example, the widespread use of unit pricing within
grocery stores makes it easier for consumers to make price comparisons.
Cost of Service Pricing. Customers need only pay for the level of service(s)
they need. For example, cost of service pricing may account for the difference
between an installed and pick-up price of home appliances.
One of the most popular price legitimising techniques is an everyday low price policy. This policy offers buyers consistently lower prices than competitors.
Championed by Walmart, Kmart, and Toys R Us, everyday low pricing (often
denoted by its acronym, EDLP) has become a mainstay of channel pricing. The use
of EDLP is not limited to any particular channel member and ranges from convenience stores to clothing brands, from grocery products to fast-food brands.
The EDLP movement provides the best examples of how pricing is linked to
channel relationships. The use of EDLP requires cost reductions at every channel
level. EDLP is a relationship-orientated principle that necessitates a passing on of cost
savings from channel member to channel member all the way to the ultimate consumer. EDLP requires a collaborative pricing strategy between channel members. In the
CRM, cooperative pricing strategies foster positive internal channel environments.
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This will be discussed in greater detail in Module 9. By their very nature, prices usually
can only deliver short-term rewards (i.e., lower prices). Moreover, the prospect of
illegal price discrimination generally prevents channel members from offering their
better customers many discounts or allowances they might otherwise provide. So price
alone is unlikely to inspire long-term buyerseller exchanges in channel settings. When
used wisely in combination with the other marketing mix elements, however, fair
prices can prove effective in building long-term channel relationships.

4.4

The Promotions Ingredient


A primary purpose of each of these price legitimising techniques is to communicate
a sense of fair play or equity to customers. In each instance, the seller is attempting
to promote a sense of value. As such, price legitimacy serves as a suitable lead in to
the next ingredient in the marketing mix, promotion. Promotion involves any form
of purposeful communications employed by channel members with the intent of
informing, reminding, and/or persuading prospects and customers regarding some
aspect of their market offering.

4.4.1

Promotional Mix
Several promotional options are available to channel members. For the sake of
simplicity, the promotional mix can be divided into personal and non-personal selling.
Personal selling is especially important in marketing channels because the act of
selling itself is a major function of virtually all exchange partners. Invariably, some
channel member must assume responsibility for the personal selling function. A
good definition of personal selling is one that embraces a relationship-building
perspective. Accordingly, personal selling is defined as an interpersonal communication process by which a seller uncovers and satisfies the needs of a buyer, to the
mutual long-term benefit of both parties.17
Non-personal selling involves all other types of promotions. These include
advertising, public relations/publicity, and sales promotions. Advertising is paid,
non-personal communications delivered by an identified organisation targeted
toward some particular audience. It is generally intended to either inform or
persuade the audience. Public relations and publicity include all forms of non-paid
communication of information about a channel member or market offering,
generally in some media form. Sales promotions include all those marketing
activities, other than personal selling, advertising, and publicity, that stimulate
customer demand and channel member effectiveness. These include displays, trade
shows, exhibitions, demonstrations, and other selling efforts not in the ordinary
sales routine. Sales promotion is enormously important within marketing channels.

4.4.2

Traditional versus Relational Communication


The role of the promotions ingredient in the marketing mix is often misunderstood.
Marketers have traditionally viewed promotions from a tactical standpoint. As such,
promotion has been seen as a portfolio of persuasive tactics used with the intention
of informing, changing preferences and attitudes, positioning and/or repositioning
products, and, ultimately, stimulating sales.18

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But the contemporary view of promotions suggests they represent yet another
way to build relationships. Relational promotion involves a communication process
between channel members. The purpose of this communication is to encourage new
or to strengthen existing exchange relationships. Since the foundation of relational
promotions is communication, several fundamental concepts associated with
communication should be reviewed. The traditional communications model
illustrated in the top half of Exhibit 4.3 depicts a series of sequential message flows
between senders and receivers. Note that:
The message is the central idea one party is attempting to deliver to its counterpart.
The source of the message is the sender.
The receiver is the recipient of a message.
Feedback is the means by which receivers acknowledge receipt and understanding
of the message.
Exhibit 4.3

Traditional versus relational communication models


Traditional Channel Communications Model
Feedback

Sender

Receiver

Message

Encoding

Decoding

Relational Communication Model


Noise

Noise

Cognition

Cognition

Noise

Noise

Synchronous
cognition

In the conventional model of the communication process, messages are essentially bilateral. The sender initiates a message, conveys this central idea through some
sort of medium and, in turn, the receiver responds to his or her receipt of this
message. This two-way communication exchange is greatly influenced by the
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process of encoding and decoding. The sender of a message must package this
central idea in such a way that it can be understood by the receiver in the manner
intended. This is known as encoding a message. Without encoding, successful
communication has not occurred. Concurrent with his or her receipt of a message,
the receiver then decodes it. Decoding is the process through which the receiver
interprets and assigns meaning to the message. The acts of encoding and decoding
often lead to distorted communications. In some cases, the message is responsible for
the decoding error. For example:
When a national brand of washing-up liquid featured a corsage of fresh lemons
dangling around its product, it did so with the intention of communicating the
lemon-fresh scent. Some consumers were exceptionally receptive to the message.
But was it the right message? Not necessarily. Across the nation, numerous consumers were hospitalised because they drank the detergent.
When Chevrolet marketed its popular Nova model in Spanish-speaking countries, some consumers may have got the wrong idea. In Spanish, va is a form of
the verb ir (to go). When translated, the Nova model was decoded as no go
not a particularly good message for promoting a transportation vehicle!
At other times, the source is responsible for decoding problems:
When the Beef Industry Council promoted leaner cuts in its Real Food/Real
People message, it backfired. Soon after the campaign began, actor and Beef
Council spokesperson James Garner had heart-bypass surgery, and some consumers naturally linked his health problems to eating too much red meat. This
debacle came on the heels of the actions of its previous spokesperson, actress
Cybil Shephard, who confessed she didnt eat beef in a national magazine article.19
In 2005 several brands promoted by Kate Moss (including Rimmel, H&M and
Burberry) were compelled to review her contract after the British supermodel
was involved in a drugs scandal.20
In each case, some unanticipated external factor interfered with the communication process. This interference is known as noise any physical or psychological
barrier impeding the proper receipt or decoding of a message. Sometimes, such
externalities are intentional, for example, when a brand employs a celebrity or model
to poke fun at themselves. But most of the time, noise is unintentional and has a
detrimental effect on the message. Noise can occur at any stage in the communication process.
In the traditional model, communication involves a succession of discrete communicative processes. But in the relational model, communication is represented as
a continuous, perpetual process in which the sender and receiver are essentially
indistinguishable. The message and feedback are nearly simultaneous. The outcome
of relational communication is shared meaning. Shared meaning refers to the
interwoven communications that occur in the marketing channel. The bottom half
of Exhibit 4.3 illustrates the relational communication model. This model accommodates the agile competitive environment that marketers will surely face in the
future because it accounts for the possibility of continuous adaptation. As each
exchange partner (i.e., each circle) moves closer to the other, shared meaning, or
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synchronous cognition, increases. This is a striking departure from the traditional


view of channel communications processes. Shared meaning encourages the
alignment of promotional objectives among exchange partners within marketing
channels. When exchange partners achieve high degrees of shared meaning, they are
likely to realise similar channel goals. Thus, shared meaning is vital to building
effective and efficient marketing channel relationships.
In addition, making customers part of their promotion helps firms to strengthen
their exchange relationships. Organisations are increasingly involving consumers in
promotions, for example, using student brand ambassadors to promote soft drink
brands to their friends at parties. Consumer involvement is most apparent online,
with the use of consumer-led blogs, feedback and ratings, and other social network
mediums.

4.4.3

Promotional Objectives
For relational promotion to flourish, suppliers and retailers must jointly pursue a
promotional strategy. Channel members often form trade marketing departments as
a means of achieving promotional cooperation. These departments are designed to
learn as much about exchange partners objectives as possible.21 Consistent objectives are a prerequisite to relational promotions. In fact, some alliances between
previously independent marketers have developed solely as a result of promotional
cooperation. For instance, Del Monte, a consumer foods firm, and Lego Systems, a
major marketer of toys, allied with one another for a promotion in which free Lego
toy samples were attached to more than 77 million packages of Del Montes line of
childrens desserts such as Fruit Snack Cups and Pudding Snack Cups. This promotional alliance presented both companies with the opportunity to strengthen
relationships with their target market children.22
Five objectives are generally associated with relational promotions in marketing
channels:
Stimulating Sales. To offset declining sales, Levi Strauss & Company successfully used promotions to reinforce the lifestyle relationship between consumers
and its Levi jeans.23
Differentiating Offerings. Promotions are also intended to differentiate
channel members offerings. This is especially important in highly competitive
markets. Many hotel restaurants are employing regionalised menus to accomplish
this goal. Promotion-orientated recipes are attempting to lure diners from
Westin Hotels Steamed New Zealand Greenshell Mussels to the Seattle Sheraton Hotels Blueberry Flan.24
Sharing Information. A primary function of promotion is to provide information to current and prospective exchange partners. This is particularly
important within relational promotions. As discussed earlier, synchronous cognition can only be achieved when information is shared. Many colleges and
universities use information advertisements to inform present and prospective
students. These promotional messages usually include a list of course offerings,
curriculum requirements, or degree-granting programme options.

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Accentuating a Market Offerings Value. Relational promotions can be used


to demonstrate the value of a product or service. You might recall the Listerine
commercials suggesting that the product not only freshens breath and kills
germs; it also provides protection against gingivitis. The value added by this
attribute provides an extra incentive for customers to purchase Listerine. One
caveat is in order: before one accentuates a products or services value by playing
up the existence of a previously unconsidered or underconsidered attribute, be
sure the offering in question actually has the attribute.
Stabilising Seasonal Demand. Because many products are seasonal, relational
promotions provide a cooperative, low-pressure mechanism through which customers can be induced to consider purchasing products at out-of-season
intervals. Relationship-orientated pricing allowances strategies may be used.

4.4.4

Pull versus Push Strategies


While there are several situation-specific promotional objectives, relational promotion tactics as a whole can be classified into two strategic categories, pull and push
promotions. A pull strategy describes persuasive communications aimed directly at
the ultimate consumer. The goal of pull promotions is to stimulate the final users
desire for the offering. It is assumed that this demand will subsequently pull the
market offering through the channel. The manufacturers coupons that fall out of
your Sunday newspaper are examples of a pull strategy. These promotional messages generally involving price incentives are conveyed by the manufacturer directly
to the consumer through the newspaper medium. Then, consumers presumably
encourage their retailers to carry the couponed merchandise to facilitate redemption,
if they do not already do so.

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Exhibit 4.4

Pull-push promotion strategies

Pull Promotions:
A Domino Effect

Producer Consumer Retailer Wholesaler

Push Promotions:
A Domino Effect

Producer Wholesaler Retailer Consumer

As the top half of Exhibit 4.4 demonstrates, pulling strategies presume that the
ultimate consumer will take the initiative to create product flows. For example, the
Hoechst Marion Nicorette smoking cessation programme is advertised directly to
the consumer. The hope is that the promotional message will induce consumers to
see a physician who will then write a prescription for the product. After this
happens, the product will be pulled through the channel. The promotional sequence
works like this:
pharmaceutical manufacturer consumer physician retail pharmacist
pharmaceutical wholesaler manufacturer

Pull strategies often are used with new product introductions to entice the consumer into creating early demand for an offering. Pull strategies can also be used to
create loyalty in the face of price competition. An example of a pull strategy is when
a firm distributes free samples of their product in the hope that raising visibility of
the brand among the target audience will stimulate demand. For example, energy
drink brand Red Bull employs student brand ambassadors to give out free cans of
Red Bull at parties.
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Pull strategies have occasionally been known to resurrect marketing dinosaurs


products from another time that have since lost market share and customer interest.
A popular pastime for kids in the 1950s and 1960s, the Duncan yo-yo no longer has
the childrens toy market on a string. The yo-yo competes for valuable shelf space
near cash registers in discount and speciality toy retailers. Hoping to rejuvenate
childrens interest in the yo-yo and away from high-tech video games, Duncan
marketing director Michael Caffrey went directly to kids. Caffrey offered $25 to
children who could perform yo-yo tricks. He was hopeful that kids resurgent
interest would force retailers to carry inventories and provide prime shelf space.
By contrast, push strategies target their persuasive communications at intermediaries pushing against the next link in the distribution chain. As illustrated in the
bottom half of Exhibit 4.4, push promotions hopefully create a domino effect
through the channel on the way to the ultimate consumer. The typical push promotion is launched by manufacturers and aimed at resellers. The success of push
strategies rests with the intermediaries receptiveness to the promotion. Push
promotional strategies allow the channel participants to exercise greater control over
the promotional message.
A survey of medical supply distributors revealed several elements that exercise a
critical influence on the acceptability of push promotion strategies:25
Allowances. Price discounts and promotional allowances were cited as the most
important factors influencing the willingness of distributors to participate in
manufacturer-sponsored push strategies.
Advance Notice. The provision of long lead times for distributors enhanced
their interest in participating in manufacturer-sponsored promotions.
Training and Support. When manufacturers provide ample training and
support materials, distributors are more likely to embrace the programme.
Several issues should be considered by exchange partners when deliberating
whether a push or a pull promotional strategy should be pursued. The nature of
these issues reinforces the interrelatedness of the marketing mix variables. The
issues include:
Budgetary Constraints. All firms face limits on the amount of money they can
spend on promotions. In channel relationships, it is particularly important to
determine the amount of promotion expenditures expected at each channel level.
Ideally, this amount should be jointly determined and agreed upon in advance.
Nature of the Product Offering. Exchange partners should consider which
promotional strategy is most appropriate given the tangible and intangible characteristics of the market offering. For example, using a pull strategy for products
featuring little to no opportunity for differentiation makes little sense. Are ultimate customers likely to pressure channel members to carry special inventories
of commodity products such as milk or eggs? Probably not. Moreover, there
should be a high level of agreement among exchange partners regarding the
nature of the product offering before either strategy is selected.
Product Life Cycle. Whether the product is in its introductory, growth, maturity,
or decline stage should impact the promotional strategy employed. Different obMarketing Channels Edinburgh Business School

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jectives informing customers, blocking competitive entry, differentiating products through repositioning are appropriate as a market offering passes from one
life cycle stage to another. The challenge, of course, is to determine where a product offering is in its product life cycle at a given point in time a task far easier to
describe than it is to achieve.
Product Valuation. The promotional efforts of channel members are constrained by the ceiling on the selling price of a product offering. To preserve the
profit objectives at each channel level, promotional budgets must be reasonable.
If promotional expenditures are too high, operational costs will have to decrease
or the selling price will have to increase.
Market Conditions. The prevailing conditions within a target market will
invariably affect the magnitude and effectiveness of promotional strategies. Any
firm that is weighing which promotional strategy to use should concurrently
consider the characteristics, needs, attitudes, preferences, likes and dislikes, and
strengths and weaknesses of its customers and competition.
Most channel members will not opt solely for either a pull or push strategy. Instead, exchange partners operating in todays marketplace are much more likely to
employ a combination of push and pull promotions in their attempts to build longterm relationships with other channel members.

4.5

The Place Ingredient


The final ingredient in the marketing mix of any channel participant is place. The
place element is given only a brief treatment here because the topic is the primary
subject of the entire book. But the place ingredient is critical. All products/services
must be communicated and distributed through a marketing channel regardless of
the number and type of intermediary used.
Place is often described as distribution. However, the term place is more inclusive of the relationship functions in marketing channels.
In Module 1, we discussed the role of marketing channels in the organisations
mission. It is important to recall that relationship building is an interactive process;
it cannot merely be relegated to the place ingredient. Accordingly, place may be
defined as all those distribution, logistics, and behavioural functions that regulate the
flow of market offerings between exchange partners. The goal of place is to
minimise the costs of these functions while maximising customer satisfaction and
market coverage.
It is worth bearing in mind, however, that minimising distribution costs can
damage long-term channel relationships; it is important to consider the benefits of
long-term loyalty alongside quick wins.
The place element provides the means to tie together marketing management and
relationship marketing. After all, relationship marketing is part and parcel of
exchange, and the marketing channel provides the place where exchanges occur.
There, manufacturers and intermediaries such as wholesalers and retailers work
together to add value to the exchange process. Decisions relating to product,

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promotional, and pricing variables are all made within the context of a marketing
channel.
For example, manufacturers often include intermediaries in product development
or line-extension decisions because retailers have limited shelf space. Likewise, a
retailers private labelling decision usually involves at least one other channel
partner. Product positioning decisions impact channel member choices just as
there are manufacturers who would not want their products sold by Target stores,
other producers would love to be one of Targets suppliers.
Or, consider that many aspects of promotional programmes are actually executed
within channels. Outsourcing decisions pertaining, say, to whether a third-party
speciality service provider such as an advertising agency should be used are made
and administered there. In effect, a decision to outsource advertising differs little
from a manufacturers decision to use an independent retailer or own the store.
Manufacturers often use intermediaries to perform most, if not all, of their sales
effort. This is why producers bring most merchant and agent middlemen into the
channel in the first place. Finally, consider that a firms pricing programme affects
its positioning strategy and vice versa. Target stores are not likely to provide a
suitable outlet for a manufacturer pursuing a premium pricing policy, but then again,
Target is not likely to partner-up with such a manufacturer in the first place. Time
Out 4.2 illustrates how a set of place decisions relate to the business of producing
and selling ice cream in North America.
The definition of place indicates that there is a trade-off between channel costs
and the benefits afforded to exchange partners. The relationship perspective
advances the point that these trade-offs are linked to the other ingredients in the
marketing mix. Because the overriding purpose of place is to maximise customer
satisfaction, we now briefly turn to the concept known as the marketing concept.

Time Out 4.2 ______________________________________________


Collaboration makes good ice cream
At a processing facility in Illinois, USA, the ice cream division of Mars Chocolate
produces an assortment of bars, cones and other ice cream snacks for the
North American market. Products include Snickers Ice Cream Bars, Twix Ice
Cream Bars and M&M Cookies and Cones. Mars makes its own chocolate
(from bean to bar). At the ice cream processing facility, special caramel is
produced, as well as the ice cream itself. But Mars recognises what its core
competencies are, and where efficiencies can be gained. As a result, making the
ice cream products so many Americans are familiar with and love, involves a
web of relationships between many organisations. For example, Mars makes
sure it sources the same peanuts as those used in its candy bars. It buys cookies
and brownies from baking specialists and ice cream mix from regional suppliers,
who in turn source from local farmers. Mars even uses external laboratories for
food safety analysis.
To maintain quality across this network, Mars upholds strict standards for
transportation, packaging, code dating and traceability of all its raw materials and
finished products. Photos of the sales team and their key accounts help remind
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production workers that manufacturing and sales must work together as a team.
And a poster on the wall of the meeting room states: The consumer is our
boss. Quality is our work. And value for money is our goal.
Meanwhile, Joe & Ross is an example of an independent ice cream distributor
that delivers, among other brands, Mars products. The family-owned business
delivers to large grocery stores, convenience stores and companies such as
hotels in Illinois. It also provides freezers and point of sale marketing support
through its partner brands, and maintains distribution food safety standards.
Questions
How do the various partners involved in making Mars ice cream products
add value to the exchange process?
Why is maintaining good relations so important in this network of organisations?
Adapted from Carper, J. (2012), Mars Ice Cream Selected as the 2012 Plant of the Year, Dairy
Foods, 113(8), 3040; Joe and Ross Ice Cream: www.joeandrossicecream.com/services.php
[Accessed 16 September 2013].
__________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

4.6

Strategy Formulation: Role of the Marketing Concept


The marketing mix is a set of marketing programmes relating to product (development, positioning), promotion (personal selling, sales promotion, and advertising),
pricing (skimming-the-cream, discounting), and distribution (logistics, channel
structure, efforts at relationship management) decisions. These programmes jointly
support a marketing strategy. In turn, the marketing strategy is guided by corporatelevel objectives. Ultimately, the marketing mix becomes the channel members
market offering.
Any marketing strategy can be defined along three basic dimensions. Within the
framework of a strategic marketing channel decision, these dimensions are:26
A channel members markets. Channel members strategies are defined by the
products they offer, the markets they serve, their competitors, and their degree
of vertical integration.
A channel members functional area strategies. Channel members strategies
can be defined by the functional area strategies emphasised in their chosen markets. These strategies might include a promotion-orientated positioning strategy,
pricing strategy, distribution strategy, or product-line strategy.
A channel members strategic assets or skills. Strategic assets or skills are
critical to strategy in that they enable channel members to create sustainable
competitive advantages in selected markets. Strategic assets are earned resources,
such as a favourable brand image or customer loyalty, that are strong relative to
competitors. Strategic skills represent something a channel member does particularly well, such as on-time service delivery, that has strategic relevance to the

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marketers success. Marketing strategies must evaluate the feasibility of creating


the assets or skills that lead to sustainable competitive advantages.
The marketing concept is the core of any marketing mix strategy. The marketing
concept asserts that customer satisfaction is the basis for all marketing mix decisions. But the marketing mix is not a cure-all for ensuring profitable customer
relationships. Southwest Airlines boasts low-price leadership in the airline industry
and succeeds. So why did other low-price airlines like People Express fail? People
Express had low prices, but it also had one of the industrys worst on-time take-off
records.27 Southwest Airlines offers customers low prices, enthusiastic flight
attendants and an exceptional on-time take-off record. Southwest Airlines marketing mix is based on more than customers desire for low-cost air transportation. The
success of Southwest Airlines is based on building relationships with internal
customers (employees), external customers (businesses and consumers), and travel
intermediaries (travel agencies, airport personnel).
The marketing concept suggests that a channel members marketing mix strategy
flows from the customer. Southwest Airlines marketing mix strategy goes beyond
the marketing concept; it ascribes to the relationship marketing concept. The
relationship marketing concept delivers exchange value by addressing simultaneously the needs of each link in the marketing channel. In this way, the relationship
marketing concept may be viewed as the thread that stitches channel members
together. Consider Walmarts marketing mix strategy: Far and away the price leader
in its field, [Walmart] gives the best value for customers, has a tremendous rate of
return for shareholders, and has created a place where employees love to work.28
We shall see whether Walmart can hold onto these values in the years to come.
As discussed in Module 1, the relationship marketing concept is the culmination
of all exchange relationships. The CRM depicts the marketing concept as a relationship-building tool. The relationship marketing concept suggests that channel
members should focus outwardly on satisfying their partners needs, rather than
their own. The marketing concept begins with well-defined markets. The relationship marketing concept continues by focusing on and coordinating those marketing
mix activities that affect customer needs, and ends by producing long-term relationships and profits through creating customer satisfaction.

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Module 4 / External Channel Environment

4.7

Key Terms
agile competitive environments
algorithmic pricing methods
break-even analysis
competitive pricing
cost-plus pricing
decoding
encoding
functional allowances
market-entry pricing
market-orientated pricing methods
marketing concept
marketing mix
modified break-even pricing
negative option contracts
non-personal selling
penetration pricing
personal selling
place

price
price elasticity of demand
price legitimacy
price premium
product
promotion
promotional allowance
pull strategy
push strategy
relationship marketing concept
relationship-orientated pricing methods
relationship pricing
relational promotion
shared meaning
skimming-the-cream pricing
valuation
value satisfaction
volume pricing

Learning Summary
The marketing mix offers the means by which the product, pricing, promotion, and
place variables present in a channel relationship can be strategically apportioned to
meet the channels needs. Marketers must carefully consider how to combine the
marketing mix ingredients to achieve the desired relationship outcomes. These mix
elements are the manageable components by which the norms, behaviours, and
functional outcomes of marketing relationships can be developed over time.
A product is a unique bundle of intangible and tangible attributes offered en masse
to customers. Products provide the vehicles through which exchanges of value can
simultaneously satisfy buyer and seller needs. Portraying products as value satisfiers
in marketing relationships implies channel members should transform their operations from function delivery systems to value delivery systems. In a function delivery
system, marketers attentions are typically focused inward; products begin with the
organisation and channel partners aim to develop superior physical processes for
moving products from the factory to the market. In a value delivery channel system,
marketing attentions are first focused upon external concerns. Channel partners
look outward to identify customer needs. Products, thus, originate from a desire to
satisfy customer needs. The value delivery sequence involves the assessment,
provision, and communication of customer value.

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Edinburgh Business School Marketing Channels

Module 4 / Marketing Mix and Relationship Marketing

Price is the final exchange value of a good or service, as has been agreed upon by
the seller and buyer. Any discussion of pricing should begin with the notion of
valuation, or the simultaneous appraisal by potential channel partners of an offerings economic and psychological worth. In marketing channels, each exchange
partner provides some added value to the offering. Channel members expect and
must receive compensation in exchange for their role in enhancing the value of an
exchange object. The price should allocate compensation proportionate to each
channel members contribution. Algorithmic (cost-plus, break-even, modified breakeven), market-orientated (competitive pricing, market-entry, skimming-the-cream)
and relationship-orientated (volume pricing, functional allowances, promotional
allowances) methods of setting prices exist and each can be applied within marketing channels. An underlying factor influencing any channel pricing decision, but in
particular relationship-orientated pricing decisions, is the notion of establishing price
legitimacy, or the convergence of the buyers and sellers valuation of a market
offering.
Price-legitimising techniques are supposed to communicate a sense of fair play to
customers. The seller is attempting to promote a sense of value to customers.
Promotion involves any purposeful communications employed by channel members
to inform, remind, and/or persuade prospects and customers regarding some aspect
of their market offering. In channel relationships, promotion is a portfolio of
persuasive tactics that can be wielded with the purpose of informing, changing
preferences and attitudes, positioning and/or repositioning products, and, ultimately, stimulating sales. But the contemporary view also posits promotions as a means
of relationship building. Relational promotion involves any communications
between channel members that is intended to facilitate new or fortify existing
exchange relationships. Over time, relational promotions should lead to relational
communication. Relational communication is a continuous process in which the
sender and receiver of a message become essentially indistinguishable, since the
message and feedback become virtually simultaneous events. The outcome of
relational communications is shared meaning, or synchronous cognition. Five
objectives are usually associated with relational channel promotions: stimulating
sales, sharing information, differentiating offerings, accentuating value, or stabilising
seasonal demand. Relational promotions tactics can be classified into two strategic
categories, consisting of pull and push promotions.
The final ingredient in the marketing mix of any channel participant is place, or
all those distribution, logistics, and behavioural functions that regulate the flow of
market offerings between exchange partners. The goal of place is to minimise the
costs of these functions while maximising customer satisfaction. A trade-off exists
between channel costs and the benefits afforded to exchange partners. These tradeoffs are linked to the other ingredients in the marketing mix.
The four components of the marketing mix support a channel members marketing strategy and, ultimately, its market offering. A marketing strategy can be defined
along three basic dimensions: the channel members markets, functional area
strategies, and strategic assets or skills.

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Module 4 / External Channel Environment

The marketing concept is the core of any marketing mix strategy. It asserts that
customer satisfaction is the basis for all marketing mix decisions. The contemporary
view is that this idea needs to be taken one step further, to a relationship marketing
concept. The marketing relationship concept is the culmination of all exchange
relationships; it delivers exchange value by addressing simultaneously the needs of
each link in the marketing channels and produces long-term relationships and
profits by creating more customer satisfaction.

Review Questions
Short-Answer and Essay Questions
4.1

What is the main reason why so many channel members use algorithmic pricing
methods?

4.2

In what kind of market is a price-skimming strategy more likely to prove successful?

4.3

What is the pricing issue that makes consumers feel they are being most exploited by
US businesses?

4.4

At which stage of the communication process is noise likely to be a problem?

4.5

According to the text, what is the outcome of relational communication?

4.6

According to the text, what determines the success of pull strategies?

4.7

Hospital food has been the butt of many jokes. Few of us include hospital food as one of
our greatest dining memories, and often hospitals in the UK are criticised for serving
unhealthy food. Hospitals are out to change that image. A growing group of hospitals
are dedicated to improving their food and making it fresher and healthier, championed
by a national charity that campaigns for healthy, humane and sustainable food. Discuss
how this change in menus indicates that some hospitals are acknowledging that they
operate in an agile competitive environment.

4.8

List the three steps in the value delivery sequence.

4.9

Discuss the difference between algorithmic pricing methods and market-orientated


pricing methods.

4.10 Compare the traditional view of communications and the relational communications
model.
4.11 Discuss the following statement: Place is distribution.

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Edinburgh Business School Marketing Channels

Module 4 / Marketing Mix and Relationship Marketing

4.12 The rock group KISS last had a top 20 hit in 1979. Yet the 1996 KISS concert tour
grossed more money than any other rock tour that year. How might the application of
the relationship marketing concept be used to account for its success?

Multiple Choice Questions


4.13 Products:
A. are unique bundles of tangible and intangible attributes.
B. are the vehicles through which exchanges of value concurrently satisfy both
buyers and sellers needs.
C. evolve to meet changes in the environment.
D. must be aligned with price and promotion to match up with the components of
the various channel relationships.
E. are described by all of the above.
4.14 Which of the following would be the best example of a core product?
A. A bottle of wine-flavoured ketchup.
B. A bottle of ketchup sold in a plastic bottle with an easy-pour spout.
C. A bottle of ketchup sold in a package along with similar-sized bottles of
mustard and pickle relish.
D. A bottle of ketchup specifically designed to enhance the flavour of French fries.
E. A bottle of ketchup.
4.15 A(n) ____ is a marketplace in which channel members constantly modify and improve
their product offerings to better satisfy changing customer needs.
A. dynamic buyers market
B. accommodating channel configuration
C. agile competitive environment
D. dynamic sellers market
E. environmentally responsive channel
4.16 Which of the following statements about a value delivery system is true?
A. A value delivery system first focuses on identifying customer needs.
B. A value delivery system is typically focused inward.
C. The view of a value delivery system is that products begin within the organisation.
D. A value delivery system might focus on developing superior distribution
systems for moving products from manufacturer to customer.
E. None of the above statements about a value delivery system is true.
4.17 A 12-pack of popularly priced beer sells for $12.99, yet a 12-pack of Blue Moon beer
costs $15.99. The reason why Blue Moon uses premium pricing is:
A. to eliminate perceived risks related to stocking the beer.
B. because it did not have sufficient information about market pricing.
C. to reduce the perceptions of risk.
D. to preserve a relationship with a long-time exchange partner.
E. to do none of the above.
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Module 4 / External Channel Environment

4.18 Joan is the owner of Rift in Time, a store that sells everything from watches to
datebooks to calendars anything that has to do with time. Yesterday, she got in a case
of watches. She paid $15.00 for each watch. Before placing the watches in store
inventory, she multiplied $15 by 120 per cent and put a sticker price of $18 on each
watch. Which algorithmic pricing method did Joan use?
A. Cost-plus pricing.
B. Volume pricing.
C. Competitive pricing.
D. Break-even analysis.
E. Penetration pricing.
4.19 Mark is purchasing a pet supply store. He thinks that break-even analysis would be a
logical method for setting his prices. He asks your opinion about break-even analysis.
What do you tell Mark?
A. Break-even analysis as a pricing method is inherently reactive.
B. Break-even analysis assumes that customers act rationally, but that is not
necessarily true.
C. Break-even analysis should not be used with perishable products like fish.
D. Break-even analysis will only work in relatively inelastic markets.
E. Break-even analysis is a great method for setting market-orientated prices.
4.20 The cost per seat per mile for United Airlines is 9.4 cents. Northwest charges 9.1 cents,
Delta charges 9.4 cents, and US Air charges 10.8 cents. When Southwest Airlines
started flying, it charged just 7.0 cents. Southwest Airlines used ____ pricing, a marketorientated pricing method to enter the market.
A. penetration
B. volume
C. cost-plus
D. skimming-the-cream
E. competitive
4.21 Regular toothbrushes cost around $2.00 each. Radius successfully introduced an ovalheaded toothbrush made of black neoprene at the price of $9.95. High initial prices are
the result of using ____ pricing, a market-orientated pricing method.
A. penetration
B. volume
C. cost-plus
D. skimming-the-cream
E. competitive
4.22 An office supply wholesale company sells a pack of six art gum erasers for $2.95, a pack
of one dozen art gum erasers for $4.25, and a case of 100 art gum erasers for $20. The
wholesaler uses ____, a relationship-orientated pricing method.
A. penetration pricing
B. volume pricing
C. cost-plus pricing
D. skimming-the-cream pricing
E. competitive pricing
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Edinburgh Business School Marketing Channels

Module 4 / Marketing Mix and Relationship Marketing

4.23 ____ are agreements in which buyers accept an ongoing flow of goods from vendors.
Buyers continue to receive goods until they tell their vendor to halt supply.
A. Supply-orientated arrangements
B. Relationship vending
C. Notification agreements
D. Demand-based agreements
E. Negative option contracts
4.24 Within any channel, rebates and trade-in allowances given to customers are examples of
____ allowances.
A. volume
B. functional
C. countertrade
D. barter
E. promotional
4.25 Price legitimacy exists:
A. whenever a buyers and sellers perceptions of a market offerings value
converge.
B. when the valuation of a good or service is the direct result of some function
performed by a channel member.
C. whenever a price level in excess of the normal market value exists.
D. whenever all possible discounts have been applied, and the final price is
calculated.
E. when all channel members agree on a list price.
4.26 Which of the following is an example of personal selling for burial plots?
A. The funeral director buys an ad in an AARP publication.
B. The local newspaper runs an article on why people like to own family burial
plots.
C. The funeral director develops a sales brochure to mail to prospective customers.
D. The funeral home director talks to Kathy about making her funeral plans early
to save her family the trouble.
E. At the local fair, the funeral director sets up a display showing the advantages
of owning your own family burial plots.
4.27 Petra has come up with an idea for a weekly newspaper for collectors of advertising
memorabilia. To attract subscribers, she developed an ad to run in Antique Trader, a
publication aimed at anyone who collects. The ad described the newspapers contents.
In writing a description of the newspapers regular features for the ad, Petra was
engaged in the communication process of ____.
A. introducing
B. encoding
C. translating
D. decoding
E. promoting

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Module 4 / External Channel Environment

4.28 When Al was studying the price list for 3m adhesives and trying to decide what to order
for his office supply department, he spilled a bottle of Coke on the list. The spilled Coke
made the price list illegible, and Al threw it in the trash. In terms of the communication
process, the spilled Coke was an example of ____.
A. an interrupter
B. communication interference
C. a physical barrier to communication
D. a communication delay
E. noise
4.29 Shared meaning:
A. encourages the alignment of promotional objectives among channel members.
B. is vital to building effective and efficient marketing channel relationships.
C. works well with the agile competitive environment that marketers will operate
in the future.
D. refers to the interwoven communication that occurs in marketing channels.
E. is described by all of the above.
4.30 There are several brands of pantyhose on the market. Hanes Resilience pantyhose are
described in its ads as Beautifully Sheer. Deceptively Strong. Which of the following
was the most likely objective for this promotion to strengthen Haness relationship with
its target market?
A. Stimulate sales.
B. Differentiate its product offerings from its competitors.
C. Share information.
D. Accentuate a market offerings value.
E. Stabilise seasonal demand.
4.31 Clorox bleach is associated with whitening clothes. In its ads, Clorox has described the
bleach as a good cleaner for removing germs and bacteria from kitchen counter tops,
cutting boards, and any food preparation areas. The objective of this ad is to:
A. stimulate sales.
B. differentiate its product offerings from its competitors.
C. share information.
D. accentuate a market offerings value.
E. stabilise seasonal demand.
4.32 Tom saw an ad for Tecnu, a poison oak and poison ivy preventative, in one of his
gardening magazines. Since he is susceptible to rashes from contact with poison ivy, he
immediately took the magazine to his local drugstore and showed the ad to his pharmacist who ordered a case for his store. Tecnu was using a(n) ____.
A. kinetic strategy
B. pull strategy
C. interrelated communications linkage
D. focused cognitive communication
E. push strategy

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Edinburgh Business School Marketing Channels

Module 4 / Marketing Mix and Relationship Marketing

4.33 An ad for Fleischmanns Egg Beaters in a magazine aimed at restaurant owners read,
Profit from the brand power that Egg Beaters brings to your morning menu. This ad is
an example of a(n) ____.
A. kinetic strategy
B. pull strategy
C. interrelated communications linkage
D. focused cognitive communication
E. push strategy
4.34 When asked to name a detergent during marketing research projects, a large
proportion of the population will name Ariel because there is such a strong brand
awareness of Tide detergent. In terms of strategic marketing decisions, the Tide brand
is a(n) ____.
A. tactical asset
B. internal resource
C. asset resource
D. intangible resource
E. strategic asset
4.35 The relationship marketing concept:
A. delivers exchange value by addressing simultaneously the needs of each link in
the marketing channel.
B. focuses on and coordinates those marketing mix activities that affect customer
needs and ends by producing long-term relationships and profits through
customer satisfaction.
C. suggests that channel members should focus outwardly on satisfying their
partners needs, rather than their own.
D. is a culmination of all exchange relationships.
E. is accurately described by all of the above.

Discussion Questions
4.36 What are the four key ingredients in the marketing mix? How is management of the
marketing mix critical to successful marketing channel relationships?
4.37 Define the product element of the marketing mix. How do the two key attributes of the
product component combine in relationship marketing?
4.38 How do agile competitive environments modify the product offerings in the
marketplace?
4.39 Explain the relationship between products, value satisfaction, and value delivery systems.
4.40 Define the price ingredient in the marketing mix. How is price important in marketing
channel relationships?

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Module 4 / External Channel Environment

4.41 Describe how promotional strategies impact relationship building in the marketing
channel.
4.42 How do push and pull promotional strategies differ in their effects on relationship
building?
4.43 What is the fourth element of the marketing mix?
4.44 How do the elements of the marketing mix relate to the marketing concept in
relationship marketing strategy?

References
1. The definition of product is still fairly controverted. The definition used here represents
a more popular view and it coincides with the definition proffered by Berkowitz, Eric N.,
Roger A. Kerin, Steven W. Hartley, and William Rudelius (1992), Marketing, Third Edition, Homewood, IL: Irwin, 254.
2. Goldman, Steven L. (1994), Agile Competition and Virtual Corporations: The Next
American Century, National Forum, The Phi Kappa Phi Journal, LXXIV(Spring), 43
47.
3. Dugas, Christine, Mark N. Vamos, and Jonathan B. Levine (1987), Marketings New
Look: Campbell Leads a Revolution in the Way Consumer Products Are Sold, Business
Week, (26 January), 6469.
4. Jabbonsky, Larry (1992), Coke, Gatorade Agree to Disagree, Wait and See Who Sweats
Most, Beverage World, (31 May)1, 4.
5. Bower, Marvin and Garda, Robert A. (1986), The Role of Marketing in Management, in
Handbook of Modern Marketing, Victor P. Buell, ed., New York: McGraw-Hill, 110.
6. Sebastian, Pamela (1993), Health: Pleasing Hospital Patients Can Pay Off, The Wall
Street Journal, (13 May), B1.
7. Evans-Correia, Kate (1993), PCs Turned Commodity? Well Almost In a Way!
Purchasing, 114 (17 January), 5456.
8. Conatser, Kelly R. (1993), Direct Comparisons, InfoWorld, 15(28 June), S8092.
9. Adapted from Rao, Akshay and Mark E. Bergen (1992), Price Premium Variations as a
Consequence of Buyers Lack of Information, Journal of Consumer Research, 19(December),
412423.
10. King, M. (2013). Supermarket Deals: How the Price Promises Match Up, The Guardian,
11
March
2005,
[online]
available
at:
http://www.theguardian.com/money/2013/mar/11/supermarket-deals-price-promisesmatch-up [Accessed 20 August 2013].
11. Wills, Gordon, Sherril H. Kennedy, John Cheese, and Angela Rushton (1990), Maximizing Market Effectiveness, Management Decision, 28(2), 87101.
12. Phillips, Owen R. (1993), Negative Option Contracts and Consumer Switching Costs,
Southern Economic Journal, 60(October), 304315.
13. Hynowitz, Carol and Gabriella Stern (1993), Taking Flak: At Procter & Gamble, Brands
Face Pressure And So Do Executives , The Wall Street Journal, (10 May), A1.
14. Stern, Louis W. and Adel I. El-Ansary (1992), Marketing Channels, Fourth Edition,
Englewood Cliffs, NJ: Prentice Hall, 82.
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15. Parasuraman, A., Leonard L. Berry, and Valerie A. Zeithaml (1991), Understanding
Customer Expectations of Service, Sloan Management Review, 32(Spring), 3948 and Caudron, Shari (1993), The Unhappy Consumer, Industry Week, 242(15 November), 2628.
16. Stern, Louis W. and Adel I. El-Ansary (1992), Marketing Channels, Fourth Edition,
Englewood Cliffs, NJ: Prentice Hall, 403.
17. Weitz, Barton A., Stephen B. Castleberry and John F. Tanner, Jr (1992), Selling: Building
Partnerships, Homewood, IL: Irwin, 5.
18. Robinson, Brian J. (1993), Promotion Is a New Way to Make Brand Contact with
Buyers, Marketing News, 27(12 April), 4, 16.
19. Bird, Laura (1992), Advertising: Sour Remarks on Milk May Focus Attention on Big
Dairy Campaign, The Wall Street Journal, (1 October), B5.
20. BBC News (2005), Rimmel Review Kate Moss Contract, 22 September 2005, [online]
available at: http://news.bbc.co.uk/1/hi/uk/4271052.stm [Accessed 20 August 2013].
21. Trade Marketing: A Retail Perspective (1990), International Journal of Physical Distribution
& Logistics Management, 20(3), iiiv.
22. Lefton, Terry (1993), Lego/Del Monte Double Team Kids, Brandweek, 34(14 June), 1, 6.
23. Black, Susan S. and Anne Imperato Colgate (1990), Levis Sings the Blues, Bobbin,
32(November), 4248.
24. Lamalle, Cecile (1993), Profitable Promotions, Restaurant Hospitality, 77(November),
102113.
25. Glover, Donald R. (1991), Distributor Attitudes Toward Manufacturer-Sponsored
Promotions, Industrial Marketing Management, 20(August), 241249.
26. Aaker, David A. (1995), Strategic Market Management, Fourth Edition, New York: John
Wiley & Sons, Inc., 4.
27. Treacy, Michael (1995), You Need a Value Discipline But Which One? Fortune, (17
April), 195.
28. Treacy, Michael (1995), You Need a Value Discipline But Which One? Fortune, (17
April), 195.

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PART 2

External Channel Environment


Module 5 Environmental Scanning: Managing Uncertainty
Module 6 Legal Developments in Marketing Channels
Module 7 Ethical Issues in Relationship Marketing
Module 8 Global Challenges and Opportunities

Marketing Channels Edinburgh Business School

Part 2 / External Channel Environment

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Competitive

Edinburgh Business School Marketing Channels

Module 5

Environmental Scanning: Managing


Uncertainty
Contents
5.1 Entropy and Environmental Scanning ..................................................5/2
5.2 Decision Support Systems .....................................................................5/8
5.3 The External Channel Environment .................................................. 5/10
5.4 Internal and External Political Economies: An Environmental
Framework ........................................................................................... 5/19
5.5 Key Terms ............................................................................................ 5/20
Learning Summary ......................................................................................... 5/20
Review Questions ........................................................................................... 5/22
Learning Objectives
After reading this module, you should be able to:
Understand how channel members affect and are affected by the channel
environment.
Discuss the importance of dynamism in marketing channel flows.
Identify the environmental variables that affect marketing channels.
Describe the impact of internationalisation on environmental scanning.
Relate the political economy model to contemporary marketing channels.
Explain how the political economy framework encourages a social system
perspective for managing the channel environment.
A marketing channel must continually adjust to its external environment economic,
technological, political, legal, ethical, and sociocultural factors. Look back at the
Channel Relationship Model and notice that the internal channel environment the
relationship process within a marketing channel is encased in this external
environment. These macroenvironmental forces that change the movement and
shape of a marketing channel are the topic of Part 2.
Channels are always changing even when they dont appear to be because their
environments are never static. Moreover, current conditions in the channel environment can influence the strength of the channel relationship. The environment can
either enhance or lessen a channel members control over its counterparts. Changing
environmental conditions can also affect channel participants in different ways. As
such, channel partners must be concerned with more than just how changes affect
their own operations; they must be aware of how the channel environment influences
all channel members.
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Module 5 / Environmental Scanning: Managing Uncertainty

In addition to continual change, three other properties have relevance to channel


environments: variability, potency, and distinctiveness.
Variability. The development and subsequent performance of marketing
channels depend on the ever-changing environment. Channel relationships are
actually moving even when they appear static. Whether and how channel members remain connected to one another is related to environmental influences.
Potency. Current conditions in the channel environment influence the strength
of the channel relationship. The environment may either enhance or lessen a
channel members control over its counterparts.
Distinctiveness. Each channel member is unique. Changing environmental
conditions affect channel participants in different ways. As such, channel partners must be concerned with more than just how environmental changes affect
their own operations; they should also be aware of how the channel environment
influences all channel members.
A channel member engages in practices which transform its surrounding environment. For instance, if many producers in a country opt for cheaper, but highly
skilled, labour overseas to reduce costs, this can have a detrimental effect on the
home economy, leaving people under- or unemployed and lessening the purchase
power of the marketplace.1
Two other properties are important to us. First, the impact that any environmental variable has on channel relationship is irreversible. Once something has altered the
state of the channel relationship, it will never be the same again. This is not to say
that channel members cannot successfully adapt to their changing environment;
they can. However, the influence of environmental forces on channel relationships
is nonetheless permanent and has a lasting effect on the performance of the
marketing channel.
The second relevant property is the fact that channels inevitably must expend
energy to preserve relationships in the wake of environmental change. This consumption of energy is known as entropy. Entropy accounts for the disorder,
uncertainty, and wasted effort present in any physical environment. Unless preventative measures are taken, entropy always increases through a naturally occurring
process.2 As a result, channel managers must continually struggle against entropys
negative effects. This is particularly difficult because of the constant yet unpredictable forces of the external environment that impact marketing channels.

5.1

Entropy and Environmental Scanning


Although channel members do not usually operate in a state of disorder, they do
operate under conditions of uncertainty. This uncertainty makes environmental
scanning a necessity. Environmental scanning involves the appraisal, prediction,
and monitoring of external factors that can impact a channel system. These external
factors contribute to the uncertainty in which marketing channels operate. Monitoring these external factors in order to manage uncertainty fosters better channel
performance.

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Module 5 / Environmental Scanning: Managing Uncertainty

Environmental scanning is necessary for other reasons as well. Channels of distribution are usually defined by contractual relationships and use assets that are not
easy to adjust or redeploy. Routines are typically well established and decisionmaking authority is often spread throughout the system. Despite these rather
immobile constraints, channel members must work together to provide products
and services for consumers whose needs are always changing. The relevant channel
environment is equally likely to exist in a state of flux. Under such circumstances,
information gained from environmental scanning is more than just useful; it is a
strategic resource.
An example from the hospitality industry illustrates the relationship between
environmental scanning and channel performance. A restaurant manager once
found himself faced with a $2-per-pound hike in the wholesale cost of shrimp. The
price increase was due to a poor shrimp harvest, so all suppliers were forced to
increase their shrimp prices. The restaurant manager failed to change menu prices,
though. He would have had to spend over $500 to modify the existing menus. But
because he failed to make this investment, his business lost thousands of dollars by
selling his shrimp at a loss. He failed to react to a change in the environment.3
To fully appreciate the relationship between entropy and channel environments,
we need to first consider four important characteristics: working systems, market
intelligence, different effects, and channel dynamism.

5.1.1

Working Systems
Entropy arises in all working systems, including marketing channels. Working systems
are composed of mutually dependent parts (channel members) that support various
processes. Working systems feature four stages input, transformation, output, and
adjustment that are linked together in a continuous loop. As Exhibit 5.1 shows, in
marketing channels inputs are the raw materials that are transformed into final
outputs as they pass through the various stages of the channel system. The nature of
the inputs, outputs, and transformation processes involved are adjusted over time in
response to the influence of changing environment.
Exhibit 5.1

Working systems

Input

Knowledge

Transformation

Editing/design/production

Output

Textbook

Adjustment

Revised edition

The environments in which channels operate are also continuously changing.


This points to the need for proactive rather than reactive environmental scanning.
Channel members cannot just wait for something to happen; they should proactiveMarketing Channels Edinburgh Business School

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Module 5 / Environmental Scanning: Managing Uncertainty

ly participate in their working system.4 Performance problems emerge when the


working system reflected in the channel members behaviours remains static
while channel environments change.5
Proactive environmental scanning improves channel performance. For example,
long before the North American Free Trade Agreement (NAFTA) was signed,
proactive US marketers had already scanned their economic environment. They
observed declining inflation and external debt trends in Mexico. Coupled with an
increasing gross domestic product, these trends indicated that Mexico could be a
feasible exchange partner. Some companies sensed the opportunity for a borderless
logistical network. By the time NAFTA was signed, these companies were primed to
develop new channel relationships because they were prepared before their competition. Distribution is the key to successfully linking US, Canadian, and Mexican trade,
and these logistic firms were among the front-runners in developing borderless
connections.6

5.1.2

Market Intelligence
In marketing channels, the process of entropy is based on information exchange or
lack thereof. To achieve equilibrium, working systems must receive and respond
appropriately to information from their environment. Similarly, if channel members
are to accurately assess their position in the system, they must obtain useful and
usable environmental information, known as market intelligence. The channel
member can then adjust in response to this market intelligence received from and
about the environment.
One biotechnology company can attest to the value of environmental scanning.
Biostat Diagnostics, Inc. develops technologies that provide fast and accurate
medical diagnostic testing. Their first product, called Triage, tests urine samples for
the presence of up to seven different illegal drugs, such as cocaine and heroin, and
provides the diagnostic results in just 10 minutes. Despite the products obvious
strong points, Biostat initially had a difficult time attracting venture capitalists.
However, the company conducted an extensive market intelligence program which
quickly brought in the capital they needed. Kim Bickenstaff, co-owner and chief
executive, concluded that this market intelligence defined who its target market was
and what channels it needed to use to reach them. Knowledge about its environment also enabled Biostat to attract exchange partners to help in the international
distribution of its diagnostic technologies.7
In the last several years, technology has dramatically increased the amount of
information to which marketers have access. Technological advances have made the
world more connected and activities easier to track. Organisations can track vast
amounts of data on anything from weather patterns, to online social networking, to
credit card activity, helping to inform commercial decisions across sectors. Meanwhile, specialist tools, processes and procedures have emerged to help organisations
store, manage and manipulate very large data sets.8 While this trend has generally
proven very useful, channel members have also encountered several challenges as a
result. These challenges include information overload, information accuracy, and
information rivalry.

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Information Overload
Information overload refers to those situations where the capacity of channel members to manage data is strained because excessive amounts of information are
available. To avoid information overload, channel members must first decide which
information will be most useful for making channel decisions. This is why top
management demands executive reports shorter versions which selectively sift
through the information that is available on a given topic.
Information overload can create market opportunities as well. Teltech Resource
Network Corporation is capitalising on the information overload that modern
scientists often encounter. In effect, too much is being written about too many topics
for anyone to keep up with. Teltech helps scientists pluck useful needles of data from
the virtual haystacks of information that are available on particular scientific topics.
The company consolidates intelligence taken from both databases and people,
integrating quantitative and qualitative sources.9
Information Accuracy
Channel members are also concerned about the quality of market information
available to them. Conflicting accounts of changes in the environment are not
uncommon. As an example, you are probably aware of the battles that economists
wage over the true state of our economy. Each economist cites different sets of data
to arrive at his or her forecast and each is certain that his or her information is
correct. Similarly, channel members must not only decide which marketing intelligence to use, they must also assess the certitude of the information. Information
accuracy addresses the correctness and precision of market intelligence the degree
to which one can use it with confidence and certainty.
Many research companies have prospered from selling huge databases to channel
members. For example, multinational corporations like Procter & Gamble, Unilever,
and Kraft General Foods typically rely on shopping data purchased from researchers to make product development, distribution, and other marketing decisions.
Many companies also rely on credit reports to assess the attractiveness of a potential
exchange partner. An accurate credit history will provide information that is useful
in the selection of exchange partners. But the results could be disastrous when this
information is based on unreliable data.
Channel members can evaluate the accuracy of information in several ways including:
Source Reliability. Is the source of information credible? Does the information
provider have a good reputation for reliability, truthfulness, and accuracy in reporting?
Data Collection Methods. What methods were used to collect the information? How much confidence can one place in the information-gathering
methods employed?
Sampling Design. Who were the respondents or participants in the research? Is
the information representative of the population of interest?

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Information Context. For what purpose was the information collected? Does
the context for which the information was collected correspond meaningfully
with the channel setting at hand?
Accurate information is critical in channel relationships. A relationship orientation to marketing channels requires a customer satisfaction approach. This first
requires that customer needs be accurately identified. But as Time Out 5.1 illustrates, sometimes the process by which accurate market intelligence is obtained can
be taken to extremes.

Time Out 5.1 ______________________________________________


Tracking customers movements and moods
Traditional bricks-and-mortar retailers are catching up with their online
counterparts when it comes to tracking customers and profiling their behaviour
and characteristics. How many customers come through the door and which
direction are they most likely to turn? How many are repeat visitors? Are they
male or female, and what mood are they in? How long do customers spend on a
particular aisle? How long do they look at merchandise before buying? Answers
to these sorts of questions help retailers determine store layout, how many tills
to open, how to customise coupons and make many more critical decisions.
Now new technology is enabling retailers to answer these questions, for
example by gathering data through the Wi-Fi signals of customers smartphones
or sophisticated video footage. Supermarkets have long been known to use
intelligent tracking methods. For example, Experian FootFall uses technology
such as thermal cameras and laser counters to provide data to help retailers
decide the optimum staff to visitor ratio for a store, how long customers wait in
queues and how this impacts sales, and where marketing is being most effective.
Questions
Do these tracking tactics bother you? Why or why not?
Can you think of any other non-traditional approaches to environmental
scanning beyond those discussed in this example?
Adapted from Clifford, Stephanie and Hardy, Quentin (2013), Attention, Shoppers: Store Is
Tracking
Your
Cell,
New
York
Times
(14
July),
[online]
available
at:
http://www.nytimes.com/2013/07/15/business/attention-shopper-stores-are-tracking-yourcell.html?pagewanted=all&_r=0 [Accessed 16 September 2013]; Experian FootFall, [online]
http://www.footfall.com/ [Accessed 16 September 2013].
__________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

Information Rivalry
Because information is so valuable to channel members, it is also a competitive
resource which channel members may wish to keep to themselves. For example,
when department stores like J. C. Penney or Target share point-of-sale information
regarding which toddler dresses are hot and which are not, Buster Brown Apparel,
Inc. can improve its manufacturing and distribution efficiency. All parties in this

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channel system gain an edge over other channel systems that do not have access to
such information.10
To a large extent, information rivalry really boils down to information hoarding.
The decision to hoard information from a competitive marketing channel system
may not be wrong in a legal sense; however, it may raise an ethical dilemma. It also
raises the potential for problems and misuse. Environmental information is especially valuable because it assists channel members in planning. The position advocated
in this text supports an open exchange of information among channel members,
with consideration given to the protection of proprietary information. Given the
entropic nature of closed channel systems, open exchange of information will foster
better relationships and improve overall performance.
Along with the ethical concerns presented by information hoarding, there are
other concerns about the security and inappropriate procurement and use of market
intelligence. This is an increasing issue of concern, as organisations today have
access to so much consumer data due to advances in information technology and
the growth of online consumer content (for example, on social networking sites).
In spite of the concerns, it is clear that market intelligence helps channel members manage their exchange relationships better. Environmental information is often
available through open, direct means such as the mass media, trade publications, and
salespeople. Other, less direct means are also available. These include consulting
firms, surveillance of clients, surveys, economic reports, and trade shows and
conventions.11
The uncertainty of channel environments is compounded by an inherent difficulty in predicting the effects of changes in the environment. No matter how much
market intelligence a channel member has gathered regarding its environment,
entropy tells us that disorder is a natural occurrence. While this circumstance does
not diminish the need for information, it does suggest that environmental forecasting is an imperfect science.

5.1.3

Different Effects
We have already noted that different external stimuli affect channel members in
different ways. Since a prediction of future events is a major objective of most
environmental scanning efforts, it would be helpful to understand the magnitude
and intensity of entropic processes. Yet, by definition, the consequences of entropy
are not generalisable from one situation to the next. This is because the same
environmental trends often have different effects on different channel members.
To illustrate this characteristic we call different effects, consider coffee. When the
rising demand for healthier foods is coupled with medical studies announcing the
harmful effects of caffeine, caffeinated coffees future appears bleak. But, this is
actually far from the case because other factors influence the relationship between
the environment and coffee demand.
And how can the success of Starbucks Coffee Companys coffee bars be explained? Each week, thousands of people sip on cappuccino or special blends at
these coffee bars, contributing to a success story that would appear to buck the

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general environmental trends. Obviously, the trends present in the external environment have affected different channel members in different ways.12 Starbucks
Coffee epitomises how important it is to purposefully adapt in the face of seemingly
negative environment forces. Starbucks coffee bar customers are not just buying
caffeinated coffee, they are consuming a treat.

5.1.4

Channel Dynamism
Channel environments are also characterised by a property known as dynamism.
The notion of channel dynamism suggests that the environmental forces concurrently flowing from and directed toward marketing channels are constantly
changing. Because channel environments are dynamic, channel members should be:
Flexible. Channel members must be willing and capable of adapting in response
to marketplace changes. They must also recognise that changing environmental
stimuli do not just affect a single member within a marketing channel. Each
channel member will likely be affected, albeit in different ways, by environmental
conditions.
Prepared. Since market intelligence is imperfect, exchange partners should use it
judiciously. The judicious application of market intelligence can contribute to a
state of channel foresight. In channel relationships, foresight relates to a channel
members ability to accurately predict the future of its relevant environment. As
we have said, by openly sharing information exchange partners can minimise the
uncertainty of their market intelligence and make better decisions. Exchange
partners will then be better able to anticipate and prepare for changes in their
environments.
Attuned. For channel members to perform effectively in spite of uncertain
conditions, they should work together. This requires that channel members are
attuned to the cues present in their channel environments. Channel members
should also monitor their exchange partners needs and the ways that changing
environmental conditions impact those needs.
The level of dynamism in a channels external environment affects channel relationships. For example, as a relationship becomes closer, each party increases its
knowledge of the other. This enhances the forecasting capabilities of each channel
member. But the opportunity costs of relying on a single or small number of
relationships can be high in a dynamic environment. Even channel environments
traditionally not thought to be dynamic are changing.

5.2

Decision Support Systems


Potentially large payoffs are available for channel members who can detect current
environmental trends. Even larger gains will accrue to those who are able to
accurately forecast future trends. The first, critical step in this process of forecasting
involves identifying the proper strategic considerations (or, issues). Generally
speaking, these considerations are:
Current or future trends that will influence market size.

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Customer preferences that affect their wants and perceived needs.


Broad industry directions. The success or failure of current channel strategies.
Some trends have a high potential impact but a low probability of actually occurring. Such issues are usually not worth the expenditure of resources that would be
necessary to resolve them.
For larger channel members, market intelligence (i.e., the answers to these questions) is best gathered through a decision support system (DSS).13 A DSS features
a coordinated set of data systems, tools, and techniques, along with supporting
software and hardware for environmental scanning. It provides the means by which
a channel organisation can gather and interpret intelligence from the relevant
environment, then convert this intelligence into a basis for marketing action.14
The data system in a DSS includes the processes used to obtain and the methods
used to store market intelligence from inside and outside of the firm. It should
contain data sectors on customer (market), economic and demographic, competitive, technological, and industry trends.15 The customer intelligence sector typically
contains information on who buys and uses the product, where the product is
bought and used, in what situations and quantities the product is bought, and so on.
The module containing general economic and demographic information categorises
relevant factors about what is happening in these external environmental components. The competitor module should make available information on current and
potential competitors, answering such questions as: who are they? What are their
relative strengths, unique capabilities, and market shares? In which market niches do
they operate?
Only the information that is likely to prove useful in marketing or channel decision making should be entered into a DSS. The DSSs basic purpose is to capture
relevant market intelligence and to convert that data to useful forms.
The number of online databases that provide information on potential customers, competitors, industries, and general economic trends has expanded rapidly in
recent years. This explosion of information has exercised a critical influence on the
development of decision support systems. Thousands of databases are currently
available, and one can only expect the number to increase in the years ahead.
Companies are increasingly having to set up separate systems to periodically track
and capture this information. Many firms are also outsourcing this requirement, or
establishing the in-house position of Chief Information Officer (CIO). The CIO
serves as the liaison between the firms top decision makers (including those
responsible for channels decisions) and its DSS function. He or she is responsible
for planning, coordinating, and controlling the firms intelligence resources. The
CIO is more concerned with the firms big picture than functional area managers
daily activities.16
The emergence of online databases and DSSs has not eliminated the need for
traditional marketing research aimed at gathering specific pieces of market intelligence. Indeed, the two approaches to gathering and managing market intelligence
are complementary rather than competitive. DSSs provide valuable input to strategic
channels planning. They allow channel managers to stay in touch with their relevant
external environments and serve as valuable early warning devices. But occasions
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regularly arise when DSSs do not provide sufficient information about how to
handle specific problems or opportunities.17 This is where focused marketing
research is best used.

5.3

The External Channel Environment


Channel relationships evolve in a dynamic environment. But merely recognising the
existence of changing environment is not enough to ensure success. For that,
exchange partners must continuously scan, or examine, the environment. On the
surface, it may appear futile to scan conditions that are always changing. After all,
whats the value in spending energy to study an environment if the conditions are
likely to change anyway? When viewed as a whole, the environment may prove too
difficult to deal with efficiently or comfortably. This is precisely why successful
environmental scanning requires channel members to assume a disaggregate
perspective. In other words, successful environmental scanning involves studying
each component of the external environment individually.
Five key components of the external environment illustrated in the CRM are the:
competitive environment.
economic environment.
technological environment.
sociocultural environment.
legal, ethical, and regulatory environment.
The impact of these components is complicated by the global scope of the external environment. Furthermore, each of these environmental components is
essentially borderless as depicted in the CRM the environment never affects only
one partner in isolation; it also influences the relationship between channel partners.
Because most environmental conditions are beyond the control of individual
channel members, pooling resources to anticipate and react more swiftly to environmental changes is one advantage of developing a relationship. Before we move
on to explore the key components of the external environment, Time Out 5.2
illustrates how one company has risen to help proactive organisations monitor the
external environment and keep attuned to trends.

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Time Out 5.2 ______________________________________________


Trendwatching.com
Trendwatching.com is a service launched in 2002 to help inform business
decision makers by scanning the world for consumer trends and related business ideas. Assisting its 30 plus professionals working in London, Singapore,
Sydney, New York, Lagos and So Paulo, Trendwatching.com has more than
2500 trend spotters in over 90 countries. These trend savvy individuals make
up the organisations Happy Spotting Network, and well-spotted insights and
innovations are rewarded with points (which can be redeemed for gifts).
Questions
The only constant in any market or marketing channel setting is change.
What are the implications of this simple but unavoidable fact for the management of marketing channels and the management of channel relationships?
What are the implications for the process of strategic planning within
marketing channels?
Adapted from http://www.trendwatching.com/ [Accessed 16 September 2013].
__________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

5.3.1

Competitive Environment
Competition is an uncontrollable component of the channel environment. Competition can occur at any level of a marketing channel. The rapidity with which market
circumstances can shift makes the environments competitive component quite
difficult to manage. To illustrate, consider that not so long ago Sears clearly led the
way in American retailing. Today, however, Walmart is in a commanding position,
and its expansion continues. Walmarts dominance has forced other channel
members to adapt to the changes in retail structure. Its success and strength have
also inspired many of its exchange partners to introduce changes in their manufacturing and distribution processes.
Channel members often go to great lengths to gain market share. Consider the
small victory achieved by the second leading soft drink competitor in the airline
industry PepsiCo. Although this is a tiny subset of the overall soft drink market,
accounting for less than 1 per cent of total cola sales, the competition for market
share is fierce. After years of trying to win distribution rights on major airline
carriers, PepsiCo finally became the second cola supplier on Northwest Airlines.
Airlines have traditionally rewarded their suppliers with exclusive contracts and rival
Coca-Cola has long dominated airline distribution, so PepsiCos breakthrough was
significant. The next stage for channel competition? The new arrangement allows
for the distribution of PepsiCos KFC, Pizza Hut, and Taco Bell fast-food products
on some Northwest flights.18
There are four types of competitive channel environments: horizontal, vertical,
system, and network.19 Horizontal competition occurs between channel members
operating at the same level and generally within the same market. For example,
stores such as Sears, Kmart, and Walmart usually compete for the same discountoriented customers, even though exceptions do exist with respect to certain product

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lines of Sears. While retailers follow different paths to attract its customers, their
product width and depth are similar. For certain other product categories, off-price
speciality retailers like T.J. Maxx, Ross Dress for Less, and Burlington Coat Factory
also compete against Sears, Kmart, and Walmart.
Vertical competition occurs when channel members operating at different
channel levels compete for a share of the same market. In other words, vertical
competition arises whenever manufacturers and resellers struggle over their share of
the systems profits. Retailers may compete against wholesalers. Resellers may also
compete against other resellers in the same channel system. Manufacturers may even
compete against retailers. For example, on occasion IBMs direct salesforce has
called on accounts of independent computer retailers who also carry IBMs line of
computers. This type of vertical competition, known as dual distribution, can be
disruptive to the channel systems harmony.
Naturally, dissension can arise between a manufacturer and its dealers who are in
competition with each other. Several years ago, prior to the Hewlett-Packard
merger, Compaq Computer Corporation elected to extend its distribution channels
through the use of mail-order and mega-discounter firms. This decision infuriated
independent computer retailers who found it more difficult to be price competitive.
Independent retailers also experienced difficulties maintaining sufficient inventories
of hot products. One dealer insisted that Compaq intentionally diverted inventories
to its new sales channels, at the expense of more traditional outlets. Matt Hirzsimmons, a New York ComputerLand dealer, complained: Its not just that we lose an
order. We lose a long-term relationship with a customer.20 Example of firms that
engage in horizontal and vertical competition are shown in Exhibit 5.2.

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Exhibit 5.2

Examples of firms in the horizontal and vertical competitive


environment
Horizontal

Walmart

OfficeMax

ComputerLand

Consumer

Vertical

Compaq

Walmart

Consumer

System competition occurs among complete channel units. In the UK the


package-holiday industry is a prime example of system competition, where companies like Monarch, Thomas Cook, and Thomson all vie for holiday makers. These
competitors dominate the distribution of reservation through their charter flight
ticketing systems, travel agencies, and company-vested travel wholesalers. As a
result, these companies compete as members of a complete system rather than at
any specific channel level.
A new type of competition has recently emerged in the marketplace. Network
competition occurs among networks of channel members competing across
industries and markets. A network is a cluster of channel relationships that are
constructed for the purpose of maximising exchange utility among the partners.
These clusters of relationships can exist either at horizontal (i.e., between sets of
producers) or vertical channel levels (i.e., between producers and suppliers), or at
both levels simultaneously. Several firms may be involved with one another at each
level.
An example of network competition is embodied in a Mountain View, California,
software concern. General Magic, Inc. was a software consortium that included
more than 10 companies, including Motorola, Fujitsu Ltd., Sony Corp., Apple,
Philips Electronics, and Toshiba Corp., on its roster. While most of these firms
were competing directly with one another, the General Magic network allowed these
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industry giants to develop and share technologies across a number of video and
telecommunications applications.
Network competition is a complex and unsettled market factor because it is still
in its early stages of development. However, some observers believe network
competition will emerge as a dominant environmental issue.21

5.3.2

Economic Environment
Predicting and responding to the economys anticipated impact is a particularly
important aspect of channel management. Yet, no single environmental issue is
more difficult to forecast. Economic conditions are constantly being measured
through a variety of indicators. These indicators range from measures of gross
domestic production (GDP) to consumer confidence. Different economic indicators often send mixed signals. At other times, economists themselves cannot agree
on the meanings of economic signals.
Economic indicators sometimes also provide misleading cues for marketers.
Doubts about the timeliness and consistency of many economic measures certainly
exist. Moreover, economic indicators are only themselves generalisations, providing
an aggregate index of the economic outlook or performance at a particular point in
time. For instance, many channel members may flourish despite a drop in the Dow
Jones Industrial Average. This should surprise no one since the Dow Jones average
is simply a daily compilation of the stock prices for 30 publicly traded US corporations.
Still, economic conditions have a reverberating effect on every level of channel
systems. For example, when domestic demand grows, commodities are more likely
to be pulled through the distribution system. In response, manufacturers and
distributors send larger shipments. This, in turn, signals more economic growth.
These secondary effects are magnified by the dual influence of derived demand and
joint demand. Because channel members especially producers buy goods that
will be used directly or indirectly to satisfy consumers requirements, the demand for
all products flowing through channel systems comes from consumer demand. This
is known as derived demand. For example, the demand for computer chips is
derived from consumer demands for faster and smaller personal computers. On the
other hand, the channel flows of many other products especially raw materials and
unfinished components are subject to joint demand. Joint demand exists when
two or more items are used together to produce a product. For instance, a company
that produces axes needs the same number of axe handles as it does axe heads. This
is because the two items are jointly demanded.
Additionally, sometimes larger shipments through the channels are merely inventory stockpiles that are being dumped into the marketplace.22 Such practices occur
frequently in the apparel industry. There, unpopular or dated fashions are filtered
through off-price retailers to eliminate excess inventories. It only takes the target
audience to shun a particular look, and clothing manufacturers are forced to dump
inventories in the marketplace at markedly lower prices. In other words, the
movement of some goods is not necessarily based on consumer spending. For this

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reason, consumer confidence indices can prove to be false indicators of future


channel profitability.
In the face of all of this uncertainty, how can channel members effectively scan
their economic environments? Literally hundreds of indicators are available from
which to choose. The nature of these cues about the economic environment is
shaped by the conditions prevailing within four general economic factors:

economic infrastructure.
consumer buying power.
currency stability.
national trade policies.
The economic infrastructure is a composite of the communication, education, financial, and distribution support systems in any market sector. For example, emerging
economies such as India and Brazil generally prove attractive to global marketers
because of the size of the consumer population and their demand for goods.
However, there can be problems with developing and sustaining channel relationships in infrastructure-poor regions such as delivering perishable or valuable goods
to remote areas.
Consumer buying power indices generally provide useful insights into future channel
performance. When consumers are not buying, there is no force to drive goods
through the marketing channel. Because of the effects of joint and derived demand,
lower consumer spending can have magnified effects on a channels overall performance. When consumers have less buying power, retailers make fewer sales and
require fewer replacement goods. In turn, a lower GDP results in fewer employment opportunities, decreasing consumers buyer power. As a result, consumer
demand decreases again.
Currency stability often exercises a pivotal influence on channel performance. Small
and medium-sized US channel members often find that they have to protect
themselves against the falling value of foreign currencies. At other times, the only
currency falling is domestic. Currency fluctuations force many retailers to restrict
exchange to US dollars or other hard currencies.
A countrys trade policy can also prove to be a significant economic indicator. The
USs trade policy with Vietnam received a good deal of attention in the early to mid1990s. Most US exporters, sensing a market opportunity, cheered when trade
sanctions against Vietnam were lifted. Yet many Americans balked at the prospect
of open trade with Vietnam. Likewise, during apartheids final years, many US
channel members were forced to abandon exchange relationships in South Africa.
Many of these relationships had been extremely lucrative.
These four general economic factors are hardly exhaustive. Other macro economic factors such as inflation levels, employment rates, or interest rates can also
exercise substantial effects on channel structure and performance. Other environmental cues such as the size of the federal deficit and fluctuations in the stock
market can also help channel members manage uncertainty. Still, when taken as a
set, these four factors illustrate how complicated exchange relationships can become
when economic conditions are uncertain.
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5.3.3

Technological Environment
The technological environment primarily confronts those processes by which
information and knowledge-based products are introduced into channel systems.
When technology is based on information sharing, channel relationships often
develop for the sole purpose of research and development. This is often evident in
alliances between car manufacturers or producers of computer software, for
example.
The technological environment knowledge-based products in particular influences many channel relationships because technological advances change the
standards of exchange utility. In many instances, technology has made fast delivery
synonymous with overnight delivery. Today, same-day deliveries are common.
Breakthroughs in computer and communications technology advancements are also
stimulating improved distribution standards. This is evident in the supermarket
sector, for example, where many people are opting for online shopping and sameday delivery (or delivery at a specific time), or click and collect, where goods can be
purchased online and collected in-store. For such systems to work, there needs to be
seamless integration between online purchasing, stocking, picking and delivery
systems.
Technology is making the world of marketing channels smaller and faster as well.
As a result, the balance of power in many channel systems has shifted away from
manufacturers and toward retailers. Retailers in many channel systems such as food
retailing are now able to quickly gain accurate information regarding items which are
or are not popular with their customers. Over the past decade or so, retailers have
used this information to leverage their positions with manufacturers and wholesalers. During the same period, however, the information technology revolution has
triggered strong growth in non-store retailers, particularly in online retailers. In any
number of industrial and service sectors, old-line channel structures have been
weakened by the introduction and rapid growth of the Internet. The positions of
some traditional retailers have been eroded as a result. On the other hand, many
traditional retailers also offer products and services online, and are embracing new
technologies to differentiate themselves. Technology is making change the only
constant in channel relationships.
A technological imperative is emerging wherein the channel structure or design stems
from the prevailing technology operating within the channel. Two general, technology-based channel structures currently exist. One, called pooled interdependence,
describes two channel members who operate independently but whose pooled
resources simultaneously contribute to each partners overall success. The other
technology-based channel structure is known as sequential interdependence. In
sequential interdependence, technology and the changes that generally accompany it
are pushed through a channel system from one member to the next. The flows of
information and technology are one way. Two-way exchange of technology requires
an integration of channel members technology-based knowledge. This results in
reciprocal interdependence, in which knowledge-based products can be jointly
developed and marketed. Once reciprocal interdependence emerges, the channel
inputs and outputs of exchange partners become essentially indistinguishable.23

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5.3.4

Sociocultural Environment
Changes in channel structures are frequently due to changes in the sociocultural
environment. This is because whenever consumer values, attitudes, or lifestyles
change, the way in which consumers express needs and buying motivations also
change. For example, consumers have always needed to get from point A to point
B. But over the years, the way consumers have chosen to satisfy this transportation
need has changed drastically.
When such a sociocultural change occurs, channel members must respond by
adapting their need-satisfying marketing mix strategies. This process changes the
products and services all of us acquire, use, and dispose of in our roles as consumers.
To illustrate how this works, consider that todays households increasingly feature
single parents or two parents who work outside the home. Such households often
have little discretionary time to spend shopping. Retailers have responded to this
change by offering extended store hours, broader product assortments in a single
location, and in-home shopping capabilities. Such changes in the retail mix are
inevitably accompanied by changes in supply systems within the channel.
The sociocultural environment exists as the point of connection between channel
members, society, and its culture. Several sociocultural characteristics influence
channel behaviours, including:
Cultural Diversity. The issue of cultural diversity affects manufacturers and
resellers. For example, the channels through which financial services are delivered
to consumers are now addressing cultural diversity; in many parts of the US automated teller machines (ATMs) allow users to select between English and Spanish
directions.
Social Issues. Social concerns also affect the way goods flow through marketing
channels. One example is the proliferation of green marketing claims by manufacturers. These product claims are specifically intended to appeal to the
environmental consciousness of consumers. As we noted in Module 2, recycling
is a channel function that requires consumers to become de facto producers. Recycled materials, then, generally re-enter the manufacturing process as raw
materials.
New Product Channels. Will ATMs eventually replace the channels traditionally available for banking services? Will online grocery shopping replace traditional
bricks-and-mortar stores? Will consumers opt for home shopping over the
shopping mall when buying clothes? These questions address how issues such as
convenience, driven by family or work-related pressures, impact the distribution
of goods and services in traditional channel systems.
The sociocultural environment reflects the combined effects of all other environmental factors. Franchisees must adapt to regional preferences. Manufacturers
must adapt their products and promotional patterns to changing society-based
demands. And, inevitably, intermediaries are obliged to provide new modes of
distribution for these altered goods and services. For instance, cultural trends
compelled General Mills to reorient its entire approach to distribution. The huge
Midwestern food processor had observed how Americans were increasingly
consuming food based on their concerns about food quality, diet, physical fitness,

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and natural ingredients. At the same time, Americas eating habits shifted dramatically toward away-from-home and on-the-run dining. General Mills responded in
two ways. First, the firm developed a chain of Good Earth restaurants that featured
natural foods. Then, operating within its long-standing distribution channels,
General Mills introduced healthy, eat-on-the-run products such as Yoplait and
Nature Valley Granola bars to the grocery sector.24
Since all human interactions unfolding within sociocultural settings are motivated
at various times by economic and/or political concerns, eco-political interests
cannot be easily separated from sociocultural issues. Nor, most likely, should one
even try to achieve such a separation. The pressing question that remains, then, is
how does the channel environment affect the relationships among exchange
partners? One model has proven useful for integrating the effects of these environmental externalities into the channel system. The political economy framework describes
how interacting sets of internal and external environments affect the behaviour and
performance of channels systems.25 In the CRM, the external environment envelops
the internal environment. The political economy framework provides a more
complete picture of the junction between the internal and external channel environments. The political economy framework is illustrated in Exhibit 5.3.
Exhibit 5.3

The political economy framework

Distribution
Channel

Channel
Environment

Internal economy
Internal economic structure
Internal economic processes

External economy
External economic
environment

Internal polity
Internal sociopolitical structure
Internal sociopolitical processes

External polity
External sociopolitical
environment

Adapted from Reve, Torger and Louis W. Stern (1979), Interorganisational Relations in Marketing Channels,
Academy of Management Review, 4(July), 405416.

5.3.5

Legal, Ethical, and Regulatory Environment


Unlike the economic environment, the nature of the legal and regulatory environment is relatively clear. Laws and regulations are an administered body of
principles and rules applied more or less uniformly in the face of disputes or
problems.26 Channel members behaviours are restricted by a series of laws that
regulate and govern their actions.
The elimination or introduction of legal and regulatory constraints can pose both
major threats and opportunities to channel members and to entire channel systems.
For instance, deregulation in the banking, air travel, and railroad industries had
enormous implications for the structure of the channel systems that had previously
prevailed within each sector. On the other hand, the introduction of legislation

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aimed at curbing piracy of software, music, and movies significantly impacted the
means by which those items were internationally distributed. An extensive discussion of the legal and regulatory environment and how it impacts marketing channels
is offered in the next module.

5.4

Internal and External Political Economies: An


Environmental Framework
The act of cooperating through the exchange of goods and services is based on the
premise that two or more channel members engage in economic behaviours for
their mutual gain. As such, one hopefully enters an exchange relationship to further
his or her own interest, and with the intent of benefiting other channel members.27
In this way, channels are collectivities of organisations and their human representatives. It is actually these human representatives who jointly pursue their own selfinterests and the channels common objectives.28 The interaction process that
emerges from such trade-offs could be characterised as a social system. The social
system orientation is based on the assumption that environmental conditions regulate
both organisational and individual behaviours. The political economy framework
recognises and accounts for both the external and internal environment. By now, it
should be evident that channel members are catalysts for and victims of their dynamic
external environments. The interaction between channel members operating within
any channel system (internal environment) is invariably influenced by the socioeconomic and political forces in the marketplace (external environment).
The internal political economy encompasses the channel structure and processes that
are derived from exchange processes. The internal political economy consists of two
components: the internal economy and the internal polity. The internal economy
captures the economic structure and processes of the channel. It would describe, for
example, the process by which resources are allocated or terms of exchange are
derived. The internal polity accounts for the behavioural aspects of the exchange
partners. It addresses, for example, the level of cooperation and conflict that exist in
an exchange relationship.
The external political economy is dichotomised into an external economy and external polity. The external economy accounts for the economic environment in
which marketing channels develop and function. The external polity captures the
sociopolitical environment. As Exhibit 5.2 illustrates, the political economy framework suggests that channel members not only adapt to their environment, they also
help shape it.29
Members of channel systems face multiple environments and environmental
trends. However, there are important clusters of environmental forces summarised within the internal and external political economies that have substantial and
predictable effects on channel systems. The political economy framework accounts
for these effects.
The political economy (P-E) perspective advances our understanding in a couple of
ways. The global automotive sector offers a useful illustration. The P-E framework
suggests that channel members are active participants in a dynamic environment.

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Accordingly, car manufacturers are producing electric cars in response to the changing
preferences of the consumer market. Furthermore, the environment provides
opportunities and presents limitations to all channel relationships. Due to their
infancy, a lack of necessary infrastructure still presents challenges for electric cars, for
example. Collaborative working between manufacturers and other stakeholders could
be beneficial. The framework also suggests that channel performance is ultimately a
pursuit of some equilibrium between internal and external environments. The
difficulty in attaining such a state of equilibrium is compounded by the complex
nature of the environment. A daunting challenge, to be sure, but one that the entire
automotive industry has attempted to manage through just-in-time supplier agreements and increased vertical integration, for example, and will continue to attempt to
manage. The P-E environment in which car producers operate is sure to become even
more complex as channel relationships increasingly extend across international
boundaries. The need for these producers to scan their relevant environments to
lessen uncertainty and prevent entropy can only increase with the passage of time.

5.5

Key Terms
channel dynamism
decision support system
derived demand
entropy
environmental scanning
external economy
external polity
horizontal competition
internal economy
internal polity

joint demand
laws and regulations
market intelligence
network competition
pooled interdependence
reciprocal interdependence
sequential interdependence
system competition
vertical competition

Learning Summary
Entropy accounts for the disorder, uncertainty, and wasted effort present in any
physical environment. Entropy always increases in any naturally occurring process
including working systems such as marketing channels. Channel members always
operate under conditions of uncertainty and entropy. Together, these characteristics
make environmental scanning a necessity. Environmental scanning involves the
appraisal, prediction, and monitoring of all external factors that may substantially
impact a channel system. A great many performance problems may be linked to
circumstances where the behaviours of channel members remained static while their
channel environments changed.
To achieve the state of equilibrium they naturally seek, organisms must receive
and respond to information cues from their environment. Similarly, if channel
members are to accurately assess their position in the system, they must obtain
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useful market intelligence for decision making. Here, market intelligence refers to
data that is useful as an input into managerial decision making. In this way, all
channel members are, or at least ought to be, information seekers.
Information overload refers to those situations where the capacity of channel
members to comfortably manage data is strained because of excessive amounts of
information. To avoid such overload, channel members must first decide which
information will be most useful for making channel decisions. Information overload
can also open up market opportunities. Channel members sometimes receive
conflicting accounts of changes in the environment. Thus, they must address the
accuracy and precision of this market intelligence the degree to which they can use
it with confidence or certainty. Because information is so valuable to channel
members, it is also a competitive resource. Environmental information is especially
valuable because it assists channel members in planning for the future. When
properly used, environmental information can also help fortify the trust between
exchange partners. But there is still potential for problems and misuse.
Channel environments are entropic because they are characterised by a property
known as dynamism. The notion of channel dynamism is that energetic environmental forces concurrently emanating from and directed toward marketing channels
are constantly changing. As a result, channel managers need to be flexible, prepared,
and attuned to their surroundings. However, merely recognising the existence of a
changing environment is insufficient to safeguard success. For that, exchange
partners must continuously scan the environment. Successful scanning also requires
that channel members assume a disaggregate orientation, in which channel members
do not view the environment as a single or complete entity.
Five key components of the environment must be monitored: competitive, economic, technological, sociocultural, and legal, ethical, and regulatory. Four types of
competitive channel environments exist. Horizontal competition occurs between
channel members operating at the same level. Vertical competition occurs when
channel members operating at different channel levels compete for a share of the
same market. System competition occurs among complete channel units. Network
competition occurs among a labyrinthine network of channel members contending
across industries and markets.
Predicting and responding to the anticipated impact of the economy is a particularly important aspect of channel management. Yet no single environmental issue is
more difficult to forecast. The state of the economy is constantly being measured
through a variety of indicators, ranging from gross domestic production to consumer confidence indices. The nature of any cues about the state of the economic
environment is always tempered by the conditions prevailing within the following
four economic indicators: economic infrastructure, consumer buying power,
currency stability, and national trade policies.
The first, critical step in environmental scanning is identifying what questions to
ask. These questions might pertain to: current or future trends, customer preferences, industry directions, success or failure of current channel strategies, and
competitors strategies. The answers to these questions can be gathered and

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interpreted through a decision support system (DSS). Only the information that is
likely to prove useful should be entered into a DSS.
The technological environment encompasses those processes by which
knowledge-based products and information itself are introduced into channel
systems. Because technology is predicated on information sharing, one can easily see
how channel relationships might develop for the sole purpose of research and
development. A sense of a technological imperative is now emerging in many
channels settings. The technological imperative suggests that most channel structure
is derived from the prevailing technology operating within the channel. Two general,
technology-based channel structures currently exist that influence channel relationships. One, called pooled interdependence, describes two channel members who
operate independently, but whose pooled resources contribute to each members
overall success. The other technology-based channel structure is known as sequential interdependence. In sequential interdependence, technology, and the changes
that generally accompany it, is pushed through channel members. Information and
technological flows are essentially one-way. For a two-way exchange to occur
requires an integration of channel members technology-based knowledge. This
results in a reciprocal imperative.
When the values, attitudes, and lifestyles of consumers change, channel members
must adapt their need-satisfying marketing mix strategies in response to these
consumers changing needs. This process changes the products and services all of us
acquire, use, and dispose of in our roles as consumers. The sociocultural environment exists as the point of connection between channel members, society, and its
culture. In fact, the sociocultural environment is truly an aggregation of all other
environmental factors.

Review Questions
Short-Answer and Essay Questions

5/22

5.1

Changing environments affect channels of distribution. List three properties that


describe both changing environments of channels.

5.2

Briefly explain why channel members need to engage in environmental scanning.

5.3

How do busy executives protect themselves from information overload?

5.4

Is the hoarding of information unethical and/or illegal?

5.5

What is the first critical step in the process of forecasting future environmental trends?

5.6

What is the best way for firms like Mattel, FedEx, General Motors, and Nabisco to
gather market intelligence?

5.7

What is another name for vertical competition?


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5.8

Coca-Cola tried for many years to be a viable product in India. When the Indian
government told Coca-Cola that to stay in India, it would have to release the formula
for its concentrate, it left the country until the law was changed (16 years later). How
does this example relate to the concept of entropy?

5.9

Following its opening, Euro Disney Resort in France had disappointing attendance.
Europeans complained about the cost of its tickets, the traffic problems, and the parks
apparent basic disdain for local culture. How might environmental scanning have
prevented these problems?

5.10 Japanese firms tend to operate as if they were closed systems information going in but
never coming out. Any time a Japanese employee in one of the technological industries
has any contact with a foreign counterpart, he is carefully debriefed by his marketing
research people. The information is recorded, analysed, and circulated freely within the
corporation. Often when this knowledge is grouped with other information, the
Japanese are in a position to forecast trends before anyone else can. Do you believe this
information should be made available to channel members?
5.11 Toy makers race to get the next irresistible toy for children to market. Marketing
research indicates that parents want more unisex or gender-neutral toys. Similar
research with children indicate that they prefer gender-specific toys. This and similar
incongruities make this a difficult channel in which to operate. Discuss the characteristics that toy industry channel members need to survive in such a dynamic channel.
5.12 Discuss the following statement: The emergence of decision support systems has made
marketing research obsolete.

Multiple Choice Questions


5.13 ____ accounts for the disorder, uncertainty, and wasted effort present in any physical
environment.
A. Entropy
B. Incongruity
C. Shared dependence
D. Environmental discrepancy
E. Synergy
5.14 Environmental scanning:
A. removes all uncertainty from the marketplace.
B. never produces information overload.
C. involves the appraisal, predicting, and monitoring of external factors that can
affect a channel system.
D. prevents entropy.
E. monitors internal factors like competition that can affect a channel system.

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5.15 A toy manufacturer that acted proactively instead of reactively would:


A. stockpile plastic once it decided that there really was a widespread petroleum
shortage.
B. predict a resurgence of interest in 1970s toys and re-introduce the Smurfs.
C. change its manufacturing processes to meet newly enforced federal guidelines.
D. modify its television advertising campaign to meet requirements enforced by
the FCC.
E. do none of the above.
5.16 ____ refers to those situations in which the capacity of channel members to manage
data is strained because excessive amounts of information are available.
A. Situational over-saturation
B. Information redundancy
C. Environmental over-saturation
D. Information overload
E. Data overflow
5.17 In assessing the certitude of information that a firm receives, it is not uncommon for the
receiving firm to question:
A. the credibility of the source supplying the information.
B. how the respondents to the research were selected.
C. the methods used to collect the data.
D. the purpose for which the information was initially collected.
E. all of the above.
5.18 How can the manufacturer of computer hardware gather market intelligence?
A. By reading trade publications.
B. By talking to his or her salespeople.
C. By hiring consulting firms.
D. By paying attention to mass media information sources.
E. By doing any and all of the above.
5.19 ____ suggests that the environmental forces concurrently flowing from and directed
toward marketing channels are continuously changing.
A. Channel dynamism
B. Market energy
C. Channel animation
D. Environmental concurrences
E. Environmental currents

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5.20 At a recent convention, the CEO of a pharmaceutical company told its distributors and
its suppliers that they should be willing and capable of adapting to environmental
changes, prepared for change with channel foresight, and attuned to environment cues
which indicate that change is coming. She was telling them how to deal with ____.
A. information overload
B. negative entropy
C. internal polity
D. external polity
E. channel dynamism
5.21 Potentially large payoffs are available to channel members who are able to accurately
forecast future trends. The first critical step in this process of forecasting is to:
A. develop several contingency plans based on current market intelligence.
B. design a marketing strategy.
C. hire a consulting firm.
D. determine which trend will be the most profitable.
E. identify the proper strategic questions to ask.
5.22 ____ is defined as a coordinated system of data systems, tools, and techniques, along
with software and hardware for environmental scanning.
A. An information-gathering system
B. A computerised environmental scanning unit
C. Computerised marketing research
D. An online database
E. A decision support system (DSS)
5.23 A decision support system (DSS):
A. is a coordinated system of data systems, tools, and techniques, along with
software and hardware for environmental scanning.
B. should contain all available information because it might be useful in the future
even if it is not useful now.
C. can and does replace traditional marketing research.
D. should be used in tactical, not strategic, channel planning.
E. is accurately described by all of the above.
5.24 Which of the following is NOT one of the key components of the external
environment?
A. Competition.
B. Technology.
C. The economy.
D. Culture and society.
E. Suppliers and distributors.

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5.25 ____ competition occurs between channel members operating at the same level and
generally within the same market.
A. Horizontal
B. Lateral
C. System
D. Network
E. Vertical
5.26 ____ competition occurs when channel members operating at different channel levels
compete for a share of the same market.
A. Horizontal
B. Lateral
C. System
D. Network
E. Vertical
5.27 ____ competition occurs among complete channel units.
A. Horizontal
B. Lateral
C. System
D. Network
E. Vertical
5.28 A New York City luxury supplier of events and catering recently partnered with a
competing hospitality firm which in turn worked in partnership with a busy convention
centre. The aim was to promote the convention centres new facilities to a wider
audience. This is an example of firms sharing their expertise in ____ competition.
A. horizontal
B. lateral
C. system
D. network
E. vertical
5.29 Kaolin or white clay is necessary to whiten paper. The more white copier paper sold,
the more kaolin needed. Therefore, the demand for kaolin is ____.
A. joint
B. inelastic
C. derived
D. combined
E. elastic

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5.30 In order to make bread, a local baker needs flour, yeast, salt and water. If any one is
missing, the bread cannot be made. Demand for these products by the baker is ____.
A. joint
B. inelastic
C. derived
D. combined
E. elastic
5.31 Silcorps makes computer-aided design software. Its best-selling product was based on an
operating system which later became dated in its target customers view. Silcorps had to
keep its current customers satisfied while it developed a system that would function
with their preferred operating system. Silcorps was most affected by the ____ component of its external environment.
A. technological
B. competitive
C. legal and regulatory
D. economic
E. sociocultural
5.32 In____, technology and the changes that generally accompany it are pushed through a
channel system from one member to the next.
A. successive independence
B. reciprocal interdependence
C. pooled interdependence
D. serial independence
E. sequential interdependence
5.33 The fact that more women are taking advantage of relaxed dress codes at work has
caused sales for the nations largest manufacturer and marketer of sheer tights to drop
by at least 5 per cent for each of the last three years. This drop is sales is directly
related to a change in its ____ environment.
A. competitive
B. sociocultural
C. legal and regulatory
D. economic
E. technological
5.34 The internal political economy encompasses:
A. the social, cultural, and political environment of the channel system.
B. addresses the level of conflict and cooperation the channel system will
experience as a result of its interaction with the external environment.
C. all of the various ways that the channel members can respond to changes in the
internal environment.
D. the channel structure and the processes that are derived from exchange
processes.
E. all of the exchange processes whether they are performed inside or outside the
channel structure.

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Discussion Questions
5.35 Describe the channel environment in terms of three properties that impact channel
members.
5.36 What is environmental scanning? How does it relate to entropy?
5.37 What is marketing intelligence? Describe some methods that channel members can use
to obtain market intelligence.
5.38 How is marketing intelligence credibility monitored by the marketing channel?
5.39 Define dynamism in terms of marketing channels. Describe three concepts key to
channel management resulting from the dynamism concept and their impact on channel
relationships.
5.40 What are five components of the channel environment? What is the relationship
between these components?
5.41 Discuss the effect of the competitive environment on channel members?
5.42 How does the political and economic environment affect marketing channels?
5.43 How does the legal and ethical environment impact marketing channel members?
5.44 What is the technological imperative regarding channel structure? What are the three
forms of interdependence used to describe channel relationships?
5.45 How does the sociocultural environment affect the marketing channel?
5.46 Differentiate between internal and external political economic environments. How has
internationalisation impacted channel members abilities to monitor their changing
environments?

References
1. Rohwedder, Cecile (1994), Its Time to Leave Home: Menswear Maker Moves Production to Eastern Europe, The Wall Street Journal, (15 April), B1.
2. Hewitt, Paul G. (1992), Conceptual Physics: The High School Physics Program, Second Edition,
Reading, MA: Addison-Wesley, 356.
3. Brooks, Daniel R. and E. O. Wiley (1988), Evolution as Entropy: Toward a Unified Theory of
Biology, Second Edition, Chicago, IL: University of Chicago Press.
4. Flatow, Peter (1993), Why Some Companies Just Cant Reinvent Themselves, Making
News, 27(25 October), 4.
5. Byrne, Patrick (1993), Logistics Will Need Borderless Networks, Transportation &
Distribution, 34(June), 3739.
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6. Gupta, Udayan (1993), Enterprise: Costly Research Pays Off for Bio-tech Start-Up, The
Wall Street Journal, (2 August), B2.
7. Kirkpatrick, David (1993), Groupware Goes Boom, Fortune, 128(27 December), 99
106.
8. Kusnetzky, D. (2010), What is Big Data? [online] available at:
http://www.zdnet.com/blog/virtualization/what-is-big-data/1708 [Accessed 12 September 2013].
9. Information Overload, Economist, 327(26 June), 9091.
10. Sprout, Alison L. (1995), The Rise of Netscape, Fortune, (19 July), 140142.
11. This is compiled from Gelb, Betsy D., Mary Jane Saxton, George M. Zinkhan, and
Nancy D. Albers (1991), Competitive Intelligence: Insights from Executives, Business
Horizons, 34(January/February), 4347 and Motwani, Jaideep, Gillian Rice, and Essam
Mahmoud (1992), Promoting Exports Through International Trade Shows: A Dual
Perspective, Review of Business, 13(Spring), 3842.
12. Deveny, Kathleen (1993), Marketscan: Decaf Loses Favor with Seekers of Flavor, The
Wall Street Journal, (25 February), B1.
13. Churchill, Jr, Gilbert A. (1990), Marketing Research: Methodological Foundations, Fifth
Edition, Chicago: The Dryden Press.
14. Little, John D. C. (1979), Decision Support Systems for Managers, Journal of Marketing,
43(Summer), 11.
15. Spraque, Jr, Ralph H. and Eric D. Carlson (1982), Effective Decision Support Systems,
Englewood Cliffs, NJ: Prentice-Hall.
16. ORiordan, P. Declan (1987), The CIO: MIS Makes Its Move into the Executive Suite,
Journal of Information Systems Management, (Summer), 5456.
17. For a comparison of the benefits and costs of using each approach, see Prescott, John E.
and Daniel C. Smith (1987), A Project-Based Approach to Competitive Analysis, Strategic Management Journal, 8 (September-October), 411423.
18. McCarthy, Michael J. (1993), Marketing & Media: Pepsi Climbs Aboard Northwest
Airlines with Five-Year Pact, The Wall Street Journal, (15 April), B10.
19. These categories of competition are loosely based on those presented in Palamountain,
Joseph C. (1955), The Politics of Distribution,Cambridge, MA: Harvard University Press and
Thorelli, Hans B. (1986), Networks: Between Markets and Hierarchies, Strategic Management Journal, 7, 3751.
20. Pope, Kyle (1993), Computes: Dealers Accuse Compaq of Jilting Team, The Wall Street
Journal, (27 April), B1.
21. For an excellent discussion of the impact of network in channel relationships, see
Hakansson, Hakan II and Snehota, L. (1989), No Business Is an Island, Scandanavian
Journal of Management, 4(3), 187200.
22. See Arendes, Michael J. (1994), Traffic & Revenues Abound, Fleet Owner, 89(24
January), 3031 and Evans, Michael K. (1993), Trends to Watch for in 94, Transportation
& Distribution, (1 November).
23. Thompson, James D. (1967), Organizations in Action, New York: McGraw-Hill, 47.
24. Adapted from Stern, Louis W. and Torger Reve (1980), Distribution Channels as
Political Economics: A Framework for Comparative Analysis, Journal of Marketing,
44(Summer), 5264.
25. Kresch, Sandra D. (1983), The Impact of Consumer Trends on Corporate Strategy,
Journal of Business Strategy, 3(Winter), 2128.

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26. Paraphrased from the writings of Dean Roscoe Pound of the Harvard Law School in his
comments on justice. See also Corley, Robert N., O. Lee Reed, and Peter J. Shedd
(1993), The Legal and Regulatory Environment of Business, New York: McGraw Hill.
27. For a detailed discussion of the politics of exchange, refer to Buchanan, James M. and
Gordon Tullock (1971), The Calculus of Consent: Logical Foundations of Constitutional Democracy, Ann Arbor, MI: University of Michigan Press.
28. Reve, Torger and Louis W. Stern (1979), Interorganizational Relations in Marketing
Channels, Academy of Management Review, 4(July), 405416.
29. Pfeffer, Jeffrey and Gerald R. Salaick (1978), The External Control of Organizations, New
York: Harper & Row, 23.

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Module 6

Legal Developments in Marketing


Channels
Contents
6.1 A Historical Overview of Federal Legislation Affecting Channel

Practices ..................................................................................................6/2
6.2 Traditional Legal Issues in Channel Relationships ..............................6/6
6.3 Emerging Legal Issues in Channel Relationships.............................. 6/14
6.4 Moving Beyond Legality: Toward Ethical Channel Management... 6/19
6.5 Key Terms ............................................................................................ 6/22
Learning Summary ......................................................................................... 6/22
Review Questions ........................................................................................... 6/23

Learning Objectives
After reading this module, you should be able to:
Provide an overview of the US antitrust legislation that relates to marketing
channels.
Discuss the differences between per se- and rule of reason-based court decisions.
Discuss how existing legislation influences channel practices such as tying
arrangements, resale price maintenance, and dual distribution.
Discuss evolving legal issues such as slotting allowances and parallel import
channels.
Understand the difference between legal and ethical imperatives in channel
management.
Risk-taking involves any activity where there is a chance of loss. Decisions to take
part in channel relationships always expose each participant to various types of risk.
Many of these risks are economic, psychological, or social in nature.1 But channel
relationships also involve legal risks. Although one would assume clear guidelines
are in place that permit an accurate assessment of the legal risk associated with
channel decisions, this is not entirely the case. The judicial system that has evolved
to protect business interests still permits only educated guesses concerning the
legality of many channel activities. The US justice system colours most legal issues in
shades of grey, rather than in black or white.
US antitrust legislation is a model of flexible law, capable of evolving with changing times and unforeseen circumstances. As a result of its inherent flexibility, the
legality of several channel practices is far from clear and so the possible risks can
only be estimated. Antitrust law, for instance, is rarely certain. Instead, it depends
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ultimately on how judges and juries see the facts, then evaluate these facts based on
the law. Because laws are written and passed in Congress, it is impossible to separate
politics from US antitrust legislation. As such, the legal and political components of
the external environment are a distinct force in the CRM.
Firms that want to manage their channel relationships with the utmost efficiency
must understand the laws that apply to their particular marketing activities. Regardless of how they arise, legal problems in competitive markets can be neither avoided
nor resolved without a general understanding of the relevant laws. The laws defining
the nature of legal channel behaviours must be understood as a complete body, even
though that is not how they evolved. Otherwise, a course of action intended to
avoid or escape one legal transgression may only result in a firm being entangled in
the web of another law.
When developing channel strategies, managers must understand the laws affecting those strategies, as well as the legal defences available under those laws. Perhaps
most importantly, channel managers must also understand how the courts interpret
these statutes. These interpretations establish precedents regarding what is and what
is not acceptable channel practice. Finally, effective managers should be sensitive to
signals that suggest these legal roadmarks are likely to be redefined in the future. In
this module, we present an overview of the US laws affecting channels practices and
discuss their judicial interpretations. We also look briefly at what the future holds in
the way of emerging legal issues. Finally, we discuss the best means for staying clear
of possible legal difficulties by acting ethically.

6.1

A Historical Overview of Federal Legislation Affecting


Channel Practices
The US government seeks to harmonise profit-seeking behaviours with the interests
of various channel members, competitors, and consumers. Federal antitrust laws are
the most important tools in this undertaking. Antitrust laws seek to inhibit or
prohibit certain undesirable channel member behaviours. Antitrust laws also attempt
to shape channel structure along what the government views as more competitive
lines. The broad purpose of antitrust legislation is to introduce sound economic
analysis and rationality into the legal decision-making process. Still, this body of
antitrust legislation remains open to differing interpretation depending on political
or judicial thought/opinion.

6.1.1

Early Legislation
Antitrust law in the US generally rests upon three early statutes: the Sherman Act of
1890, the Clayton Act of 1914, and the Federal Trade Commission (FTC) Act of
1914. Section 1 of the Sherman Act prohibited contracts, combinations, and
conspiracies in restraint of trade all activities that would tend to lessen free market
competition. Section 2 outlawed monopolisation, attempts to monopolise, and
combinations or conspiracies to monopolise any part of the trade or commerce
among the several states, or with foreign nations.2

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Enforcement of the Sherman Act during its first two decades of existence was
unspectacular. However, two other landmark sets of legislation were passed in 1914
to give the paper tiger some teeth. The Clayton Acts first section outlawed
practices not covered by the Sherman Act and sought to restrain the growth of
monopoly before Sherman Act violations could develop. Section 2 prohibited price
discrimination that substantially lessened competition or tended to create a monopoly. Section 3 outlawed any tying clauses and exclusive dealing arrangements
tending to adversely affect competition. Section 7 forbade mergers which would
lessen competition. Section 8 prohibited interlocking boards of directors among
competing firms. As you can see, Sections 1, 2, and 3 each feature ambiguous
wording, leaving room for future subjective interpretations. The prevailing law of
the land was essentially in place by 1914, but the element of chance remains to this
day.
Proponents of antitrust efforts also saw the need for an organisation that would
perform both investigatory and judicial functions, and possess special competence in
matters of business. Such an agency was created with the 1914 passage of the Federal
Trade Commission (FTC) Act. Section 5 of the FTC Act also outlawed unfair
methods of competition, leaving the Commission and ultimately the US Supreme
Court the task of determining what practices were subject to this catch-all prohibition.3 Section 5s vague wording contributed a few more touches of grey to some
already subjective business activities.

6.1.2

Later Legislation
By 1936, it was apparent that stronger measures were necessary to protect smaller
and/or independent enterprises from larger firms predatory pricing. The Robinson-Patman Act attempted to do exactly that. As Wright Patman, the bills cosponsor, said, the legislation was designed to give the little fellows a square deal.4
In short, the Robinson-Patman Act heavily amended Section 2 of the Clayton Act.
It prohibited practices in which sellers charge different prices to different purchasers
of goods of like quality, where the effect may substantially lessen competition or
tend to create a monopoly in any line of commerce, or to injure, destroy, or prevent
competition with any person who either grants or knowingly receives the benefit of
such discrimination.5
In spite of its strong wording, three potential escape routes were then specified
for firms accused of price discrimination. The Robinson-Patman Act stated that
price discrimination may be justified if: (1) it is carried out to dispose of perishable or
obsolescent goods; (2) it merely makes due allowance for differences in the cost of
manufacture, sale or delivery resulting from differing methods or quantities in
which the offering is sold or delivered; or (3) it is effected in good faith to meet a
competitors equally low price.6
The act also prohibited the payment of brokerage commissions or any allowance
or discount except to middlemen actually performing services as independent
middlemen. No defences were permitted for this offence.
In 1948, the FTC released a report suggesting that if nothing were done in response to a recent flurry of merger activities, the giant corporations will ultimately

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take over the country.7 In response, Congress passed the Celler-Kefauver Act in
1950, which closed some loopholes in the Clayton Acts 7th Section. Mergers
between firms at different channel levels were also brought within the laws reach by
the Act. It stated that any merger, either horizontal or vertical, that inhibited free
market competition was illegal.
Since 1950, several lesser statutes have been passed that also affect marketing
channel behaviours. These include the Lanham Act (concerned with trademarks and
promotions); the Food, Drug, and Cosmetic Act (extending the Pure Food and
Drug Act, which created the Food and Drug Administration); the Consumer
Product Safety Act (which established the Consumer Product Safety Commission);
and various other statutes aimed at safeguarding the rights of consumers. Basically,
however, the legal playing field on which channel members perform today had
already been ploughed by 1950. But how the laws themselves are interpreted by the
courts continues to evolve.

6.1.3

The Per Se Rule versus the Rule of Reason


The Sherman Act forbade every contract, combination or conspiracy in restraint of
trade or commerce among the several states.8 Court decisions have interpreted this
language as making all activities aimed at fixing prices, restricting or pooling output,
or sharing markets on a predetermined basis, per se illegal, or illegal as such. To win
judgment under a per se rule, the US Justice Department only needs to prove the
existence of a certain prohibited practice and that this conduct falls within a class of
plainly anticompetitive practices.9 In other words, these three practices are subject
to prohibition and punishment each time they are detected. Their per se status
means that no inquiry into the organisations economic rationale for the practice is
required, nor is any examination of the consequences of the practice in the marketplace necessary.
The notion of per se illegality was introduced to provide more efficiency in the
courts. Rather than having to listen to every suit, courts can use the per se rule to
dispose of clones legal disputes involving circumstances similar to those of
previous cases coming before them. Those per se rulings must be based on
preceding case rulings. When a channel practice is per se prohibited, issues of legality
can be framed starkly in black and white.
Unfortunately, such clear-cut rulings are rare. This is because the Sherman Act
was also accompanied by a concept known as the rule of reason. When the rule of
reason is introduced, the courts undertake a broader inquiry into the facts associated with the dispute. The history leading up to the dispute, the reasons why the
practices were implemented, and the effect the practices had on competition in and
outside of the channel are also considered. The rule of reason was introduced
because during the early twentieth century many business leaders felt monopoly was
inevitable if more flexible interpretations of the Sherman Act were not employed by
the courts. The suppression of competition is automatically presumed for practices
falling clearly within the bounds of per se rules. By contrast, when the rule of reason
is invoked, the courts embark upon a careful factual inquiry to determine whether,
on balance, competition has actually been suppressed.

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The first risk an organisation assumes when it acts illegally in a channel is whether someone will detect the act. There are times, particularly in the short run, when
no one does or at least no one files a complaint. The Russian roulette really begins
when the rule of reason is used to resolve legal disputes in marketing channels as
illustrated in Time Out 6.1.

Time Out 6.1 ______________________________________________


A Long and Winding Road
The relevant product market for farm tractors includes all comparable brands
for which substantial cross-elasticity of demand exists. The relevant geographic
market for tractors includes the market as perceived by consumers. The
primary goal of antitrust law is to protect competition among brands. These
were the conclusions reached in a 1991 Supreme Court ruling.
The long and winding proceedings of the Tunis Brothers case began when the suit
was filed in 1982. The party who purchased the Tunis Brothers Company, which
at the time sold Ford tractors, failed to make the purchase contingent upon
obtaining the transfer to them of the Ford franchise. As it turned out, Ford did
not grant the franchise to the buyers of Tunis. Instead, Ford gave the franchise
to other firms. In response, the Tunis owners sued Ford, asserting various
antitrust- and fraud-based claims.
To win legal compensation under the Sherman Act using a rule of reason
analysis, a plaintiff must prove that: (1) the defendants contracted, combined or
conspired among each other; (2) the combination or conspiracy produced
adverse, anticompetitive effects within the relevant product and geographic
markets; (3) the objects of and the conduct pursuant to that conduct were
illegal; and (4) that the plaintiffs were injured as a proximate result of that
conspiracy. In this case, the Supreme Court directed its inquiry to the determination of the relevant product and geographic markets.
The court found insufficient proof of Fords market power to injure brand
competition significantly in the geographic area it prescribed. The court then
overturned a previous damage claim, which was in excess of $4 million, and
returned the case to a lower court for a new trial on the basis of fraud. After
nearly a decade of litigation, Ford and Tunis Brothers had been returned nearly
to square one.
Questions
What does this story tell us about the risks associated with channel litigation?
Adapted from Tunis Brothers Co., et al. v. Ford Motor Co., et al., CCH 69668 (CAN3, Dec. 1991);
BNA ATRR No. 1547 (9 Jan. 1992), 15 and Michels, Antony J. (1994), Its Time to Buy the Farm,
Fortune, (11 July), p. 28.
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6.2

Traditional Legal Issues in Channel Relationships


How does federal legislation affect business practices? In many ways, thats how.
Because it was designed to bring a wide range of business behaviours under its
dominion, US antitrust legislation is written in general terms and this affects a wide
range of business practices. Moreover, the FTCs and Department of Justices
enforcement policies have proven more permissive than the law would otherwise
suggest, and the courts have tended to rule in the favour of business over the
interests of consumers or competition.
Questionable pricing activities, however, have been subjected to particular scrutiny, with the practice known as resale price maintenance singled out for special
attention in recent years. Since 1950, mergers also have received special attention.
Still, a given mergers legal status has remained subject to the comings and goings of
Democratic- and Republican-dominated administrations, with Democratic administrations generally favouring consumer interests over the interests of business.
Additionally, in recent years, the US government has increasingly encouraged
Americas foreign trading partners to strengthen their own free competition laws
and to open their markets. American business can only view this as a positive
development.
How does Federal legislation specifically affect channel relationships? Six practices are of particular interest to us. These are: price discrimination, resale price
maintenance, vertical integration and mergers, dual distribution, tying arrangements,
and refusals to deal and resale relationships. Each of these channel practices and the
legislative acts that affect them are discussed below. They are summarised in Exhibit
6.1.
Exhibit 6.1

Summary of legislation affecting marketing channels

Year enacted Legislative act


1890
Sherman Act

1914

Clayton Act

1914

Federal Trade Commission


Tariff Act (Amended)
Robinson-Patman
Celler-Kefauver
Consumer Goods
Pricing Law
Vertical Restraints
Guidelines

1930
1936
1950
1975
1985

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Channel practices potentially affected


Resale price maintenance, illegal vertical
integration and mergers, exclusive dealings,
refusals to deal, resale restrictions
Tying contracts, exclusive dealings arrangements, dual distribution
Price discrimination, dual distribution
Parallel import channels
Price discrimination, promotional allowances
Horizontal mergers, vertical mergers
Resale price maintenance
Exclusive dealing arrangements

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6.2.1

Price Discrimination
Price discrimination involves the sale or purchase of a good or service at differing
price levels, when the differing prices are not directly related to differences in the
sellers cost. Buying and selling firms can each engage in price discrimination.
When a seller charges competing channel members different prices, the behaviour might be viewed as a reward to one channel member. However, if the channel
member receiving the lower price used its channel position to force lower prices,
such an action may be considered coercive. The Robinson-Patman Act makes it
unlawful for an organisation to knowingly induce or receive a discriminatory price.
Recent interpretations suggest the Act functions to equalise buying power so that
larger channel members do not receive better deals than smaller channel members.
Robinson-Patman also governs the fairness of promotional allowances granted to
customers.
In addition, the FTC Act interprets all coercive activity by larger or more powerful channel members as an unfair method of competition.10 Powerful buyers are
likewise prohibited from forcing special promotional allowances or other special
services from weaker suppliers.
Despite these legal positions, buyer-induced price discrimination is difficult to
prove and is widely practiced.11 Sellers frequently offer one buyer a lower price than
another on the same product or by awarding one of them a cash reward. Is this
price discrimination or good marketing? Marketing principles teach us to segment
based on shared characteristics. Some segments may be more prone to buying on
the basis of price than others. Segmentation strategies argue that marketers should
design a different marketing mix, including price, to each segment. Still, many
channel recruiters and managers currently suggest that too many new managers fail
to understand or realise that they cannot offer different discounts to competing
purchasers without considering certain issues.
There are times when the use of reward power is considered discriminatory. The
Robinson-Patman Act states that price discrimination must injure competition in
some manner to be declared illegal.12 Injury to competition may be shown at either
the primary, secondary, or tertiary level. Primary level injuries involve competition
among firms that are direct rivals. Secondary level injuries involve firms competing
with buyers to whom a discriminatory price has been charged. Tertiary level injury
involves firms competing with customers of a buyer to whom favourable discriminatory prices have been offered.13
On the other hand, the history of court rulings suggests that injury to competition will not be inferred when the price differentials are too small to have any
significant effect on sales or market shares. Nor will injury be inferred when the
discriminatory prices were in place for too short a time to meaningfully affect
channel member positions. For decades, experts have argued that the criteria used
to enforce Robinson-Patman conflict with the broader pro-competitive thrusts of
other antitrust legislation. At this point, price discrimination in vertical channel
relationships is per se illegal only if there is an expressed or implied agreement to fix
distributors or dealers prices. Otherwise, the issue of what is or is not an illegal
pricing behaviour remains up in the air.

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For instance, in recent years health maintenance organisations have been able to
force deep pricing reductions by telling manufacturers that they would eliminate
certain drugs from prescription lists used by member doctors. Meanwhile, drug
retailers having a broader customer base, such as Kroger grocery stores, must carry a
wider range of pharmaceuticals. Their ability to negotiate for lower prices is limited
because Kroger is unlikely to remove drugs from its shelves that customers might
request. Krogers drug prices are thus higher than many of its competitors.
In-store pharmacies have long been central to Krogers profit strategies. In response to these negative trends, Kroger and three other grocery store chains
brought suit against the Pharmaceutical Manufacturers Association (PMA).14 The
suit claims that the grocery chains pharmacy business had eroded in recent years
due to price discrimination and alleged that a violation of the Robinson-Patman Act
had occurred. In this case, unlike the Sherman Antitrust Act, Kroger and its fellow
plaintiffs do not have to prove a conspiracy existed. Instead, they need only show
that the PMA acted unfairly in pricing similar products for different customers.
Other pricing topics that fall into a legislative grey area are quantity and functional discounts. The provision of quantity discounts is a traditional channel practice.
Such discounts are offered based on the number of units purchased, size of load
received, or dollars spent by buyers. Quantity is an element of pricing that legally
justifies a sellers use of different prices for different customers. Thus, price differentials based on quantities are permissible if they represent true allowances for
differences in manufacturing, selling, or delivery costs. The FTC has, however,
denied larger discounts on orders placed by chains or cooperative buying agencies
where no savings were present in the cost of delivery, production, or promotional
efforts.
Suppliers routinely offer different prices to different types of distributors depending on the functions these channel members perform. Traditional trade or
functional discounts are straightforward in nature and are granted to wholesalers but
not retailers. However, difficulties arise when the performance of channel functions
is mixed or integrated across various channel levels. In todays marketplace, this is
increasingly the case. When retailers perform the functions normally provided by
wholesalers, price discrimination problems may arise. In 1990, the Supreme Court
ruled that all functional discounts not justified by the value of services rendered by
wholesalers or retailers may be illegal.15

6.2.2

Resale Price Maintenance


Resale price maintenance (RPM) occurs when a manufacturer sets the price at
which its product can be sold by independent wholesalers and retailers. Minimum
RPM occurs when the producers set only minimum resale prices, allowing distributors to charge higher prices. Conversely, maximum RPM occurs when producers set
only maximum resale prices, allowing resellers to charge lower prices. Supporters of
the practice argue that RPM protects the margin between retail and wholesale prices
from being eroded by potentially cut-throat competition. Advocates also suggest
that manufacturers benefit because retailers have more funds to spend on advertising and service, which in turn, supports the manufacturers brand.

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Minimum RPM also prevents retailers from using a manufacturers product as a


loss leader an item sold at a sharply reduced price. Loss leaders are intended to
entice customers to buy other goods at regular prices after they have entered a store
to purchase the loss leader item. Loss leaders can injure manufacturers reputations
for quality. They can also limit their access to other markets since retailers may not
carry items already discounted elsewhere.
Until 1975, anticompetitive price-fixing practice through RPM was exempted
from federal antitrust legislation by the Miller-Tydings Act of 1937 and the McGuire
Act of 1952.16 These acts exempted RPM for manufacturers in states that permitted
vertical pricing arrangements between manufacturers and retailers. This included
almost all heavily industrial states. However, with the passage of the Consumer
Goods Pricing law in 1975, the legal basis for exempting RPM from federal antitrust
legislation was removed.
All forms of RPM are now per se illegal under current interpretations of the
Sherman Act.17 The prosecution need not prove the RPM incident had anticompetitive effects. Nor can a manufacturer defend itself by demonstrating, for example,
how the RPM provided pro-competitive efficiencies that benefited consumers. Such
competitive effects could be balanced against other consequences of the RPM if it
were evaluated under the same rule of reason that applies to other vertical agreements.18
Despite RPMs current legal status, manufacturer efforts to influence the prices
charged by their channel partners have not disappeared. Manufacturers are concerned about their products image and find it in their best interest to provide
channel members with substantial profit margins. Higher margins allow intermediaries and retailers to provide better pre- and post-sale service.19 Tactics used to ensure
higher resell prices include manufacturers suggested retail prices, promotional
prices advertised on national, regional, or local television, or price-marking goods
prior to delivery.

6.2.3

Vertical Integration and Mergers


Vertical integration occurs when a firm owns and manages organisations at more
than one channel level. It emerges through the forward integration of manufacturers, backward integration of retailers, or through an intermediarys up- or
downstream expansion. Vertical integration is generally motivated by the pursuit of
more control over channel member behaviour and prices and/or economies of
scale.
Vertical integration can result from a firms natural growth and expansion. For
instance, a manufacturer might elect to develop its own warehousing or retailing
facilities or outlets. Integration is often pursued to guarantee that downstream
distribution outlets have timely and consistent access to products. This sort of
internal expansion falls under the authority of the Sherman Act, which prohibits
monopoly or attempts to monopolise any part of the trade or commerce among the
several states, or with foreign nations. But internal expansion is not prohibited by
Sherman unless the expansionary actions have the intent or effect of injuring

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competition. The Sherman Act, like most other antitrust legislation, highlights the
interrelatedness between the legal and the competitive environments.
Integration can also be achieved when one firm acquires the stock or assets of
another company operating at a different (vertical) or the same (horizontal) channel
level. This is known as a merger. Such external expansion is governed by the CellerKefauver Act. Celler-Kefauver prohibits one firms purchase of anothers stock or
assets if the acquisition or merger tends to substantially inhibit competition or
promote monopoly.
The courts have overturned many mergers and acquisitions since 1950. During
the same period, vertical integration via internal expansion has received favourable
consideration from the courts. The courts have operated under the assumption that
internal expansion expands investment and production and, thus, can promote
competition. By contrast, the courts have often ruled that vertical expansion
through merger removes another competitor from the market. A merger between
Brown Shoe, a major shoe producer, and Kinney Shoe Stores, at the time the
countrys largest chain of independent shoe stores, was voided for this reason. The
government ruled that the opportunity for other shoe manufacturers to reach the
end-user market would have been significantly reduced by the merger.20
The Federal Trade Commission also gets involved in matters pertaining to mergers and vertical integration. For example, in the past Pepsi and Coca-Cola have
moved to acquire competing brands and the FTC has raised antitrust objections to
the mergers which, had they gone through, would have given Coke and Pepsi too
high a percentage of the US soft drink market.
The anticompetitive effects of channel mergers sometime pop up in unusual
ways. In the mid-1990s, concert ticket retailer Ticketmaster absorbed its major
competitor, Ticketron. Rock concert prices appeared to rise significantly as a result.
In response, grunge rockers Pearl Jam brought suit against Ticketmaster, asserting
that a near-monopoly position allowed Ticketmaster to charge exorbitant fees for its
services. The case was settled out of court, but not before Eddie Vedders Seattlebased group reaped a whirlwind of goodwill from Americas rock fans.

6.2.4

Dual Distribution
Dual distribution occurs when the manufacturer of a branded good sells that brand
or essentially the same product under a different brand name to the same
market through two or more competing channels. Dual distribution is routine in
industries such as automotive tyres, personal computers, and paint. Suppliers of soft
drinks and snack foods also regularly engage in this activity. Dual distribution
usually reflects suppliers efforts to reach a new market or to adapt their products or
distribution practices to perceived differences among potential buyer groups.
Dual distribution is not per se illegal under federal antitrust laws. But critics allege
that dual distribution negatively affects independent distributors. When a producer
distributes through its own vertically integrated channel in competition with
independent channel members at wholesale or retail levels, the manufacturer may
use the company-owned outlets to undercut the independent intermediarys prices.

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If this activity tended to drive distributors out of business, it would violate the
antitrust provisions of the Sherman and Clayton Acts.

6.2.5

Tying Arrangements
The Clayton Act prohibits any contract for the sale or lease of goods that imposes a
condition that the purchaser shall not use or deal in the goods, supplies, or other
commodities of a competitor of the lessor or seller, where the effect may be to
substantially lessen competition or to create a monopoly. This portion of the
Clayton Act has relevance to three types of tying practices: tying contracts, full-line
forcing, and exclusive dealing arrangements.
Under a tying contract, the purchaser of some good say, a machine agrees,
as a condition of purchase, to buy the sellers supplies of some other commodity,
such as raw materials processed by the machine. This type of agreement shuts out
competing materials suppliers from the opportunity to sell the tied commodity to
the buyer. Again, competing sellers are edged out of the picture for the contracts
duration. Full-line forcing is a related issue. This practice, also known as full-line
pricing, occurs when dealers must carry a suppliers entire line in order to obtain
distribution rights to an especially desirable item.
Finally, in an exclusive dealing agreement an intermediary agrees to devote its
efforts exclusively toward distributing the product line of a particular manufacturer.
Handling competing manufacturers products is explicitly or implicitly disallowed.
For a distributors willingness to deal exclusively, manufacturers may grant their
dealers exclusive franchises. The legality of exclusive dealing agreements is governed
by the Sherman Act. Dealers given an exclusive franchise presumably derive benefit
from having to face less competition from other dealers handling the same product.
The development of exclusive dealing agreements also appeals to manufacturers
because such arrangements help attract dealers and ensure that the manufacturers
products will be merchandised with substantial attention and enthusiasm.
The three tying practices described above involve attempts to restrict competition that span different (usually adjacent) vertical stages in the distribution chain
between producers and users of a product. As such, the set of practices are jointly
known as vertical restrictions. The law on these vertical restrictions has evolved
along divergent lines.
The Clayton Acts wording appears to offer a flat, per se prohibition of practices
involving vertical restriction. However, the presumption against tying arrangements
is not nearly as strong as the per se rule against price discrimination. For tying
arrangements, antitrust violations will not be found unless a substantial volume
near monopoly-level of sales is foreclosed by the vertical restriction. For relatively
small marketers of unpatented goods, these conditions will likely never be satisfied.
Marketers of all sizes attempting to enter new markets through tying contracts are
usually safe from legal censure, as well. Furthermore, the courts have also been
willing to consider extenuating circumstances under a rule of reason. Extenuating
circumstances might include issues such as a sellers need to exercise control over
complementary goods or services to ensure the tying products satisfactory operation. Moreover, the courts will not punish purely voluntary or informal tying

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arrangements. For instance, buyers may habitually purchase a machine manufacturers products under the assumption that the product will work better or because
doing so makes production more convenient.
Franchise agreements that restrict competition among a manufacturers outlets
are not covered by the Clayton Act. At present, manufacturers are fully within the
law in limiting the number and location of outlets to which franchises are granted.
But when dealers agree among themselves to not pursue each others markets or
solicit the same customers, the law is violated.
These horizontal agreements between channel members represent conspiracies in
restraint of trade.21
Purely vertical restraints those imposed unilaterally by a manufacturer (or retailer) on its dealers (suppliers) have historically been viewed sympathetically by the
courts. Essentially, the courts concede that vertical agreements often promote
interbrand competition by allowing manufacturers (retailers) to achieve distribution
efficiencies. While some forms of vertical integration may well prove anticompetitive, vertical restrictions and exclusive territories are judged under a rule of reason.
The legality of exclusive dealing agreements remains unresolved. The Department of Justice did recognise the potential dampening effects exclusive dealings may
have on competition in its 1985 vertical restraints guidelines. The Justice Department also indicated that instances where the practice is likely to substantially
harm competition may prove unusual.22 In short, the courts are unlikely to react
harshly to exclusive dealing agreements unless the practice significantly raises rivals
costs of gaining access to input or distribution facilities and raises costs to the point
where the firm must raise its own prices.
Assertions of antitrust injury relating to tying arrangements continue to centre on
the harm done to the competitive marketplace rather than the injury incurred by any
particular competitor. For instance, a threat to withhold software service if customers did not also contract for hardware service was not viewed as an unlawful tie
under one rule of reason judgment. The plaintiff, Datagate Corp., is a supplier of
computer services and parts. Datagate sued Hewlett-Packard, Inc. (HP), accusing
HP of restricting its access to parts, service, and information. Datagate also charged
that HP illegally tied the sale of its software and hardware services together. No
injury was found because Datagate failed to show that HP service prices or profits
had increased during the period in question.23
Nor can a tying claim be upheld by the courts unless there is evidence of a conspiracy. In the early 1990s, Wang Laboratories, Inc. offered purchasers of personal
computers and hardware a maintenance service known as a WSS contract. Once
customers were under WSS contracts, to purchase software they also had to
subscribe to Wangs hardware maintenance programme. Systemcare accused Wang
of unlawful tying, asserting that Wang had used its substantial market power in
software support channels to eliminate competition in hardware maintenance
channels. Current interpretations of the Sherman Act require proof of a concerted
activity (i.e., a conspiracy) among two or more separate parties to sustain an illegal
tying claim. Since a company cannot conspire with itself, the district court granted
judgment to Wang.24 In this ruling, the right to compete vigorously was sustained.
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Time Out 6.2 presents an example of how situations pertaining to the legality of
tying arrangements contracts are not always as clear cut as legal statutes would
imply.

Time Out 6.2 ______________________________________________


Tying Arrangements: Sometimes a Matter of Life and Death
Funeral directors activities involve the sale of services, not goods. For this
reason, the District Court for the Federal District of Maine held that funeral
directors handling fees charged to consumers who purchase caskets from thirdparty vendors do not constitute an illegal tie to funeral services. Hence, the
imposition of such handling fees does not make funeral directors liable for
antitrust damages.
Several years earlier, the Greene County Funeral Association decided to place
an advertisement in a local newspaper warning consumers about out-of-town
salespersons who were selling vaults and caskets. At around the same time, a
local cemetery began selling vaults and caskets. In response, local funeral
directors began imposing casket-handling fees on funeral items not purchased
from them. Their reaction led directly to the Greene County Memorial Parks
(the cemetery) decision to file antitrust charges.
The courts ruled in the funeral directors favour, finding that their actions did
not coerce customers in their selection of caskets. Moreover, no evidence of a
concerted effort (a conspiracy) to impose casket-handling fees was found to
exist. Merely circulating a list of casket-handling fees charged by Association
members was viewed by the Court as insufficient evidence to sustain a charge of
price fixing in violation of antitrust law.
Questions
Do you think US antitrust laws were purposefully designed in ways intended
to introduce a measure of ambiguity into questions concerned with tying
contracts or exclusive dealings? Why or why not? In the future, are there
likely to be fewer or more legal disputes over tying contracts? How about
exclusive dealing arrangements? Why or why not?
Adapted from Greene County Memorial Park, et al. v. Greene County Funeral Association, et al., CCH
69947 (DC W PA, July 1992); BNA ATRR, 1576 (30 July, 1992), 133 and Lubove, Seth (1993), If
You Gotta Go , Forbes, (4 January), 16.
__________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

6.2.6

Refusals to Deal and Resale Restrictions


In the 1919 case now known as the Colgate Doctrine, the Sherman Act was
interpreted as not restricting organisations rights to:25
exercise [their] own independent discretion to the parties with whom [they]
will deal. And, of course, [these organisations] may announce in advance the
circumstances under which [they] will refuse to deal.

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In other words, marketers can usually choose to do business with whatever


channel member they want, and, prior to actually entering into a contract, can also
refuse to deal with whomever they want. In the case of existing contractual channel
arrangements, however, a channel members use of a refusal to deal is legally
restricted.
In particular, refusals to deal cannot be used punitively to eliminate channel
members who refuse to accommodate policies stipulated by a seller who may be
acting in restraint of trade. For example, Los Angeles-based Racket Doctor was
reducing its price on Prince rackets. In response, the manufacturer of Prince rackets
cut the Racket Doctor out of its distribution channel. The courts overturned
Princes refusal to deal, accepting the argument that Prince was trying to impose an
illegal resale price maintenance agreement on the Racket Doctor.26
Resale restrictions refer to manufacturers attempts to designate to whom and
in what geographic areas their products may be sold. For over 50 years the courts
used the rule of reason to judge whether particular incidents of resale restrictions
represent illegal restraints of trade. In 1967, the US v. Arnold Schwinn and Co. case
argued against the rule of reason approach. For years, Schwinn had informed
distributors that some retailers were not to receive its bicycles. But in this landmark
ruling, the court asserted that the Sherman Act made it unreasonable:27
for a manufacturer to restrict and confine areas or persons within which an
article may be traded after the manufacturer has parted with dominion over it.
Once the manufacturer has departed with title and risk, he has parted with
dominion over it, and his effort thereafter to restrict territory or persons to
whom the product may be transferred is per se a violation of Section 1 of the
Sherman Act.

For 10 years, the legal use of resale restrictions by manufacturers was essentially
eliminated by this decision. But then in 1977, in a decision involving Sylvania, a
manufacturer of television sets, the court ruled that disputes involving resale
restrictions should again be judged based on the rule of reason. This ruling stipulated that such judgments were to proceed on a case-by-case basis and that resale
restraints were no longer viewed as per se illegal if they did not have a dampening
effect on competition without redeeming value.28 While that seemed acceptable,
the notion of what constitutes sufficient redeeming value has remained subject to
further legal debate. Once again, we see that the legality of particular channel
practices often involves something of a matter of chance.

6.3

Emerging Legal Issues in Channel Relationships


Slotting allowances and parallel import channels are significant legally controversial
practices that have arisen relatively recently. Changing international business law is
also affecting channel relationships. Meanwhile, the US Congress has taken an active
role in designing regulations aimed at protecting consumer rights against the
possibility of unethical telemarketer practices, resulting in the Telemarketing and
Consumer Fraud and Prevention Act. The acquisition and use of mailing lists in

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direct marketing channels is also increasingly subject to legal deliberation at the


federal level.29

6.3.1

Slotting Allowances
Retail shelf space has become increasingly scarce as the number of new grocery
products introduced and stocked by the typical grocery store significantly increase.
In all consumer sectors, retailers now confront more product categories and brands
than ever before. This product proliferation has contributed to a shift of channel
power away from manufacturers and toward retailers. Naturally, competition among
manufacturers and wholesalers for this limited shelf space is fierce. The shift in
channel power structure and increased competition is evidenced by the growth of
slotting allowances paid by producers in recent years.
Slotting allowances are shelf space rental fees paid by manufacturers to retailers.
Slotting allowances are charged for two reasons. First, they offset retailers expenses
for handling product failures, including the removal of unsold stock. The costs of
initial shelf stocking and of updating inventory and information systems are also
offset. Second, slotting allowances help balance the supply and demand of scarce shelf
space. While the payment of stocking fees to retailers has existed since at least the
1930s-era A&P milk case (the incident most directly responsible for the RobinsonPatman Act), the practice has increased over the years.
In part, slotting allowance controversies arise because manufacturers and retailers
quibble over how to divide the economic gains resulting from their channel transactions. Manufacturers had their own way for a long time. But now, armed with
improved information scanning capabilities, retailers are trying to better their
position. At another level, slotting allowances could have potential anticompetitive
effects similar to those of resale price maintenance (RPM) because both practices
involve contractual provisions that can raise retailer prices and profits. When
slotting allowances are incurred, manufacturers must raise the wholesale price to
their retailers. In turn, this action effectively commits retailers to higher prices.
However, certain sellers, such as Kraft or Procter & Gamble, enjoy enviable
reputations for successfully bringing new products to market and therefore often
refuse (or are not asked) to pay slotting allowances. This strikes some as unfair
favouritism, and has contributed to a situation in which slotting allowances may
soon be viewed through the same lens as is RPM. If this occurs, slotting allowances
would be a violation of the Robinson-Patman Act.30 But for now, they remain legal.
Naturally, producers complain about having to bear the extra costs associated
with slotting fees. About 55 per cent of all food manufacturers promotional
expenditures including expenditures at the retailer and consumer level currently
go to slotting fees.31 Retailers defend their actions, claiming that producers frequently fail to act in retailers best interest. Retailers charge that producers too often try to
sell them products that their customers either dont want or need. Retailers may be
right.32
Major producers compete nationally, but virtually all retailers compete locally.
While the producer may be spending $10 million on a national ad campaign, what

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local retailers are really interested in is how much will be spent on advertising in
their local paper.
The day may come when manufacturers decide to pass on the cost of slotting
allowances in the form of increased consumer prices. This is not likely to happen,
however, unless their competitors do the same. As long as manufacturers can gain
channel advantages by not raising prices, they will probably continue to absorb
slotting allowances. So slotting allowances are only anticompetitive if manufacturers
collude to raise prices.
On the other hand, slotting allowances increase entry barriers for new grocery
products. Whether this is anticompetitive depends on other circumstances. For
example, if there are only one or two major producers of a particular product and
each pays slotting allowances to keep smaller competitors off supermarket shelves,
they might be guilty of anticompetitive behaviour.

6.3.2

Parallel Import Channels


A few years back it was possible for American consumers to buy a new MercedesBenz in Europe, pay to ship it home, and still save money simply by bypassing US
Mercedes dealers. Parallel import channels, also known as grey markets, arise
when an authentic, branded product comes into the domestic market of a foreign
country through unauthorised channels that rival the products authorised distribution system. Parallel import also occurs when branded products are exported but
returned to the home market, arriving to compete with merchandise moving
through the manufacturers authorised channels. These are known as reimports.
Some reimports are commercially motivated. For instance, merchants may purchase
goods overseas because they are less expensive and/or more easily available, and
then return the items to their country of origin. Other reimports are personally
motivated. Business or leisure travellers may bring branded merchandise back to the
US because it was cheaper in, say, Hong Kong or Amsterdam.
Grey market problems reached a critical point in 1988 when the Supreme Court
handed Kmart a victory.33 This landmark ruling decreed that American trademark
owners such as Cartier watches, Duracell batteries, and Seiko watches could not
prevent the unauthorised reimportation of products bearing their marks or names.
Legally speaking, an owners rights to control a trademark end once ownership
changes hands in this case, in either Europe or Asia. The Courts decision was
consistent with long-standing US Customs Bureau Practices. The letter of this law,
written in 1932, remains unchanged to this day. Exhibit 6.2 illustrates parallel import
channels using the Kmart case as an example.
The most common form of parallel import channels involves products made
overseas by American firms. The foreign producer may be a subsidiary, joint
venture, or some other business form which has a commonality of interests with the
American marketer. Typically, these foreign divisions of US firms then sell to
authorised dealers in their own country. But somewhere in the authorised channel,
marketing control is lost. As a result, the product gets into an unauthorised channel,
with some of it being exported to the US. Once in the US, these goods compete
with similar domestically produced products.

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The way in which the Kmart v. Cartier dispute was resolved made it clear that the
Tariff Act of 1930 does not protect the US firm in such situations. Although it was
the authorised trademark owner, the ruling disavowed Cartiers right to stop
unauthorised imports of its watches because the two producing entities were
deemed independent of each other.
Exhibit 6.2

Illustration of parallel import channels

Producer

Producer

(United States)

(France)

Authorised
intermediary

Unauthorised
intermediary

Authorised
intermediary

Consumers

Consumers

(United States)

(European)

Adapted from Weigand, Robert E. (1991), Parallel Import Channels Options for Preserving Traits in
Integrity, Columbia Journal of World Business, 26(1), 5360.

Unauthorised marketing channels in the US have a surprisingly long history. In


the 1880s, a European company granted Appolinaris of New York the exclusive
right to import Janos spring water from Hungary. At about the same time, an astute
trader named Scherer learned Janos water could be bought in Germany and
transported to America at a cost that would permit him to undercut Appolinaris.
Legal remedy was sought by Appolinaris, based on the grounds that Scherers
channel was not the one intended by Janos or Appolinaris. The New York District
Court agreed that Scherers parallel channel practices disrupted some well-laid plans.
Still, the goods were genuine. On that basis, it was decided that the practice could
not be legally halted.34 Some 35 years later in a Supreme Court case, an American
licensee of a French cosmetics manufacturer was unable to prevent the unauthorised import of certain cosmetics, even though it believed it held exclusive rights to
US distribution.35
Responding to these two cases, Congress inserted a new paragraph in the Tariff
Act of 1930. This insert declared that imports bearing trademarks owned and
registered by a US citizen, corporation, or association cannot be admitted unless
written consent of the owner is produced at the time of making entry.36 Later
Supreme Court judgments rejected this position, in effect implying that Congress
did not mean what it appeared to say. Finally, in the Kmart case, the Supreme Court
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held that Congresss intent was to protect only those American licensees marketing
products whose trademarks were owned by European or other foreign countries.
What does this interpretation really mean? It works like this: foreign manufacturers
sometimes license an American firm to be the exclusive importer of products
bearing a foreign name or trademark. These firms register the foreigners name,
agree to pay royalties and, thus, become legal trademark owner in the US.
Operating under the assumption that it alone will benefit, the American firm then
sets forth to develop a domestic market for the product.
Now suppose that a third party distributor in Hong Kong buys several lots of the
product, which had been intended for the Australian market. The third party then
ships these lots to Los Angeles for sale in America. However, the US Bureau of
Customs now interprets the 1930 Tariff Act in a way that effectively prevents goods
brought to the US by a third party distributor from entering the country. These
goods can enter the US only if the American licensee or trademark owner agrees to
their importation in writing. Since such agreement is unlikely, their entry is effectively denied. Still, US companies who were taking advantage of parallel import
channels were able to claim a victory because only a small portion of their merchandise falls into the foreign licensorAmerican licensee category.37
What should American manufacturers who are being victimised by parallel import channels do? Perhaps the most powerful reactive strategy available is to
terminate the opportunistic intermediary. As noted earlier, the Supreme Court has
consistently affirmed the Colgate Doctrines legitimacy. This precedent permits
sellers to announce conditions of sales in advance and to terminate buyers/dealers
who fail to abide by those conditions. Sharp Electronics decision to eliminate a
retailer which was able to cut prices because of its reimport connection was upheld
on these grounds. Although issues of RPM were also at stake, Sharp had not
attempted to fix a particular price.38 Apples policy statement for resellers is clear:
Any Apple dealer or value added dealer found to be in violation of [grey market]
prohibitions will be stripped of its authorised status.39
Terminating foreign distributors can prove either easier or far more difficult than
termination in the US. Manufacturers must exercise more caution in some countries
than others in selecting and policing their distributors policies. There are times
when terminating an intermediary in foreign markets can prove so costly that it is
simply not worth the trouble. At other times, local legal routines are an extraordinary barrier. For instance, Puerto Ricos legislation is notoriously protective of local
dealers. US manufacturers have reacted by shipping directly to Puerto Ricos endusers.40

6.3.3

International Business Law


Although international markets are complex and change is often the only constant,
it is important to point out that legal differences and higher risk should not necessarily be considered obstacles to international commercial dealings. What are
problems for some often represent international opportunities for other, more
venturesome channel members. Often the possibility of earning high returns makes

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international ventures worthwhile, particularly in emerging economies such as China


and Brazil where there are large populations of increasingly well-off consumers.
The Sherman, Clayton, and FTC Acts are all likely to significantly impact the
legality of transactions in international channels. The precise wording of the
Sherman Act suggests that it prohibits contracts in restraint of trade or commerce among the several states, or with foreign nations. The Clayton and FTC Acts
also define commerce to include foreign nations. In addition, two other acts impact
predominately on international channel relationships. The Webb-Pomerene Act of 1918
provides a limited antitrust exemption for mergers of competing businesses that
intend to engage in collective export sales. This exemption does not apply to
channel behaviours that harm domestic competitors of either of the merging firms.
The Export Trading Company Act of 1982 was enacted specifically to increase American exports. The Act reduced restrictions on trade financing and uncertainty
regarding when US antitrust laws apply to international channel transactions. This
legislation increased the export efficiency of US manufacturers and suppliers.
When these international antitrust provisions are enforced, the Department of
Justice focuses on protecting US consumers from anticompetitive effects. The
major distinction between domestic and international antitrust enforcements lies in
the regard that the US Justice Department must have for international comity.
International comity pertains to the courtesy and respect accorded to other countries
laws in international disputes. Before an activity is challenged as illegal, the Justice
Department must consider the interest of other nations that also have jurisdiction
over the transaction in question.41

6.4

Moving Beyond Legality: Toward Ethical Channel


Management
We hope it is clear to you by now that US business law antitrust law in particular
is a rather murky body. The ways in which current US business law influences the
legality of many channel practices are hardly predetermined. No one really knows in
advance when injury to competition will be claimed or how a rule of reason
judgment in a channel legal dispute will turn out. Because of this lack of clarity, the
safest policy for channel members is not to test their judicial fates by engaging in
legally risky business practices. How can an organisation accomplish this? To answer
this question, we first need to understand what the concept of law itself represents.
The law consists of principles and regulations established by a government that are
deemed applicable to a people. The law should only be viewed as a minimum
standard of ethical behaviour a baseline for the marketing concept-orientated
organisation. Thus, the moral organisation attempts to operate well above the minimum ethical standards prescribed by the law itself, in turn keeping its practices well
beyond the murky waters of US antitrust laws.
Ethical channel management aspires to compete vigorously and to succeed,
but only within the bounds of sound ethical principles standards predicated on
ideals such as a sense of fairness and justice.42 Of course, organisational goals
continue to stress profitability, but only within the bounds of obeying the law and
being sensitive to ethical standards. Illegal or unethical practices are by no means

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necessary for a marketing channels successful and efficient operations. In fact, quite
to the contrary, organisations will likely find that channel relationships unfold more
smoothly and with greater efficiency when others know they view unethical practices as unacceptable.
Developing ethical management practices means becoming sensitive to legal
issues in channels decision making. It also means avoiding those practices where
others are likely to be hurt. Ethical channel management can be encouraged by the
development of corporate codes of ethics. Such codes can only be developed on a
situation-by-situation basis. However, a framework outlining the basic nature of a
code of ethics is shown in Exhibit 6.3. Generally speaking, these codes should
provide ethical guidelines to managers for their conduct in their channel affairs,
thereby reducing their uncertainty and anxiety. With such guidelines in place,
managers will become reluctant to undertake illegal or unethically questionable
activities for fear of personal sanction. We will discuss codes of ethics in more detail
in Module 7. By encouraging high standards in their management and employees,
ethical organisations signal to suppliers and customers that they reject unethical
business behaviours. This minimises the possibility of lawsuits because it deters
questionable activities from which lawsuits might result. Ethical managers presumably understand and pursue the enlightened self-interests that are associated with
acting and responding in ethical ways.
Exhibit 6.3

Decisionmaking style

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Corporate ethics code: an instructive framework


Organisational orientation
Unethical management
Ethical management
Management decisions and
Management decisions and
behaviours signify an active
behaviours conform to standards
opposition to what is moral
of what is moral (ethical).
(ethical). Management decisions
Management decisions and
and behaviours are often
behaviours conform to profesincompatible with broadly
sional standards of conduct.
accepted ethical principles. An
Management demonstrates
active refutation of what is moral ethical leadership and behaviours
as a matter of course.
is implied by this leadership and
these behaviours.

Managerial
motives

Selfish. Management is strictly


concerned with its or the
companys gains.

If not pure, then at least morally


sound. Management desires
success and is willing to compete
vigorously to achieve it. However, pursuit of this success will
only unfold within the bounds of
sound ethical principles (fairness,
justice).

Managerial
goals

Profitability and organisational


success will be pursued at any
price.

Profitability will be pursued


within the bounds of legal
obedience and ethical standards.
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Legal orientation

Legal standards are barriers that


management seeks to overcome
in pursuit of its goals.

Management exhibits willing


compliance with the letter and
spirit of the law. The law
represents only minimum levels
of ethical behaviour. Management
operates well above what the law
decrees.

Channel
strategy

Management exploits all possible


opportunities for corporate gain.
Management cuts corners
whenever doing so is expedient.

Management operates and


behaves by sound moral principles. Management assumes
leadership position in channel
when moral dilemmas arise.
Management pursues enlightened
self-interest.

Adapted from Carroll, Archie B. (1991), In Search of the Moral Manager, Business Horizons, (MarchApril), 7
15.

The toy industry offers a useful illustration of ethical channel management in


action. The industry proactively adopted flammability standards that are stricter than
those imposed by US regulatory agencies. Other standards exceeding those of the
government were voluntarily established for properties such as toxicity and durability that also contribute to toy safety. Some individual companies elect to go further
still. For example, Hasbro, Inc. requires that its toys undergo psychological testing.
Items that might have a negative emotional impact on children are screened out.43
Firms in other industries have taken it upon themselves to exceed industry legal
norms as well. McCulloch Corporation, a chainsaw manufacturer, became dissatisfied with what it interpreted as the Chain Saw Manufacturer Associations refusal to
support higher standards of product safety. McCulloch had originally lobbied the
Association to have higher standards adopted. When these efforts failed, McCulloch
took the bold step of withdrawing its membership. The case of McCulloch also
illustrates how ethical channel management can set a firm apart in beneficial ways.44
As things turned out, the industry established standards exceeding governmental
regulations.45 But this took several years. In the interim, McCulloch enjoyed
significant advantages because its products featured chain brakes a safety feature
other manufacturers did not include in their products.
In the face of rising consumer expectations, increasing regulations, and more
lawsuits, this type of proactive behaviour can set the ethical company apart from its
competitors. Hard data bears out such a contention. Studies have shown that firms
with high legal standards, adhering to both the letter and spirit of the law, repeatedly
outperform broad stock market indicators over the long run. The Ethics Resource
Center examined 21 old-line US companies that maintain and are known for
enforcing codes of conduct that strictly delineate moral principles and legal standards. The results are instructive: had an investor placed $10000 in the 30 companies
of the Dow Jones Industrial Average in 1960, the investment would have been
worth $44666 in 1990. However, investing a like sum in the stock of those 21
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ethical firms would have yielded a return that was over nine times greater
$420307.46
In sum, ethical channel management apparently pays. In America, marketers
continually walk a fine line between being as successful as possible (i.e., carving
market niches for themselves by satisfying customers better than competitors and,
in effect, destroying the competition) and achieving a monopoly position (which is
generally illegal). The difficulty of this balancing act is compounded by: (a) the rule
of reason, which states that a channel activitys legality depends upon the circumstances surrounding it and (b) how vigorously the US Justice Department is likely to
prosecute possible antitrust infractions during a given era. In the face of this
constant uncertainty, a decision to practice ethical channel management substantially
lessens the likelihood that channel members will become unnecessarily exposed to
excessive levels of legalistic risk. A full discussion of how channel members may
ensure that ethical marketing practices are followed is offered in the following
module.

6.5

Key Terms
antitrust law
Celler-Kefauver Act
Clayton Act
dual distribution
ethical channel management
exclusive dealing agreement
Federal Trade Commission
full-line forcing
law
merger
parallel import channels
per se rule
price discrimination

reimports
requirements contract
resale price maintenance
resale restrictions
Robinson-Patman Act
rule of reason
Sherman Act
slotting allowance
tying contract
vertical integration
vertical restraints guidelines
vertical restrictions

Learning Summary
The US government seeks to harmonise the profit-seeking behaviours of channel
members with the interests of other channel members, competitors, and the
consuming public. Federal antitrust and pricing laws are the most important tools
wielded by the government in this quest. Antitrust law in the US generally rests
upon three statutes: the Sherman Act of 1890, Clayton Act of 1914, and Federal
Trade Commission Act of 1914. Jointly, this legislation inhibits or prohibits business
activities that represent unfair methods of competition and/or tend to lessen free
market competition. Pricing behaviours are governed principally by the RobinsonPatman Act of 1936. The Celler-Kefauver Act was passed in 1950 to regulate
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horizontal or vertical mergers that tended to inhibit free market competition. Both
of these later acts were passed to close loopholes in original antitrust legislation.
The Sherman Act introduced two important concepts. One is the per se rule. To
win judgment under a per se rule, a complainant need only prove the existence of a
certain prohibited practice and that this conduct falls within a class of plainly
anticompetitive practices. The other concept is known as the rule of reason. Under
rules of reason, the courts undertake a broader inquiry into the facts associated with
the dispute. Specifically, the history leading up to the dispute, the reasons why the
disputed practices were implemented by the accused firm, and the effect the
disputed practices have on competition in and outside of the channel are considered. When channel disputes arise, judgments are more likely to be based on the rule
of reason.
Several channel behaviours have traditionally been subject to evaluation under
antitrust and pricing legislation. These practices include price discrimination, resale
price maintenance, vertical integration and mergers, dual distribution, tying arrangements, refusals to deal, and resale restrictions. Each of the other practices is
prohibited when certain circumstances are present or when certain market conditions are met. The nature of these circumstances or conditions is, however, subject
to debate. More recently, the legality of slotting allowances and parallel import
channels have been called into question. Slotting allowances are currently legal.
Some types of parallel imports channels are viewed as illegal, while others are not.
To this day, the legality or illegality of several channel practices represents something of a game of chance. Since no one really knows in advance when an injury to
competition will be claimed or how the courts will rule, channel members should
avoid engaging in legally risky behaviours altogether. This goal can be achieved
through moral channel management. The moral organisation operates well above
the ethical standards prescribed by the law itself.

Review Questions
Short-Answer and Essay Questions
6.1

What was the earliest US antitrust law?

6.2

If you were prosecuted for resale price maintenance, what would be the verdict?

6.3

What law would most directly impact the merger of Staples and Office Depot (two
large retailers of office supplies)?

6.4

What is another term meaning full-line forcing?

6.5

Which law is the basis for the regulation of vertical restrictions?

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6.6

The day may come when manufacturers decide to pass on slotting allowances to their
customers. When, and if this happens, will slotting allowances be seen as anticompetitive?

6.7

Parallel import channels are more commonly referred to by another name? What is it?

6.8

Why was the notion of per se illegality introduced in the courts?

6.9

Discuss the following statement: Because quantity discounts are given on the basis of
number of units purchased, size of load, or dollars spent by the buyer, price differentials
that result from quantity discounts are always legal.

6.10 Despite the fact that resale price maintenance is per se illegal, manufacturers still try to
influence the prices charged by their channel partners. Why might a manufacturer be
opposed to a retailer using its product as a loss leader? How might a manufacturer try
to prevent its product being used as a loss leader?
6.11 Subway promises its franchisers that it will not open a new store within a road mile of a
current operation, without giving the closest franchiser an opportunity to buy the new
store. Can the Clayton Act protect a franchiser who cant afford to buy one of the new
stores that is being opened across the street from his or her Subway franchise? How?
6.12 You go to any produce section of any US supermarket, and youll find Colorado brand
potatoes, Dole brand pineapple, and Chiquita brand bananas. The trend is to attach
brand names to produce and to try to create brand equity for that brand name. Because
branding produce is such a relatively new concept, slotting allowances are uncommon
for fresh fruits and vegetables. Do you think there will come a time when slotting
allowances will be as common a concern for the producers of Sunkist brand oranges as
it is for the manufacturer of Martha White brand flour? Discuss your answer.

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Multiple Choice Questions


6.13 Antitrust laws:
A. seek to inhibit certain undesirable channel member behaviours.
B. have introduced sound economic analysis and rationality into the legal decisionmaking process.
C. remain open to differing interpretations depending on political or judicial
thought/opinion.
D. attempt to shape channel structure in accord with what the government views
as more competitive lines.
E. are accurately described by all of the above.
6.14 The Sherman Act:
A. outlawed all tying contracts.
B. outlawed exclusive dealing arrangements.
C. prohibited price discrimination.
D. outlawed monopolisation.
E. did all of the above.
6.15 The ____ Act prohibited any price discrimination, tying contracts, and exclusive dealing
arrangements that would tend to adversely affect competition.
A. Clayton
B. Federal Trade Commission
C. Sherman
D. Robinson-Patman
E. Celler-Kefauver
6.16 In May 2012 (before the London Olympics), Roger sold silk-screened Olympic T-shirts
to retailers for $10 per shirt. In September 2012, Roger was selling the identical shirts
to retailers for $3 per shirt. This price discrimination was made legal by the:
A. Clayton Act
B. Federal Trade Commission Act
C. Sherman Act
D. Robinson-Patman Act
E. Celler-Kefauver
6.17 Court decisions have decreed that the language of the Sherman Act makes all activities
aimed at fixing prices, restricting or pooling output, or sharing markets on a predetermined basis ____.
A. per se illegal
B. illegal under the rule of reason
C. legal but unethical
D. legal under the rule of reason
E. ethical and legal behaviour

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6.18 Clear-cut per se rulings are rare because the Sherman Act was accompanied by a
concept known as the ____.
A. equality principle
B. principle of objectivity
C. rule of reason
D. 80/20 principle
E. equity rule
6.19 ____ involves the sale or purchase of a good or service at differing price levels, when
the differing prices are not directly related to differences in the sellers cost.
A. Multiple-tiered pricing
B. Price discrimination
C. Price levelling
D. Resale price maintenance
E. Multiple-line pricing
6.20 Assume the owner of The Coral Reef, a pet store specialising in saltwater fish, ordered
Aqua Tongs for arranging items in deep saltwater tanks. She was told by the manufacturer that she must charge at least $39.95 for each 34-inch-long set of tongs and that
she could charge more if she thought her customers would pay more. In this situation,
$39.95 is the:
A. minimum resale maintenance price.
B. psychological pricing level.
C. lowest price in a multiple-tiered pricing system.
D. targeted price.
E. suggested retail price.
6.21 Why do manufacturers want resale price maintenance (RPM)?
A. So that retailers will have more funds to spend on promoting the manufacturers brand.
B. To keep retailers profits from disappearing as a result of cut-throat competition.
C. To prevent their product being used as a loss leader.
D. To protect the margin between wholesalers and retailers.
E. To do any or all of the above.
6.22 Nike owns and operates Nike Town, retail stores that showcase the manufacturers
athletic shoes and sportswear. This is an example of ____.
A. multi-channel distribution
B. a tying agreement
C. a merger
D. dual distribution
E. vertical integration

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6.23 Ponderosa steakhouse chain owns a meat distributorship as well as a beef-supply


company. It also owns shares in a research firm aimed at developing beefier and more
disease-resistant cattle. Ponderosa has engaged in ____.
A. multi-channel distribution
B. a tying agreement
C. a merger
D. dual distribution
E. vertical integration
6.24 ____ occurs when the manufacturer of a good sells that brand or essentially the same
product under a different brand name to the same market through two or more
competing channels.
A. Vertical restraint
B. A non-exclusive dealing agreement
C. Horizontal restraint
D. Dual distribution
E. A tying contract
6.25 Under a(n) ____, the Kaftan Linen Company only agreed to provide the red satin
tablecloths with gold embossed dragons to the Mandarin Garden restaurant if the
restaurant owner also agreed to buy all of its staff uniforms from Kaftan Linen.
A. exclusive dealing agreement
B. full-line forcing deal
C. vertical restraint
D. tying contract
E. trade restraint
6.26 ____ occurs when dealers must carry a suppliers entire line in order to obtain
distribution rights to an especially desirable item.
A. An exclusive dealing agreement
B. Full-line forcing
C. Vertical restraint
D. Dual distribution
E. Trade restraint
6.27 An exclusive dealing agreement occurs when:
A. an intermediary agrees to devote its efforts exclusively toward distributing the
product line of a particular manufacturer.
B. the manufacturer of a good sells that brand to the same market through two or
more competing channels.
C. a firm owns and manages organisations at more than one channel level.
D. one firm acquires the stock or assets of another company operating on a
different channel level.
E. dealers must carry a suppliers entire line in order to obtain distribution rights
to an especially desirable item.

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6.28 Which of the following are examples of vertical restrictions?


A. Tying contracts.
B. Exclusive dealing agreements.
C. Full-line forcing.
D. All of the above are examples of vertical restrictions.
6.29 Eastman Kodak wanted to monopolise the business of repairing Kodak copiers; so it
would not sell photocopier replacement parts to independent service contractors.
Kodak was using a refusal to deal in order to eliminate some of its competition. In 1992,
under the ____, the company was charged with acting in restraint of trade.
A. Celler-Kefauver Act
B. Federal Trade Commission Act
C. Lanham Act
D. Colgate Doctrine of the Sherman Act
E. Robinson-Patman Act
6.30 Slotting allowances:
A. are paid by retailers to manufacturers.
B. offset manufacturers expenses for product failures.
C. are rental fees paid by all retailers.
D. are the fees paid to retailers for handling a manufacturers products.
E. are a form of resale restriction.
6.31 Slotting allowances have potential anticompetitive effects similar to those of resale price
maintenance because both practices:
A. are tying practices.
B. shut out competing materials suppliers.
C. involve contractual provisions that raise retailers prices and profits.
D. require retailers to pay fees to manufacturers before they can carry their
products.
E. are types of vertical restrictions.
6.32 Janet bought a Dooney & Bourke leather handbag for $39.95 at a flea market. It was not
second-hand. She could have bought the identical purse at Macys $125.95. Assuming
the purse was not stolen, but was being legally sold at the flea market by an unauthorised distributor, you could say that Janet did business with a(n) ____.
A. speciality dealer
B. parallel import channel
C. underground channel
D. black marketer
E. reverse channel

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6.33 International comity refers to:


A. the agreement to abide by the ruling of UN mediators in any international
dispute.
B. the cost of doing business in a foreign country.
C. the rules and regulations governing commerce activities in a foreign country.
D. the courtesy and respect accorded to other countries laws in international
disputes.
E. none of the above.

Discussion Questions
6.34 Why are US antitrust laws important in harmonising profit-seeking behaviours among
various channel members?
6.35 Describe the difference between per se- and rule of reason-based court decisions.
6.36 Which three statutes in US antitrust law are the foundation for preserving free market
competition?
6.37 What is price discrimination? Why is it important to reducing channel conflict?
6.38 How does existing legislation influence channel practices such as tying agreements, retail
price maintenance, and dual distribution?
6.39 Describe how slotting allowances may be viewed as an impediment to free market
competition.
6.40 How does moral management in organisations foster legal compliance? Does it always
ensure legal compliance among channel members?

References
1. Kahneman, Daniel and Amos Tversky (1984), Prospect Theory: An Analysis of
Decision Under Risk, Econometrika, 47(March), 263291.
2. Thorelli, Hans B. (1954), The U.S. Federal Antitrust Policy, Stockholm: Stockholms
Hogskola, 223.
3. A series of Supreme Court decisions expanding Section 5s scope culminated in FTC v.
Sperry & Hutchinson Co., 405 U.S. 233, 244245 (1972). By this time Section 5s reach
included practices that, without having necessarily been previously considered unlawful,
offend public policy or cause substantial injury to consumers.
4. Business Week (1966), Robinson-Patman: Dodo or Golden?, Business Week, (November),
66.
5. Edwards, Corwin D. (1959), The Price Discrimination Law, Washington, D.C.: Brookings
Institute, 6.
6. Shelanski, Howard (1992), Robinson-Patman Act Regulation of Intraenterprise Pricing,
California Law Review, 80(1), 247287.

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7. U.S. Federal Trade Commission (1948), The Merger Movement: A Summary Report, Washington, D.C.: Federal Trade Commission, 68. Time and distance from the events have
revealed that the supposed merger-mania triggering the Celler-Kefauver Act was actually
of quite modest proportions.
8. Thorelli, Hans B. The U.S. Federal Antitrust Policy, Stockholm: Stockholms Hogskola, 223.
9. For comprehensive but somewhat dated critical analyses of the per se rule in action, see
Green, Mark J. (1972), The Closed Enterprise System, New York: Grossman, 442.
10. See for example Great Atlantic & Pacific Tea Co., Inc., et al v. F.T.C., 87 F.T.C. 99, S.Ct. 925
(1979).
11. Federal Trade Commission v. Borden Co., 383 U.S. 637 (1966).
12. The following cases set precedents in this area: Samuel H. Moss v. Federal Trade Commission,
148 F. 2d 378 (1945), and Federal Trade Commission v. Standard Brands, Inc., 189 F. 2d 510
(1951).
13. Federal Trade Commission v. Anheuser-Busch, Inc., 363 U.S. 536 (1960), 289 F. 2d 835 (1961).
14. Kansas, Dave (1994), Technology and Health: Four Grocery Store Chains Sue 16 Drug
Firms in Pricing Debate, The Wall Street Journal, (7 March), B6.
15. Hemminger, David G. (1991), Cost Justification A Defense With New Applications,
Antitrust Law Journal, 827854.
16. The original case declaring RPM illegal under the Sherman Act was Dr. Miles Medical Co.
v. John D. Park and Sons Co. (1911). The language of Dr Miles and other cases involving
collusion among competitors suggested that maximum RPM would also be illegal.
17. The Department of Justice can obtain injunctions and criminal penalties, the FTC can
obtain injunctions, and a State Attorney General can obtain damages for its residents.
Private plaintiffs generally seek damages but can also seek injunctions. If RPM arises
from a manufacturer or retailer cartel, it would be per se illegal as a horizontal conspiracy
to set prices. The Colgate Doctrine provides a minor exception to this rule in that a manufacturer may set resale prices as long as it unilaterally and immediately terminates retailers
for charging different prices. U.S. v. Colgate, 250 U.S. S. Ct 300 (1919).
18. In Continental T.V. v. GTE [1977], the Supreme Court held that the rule of reason would
apply to vertical agreements that restrict the territories in which retailers can distribute a
manufacturers product.
19. Fabricant, Ross A. (1990), Special Retail Services and Resale Price Maintenance: The
California Wine Industry, Journal of Retailing, XX(Spring), 101108; Sheffet, Mary Jane
and Debra L. Scammon (1985), Resale Price Maintenance: Is It Safe to Suggest Retail
Prices?, Journal of Marketing, XX(Fall), 8291.
20. Brown Shoe v. U.S., 370 U.S. 294, 325 (1962).
21. The precedent for this per se ruling was established by U.S. v. General Motors Corp., et al.
384 U.S. 127 (1966) and reaffirmed by U.S. v. Sealy, Inc., et al. 388 U.S. 350 (1967).
22. U.S. Department of Justice (1985), Vertical Restraints Guidelines, Washington, D.C.: U.S.
Department of Justice, (23 January), 1820.
23. Datagate, Inc., v. Hewlett-Packard Co., CCH 69523 (CA 9, Aug. 1991), BNA ATRR No.
1529, 205.
24. Systemcare, Inc. v. Wang Laboratories, Inc., et al., CCH 69829 (DC CO Mar. 1992), 1547, 15.
25. U.S. v. Colgate, 250 U.S. S. Ct 300 (1919).
26. Barrett, Paul M. (1991), Retailing: Anti-Discount Policies of Manufacturers Are
Penalizing Certain Cut Price Stores, The Wall Street Journal, (27 February), B1.
27. United States v. Arnold Schwinn and Co. et al., 388 U.S. 365 (1967).
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28. Continental T.V., Inc. v. GTE Sylvania, Inc., 433 U.S. 36 (1977).
29. McDonald, Bruce A. (1994), Protecting Your List From Wrongful Use, Catalog Age,
11(8), 97.
30. Partch, Ken (1990), Trophies of the Trade Wars, Supermarket News, (11 May), 2533.
31. Anonymous (1994), IRS May Spread Deduction for Slotting Fees for Five Years, Frozen
Food Age, 42(10), 67.
32. Chu, Wujin (1992), Demand Signaling and Screening in Channels of Distribution,
Marketing Science, 11(4), 327347.
33. K-Mart v. Cartier, Inc., et al., 486 U.S. 176 (1988).
34. Appolinaris Co., v. Scherer, 27 F. 18, SDNY (1886).
35. A. Bourjois and Company, Inc., v. Katzel. 692 U.S. SC, 689 (1923).
36. Tariff Act quote.
37. Weigand, Robert E. (1991), Parallel Import Channels Options for Preserving Territorial Integrity, Columbia Journal of World Business, 26(Spring), 5360.
38. Business Electronics v. Sharp Electronics Corporation, 486 U.S. SC 1005, Certiorari denied,
(1988).
39. Apple Computer, Inc. (1988), Transshipping and Mail-Order Policy Statement, Apple
Computer Inc., January, unpaged company document.
40. Weigand, Robert E. (1991), Parallel Import Channels Options for Preserving Territorial Integrity, Columbia Journal of World Business, 26(Spring), 5360.
41. Department of Justice Guidelines (1988), International Operations and Enforcement
Policy, CCH, TRR, No. 24, (10 November).
42. Adapted from Carroll, Archie B. (1987), In Search of the Moral Manager, Business
Horizons, (MarchApril), 715 and Manley, Walter W., III (1992), Handbook of Good Business Practice, London: Routledge.
43. Hollie, Pamela (1985), Seeking Safe Toys That Sell, New York Times, (10 February), 4F.
44. Vicker, Ray (1982), Rise in Chain-Saw Injuries Spurs Demand for Safety Standards, but
Industry Resists, The Wall Street Journal, (23 August), 17.
45. Chen, Frederick (1991), Quality Management in the Chain Saw Industry: A Case Study,
International Journal of Quality & Reliability, 8(1), 3139.
46. Manley, Walter W., III (1992), Handbook of Good Business Practice, London: Routledge.

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Module 7

Ethical Issues in Relationship


Marketing
Contents
7.1 Personal Conviction and Exchange Conviction ...................................7/2
7.2 Social Tact and Relationship Ethics ......................................................7/5
7.3 The Ethics Continuum ...........................................................................7/6
7.4 Ethical Dilemmas in Relationship Management ............................... 7/11
7.5 Moral Codes in Channel Relationships .............................................. 7/14
7.6 Model of Relationship Ethics............................................................... 7/17
7.7 The Components of an Ethical Exchange Process ........................... 7/21
7.8 Key Terms ............................................................................................ 7/22
Learning Summary ......................................................................................... 7/23
Review Questions ........................................................................................... 7/24
Learning Objectives
After reading this module, you should be able to:
Understand the importance of ethics in building and sustaining channel relationships.
Describe the ethics continuum and the balance of interest between buyers and
sellers.
Identify and discuss the basic ethical dilemmas that can arise in marketing
channels.
Distinguish between rules-based, consequence-based and experience-based
moral codes.
Describe individual, organisational, and environmental factors that affect a
channel members ethical or unethical behaviours.
Assess why codes of ethics offer no panacea for resolving ethical conflicts in
channel relationships.
Describe the four components which must be in place for an ethical exchange to
occur in a channel relationship.
In the Channel Relationship Model, ethical and social responsibility forces are
important components of the external channel environment. In this module, we will
discuss the nature of moral and ethical behaviour in marketing channels and the
delicate balance between the interests of buyers and sellers. We will then review
several ethical dilemmas encountered by channel members in the competitive
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marketplace. We also discuss a variety of approaches to moral decision making that


are available to help channel members resolve these dilemmas and present a model
of relationship ethics.
Most marketers agree that marketing decisions should be made in accordance
with accepted ethical principles. Ethics, after all, lay out the differences between
right and wrong. But just what is meant by the term ethics? A variety of definitions
have been offered:
Ethics refers to standards of right conduct.1
Ethics is an inquiry into the nature and grounds of morality where the term
morality is taken to mean moral judgments, standards and rules of conduct.2
Ethics comprise moral principles and standards that guide behaviour.3
Ethics is the art and discipline of applying ethical principles to examine and
solve complex moral dilemmas.4
Each definition is clearly concerned with the relationship between morality and
decision behaviour. We provide a definition of marketing ethics that summarises the
descriptions offered above: Marketing ethics refers to the moral standards that
underlie exchange processes. This definition is applicable to marketing channels
because it advances the position that ethics is predicated on interactive decision
behaviours.
Critics often charge that marketing is the functional area most likely to be the
source of unethical behaviour in a business.5 As evidence, these critics point toward
instances of deceptive advertising, unscrupulous sales tactics, misrepresented
product capabilities, and unfair pricing tactics. For more than a century, marketers
have been singled out as the perpetrators of unethical actions against consumers and
other businesses.6 This is because marketing is the business function most responsible for communicating with prospects and customers and satisfying their needs. As
such, the actions of marketers are clearly in the public view and susceptible to close
scrutiny.

7.1

Personal Conviction and Exchange Conviction


Channel members must balance their own moral needs, as reflected in their own
personal value systems, with the interests of a firms internal and external stakeholders. When they enter exchange relationships, channel members must consider the
interests of several firms, including their own.
In addition, a shared level of confidence, or conviction, in the justness of anothers behaviour must exist among channel members. When such personal conviction
does not exist, the efficiency of the channel is greatly reduced. Therefore, some
moral limitations on behaviours should be in place. These moral constraints will
enable channel members to execute exchanges and eventually build relationships.7
Channel members interests are best served by seeking a trusting relationship with
the various publics with which the firm is involved. In the process, [the best
interests of] society [are] also served.8

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This idea of a ripple effect where a single ethical marketing action leads to
others, which in turn facilitates still others, and so on has several implications. For
one, it indicates that personal convictions are interrelated and that each channel
members ethical convictions are linked to the ethical codes of other exchange
partners. Second, personal convictions affect societal outcomes. The outcomes of
any exchange are not limited to the parties directly involved in the transaction.
Moreover, personal convictions are manageable. Ethical dispositions reflect the
prevailing behavioural tendencies of individuals or organisations when they encounter ethical dilemmas. To some degree, a channel members ethical disposition is
manageable by others. Over time, variables in the channel environment may change
the channel members ethical beliefs.
Exchange conviction addresses the level of confidence and faith a channel
member is willing to invest in other channel members. Likewise, each party to an
exchange must have confidence that the other party is committed to doing the right
thing. Several factors influence exchange conviction:9
Performance Outcomes. A firms market value is based on performance
measures such as growth. Growth itself is measured through increases in quantifiable outcomes such as sales, market share, and profits. These outcomes, in
turn, usually contribute to increased capital investment in the firm and its operations. Presumably, this increased investment attracts more suppliers and
customers. This cycle sometimes results in environments that encourage the
pursuit of profits at any cost. An overemphasis on short-term performance can
contribute to breaches in ethics. Consequently, a persons belief in an exchange
partner is often tied to how ethically that partner deals with performance
measures such as profits or sales. Certainly, the pursuit of revenues at any cost
can undermine exchange conviction.
Competitive Arena. As competition intensifies, firms may be more likely to
engage in unethical practices to preserve their market position. A rudimentary
understanding of relationship marketing instructs firms to keep their customers,
no matter what the cost. But the costs associated with the types of actions necessary to retain customers are valued differently by various channel members.
Certain firms may be willing to do whatever it takes to counter competitive challenges. Again, the sense of one firms confidence in another may be strained as a
result.
Expediency. Individuals driven by a short-term view of their personal circumstances or of economic conditions tend to take the path of least resistance.
Witness the fact that many students will not voluntarily take the more difficult
courses associated with their curriculum even when such courses are the ones
most likely to positively influence their professional futures. Once a short-term
view is accepted as the norm in channel relations, it often becomes easier to take
a short cut on ethics to attain a firms performance objectives. Some exchange
partners may become relatively indifferent to ethical considerations in their attempts to gain market share or build sales volume. Ensuring the continuing
exchange conviction of exchange partners may become secondary to the considerations necessary to complete the transaction.
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Custom. Many people expect that used car salespersons use puffery to exaggerate product quality. Industry convention or custom is such that these or similar
actions are expected. Certainly, prospective exchange partners have less reason
to expect full disclosure of information (i.e., the whole truth) from used car
salespeople than they would from persons representing a pharmaceutical firms
interests.10 Channel members often use their experiences with industry custom as
cues for managing their confidence in the ethicality of other exchange partners.
A channel members value system provides a mechanism for maintaining or
regaining control in situations featuring moral dilemmas. The likelihood that a
channel member will opt for the moral choice substantially improves when the
proper value system is in place. Time Out 7.1 shows the importance of upholding
such value systems.

Time Out 7.1 ______________________________________________


Whistle-blowing
One leading whistle-blower law firm claims it has helped bring about recordsetting settlements, including a multi-billion-dollar health-care settlement against
a global pharmaceutical organisation and the largest amount ever paid against a
defence contractor in a qui tam case. But on the other hand, a consultant
neuropsychologist and head of neuropsychology at a leading hospital in the UK
was dismissed after voicing his concerns. Even after a tribunal ruled that he had
been unfairly dismissed he was never reinstated. Such examples typify the wins
and losses in the ethical minefield of whistle-blowing.
In the UK, specifically in the health sector, where billions of pounds annually are
allocated from the public purse, and allegations of waste abound, there are
growing concerns over the treatment of those who try to raise safety standards.
In March 2013, the head of the National Health Service (NHS) promised to
personally intervene in cases where whistle-blowers suffered harm to their
careers. Later, in June of that year, the UK government introduced new legislation to cover whistle-blowers:
Ensure that your whistle-blowing policy covers protected disclosures made
in the public interest. From 25 June 2013, a qualifying disclosure means any
disclosure of information that, in the reasonable belief of the worker, is
made in the public interest. Employers should amend the section of their
whistle-blowing policy that explains what constitutes a protected disclosure.
Remove the requirement in your whistle-blowing policy that disclosures
must be made in good faith. The requirement that a whistle-blower make a
qualifying disclosure in good faith is removed. Employers should amend this
section of their whistle-blowing policy.
Clarify that complaints about breaches of employees' own contracts of
employment should be raised as a grievance. A consequence of the new
public interest requirement is that employees will generally be precluded
from being able to blow the whistle about breaches of their own employment contract. Employers should ensure that this is explained in the policy,
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but also make it clear that an employee making such a complaint can still use
the employer's grievance procedure.
Make sure now that other employees do not mistreat whistle-blowers.
Whistle-blowers will be protected from suffering a detriment, bullying or
harassment from another employee, from 25 June 2013. Before that date,
employees who make protected disclosures are protected from adverse
treatment only in relation to their employer's activity. Employers should
update their whistle-blowing policy to make it clear that colleagues should
not mistreat a whistle-blower.
Will this legislation both encourage and protect whistle-blowing activities? Only
time will tell.
Questions
What other steps could companies pursue to further ensure the ethicality of
their corporate behaviours other than the threat of whistle-blowing?
Is there something about the public health sector itself or the health sector
in which it competes that makes it easier or more tempting to act in ethically
questionable ways?
Adapted from Phillips and Cohen Associates http://www.phillipsandcohen.com/ [Accessed 24
September 2013]; http://www.cipd.co.uk/hr-resources/factsheets/whistleblowing.aspx
Whistleblowing Resource Summary [accessed 24 September 2013]; Thiruchelvam, J (2013), Four
Changes to Whistleblower Law All Employers Should Know, [online] Personnel Today (25 June),
available at: www.personneltoday.com/articles/25/06/2013/59482/fc [Accessed 24 September
2013]; Sawyer, Patrick and Donnelly, Laura (2013), Protect Whistleblowers Say Consultant Who
Lost Job and Home After Raising Concerns, The Telegraph, (11 September), [online] available at:
www.telegraph.co.uk/health/healthnews/10080524 [Accessed 24 September 2013].
__________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

7.2

Social Tact and Relationship Ethics


Since the focus in this book is exchange relationships, it is crucial to acknowledge
that morality is a two-way street. Although each exchange partner possesses its own
value system, ethical behaviour in channel systems depends largely on a shared
morality between channel members. The study of business ethics has generally
adopted a one-sided, or monadic, perspective. A monadic perspective examines moral
issues at the level of an individual or single organisation and ignores the interaction
of individuals or organisations. This perspective leads to false assumptions. For
instance, a monadic view implies that individuals ethical dispositions are formed in
isolation from their role in the social system. But this is clearly not the case. The
ethical disposition of individuals is affected by their memberships in an industry and
society. The ethical attitudes and behaviours of family, friends, co-workers, and
various publics also influence these ethical dispositions.
The CRM highlights how the ethics environment is anything but one-sided. In
fact, the ethics environment envelops the channel members and their internal
environment throughout the entire interaction process. In this way, the CRM
illustrates how channel members interact within a social system. It also implies that
we should adopt a dyadic perspective when studying the issue of morality in channel

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relationships. Rather than focusing on individual exchange partners, the dyadic


perspective focuses on the morality present in the exchange process itself.11 This
dyadic perspective allows us to see how the morality of each channel members
decisions are influenced by the values and behaviours of other channel members
involved in the exchange.
Similarly, a persons workplace ethics cannot be separated from the social system
in which the individual operates. This condition is reflected in the concept known as
social tact. Social tact describes individuals ways of dealing with others in their
environment. Social tact evolves over time. As a result of social tact, the relative
social status of the persons involved in an exchange dictates, in part, what constitutes appropriate behaviour.12 For relationships to flourish, exchange partners must
modify their ethical behaviours to correspond with the behaviours of other exchange partners. This leads us to a concept known as relationship ethics.
Relationship ethics describes the process by which organisational ethics are
adapted to suit the needs of particular exchange relationships. Each channel
members representatives individual employees who interact on behalf of their
respective firms are responsible for preserving the moral footing of a relationship.
The preservation of any exchange is based on maintaining a balance between
organisational, environmental, and individual employee concerns. Whether at the
individual or environmental level, the interaction process itself supplies the basis for
ethical or unethical (un/ethical for short) decision making. Thus, a decision to act
ethically or unethically should not be viewed as an aggregate of two unit-level
(individual) dispositions. To do so ignores the interactive nature of morality in
marketing channels.

7.3

The Ethics Continuum


In marketing channels, one firms actions can affect another firms actions in many
ways. But the most ethically relevant transactions are those in which the channels
partners personal or economic well-being is likely to be affected. These are most
apparent in their negative forms for instance, when one person coerces another. A
delicate balance exists between exchange partners. Breaches of ethics will reduce the
level of cooperation present in any exchange.
To illustrate, consider the buyerseller relationship. Generally, buyers are aware
of sellers persuasive tactics. No problem there, as such tactics are to be expected.
But other questions follow from this awareness: Is the seller accurately representing
their products or services qualities? Is the seller an honest person? Is the seller truly
interested in the buyers welfare? Collectively, such questions and others like them
are used to evaluate the seller.
On the other side of the relationship, sellers must pay careful attention to customers behaviours and body language. Is the customers interest genuine? Is the
customer providing a true account of his or her financial standing? Is the customer
going to follow through on his or her commitments? These questions and others
like them may be used to evaluate the intentions of the customer.

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Exhibit 7.1

The ethics continuum as an exchange scale

Ongoing
reconciliation

Sellers inte

rests favoure

Caveat
emptor

Buyer s inte

rests favoure

Caveat
venditor

Codes
of
ethics

This balance between the essentially opposing views held by buying and selling
channel members is reflected in an ethics continuum.13 The ethics continuum can be
viewed as if it were an exchange scale, as illustrated in Exhibit 7.1. One end of the
scale is weighted by the self-interests of the seller. The nature of this weight is
reflected in the well-known expression caveat emptor buyer beware. On the other end
of the scale is the conflicting stakeholder interest of the buyer. This interest is reflected
in the expression caveat venditor seller beware. Lets look at each of these conflicting
interests in relation to the scales fulcrum: the code of ethics.

7.3.1

Caveat Emptor
The caveat emptor ideology is based on the belief that the pursuit of profit maximisation is the overriding organisational ethic. This view dictates that the moral
baseline provided by the law (discussed in Module 6) represents the only constraint
on ethical business practice. The goal is to maximise profits within the constraints of
laws and regulations.
When caveat emptor genuinely applies within a channel relationship, the seller
need only ask whether the buyer can legitimately expect ethical marketing behaviours based on some legal or contractual right. For example, borrowers have a legal
right to ethical disclosure of the facts concerning a loans effective rate of interest
that is based on federal truth-in-leading statutes. Likewise, when individuals contract
with real estate agents with the intent of selling property, they have a contractual
right to a full and truthful disclosure of what their agent knows about the transaction. In many channel relationships, however, there is no regulatory basis that
prescribes what level of information should be exchanged among channel members.
This often creates an ethical dilemma. One means of resolving such predicaments is
described in Time Out 7.2.

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Time Out 7.2 ______________________________________________


Want to Have Ethical Marketing Channels? Thats Easy: Everyone
Has to Tell the Truth!
The deceptively simple matter of truth-telling presents an ongoing problem for
all business practitioners. No matter what business scandal you consider, it
usually involved some aspect of a failure to tell the truth. Whether the misrepresentations have been targeted toward customers, stockholders, or regulators,
truth is apparently not always highly valued by many in business.
A fundamental problem associated with the issue of honesty in business, then, is
how to motivate people to do what they already know is right: to avoid violating
culturally accepted standards of honesty. A related issue involves whether
absolute truth-telling standards (e.g., fully disclosing all information) apply in a
given situation. This makes ethical decision making harder than many would
otherwise assume it to be.
The issue of full disclosure extends to all manner of transactional dilemmas in
which businesspeople do not know whether, or to what degree, full disclosure
of information is required. Should suppliers ever promise delivery on a date
they know cannot be met if similar representations are common within their
particular industry? Are negotiators in channel relationships ethically obligated
to fully disclose the truth about their full offers? The issue of how much information the ethical marketer is obligated to disclose in such situations is difficult
to resolve. Marketers facing such decisions are torn between absolute moral
standards requiring truth-telling and a need for realistic and effective marketing
practices in a world that is extremely competitive.
Questions
Is it really reasonable to expect business people to tell the truth to one
another in marketing channels? Can marketers ever tell the truth without
fully disclosing all the facts that are relevant to a particular exchange interaction or exchange relationship?
Adapted from Hamilton, Brooke and David Strutton (1994), Two Practical Guidelines for
Resolving Truth-Telling Problems in Business Transactions, Journal of Business Ethics, 13, 899912
and Smith, C. Jr (1992), Economics & Ethics: The Case of Salomon Brothers, Financial Management Collection, 7, 38.
__________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

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Caveat emptor usually applies when one or more of the following conditions
exist in a channel setting:
Non-subscription to the marketing concept. As discussed in Module 4,
channel members do not always adhere to the principles of the marketing concept. In so doing, the channel member fails to accept the argument that
customers and their satisfaction exist as the focus of all marketing mix decisions.
Instead, they have a production- or sales-oriented view of exchange.
Ignorance of customer needs. Through an error of omission or commission,
channel members are sometimes unaware of customers needs. Channel members may also misinterpret customer needs in situations involving ethical
uncertainty. By default, the channel member is forced to resort to the law as a
minimum baseline for providing ethical guidance.
Short-term profit goals. Channel members under pressure to demonstrate
profitability in the short run are more likely to engage in opportunistic or exploitative behaviours. The drive for bottom-line performance can often supersede
any consideration of the methods or tactics employed.

7.3.2

Caveat Venditor
The concept of caveat venditor anchors the other end of our ethics continuum. The
school of caveat venditor seller beware draws on the pursuit of customer
satisfaction as its organisational ethic. Caveat venditor, however, is customer
satisfaction taken to its extreme.
Lest we think sellers are the only potentially unethical channel members, buyers
themselves sometimes engage in norm-violating behaviours that damage exchange
relationships. The opportunity for buyers to engage in unethical practices basically
exists as a counterweight to the opportunity that sellers have to engage in exploitative behaviour without regard for ethical or moral principles. Such unethical
customer practices could include price tag switching (misrepresenting an exchange
value), purposely delaying payments or deliveries to fellow channel members,
reporting false shortfalls in shipments, and/or intentionally damaging merchandise.
This list is far from complete, but it should give you an idea of the many opportunities that buyers have to exploit sellers in channel relationships. These practices are
cumulatively known as buyer backlash.
Buyer backlash may occur at any level of a marketing channel. However, this
inversion of how marketing ethics is conventionally viewed holds particular concern
to retailers. Consumer-initiated shoplifting and other forms of fraud cost retailers
and wholesalers billions of dollars annually because of increased personnel and
security system requirements and actual spoilage.14 Buyers may rationalise away guilt
associated with such misbehaviour.

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Exhibit 7.2

Rationalisation of unethical buyer behaviour

Listed below are justifications or rationalisations that buyers often use to explain
away their personal responsibility for ethical misdeeds they commit against sellers
in channel relationships:
Denial of responsibility. Buyers deny personal accountability because, according
to them, factors beyond their control were operating. For example, a buyer may
rationalise delayed shipments by blaming third-party delivery services.
Denial of injury. Its no big deal, nobody got hurt, is something that buyers often
suggest about an exchange impropriety they may have committed. For example, a
buyer may suggest that returning unwanted goods as damaged is normal in this
industry. The buyer may further rationalise the propriety of an action by suggesting
the amount involved is tiny when compared to the total amount of business he or
she transacted with this seller.
Denial of victim. Buyers rationalise their unethical business practices as a countervailing mechanism for a sellers exercise of power. Here, buyers may suggest that
their actions only countered the ongoing lack of attention a seller gave to their
needs.
Condemning the condemners. In this justification, buyers deflect accusations of
their own misconduct by pointing out that others have also engaged in similar behaviours. These buyers are suggesting that the unethical practice is the normative
behaviour. This is dangerous rationalisation because it suggests no social tact is operative in the exchange process.
Appeal to higher loyalties. Buyers argue that their behaviour results from an
attempt to fulfil some higher-order ideal or value. For instance, unethical buyers
might retort, I know that [behaviour] was questionable but I had to compensate my
own hard-working employees who are supporting their families. Such a rationale for
a delayed payment to a vendor suggests the buyer was acting with some other higher-priority value in mind. At the same time, this justification deprioritises the values
of ones exchange partner.
Adapted from Grove, Stephen J., Scott J. Vitell, and David Strutton (1989), Non-Normative Consumer
Behaviour and the Techniques of Neutralization, Marketing Theory and Practice, Terry Childers, et al., eds,
American Marketing Association: Chicago, IL: 131136 and Strutton, David, Scott J. Vitell, and Lou E. Pelton
(1994), How Consumers May Justify Inappropriate Behaviour in Market Settings: An Application of the
Techniques of Neutralization, Journal of Business Research, 30(3), 253260.

If these attempts at self-justifying ones misactions are successful, unethical customer actions become more likely. The means by which buyers may rationalise their
misbehaviours are summarised in Exhibit 7.2. Our ethics continuum suggests that
channel members on either side of the exchange relationship may be modifying the
norms, rules, and standards governing their exchange behaviours over time and
across circumstances. Such changes are, in many instances, based on the varying
needs of the stakeholders who influence the exchange relationship.

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7.4

Ethical Dilemmas in Relationship Management


No area of marketing is as dependent on exchange relationships as channel management. Channel management also creates a wide range of situations which
potentially generate ethical dilemmas. The channel activities receiving the most
ethical attention typically fall within one of four categories: exclusionary tactics,
diverting practices, repressive control manoeuvres, and anticompetitive channel
promotions.

7.4.1

Exclusionary Tactics
Exclusionary tactics are intentional strategies aimed at restricting normal channel
flows in a distribution system. Exclusionary tactics may be observed in a variety of
market actions. For instance, channel members are sometimes granted exclusive
distribution rights for a product or service line. Some consider this practice unethical because the free market system is impeded. Others view exclusionary practices as
necessary rewards granted to selected channel members in return for their superior
performance.
There are certainly times when exclusive dealings and exclusive territories are
used legitimately to protect interbrand competition by minimising intrabrand
competition. This enables both manufacturers and resellers to concentrate their
efforts on building and protecting brand equity. Excessive intrabrand competition
produced by widespread distribution can erode a brands image. However, when
certain channel members are accorded special distribution privileges, barriers to
market entry by new competitors are sure to arise.
Exclusionary practices do not always originate from the actions of manufacturers.
Today, the consolidated power enjoyed by mega-retailers may allow them to block
the full market distribution of goods and services, effectively keeping some manufacturers out of the market. As one retailing expert puts it, toy manufacturers
without distribution ties to Toys R Us are going to be in trouble because Toys R
Us controls about 25 per cent of the US toy market. Similarly, Walmart and Kmart
know they can provide significant market share to a manufacturer just by carrying its
goods. Consequently, the two giants wield considerable power over price and selling
terms.15

7.4.2

Diverting Practices
Diverting practices refer to the unauthorised distribution of products. One way
this is accomplished is through grey marketing. Recall from Module 6 that grey
marketing describes a situation in which a manufacturers authorised distributor sells
through unauthorised intermediaries. This practice often involves the unauthorised
distribution of branded products in other countries. As we discussed at length in
Module 6, when it occurs in an international context, grey marketing is also known
as parallel import channels.
Grey marketing damages channel relations because channel pricing strategies are
thrown out of kilter. Normal profit margins can no longer be earned by legitimate
channel members because the unauthorised intermediaries undercut dealer prices.

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Additionally, unauthorised distributors rarely offer the same service as authorised


dealers. Such behaviours can lead to high levels of customer dissatisfaction with
brands over which manufacturers actually have little control. In short, grey markets
can influence pricing policies and may affect distribution policies and changes in
buyer behaviour. Perhaps more importantly, grey marketing often generates
animosity among the parties involved.16

7.4.3

Repressive Control Manoeuvres


The practice known as repressive control manoeuvres also has ethical implications.
Repressive control manoeuvres describe coercive attempts to manipulate another
channel members business practices. One of the most common repressive control
manoeuvres is full-line forcing, the practice of offering distribution rights only to
those intermediaries who agree to carry a manufacturers entire product line.
Essentially, this involves an all-or-nothing policy aimed at securing full-line exposure.
Clothing makers have long pursued such a policy. In the past, Levi Strauss forced
many retailers to carry its whole line. Most retailers found it difficult to refuse; after
all, Levis have been the top selling brand of jeans in the world for years. Could
retailers afford to say no? In many instances, they could not. A US Mazda distributorship used a more subtle approach by tying dealer availability of the high-demand
Mazda RX-7 to sales of its less popular Mazda 323. Large dealers who could afford
to offer deeper discounts on 323s gained access to more RX-7s. The courts upheld
this practice, stating it was acceptable to use the sales of one product as an incentive
to dealers. These sometimes morally questionable channel tactics also include the
vertical price-fixing or resale price-fixing practices discussed in detail in Module 6.
Repressive control manoeuvres sometimes end up being reflected in the nature of
the channel structure itself. Authorised dealers often give up substantial control to
manufacturers to win distribution rights. Repressive control manoeuvres may be
even more common in contractual channel systems such as franchising agreements.
Franchise agreements usually specify from who the franchisee can buy, how much
the franchisee will charge for its products or services, and what its operational
procedures are. Franchisees enter into these agreements recognising that franchisers,
at least initially, can repress their freedom to act in their own best interests. These
issues are discussed in greater detail in Module 14.

7.4.4

Anticompetitive Channel Promotions


A set of practices known as anticompetitive channel promotions has received the
greatest media attention for its potential ethical dilemmas. Anticompetitive channel
promotions involve efforts by one channel member to control the distribution of its
products. Examples of anticompetitive channel promotions include brand discounts,
aggregate rebates, demand signalling, and slotting allowances. Brand discounts are
often provided to a channel member in return for shelf space. These discounts often
turn into clandestine pricing tactics in which greater shelf space is traded off in return
for lower prices. A producer may offer retailers who are willing to give its products
more shelf space the opportunity to earn higher margins. Whats the harm? First,

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manufacturers who give brand discounts are usually large manufacturers who control
many product lines. These discounts may eliminate the opportunity for small, limitedline producers to obtain shelf space. Furthermore, these discounts drive up overall
consumer costs because generic alternatives and lesser-known, presumably less
expensive brands do not have the built-in margins for such leverage. They simply
cannot compete on this basis. As a result, competition is dampened and customer
choices are limited.
Aggregate rebates are currency or merchandise credits offered on the basis of
total line sales. For example, if Procter & Gamble offers an aggregate rebate on all
of its detergent products, the retailers best interests are served by giving more and
better shelf space to Procter & Gambles lines. Another method of anticompetitive
promotions is demand signalling, which describes the manufacturers use of prelaunch advertising and skimming wholesaler pricing to convince retailers that its
new product is a winner. This practice has proven very deceptive to intermediaries.17
The most prevalent form of anticompetitive channel promotions is slotting
allowances, which we defined in Module 6 as shelf space rental fees paid by
manufacturers to retailers. Slotting allowances are also called street money or placement
fees. Because these fees or merchandising credits are often negotiated orally and in
private, little public data is available on the scope of slotting allowances. But they
may account for up to one-third of all expenditures producers make on trade
promotions. It is not unusual for bigger retailers to insist on as much as $100000 to
shelf a product line. Slotting allowances do provide retailers with a way to counter
producers repressive control tactics. However, some producers accuse retailers of
employing slotting allowances as proactive, profit-centred methods of culling out
less desirable suppliers and manufacturers. Still, without slotting allowances, one can
only wonder on what basis supermarket retailers would decide how to allocate their
shelf space among the thousands of new grocery products introduced each year.
Do slotting allowances harm channel relationships? Probably. As one expert has
stated, Slotting allowances, the death knell for new products, hurt manufacturers,
retailers and consumers.18 Slotting allowances hurt manufacturers because the
practice increases the cost of introducing new products and could ultimately restrict
research and development spending. If this occurs, customers may find they have
fewer and higher priced new products to choose from. Retailers have created a
situation where producers often bid against one another to obtain a retailers
agreement to carry their product. Manufacturers have been known to retaliate
through the use of full-line forcing.
While this is by no means an exhaustive list of the practices that warrant ethical
concern, it does highlight the importance of establishing social tact in channel
relationships. As we discussed earlier, social tact is a process by which organisational
ethics are adapted to suit the needs of distinctive exchange relationships. Social tact
emerges from each organisations value system. In turn, each organisations value
system is ultimately affected by the moral codes it has in place. The issue of how
moral codes affect an organisations value system is discussed in the next section.

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7.5

Moral Codes in Channel Relationships


Attaining or sustaining social tact becomes increasingly difficult as exchange
processes become more complex. So how can social tact best be achieved in
marketing channel relationships? The answer lies within the marketing channel
itself: each channel firm conducts all of its channel affairs based on individual moral
codes.
Moral codes deal with how channel members use rules and standards to tell
right from wrong. Issues of right and wrong in channel relationships are not always
cast in black and white. Consider the case of BMJ, Inc., a former dealership for
Chryslers Jeep and Eagle brands. BMJ brought legal action against the car maker,
charging that Chrysler did not treat all dealers fairly. BMJ alleged that Chrysler gave
larger allocations and longer credit terms on the financing of new car inventories to
selected franchises. Each party agreed that in order to consolidate its dealerships,
Chrysler terminated some dealership franchises and added the Plymouth line to
other existing dealers. But BMJ suggested Chrysler wanted to reduce financial risk
by weeding out marginal dealerships.19
A sound business decision or an unfair practice? The answer depends on whom
you ask. Issues like this often lie in the grey area between right and wrong that must
often be resolved among exchange partners. Moral issues featuring shades of grey
are made even more difficult to resolve because perceptions of what constitutes an
ethical decision vary across individuals and their respective cultures. Each employee
serves as a personal emissary or representative for the channel organisation. The
problem, of course, is that there is likely no consensus among these employees
regarding what is the right set of ethics to use.20 As a result, contradictory moral
positions can come into play when firms interact in channel settings. Three genres
of moral codes exist: rules-based moral codes, consequence-based moral codes, and
experience-based moral codes. These categories are summarised in Exhibit 7.3.
Exhibit 7.3

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Alternative moral philosophies

Rules-based
Universal moral precepts

Consequences-based
Consequences of un/ethical
decision

Experience-based
Subjective

Reconcile ethical
dilemma(s)

Egoism
Utilitarianism

Evaluation of
others behaviours

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7.5.1

Rules-Based Moral Codes


A rules-based moral code refers to a set of universal principles that people use to
resolve ethical conflicts. The Ten Commandments are a well-known set of universal
moral rules. The Thou Shalt Not precursor clearly lays out right and wrong
behaviours. Those who believe in using rules-based moral codes argue that outcomes change over time. For this reason, advocates of rule-based moral codes
believe that no two behavioural outcomes can ever be exactly alike. Not surprisingly,
then, rules-based theory posits that individual evaluations of right and wrong should
not be based on behavioural outcomes. Instead, such decisions should be based on
universal moral principles.
But, as you might expect, universal laws are hard to come by. To illustrate just
how hard, lets go back to the Ten Commandments example. Think about the
commandment Thou Shalt Not Kill. The suitability of this universal law would
likely evoke some disagreement among members of the US armed services. In a
time of war, is it acceptable to kill an enemy? Or, is it right to kill to protect ones
family in the name of self-defence?
Similar difficulties arise when moral conflicts must be resolved in traditional
marketing channels. Buyers and sellers, suppliers and producers, or wholesalers and
retailers are each likely to interpret the same event in different ways. The presumption that moral rules can be established which are universally applicable to the
behaviours of each party across all circumstances is, therefore, troubling. Rulesbased moral codes are flawed because they ignore the unique needs, interests, and
concerns of the employees acting on behalf of the channel firm.

7.5.2

Consequences-Based Moral Codes


Those who subscribe to a consequences-based moral code suggest that decision
makers can evaluate a behaviours morality based on the behaviours consequences.
As such, a morally questionable act can be deemed acceptable if the behaviour
produces a desirable outcome. The consequence-based approach appeals to channel
members because they are concerned with exchange performance and outcomes.
Still, problems concerned with how decision makers determine who the consequences benefit can emerge. Here are two separate approaches to consequence-based
codes to help resolve this issue.
Egoism. Egoism determines whether an act is right or wrong based solely on
whether the outcome optimises the decision makers self-interests. An egoistic
approach to ethical decision making within channels will injure social tact. Channel members employing an egoistic perspective will act with little regard for their
exchange partners concerns. Therefore, egoism violates a fundamental principle
in relationship marketing: a concern for the other channel members needs. So,
an egoistic perspective will almost always lead to poor outcomes in channel relations. Marketers will not be successful in the long run if their ethical actions are
motivated primarily by their own self-interests.
Utilitarianism. People who subscribe to utilitarianism believe the proper
decision in a moral dilemma is the one that produces the greatest good for the

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greatest number of people. On the surface, at least, this suggests utilitarians will
embrace the need to preserve channel relationships.
Consequence-based approaches to ethical decision making within marketing
channels are not foolproof. To illustrate, consider that franchisers invariably recruit
new franchisees by promoting their franchising systems profitable outcomes. One
could argue, therefore, that franchisers have an ethical responsibility to promote
each franchisees profitability. But again, problems can arise in the execution of a
moral code. For example, a fast-food franchiser may decide to eliminate a menu
item because it has low national appeal. The item may actually be injuring profits
throughout most of the franchise system. In response, the franchiser informs
franchisees that the item will be discontinued. However, the item happens to be the
biggest seller for a particular franchisee operating in a unique market such as
Cajun fries in the heavily French-influenced Acadia region of Louisiana. While the
results of the franchisers action will benefit the greatest number of franchisees, it
will harm a particular franchisee.

7.5.3

Experience-Based Moral Codes


Experience-based moral codes suggest that the ethicality of an issue can be evaluated based on the decision makers previous exchange encounters. Experience-based
decision makers subjectively assess cues available from the individuals and organisations involved in the dilemma. Then, based on this assessment, they determine the
morality of some action. When one is striving to develop long-term relationships
guided by social tact, examining how each member behaved in prior, related
situations is logical. The subjective nature of experience-based moral codes is also
attractive because they account for the unique character of the exchange relationship
itself. Unfortunately, several imperfections are associated with experience-based
moral codes. These include:
Situational differences. When individuals use past interactions with channel
members as a guide to current ethical behaviours, they assume the prior and
current situations are comparable. This assumption may be wrong.
Multiple cues. The experience-based approach is based on moral decision
makers subjective interpretations of prior events. But individual channel members
are likely to selectively retain different elements from their experiences. Individual channel members are also likely to recall exchange situations in ways that
reinforce egoistic interpretations of events. Different exchange partners are not
going to behave uniformly. Taken together, these characteristics make it difficult
for moral decision makers to decide which individuals, organisations, or situations should be used as cues.
A presumption of rightness. The experience-based approach assumes that
prior moral decision scenarios yielded ethical choices. When earlier decision
scenarios yield unethical outcomes, channel members using experiential
measures tend to repeat the unethical behaviour. Over time, unethical behaviours may begin to dominate and become the norm for the relationship.
Experience-based moral codes have appeal because they recognise the multifaceted nature of exchange relationships.21 When formulating business strategies,

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channel members ascribing to this situational approach try to predict the conflicts
that will arise between their organisations and their suppliers, customers, and the
community at large.22 This is good. But when individual employees look to prior
interactions with channel members, there is no guarantee that conflicting moral
positions or perceptions can be reconciled.

7.5.4

Moral Codes in Combination


No single moral code offers a foolproof guideline for deciding what is ethical or
unethical across all possible situations. In fact, most people use a combination of
these moral codes, depending on the types of decisions and the settings in which
they confront an ethical dilemma.
In relationship ethics, individuals can be depicted as bundles of moral positions
that cumulatively act in channel roles according to some decision rule. Moral codes
only partially account for the channel firms un/ethical behaviours. There are many
other factors including individual, organisational, environmental, and relationshiporiented elements that influence un/ethical behaviour in marketing channels.
These will be discussed in the next section.

7.6

Model of Relationship Ethics


In Exhibit 7.4, Peltons Model of Relationship Ethics describes how individual,
organisational, environmental, and relationship dimensions collectively influence a
channel members moral reasoning and decision making.23 The model is based on
the premise that channel members facing moral dilemmas must consider the
interactive nature of relationship ethics prior to making any decision.24

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Exhibit 7.4

Peltons model of relationship ethics

PERCEIVED ETHICAL
DILEMMA

Channel
member
1

Channel
member
2

Individual factors

Individual factors

Cognitive moral development


Personal ethic
Demographic characteristics

Cognitive moral development


Personal ethic
Demographic characteristics

Situational factors

Relationship
environment

Situational factors

Opportunity
Referents behaviours
Codes of ethics

Opportunity
Referents behaviours
Codes of ethics

Decision process

Decision process

UNETHICAL OR ETHICAL
DECISION BEHAVIOUR

7.6.1

Individual Factors
We have already discussed how moral philosophies help shape the ethical decision
rules for individuals. Other factors also influence a persons tendency to act
un/ethically. One such factor is the individuals socialisation. Socialisation relates to
how interactions with peers, family members, and other members of society shape
an individuals personal ethic. Demographic characteristics such as gender, race, and
religion also influence an individuals personal ethic.25

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7.6.2

Organisational Factors
An organisation is a group of individuals with shared goals. An organisational
environment is the collective values, attitudes, and norms that stem from these
shared goals. As such, an organisations value system exists as a composite of the
values of individuals and the formal and informal ethical policies the organisation
has in place.26 An organisations value system is the dimension that best differentiates one organisation from another. Time and again organisations with a welldefined set of ethical values have demonstrated superior market performance.27
The actions of top management are most responsible for how an organisations
value system develops. In fact, some experts suggest the two most basic responsibilities of executives are to conform to a complex code of morals and to create moral
codes for others. Three other factors influence organisational value systems:28
organisational referents, reinforcement of behaviours, and corporate codes of ethics.
Organisational Referents
An employee interacts with a number of significant others in organisational settings,
including co-workers, supervisors, and top management. Through their actions and
attitudes, these persons are symbolic of the organisations value system. Employees
often look toward the behaviours of others to determine appropriate behaviour in
similar situations.
Reinforcement of Behaviours
Formal or informal ethical codes will only be as effective in inducing moral behaviour as the system in place for enforcing them. When channel members are
punished for acting unethically, the corporate value system will be reinforced.
Conversely, ignoring ethical misconduct will reinforce more of that type of misbehaviour.
Corporate Code of Ethics
As we discussed in Module 6, corporate codes of ethics are written on a situationby-situation basis. Some are very specific, but more often than not, ethical codes lay
out general guidelines for employees to follow. More and more companies are
developing corporate codes of ethics.29 A code of ethics provides a yardstick by
which employees can assess their compliance with the organisations value system.
They also provide useful cues to current and prospective exchange partners.
An ethical code addresses what the organisation expects from its representatives
and other internal stakeholders. Today, some channel members are expanding their
ethical codes so that they precisely lay out the right and wrong ways to deal with
exchange partners. To be useful, a corporate code of ethics must be:
Accessible. A corporate code of ethics must be easily understood, applied, and
recalled and consistent with widely understood ethical practice and general
ethical theories.
Productive. A corporate code of ethics should be capable of providing the two
forms of guidance that are critical to those facing moral quandaries: insight and

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justification. Insight should be provided so relatively uncomplicated ethical problems can be solved quickly.
Applicable. An ethical code should also provide the decision maker with the
justification that is often necessary to act in one way or the other in response to
more challenging ethical dilemmas.30
Critics and cynics frequently assert that codes of ethics are little more than window dressing. Whatever the criticism, the surest proof of a companys commitment
to ethicality and propriety in the channel is reflected in its behaviour. An excellent
example of a corporate code of ethics is the one from Dow Corning. This code of
ethics is shown in Exhibit 7.5.
Exhibit 7.5

Dow Corning Corporation Code of Ethics

Dow Corning Values


INTEGRITY Our integrity is demonstrated in our ethical conduct and in our respect
for the values cherished by the society of which we are part.
EMPLOYEES Our employees are the source from which our ideas, actions and
performance flow. The full potential of our people is best realised in an environment
that breeds fairness, self-fulfilment, teamwork and dedication to excellence.
CUSTOMERS Our relationship with each customer is entered in the spirit of a longterm partnership and is predicated on making the customers interests our interests.
PROFIT Our long-term profit growth is essential to our long-term existence. How
our profits are derived, and the purposes for which they are used, are influenced by
our Values and our shareholders.

Fair, legal and ethical business practice is key to maintaining our corporate integrity. Our code addresses many diverse business situations. Those not explicitly
covered can generally be resolved through your own thoughtful judgment or
discussion with management or, as needed, a review with the Business Conduct
Committee.
Relations with Customers, Distributors, Suppliers
We are committed to providing products and services that meet the requirements
of our customers. We will provide information and support necessary to effectively
use our products.
Business integrity is a criterion for selecting and retaining those who represent Dow
Corning. Dow Corning will regularly encourage its distributors, agents, and other
representatives to conduct their business on our behalf in a legal and ethical manner.
The purchase of goods and services will be based on quality, price, service, ability to
supply and the suppliers adherence to legal and ethical business practices.

We are committed to the letter and spirit of this code. Our reputation is defined
by the individual decisions and actions of each Dow Corning employee. You
strengthen Dow Cornings reputation for integrity by knowing and living those
standards of business conduct and encouraging the same of your colleagues.
Source: 1990, Dow Corning Corporation, Dow Corning Center, Midland, MI 48640. Reprinted with Permission.
Only selected portions of Dow Corning Corporations Code of Ethics appear here.

The ethical environment of the Channel Relationship Model is laden with uncertainty, just like its other components. No code of ethics can possibly address all of
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the potential ethical dilemmas that a channel member may face. Why have one,
then? A code of ethics can provide general guidelines that can be adapted to
individual channel members and their interaction processes. But even the best of all
possible codes of ethics offers no cure-all. There is no assurance that the formal
statement is in any way going to reflect or influence the actual behaviours of a
channel member. Such codes are effective only to the extent that they are followed.
Moreover, ethical codes only offer loose frameworks that cannot possibly cover all
situations that may arise in channel relationships. Exchange partners should
continuously modify and update codes of ethics to address this shortcoming.
Finally, ethical codes have no enforcement mechanism. Ultimately, channel members must have a high level of conviction in their exchange partners.

7.6.3

The Macroenvironment
In Module 5, we indicated that a variety of environmental influences affect individuals and organisations attitudes and behaviours. Many of these influences are
reflected in formal statements of moral codes. For example, we have seen how the
legal and regulatory environment is an evolving social contract between business
and societal constituencies. However, societys values are not always formalised into
laws and regulations. Since value systems include sociocultural, political, and
technological rules and standards, one can only imagine the complex network of
interactions that influence a channel members decision to act morally or immorally.

7.7

The Components of an Ethical Exchange Process


Much of the law governing business exchange is drawn from and formalises moral
principles. Equality in exchange, the promise principle, and a sense of morality of
duty and morality of aspiration are required for ethical exchanges to occur in
channel relationships.31

7.7.1

Equality
Ancient Greek philosopher Aristotles view of exchange was: [t]here would be no
association without exchange, no exchange without equality, [and] no equality
without commensurability.32 Such a view emphasises how important equality is to
virtuous exchanges. Contemporary views of fair exchange suggest that the parties to
a fair exchange should be equal in terms of need. Channel partners do not have to
be equal in terms of power, knowledge, or moral goodness, but if each is genuinely
interested in obtaining something the other has, mutually ethical behaviours will
usually develop.33

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7.7.2

The Promise Principle


The promise principle suggests that individual channel members can voluntarily impose
obligations on themselves under which they can choose to join together for mutual
advantage. Trust allows people to cooperate with others to actively serve one
anothers purposes. Promise keeping is probably the best way to generate trust.
Ethical exchange in channel settings is therefore deeply rooted in promise keeping.
It follows that channel members are morally obligated to deliver on their promises
to one another regardless of whether those promises are legally binding.

7.7.3

Morality of Duty
The concept known as morality of duty is characterised by thou shalt nots similar to
those featured in the Ten Commandments. The morality of duty condemns those
who fail to respect the basic moral rules governing individuals and society. Individuals coexisting within channel settings thus operate under the burden of not
knowingly doing harm to one another.

7.7.4

Morality of Aspiration
By contrast, the morality of aspiration is characterised by thou shalts admonishments for channel members to be all they can be in terms of their ethicality. Examples
of the morality of aspiration in channel settings include recognition awards for
suppliers who achieved planned outcomes, forgiving errors made by an exchange
partner, and the accommodating (as opposed to grudging) resolution of conflict.
Sometimes channel members may feel tension between doing the right thing for
their channel relationships or doing what appears best for their organisation. This is
a false distinction. Over the long run, what is best for channel relationships is always
what is best for the marketing organisation.

7.8

Key Terms
aggregate rebates
anticompetitive promotions
brand discounts
caveat emptor
caveat venditor
consequence-based codes
demand signalling
diverting practices
egoism
ethics continuum
exchange conviction

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exclusionary tactics
experience-based moral codes
marketing ethics
moral codes
organisational environment
repressive control manoeuvres
relationship ethics
rules-based moral codes
social tact
utilitarianism

Edinburgh Business School Marketing Channels

Module 7 / Ethical Issues in Relationship Marketing

Learning Summary
There is substantial opportunity to act unethically within many types of marketing
relationships, a circumstance that is no doubt facilitated by the fact that marketing is
clearly in the public view and susceptible to close scrutiny. Still, marketers interests
are always best served by seeking a trusting, ethically grounded relationship with the
various publics they serve. Marketing ethics refers to the moral standards that
underlie exchange processes.
Exchange conviction addresses the intensity of the confidence and faith a given
channel member is willing to invest in the value systems of other channel members.
For successful relationships to develop, each party must have confidence that the
other is equally committed to doing the right or moral thing at all times. Several
factors influence a channel members conviction, including the nature of performance outcomes, the competitive arena, expediency, and customs that prevail
within the channel.
It is crucial to acknowledge that morality in marketing relationships is a two-way
street. Ethical behaviour depends largely on the state of cooperative morality that
exists or develops among channel members. A persons ethicality cannot be viewed
as something that is distinct from the social system in which the individual interacts.
This condition is reflected in the concept we call social tact, or individuals prescribed ways of dealing with others in their environment. For relationships to
flourish, as opposed to merely enduring, each exchange partner must modify the
ethical content of their behaviour to pursue moral convergence with some channel
counterpart. This involves relationship ethics, or the process by which organisational ethics are adapted to suit the needs of exchange relationships.
In marketing channels, one firms ethical actions can affect another firms actions
in many ways. To illustrate, consider the buyerseller relationship itself. The buyer
has to be aware of the sellers persuasive tactics. But at the other end of an implied
continuum, the seller must pay careful attention to the customers behaviour. This
balance between what can sometimes be essentially opposing views is reflected in an
ethics continuum. On one end of the scale lie the sellers self-interests otherwise
described as caveat emptor. The concept of caveat venditor, or seller beware, lies at the
other end. Caveat venditor draws on the outright pursuit of customer satisfaction as
an organisational ethic. This ethics continuum suggests that channel members, on
either side of exchange relationships, are continually modifying the norms, rules,
and standards governing exchange behaviours. Hopefully, these modifications result
in outcomes that satisfy the other party.
A wide range of channel situations potentially feature ethical dilemmas. The
channel behaviours receiving the most ethical attention over recent years include:
exclusionary tactics, diverting practices, repressive control manoeuvres, and anticompetitive promotions. Exclusionary tactics are intentional strategies aimed at
restricting normal channel flows in a distribution system. Diverting practices refer to
any actions involved in the unauthorised distribution of goods or services, including
grey marketing. Repressive control manoeuvres describe coercive attempts to
manipulate other channel members business practices and include full-line forcing
tactics. Anticompetitive channel promotions involve opportunistic efforts by one
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Module 7 / Ethical Issues in Relationship Marketing

channel member to unfairly or inappropriately manage the distribution of products


through brand discounts, aggregate rebates, and slotting allowances.
Moral codes address how channel members employ rules and standards to help
decide what is right and wrong. Issues of right and wrong in channel relationships
are not always cast in black or white. Three basic moral codes rules-based,
consequence-based, and experience-based enable decision makers to make more
sense of the often-times complicated notion of right and wrong in channel relations.
Still, no single moral code can guide what is ethical or unethical in all possible
situations. Instead, combinations of all three strategies are probably used to arrive at
morally sound decisions in most situations involving an ethical dilemma.
A variety of individual, organisational, environmental, and relationship dimensions influence an individual channel members moral reasoning and decision
making. Individual factors range from ones personal values to ones upbringing.
The organisational environment consists of the collective values, attitudes and
norms that stem from the goals shared by those individuals who make up the
organisation. In addition, the actions of top management and organisational
referents, as well as the presence or absence of corporate ethical codes, exercise
substantial influence on organisational value systems and, consequently, on the
ethical or unethical behaviours that emanate from within the organisation. The most
promising organisational avenue for preventing or resolving ethical conflicts lies in
the development of an organisational code of ethics. An ethical code should clearly
delineate what the organisation expects from each of its internal stakeholders. But
even the best code will only be effective to the degree that the organisations
designates follow its ethical prescriptions.
The macroenvironment includes laws and regulations, as well as the sociocultural,
political, and technological rules and standards that form societys values.
Equality of exchange, the promise principle, morality of duty, and morality of
aspiration must all be present for ethical exchanges to occur in channel relationships. Parties to a fair exchange must be equal in need, although not necessarily in
terms of power, knowledge, or moral goodness. The promise principle suggests that
promise keeping is probably the best way to generate trust. Finally, while the
morality of duty is characterised by thou shalt nots, the morality of aspiration is
characterised by thou shalts.

Review Questions
Short-Answer and Essay Questions

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7.1

Which functional area is most often accused of being the source of unethical behaviour
in a business?

7.2

What would be the goal of an organisation that has a caveat emptor mission?

7.3

At which level of distribution might you expect to find buyer backlash occurring?

Edinburgh Business School Marketing Channels

Module 7 / Ethical Issues in Relationship Marketing

7.4

What is a retailer talking about if he uses the term street money?

7.5

Which moral code offers the best guide for deciding what is ethical or unethical across
all possible situations? Why?

7.6

Which situational factor best differentiates one organisation from another?

7.7

Who is most responsible for how an organisations value system develops?

7.8

Which of the components of an ethical exchange process are most closely mirrored by
the expression, Just say no?

7.9

When Markus bribed the purchasing agent to buy his companys product rather than his
competitors which was more appropriate for the job, he had no ideas of the repercussions of that single unethical act. Since the firing of the purchasing agent and being fired
from his own job, Markus has begun to realise that unethical behaviour produces a
ripple effect. Discuss the implications of that ripple effect for other channel members
who might be considering another unethical act.

7.10 Discuss the following statement: Any decision whether ethical or unethical is
essentially the sum of the moral dispositions of the individuals involved in making the
decision.
7.11 Comment on the following statement: By definition, exclusionary tactics are unethical.
7.12 Discuss the following statement: Slotting allowances negatively impact both
manufacturers and their customers.
7.13 What would you say to someone who said to you, The concept of morality of duty is
simply a pretentious way of describing a rules-based moral code?
7.14 When you studied Maslows hierarchy of needs, you learned that it lists needs in the
following order: physiological, safety or security, belonging, esteem, and selfactualisation. Can you relate the concept of morality of aspiration to a channel members self-actualisation?

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Module 7 / Ethical Issues in Relationship Marketing

Multiple Choice Questions


7.15 Marketing ethics refers to:
A. the moral standards that underlie exchange processes.
B. the art of making a sale and remaining true to ones ethical code.
C. the totality of the individual ethics of each person in the channel.
D. the application of morals when it is convenient.
E. knowing the difference between a prospect and a non-prospect.
7.16 Why has marketing repeatedly been singled out as the perpetrator of the most unethical
acts against consumers and other business?
A. Marketing tends to attract the most unethical people.
B. By the very nature of exchange, marketing requires partners to violate their
personal ethics codes.
C. More people are involved in marketing than any other functional area.
D. Marketing is the business function most responsible for communicating with
prospects and consumers and satisfying their needs.
E. Marketing has NOT been singled out as the perpetrator of the most unethical
acts.
7.17 Martha wants to sell the new Ralph Lauren line of mid-priced clothes to the owner of a
small, pricey boutique. Since the new collection is priced considerably lower than the
other product lines made by Lauren, the owner is not sure that the new line will suit his
target audience. To get the owner to carry the new line, Martha told him that he would
not be allowed to carry the rest of the Lauren line if he refused to carry the new line.
Marthas statement was a lie. She wanted the sale so badly that she was willing to
undermine the ____ of the channel.
A. channel assurance
B. exchange conviction
C. exchange trust
D. channel conviction
E. channel trust
7.18 Which of the following is a factor that influences exchange conviction?
A. Expediency.
B. Customs and habits.
C. Performance outcomes.
D. Competitive arena.
E. All of the above are factors that influence exchange convictions.

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Module 7 / Ethical Issues in Relationship Marketing

7.19 A monadic perspective of morality:


A. focuses on the morality of the environment in which the individual lives.
B. studies the issue of morality in channel relationships.
C. examines moral issues at the level of an individual or single organisation.
D. allows us to see how the morality of each channel members decisions are
influenced by the values and behaviours of other channel members involved in
the exchange.
E. explains that an individuals ethical disposition develops as a result of his or her
interaction with society.
7.20 According to the text, ____ describes individuals way of dealing with others in society.
A. social tact
B. public interaction
C. social interaction
D. etiquette
E. social reciprocity
7.21 Which of the following statements about relationship ethics is true?
A. In relationship ethics, only channel members that communicate directly with
the final consumer are responsible for preserving the moral footing of the
exchange.
B. According to relationship ethics, the preservation of any exchange is based on
maintaining a balance between organisational and individual concerns and
ignoring environmental inputs.
C. According to relationship ethics, the environment supplies the basis for ethical
or unethical decision making.
D. Relationship ethics describes the process by which organisational ethics are
adapted to suit the needs of particular exchange relationships.
E. The concept of relationship ethics views a decision to act ethically as an
aggregate of two unit-level (individual) dispositions.
7.22 Robin bought a riding lawn mower at half its list price from a man selling lawn
equipment in the front of an abandoned gas station. After she got it home, she discovered that the mower would not stay running longer than two minutes. When she tried
to return the mower, the man had closed up shop and moved on. Robin has experienced:
A. the caveat emptor ideology.
B. exclusionary tactics.
C. relationship ethics.
D. the caveat venditor ideology.
E. egoism.

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Module 7 / Ethical Issues in Relationship Marketing

7.23 Whether buying a house or borrowing money from a pawn broker, Tilly believes that
the only reason she can expect ethical marketing behaviour is because it is required by
our legal system. The need to rely on the legal system rather than the morality of the
firms with which she is doing business is representative of a problem with:
A. the caveat emptor ideology.
B. exclusionary tactics.
C. ethical interaction.
D. the caveat venditor ideology.
E. egoism.
7.24 Caveat emptor usually applies when a channel member:
A. subscribes to the marketing concept.
B. ignores other duties in order to make sure that a customers needs are
satisfied.
C. is motivated by long-term profit goals.
D. has a production- or sales-oriented view of exchange.
E. can be described by any or all of the above.
7.25 Martin drives a truck for a manufacturer of consumer paper products. Yesterday after
making his deliveries, he went home for the day to clean out his truck. When he opened
the doors, he discovered three cases of toilet tissue had been left on the truck even
though he had made all of his deliveries and not shorted any of his customers. Obviously, the manufacturer had loaded three extra cases that were not on his delivery form.
That night everyone in Martins neighbourhood got free toilet tissue because Martin
believes in:
A. the caveat emptor ideology.
B. exclusionary tactics.
C. relationship ethics.
D. the caveat venditor ideology.
E. egoism.
7.26 A customer hands the sales clerk a ten dollar bill, and the clerk gives him change for a
twenty. The customer says nothing and is pleased with having duped the store. How
might the customer rationalise such behaviour?
A. By denying that the theft of $10 could hurt the retailer.
B. By denying any personal accountability for the clerks actions.
C. By pointing out others who have behaved in the same way.
D. By saying that his actions merely countered the ongoing lack of attention a
seller gives to his needs.
E. By doing all or any of the above.
7.27 Which of the following is an intentional strategy aimed at restricting normal channel
flows in a distribution system?
A. Tying contracts.
B. Full-line forcing.
C. Exclusive dealing agreement.
D. Resale price maintenance.
E. Slotting allowance.
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Edinburgh Business School Marketing Channels

Module 7 / Ethical Issues in Relationship Marketing

7.28 How can grey marketing damage channel relations?


A. By adversely affecting channel pricing strategies.
B. By causing high levels of customer dissatisfaction.
C. By generating animosity among the channel members.
D. By reducing normal profit margins.
E. By doing any and all of the above.
7.29 According to the text, one of the most common repressive control manoeuvres is:
A. resale price maintenance.
B. an exclusive dealing agreement.
C. vertical integration.
D. full-line forcing.
E. dual distribution.
7.30 Which of the following is NOT a good example of an anticompetitive channel
promotion?
A. Slotting allowances.
B. Demand signalling.
C. Full-line forcing.
D. Brand discounts.
E. Aggregate rebates.
7.31 If the manager of the Super-Sav Supermarket were receiving merchandise credits on the
basis of all of the Frito-Lay products the store was able to sell, it would:
A. be a type of repressive control manoeuvre.
B. be an example of an aggregate rebate.
C. indicate with certainty that Frito-Lay is trying to hide the fact that it is price
skimming.
D. encourage the manager to give Frito-Lays competitors more shelf space.
E. do all of the above.
7.32 What is one method that retailers can use to counter manufacturers regressive control
tactics?
A. Slotting allowances.
B. Tying contracts.
C. Full-line forcing.
D. Exclusive dealing agreement.
E. There is nothing that retailers can do except endure it.
7.33 The three genres of moral codes are:
A. ego, id, and super ego.
B. denial of responsibility, denial of injury, and denial of victim.
C. subjective, objective, and utilitarianism.
D. individual, organisational, and environmental.
E. rules-based, consequences-based, and experience-based.

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Module 7 / Ethical Issues in Relationship Marketing

7.34 People who subscribe to utilitarianism believe:


A. whether an act is right or wrong is based solely on whether the outcome
optimises the decision makers self-interests.
B. that prior moral decision scenarios yield ethical choices.
C. the proper decision in a moral dilemma is the one that produces the greatest
good for the greatest number of people.
D. that past interactions with channel members should be used as a guide to
current ethical behaviours.
E. the ethicality of an issue can be evaluated based on the decision makers
previous exchange encounters.
7.35 An organisations ____ is the dimension that best differentiates one organisation from
another.
A. tactical plan
B. strategic plan
C. value system
D. corporate culture
E. channel system
7.36 To be useful a corporate code of ethics must be:
A. easily understood, applied, and recalled.
B. action-oriented, definitive, and irreversible.
C. based on universal laws, timely, and comprehensible.
D. individually derived, situation-oriented, and definitive.
E. irreversible and environment-oriented.
7.37 The concept of morality of aspiration:
A. is characterised by admonishments for channel members to be all they can be
in terms of their ethicality.
B. condemns those who fail to respect the basic moral rules governing individuals
and society.
C. emphasises how important equality is to virtuous exchange.
D. is the best tool that channel members have for generating trust within the
system.
E. suggests that individual channel members can voluntarily impose obligations on
themselves under which they can choose to join together for mutual advantage.

Discussion Questions
7.38 What is generally meant by the term ethics? Define marketing ethics and describe the
effect of ethics on channel relationships.
7.39 Discuss the difference between personal and exchange conviction. What are several
factors that influence a channel members conviction?
7.40 Discuss the difference between monadic and dyadic perspectives on relationship ethics.

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Module 7 / Ethical Issues in Relationship Marketing

7.41 Describe the ethical continuum that exists between buyer and seller.
7.42 What is the difference between rules-based, consequence-based, and experience-based
moral codes?
7.43 Define and explain the individual, organisational, and environmental factors affecting the
ethical behaviour of an individual channel member.
7.44 Describe four basic categories of ethical dilemmas in marketing channel relationships.

References
1. White, Thomas (1993), Business Ethics: A Philosophical Reader, New York: Macmillan
Publishing, 1.
2. Hartley, Robert (1993), Business Ethics: Violations of Public Trust, New York: John Wiley &
Sons, Inc., 117.
3. Taylor, Paul W. (1975), Principles of Ethics: An Introduction, Encino, CA: Dickerson
Publishing, 1.
4. Ferrell, O.C. and John Fraedrich (1994), Business Ethics: Ethical Decision-Making and Cases,
Boston, MA: Houghton-Mifflin, 6.
5. Weiss, Joseph W. (1994), Business Ethics: A Managerial, Stakeholder Approach, Belmont, CA:
Wadsworth Publishing, 6.
6. Strutton, David, Scott J. Vitell, Jr, and Lou E. Pelton (1994), How Consumers May
Justify Inappropriate Behaviour in Market Settings: An Application of the Techniques of
Neutralization, Journal of Business Research, 30(July), 253260.
7. Houston, Franklin S. and Jule B. Gassenheimer (1987), Marketing and Exchange, Journal
of Marketing, 51(October), 318.
8. Weiss, Joseph W. (1994), Business Ethics: A Managerial, Stakeholder Approach, Belmont, CA:
Wadsworth Publishing, 1.
9. Weiss, Joseph W. (1994), Business Ethics: A Managerial, Stakeholder Approach, Belmont, CA:
Wadsworth Publishing, 1.
10. Hamilton, J. Brooke, Jr and David Strutton (1995), Two Practical Guidelines for
Resolving Truth-Telling Problems in Business Transactions, Journal of Business Ethics, 13,
899912.
11. Pelton, Lou E. (1992), The Role of Relationalism in Un/Ethical Exchange in BuyerSeller Dyads, Unpublished Dissertation, Oxford, MS: University of Mississippi.
12. Houston, Franklin S. and Jule B. Gassenheimer (1987), Marketing and Exchange, Journal
of Marketing, 51(October), 11.
13. This section of the ethics continuum is constructed from an excellent and thorough
explanation from Smith, N. Craig (1993), Ethics in Marketing, N. Craig Smith and John A.
Quelch, eds, Burr Ridge, IL: Richard D. Irwin, 2127.
14. Strutton, David, Scott J. Vitell, Jr, and Lou E. Pelton (1994), How Consumers May
Justify Inappropriate Behaviour in Market Settings: An Application of the Techniques of
Neutralization, Journal of Business Research, 30(July), 253260.
15. Felgner, Brent H. (1989), Retailers Grab Power, Control Marketplace, Marketing News,
(16 January), 12.

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16. Cespedes, Frank V. (1993), Ethical Issues in Distribution, in Ethics in Marketing, N.


Craig Smith and John A. Quelch, eds, Homewood, IL: Richard D. Irwin, 484.
17. Chu, Wuhu (1992), Demand Signaling and Screening in Channels of Distribution,
Marketing Science, 11(Fall), 327347.
18. Davis, Tim (1989), Retailer-Manufacturer Partnership Can Ease Pain of Slotting Allowances, Marketing News, 23(27 March), 1517.
19. Tannebaum, Jeffrey A. (1992), Focus on Franchising: Franchisees Weigh Joint Actions
to Gain Protections, The Wall Street Journal, (28 September), B2.
20. Lewis, Philip V. and Henry B. Speck, III (1990), Ethical Orientations for Understanding
Business Ethics, Journal of Business Communication, 27(Spring), 213232.
21. Hosmer, Larue Tone (1991), The Ethics of Management, Second Edition, Homewood, IL:
Richard D. Irwin.
22. Ferrell, O.C. and John Fraedrich (1994), Business Ethics: Ethical Decision-Making and Cases,
Boston, MA: Houghton-Mifflin, 60.
23. Pelton, Lou E. (1992), The Role of Relationalism in Un/Ethical Exchange in BuyerSeller Dyads, Unpublished Dissertation, Oxford, MS: University of Mississippi.
24. Peltons model owes much to the models advanced by Ferrell, O.C., Larry G. Gresham,
and John Fraedrich (1989), A Synthesis of Ethical Decision Models for Marketing,
Journal of Macromarketing, 9(Fall), 5564; Hunt, Shelby D. and Scott J. Vitell (1986), A
General Theory of Marketing Ethics, Journal of Macromarketing, 47(4), 2532; and Trevino, Linda Klebe (1986), Ethical Decision Making in Organizations: A Person-Situation
Interactionist Model, Academy of Management Review, 11(3), 601617.
25. Tsalikis, John and David J. Fritzche (1989), Business Ethics: A Literature Review with a
Focus on Marketing Ethics, Journal of Business Ethics, 8, 695743.
26. Hunt, Shelby D., Van R. Wood, and Lawrence B. Chonko (1989), Corporate Ethical
Values and Organizational Commitment in Marketing, Journal of Marketing, 53(July), 79.
27. Alchian, Armen and Harold Demsetz (1972), Production Information Costs and
Economic Organization, Economic Review, 62, 777795.
28. The inclusion of significant others (referents) and the opportunity to engage in unethical
decision behaviour is largely based on Sutherlands Theory of Differential Association.
This theoretical foundation was introduced to the management and marketing literature
by and it owes greatly to: Ferrell, O.C. and K. Mark Weaver (1978), Ethical Beliefs of
Marketing Managers, Journal of Marketing, 42(July), 6973; Ferrell, O.C., Mary ZeyFerrell, and Dean Krugman (1983), A Comparison of Predictors of Ethical and Unethical Behaviour Among Corporate and Agency Advertising Managers, Journal of
Macromarketing, Spring, 1927; Zey-Ferrell, Mary, K. Mark Weaver, and O.C. Ferrell
(1979), Predicting Unethical Behaviour Among Marketing Practitioners, Human Relations, 32, 557569.
29. Solomon, Robert C. (1994), Above the Bottom Line: An Introduction to Business Ethics, Second
Edition, Fort Worth, TX: Harcourt Brace College Publishers.
30. Hamilton, J. Brooke, Jr and David Strutton (1992), A Philosophical Essay on TruthTelling in the Personal Selling Role, Marketing: Perspectives for the 1990s, Robert L. King,
ed., New Orleans, LA: Southern Marketing Association Proceedings, 305310.
31. Gundlach, Gregory T. and Patrick Murphy (1993), Ethical and Legal Foundations of
Relational Marketing Exchanges, Journal of Marketing, 57(October), 3546.
32. Irwin, Terence, transl. (1985), Aristotles Nicomachean Ethics, Indianapolis: Hackett.
33. Cordero, Ronald A. (1988), Aristotle and Fair Deals, Journal of Business Ethics,
7(September), 681690.
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Edinburgh Business School Marketing Channels

Module 8

Global Challenges and Opportunities


Contents
8.1 Reasons for International Exchange Relationships .............................8/2
8.2 Typology of International Exchange Relationships .............................8/4
8.3 Direct and Indirect International Marketing Channels ......................8/9
8.4 Interface between International Marketing Channels and the
Environment ......................................................................................... 8/11
8.5 Selecting International Exchange Partners ...................................... 8/18
8.6 International Exchange Relationships: Successes and Failures ...... 8/21
8.7 International versus Domestic Channel Relationships: Some
Perspective ........................................................................................... 8/21
8.8 Key Terms ............................................................................................ 8/22
Learning Summary ......................................................................................... 8/22
Review Questions ........................................................................................... 8/24
Learning Objectives
After reading this module, you should be able to:
Discuss how environmental uncertainty impacts global channel strategies.
Discuss the major factors that underlie the selection of international exchange
partners.
Distinguish between multinational, global, and transnational channel relationships.
Recall the indirect methods of developing international exchange relationships.
Recall the direct methods of developing international exchange relationships.
Explain the connection between the macroenvironment and international channel
strategy.
Describe the process of initiating international channel relationships.
In this module, we examine how channel members in all industries confront
different tastes and preferences in the global marketplace. First, we consider the
reasons for entering into international exchange relationships at all. Next, we explain
the various types of international exchange relationships and the various methods of
entry. Then, we explore the interface between international marketing channels and
their macroenvironment. After all the factors are in place, we answer the question:
how does one select an international exchange partner?

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Module 8 / Internal Channel Environment

8.1

Reasons for International Exchange Relationships


The chocolate confectionery industry features some major international competitors, including: Nestl, Hersheys and Mars. Each firm follows a distinctive strategy
in its development of international exchange relationships. For instance, Mars has
just a few production facilities around the world and remains highly centralised.
Nestl, on the other hand, is famous for its ability to strike a balance between the
need for central coordination and subsidiaries desires for local autonomy. Considerations of the nature of market and competitive factors clearly are driving forces
behind each chocolatiers international channel strategy. Other factors are also
critical to global success. Several of these factors are discussed in Time Out 8.1.
International marketing channels are developed for many reasons, including the
facilitation of market entry, boosting market share, introducing new products,
improving service performance, and responding to shifting market conditions. Lets
look at each of these reasons in detail.

Time Out 8.1 ______________________________________________


Too Many US Firms Are Making Wrong Turns on the Road to Global
Success
Too many US corporations may be following the wrong path to success in their
globalisation efforts. According to a study by the consulting firm of McKinsey
and Co., many US firms implement changes not tied to success in foreign
markets. The study lists globalisation tactics that have exhibited the weakest and
strongest links to international marketing success. Procedures not critical for
superior international performance typically involve changing a companys
international organisational structure. Other policies with little apparent
correlation to foreign success include the establishment of cross-national task
forces or the development of internationally integrated management information systems.
The study also identified several tactics that have been most successful internationally. Among other things, more successful companies:
Tend to centralise the decision making in their international operations in
every area except new product development.
Establish worldwide management development programmes and place more
target-country citizens in senior-level management positions.
Require international experience for employees to advance into top management ranks.
Link international managers with one another through global electronic
networks, such as videoconferencing and electronic mail. Integrate their
international acquisitions in a superior way.
Let the product managers of foreign-based subsidiaries report directly to an
in-country general manager, who in turn reports to the US firm.
Always try to coordinate international activities through procedures that
allow the integrity of the foreign subsidiary to be maintained.
As always, issues of products, targeting, and positioning remain critical to
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Module 8 / Global Challenges and Opportunities

success in any market. Nevertheless, a lot can usually be learned by focusing on


strategic approaches that have previously met with success.
Questions
How can international competitors best identify the right products and the
right markets to enter? Why do you believe this particular set of tactics
proved to be the most successful predictor of international marketing success? Are there any tactics you thought would have been listed as key
success factors that are, in fact, not listed?
Adapted from Lublin, Joann S. (1993), U.S. Firms Are Seen Taking Wrong Steps on the Global
Path: Study Uncovers Few Ties Between Changes and International Success, The Wall Street
Journal, (22 March), B4; Stevens, Tim (1995), Trade Secrets, Industry Week, (6 February), 4144;
and Cramp, Beverly (1995), Refreshing Change, Marketing, (19 January), 2123.
__________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

8.1.1

Facilitating Market Entry


Many companies develop international exchange relationships to accelerate and/or
ease entry into new markets. Emerging economies like China and India represent
lucrative growth markets for many organisations operating in home markets that are
mature and slow growing. In 2013 UltraStar Cinemas of San Diego County, US,
formed a joint venture with Chinas Letian Entertainment to develop and operate
theatres throughout China. This marked one of a number of deals between American and Chinese cinema operators in recent years, as firms seek to capitalise on the
growing market.1

8.1.2

Boosting Market Share


Mergers and acquisitions among firms can immediately boost market share abroad.
This is evident in many sectors, particularly those dominated by few major players.
For example, a series of mergers and acquisitions over the years eventually led to the
creation of AnheuserBusch InBev, the worlds largest brewer in 2008. Anheuser
Busch was founded in the US; InBev was formed by the 2004 merger of Belgiums
Interbrew with Brazils AmBev. When the companies combined, Anheuser controlled nearly half the US market with brands like Budweiser and Bud Light, while
InBev had strong positions in Western Europe, Latin America, Eastern Europe and
Asia.2

8.1.3

Introducing New Products through Existing Channels


In 2010 French vehicle manufacturer Renault and Japanese vehicle manufacturer
Nissan formed a badge engineering partnership where they shared resources and
existing channels to produce new cars which were essentially the same, but branded
differently, to help them deliver new products quickly and cheaply in India.3

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Module 8 / Internal Channel Environment

8.1.4

Improving Service Performance


While soviet-era brands of chocolate remain the key players in the Russian market,
foreign brands are attracting a big following. In particular, Mars is enjoying success
with its Snickers bar; a social networking group has even emerged in honour of the
snack.4 Mars developed distributor relationships in Russia to bring fresh chocolates
to that lucrative market. Its Snickers bar has since become a Russian favourite. Mars
took a chance to build for the future and it paid off. In a huge country with a limited
infrastructure, Mars managed to keep retailers stocked with what has emerged as a
Western status symbol.5

8.1.5

Responding and Adapting to Shifting Market Conditions


Significant worldwide sugar shortages during the Second World War might have
literally blown Hersheys, an American chocolate producer, right out of business.
But Hersheys overcame the ill effects of these shifting market conditions by
securing new suppliers in Cuba. Entering the Cuban market was itself a risky
venture. Fortunately, Hershey was able to sell its plantation holdings in the late
1950s at a profit on the eve of Fidel Castros nationalisation of US-held assets.
There are other reasons for pursuing international channel relationships. For
instance, channel members can also seek new technologies, more stable currencies,
or greater sales volume through their entry into international exchange relationships.
Other companies enter international relationships to block the entry of foreign
competitors into their own markets. For example, Armstrong World Industries, Inc.
controlled about 9 per cent of the US flooring industry. Faced with increased
competition from flooring imports, Armstrong partnered with Austria-based F.
Eggert Company to introduce lower-priced synthetic flooring. The ArmstrongEggert alliance aimed to fend off increasing competition for flooring products in the
US market.6 As US domestic markets become increasingly competitive and saturated, many American channel members will have to seek out new market
opportunities overseas.

8.2

Typology of International Exchange Relationships


Regardless of how they are classified, the economic impact of international relationships is indisputable. Billions of dollars are involved and US international
transactions have increased significantly over the last few decades. These international economic activities are certainly not limited to US-based channel members.
Unprecedented numbers of firms throughout the world are engaged in the export or
import of goods. The ways in which exchange relationships develop across the
world are numerous and diverse. Attempts to categorise this vast array of international channel activity are therefore difficult. For the purposes of our discussion,
however, we will divide international exchange relationships into three general
categories: multinational, global, and transnational. These are summarised in Exhibit
8.1.

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Exhibit 8.1

Typology of global exchange relationships market

Multinational

Market
orientation
International

Channel domain

Relationship orientation

Pre-specified national
boundaries

Firm-to-firm
partnership: based on
market segments

Transnational

Regional

Flexible transcends
national boundaries

Nodal partnership:
based on
regionalisation

Global

Global

Unlimited transcends
regional boundaries

Channel network:
based on a
boundaryless market

Before we discuss each of these exchange relationship types, we need to clarify a


few terms.
The term international merely suggests something is occurring between nations.
Thus, as a term, international fails to fully capture the diversity actually present
within international exchange relationships.
The term multinational corporation (MNC) is usually used to describe firms operating in different countries, yet there is no agreement as to what a multinational
corporation really is. Three criteria have been proposed in the identification and
characterisation of MNCs. Under the first, known as the Structural Criterion, a
multinational corporation is described as any firm conducting business in more than
one country. This criterion is based on the firms channel structure. A firm owned
and operated by people from many countries can also be labelled as an MNC.
The second criterion, known as the Performance Criterion, is based on the consequences of a firms international practices. The Performance Criterion defines an
MNC on the basis of its asset holdings, employment base, net sales, and/or profitability in a foreign country. According to the Performance Criterion, once a company
devotes a substantial percentage of available resources to overseas operations, it
becomes an MNC.
Finally, under the Behavioural Criterion, any firm administered by top managers
who think and behave internationally is an MNC. This criterion is the most difficult
to apply in practice. How does a firm think or act internationally? The value of these
criteria is that they point us toward several key issues that underlie international
channel relationships. The CRM should remind us how the global marketplace
affects the entire channel system. The scope of these effects range from the
interaction process to the external channel environment.7

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8.2.1

Multinational Exchange Relationships


The first category of international channel activity may be referred to as multinational exchange relationships. In multinational exchange relationships (MERs),
channel members view the global market as segments and employ distinctive
strategies for each segment. MERs occur between trading partners who operate in
foreign markets as if they were local concerns. Such exchange partners can be
identified by the extensive development of their assets in two or more countries. In
MERs, the exchange partner based in the domestic country essentially acts as the
local representative of its foreign partner.
MERs offer international marketers the opportunity to engage in domestic-like
strategies executed in foreign markets. As exchange relationships, MERs are based
on the ability of the exchange partner located in the target market to effectively
adapt and then respond to the environmental circumstances and opportunities
prevailing in that market. The local exchange partner in an MER also provides the
foreign partner with market experience and knowledge germane to that country or
countries. The home-based partner is likely to be an exporting manufacturer.
Each MER is customised to satisfy the needs or special environmental circumstances in a single foreign country or market. To achieve such customisation, MERs
tend to be very decentralised, with substantial autonomy given to the exchange
partners operating in the local country. This means the foreign partner has less
control over the local partners operational activities. High levels of autonomy
sometimes contribute to conflict in channel relationships. At other times, however,
autonomy can alleviate conflict.
Regardless of the effects autonomy actually has on conflict, the degree of dependence among exchange partners in multinational exchange relationships is
usually low. When dependence is low, dissatisfied partners find it easier to seek
alternative channel relationships. Because MER channel strategies are typically based
on small territories, it is normally easy to recruit new trading partners from nearby
markets.
In the chocolate confectionery industry, organisations employ different strategies
that are appropriate to the market being pursued. Naturally, product lines and
promotions are adjusted to better meet the demands of particular markets this is
nothing more than a classic strategy involving market segmentation and product
positioning, put into place in various foreign settings. But organisations also develop
different types of exchange relationships in reaction to the demands of particular
nations or regions. Depending on the nature of the particular foreign market, an
organisation may employ either a cooperative or competitive arrangement with
competing companies.
Conversely, in global exchange relationships, channel members see the world as
one giant marketplace. Our attention now turns to global exchange relationships.

8.2.2

Global Exchange Relationships


GERs are responsible for a great deal of controversy. Global exchange relationships
(GERs) are, by far, the most integrated of the international exchange relationships.

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Whereas MERs channel members view the world market as segments, GER channel
members view the world as one giant boundaryless marketplace. A GER is based on
two or more channel members mutual pursuit of a worldwide channel strategy that
transcends national or regional boundaries.
GERs are the source of much controversy centring on their plausibility. Is it
really possible to construct channel strategies that will prove workable throughout
the world? This question is not easily resolved. Taken at face value, the notion of a
global marketing strategy contradicts the cornerstone principle of market segmentation. However, by definition, GERs are not market-based, nor do they develop on
the basis of markets. Instead, they involve strategic alliances and develop from the
pursuit of these strategic alignments between channel partners. Strategic alignments exist when there is an agreement or shared consensus between the
organisational visions of exchange partners. Thus, entry into a GER ideally should
result in a single vision shared among exchange partners.
GERs require the highest levels of integration involving a pursuit of consolidation and synthesis among exchange partners. By definition, synthesised channel
strategies do not come from any individual member. Channel strategies are instead
borne from the collective goals associated with the exchange relationship itself. In
GERs, issues of centralisation and control are immaterial.
Obviously, GERs are complex. They are likely to involve several exchange partners. Each exchange partner is expected to make a specialised contribution to the
alliance. Therefore, a high level of autonomy usually exists across functional areas
within the GER channel. In other words, one partner may perform the distribution
function-with no outside interference or assistance. As a result, it is difficult to
replace any exchange partner in a GER. Each exchange partners contribution is
highly valued because of that contributions unique nature. The inclusion of each
exchange partner in the strategic alliance is selective from the start. Time Out 8.2
gives an illustration of a GER.
In business-to-business buying, the concept of GER is well established. For
example car manufacturers worldwide source their many components from numerous suppliers around the globe. Having fine-tuned their relationships with these
global sources, car manufacturers, more or less, have fully integrated them into the
supply chain and rarely are these relationships broken unless in extreme circumstances.

Time Out 8.2 ______________________________________________

Airline Alliances Reach New Heights


The last time you were in an airport, you might have noticed while scanning the
departure board that it displayed several flight numbers or codes for your flight.
Indeed, you may have flown with a completely different airline to the one you
booked your ticket with. Or the plane itself might not have displayed a prominent airline logo at all: stating instead Oneworld, Star Alliance or SkyTeam.
These are the three big airline alliances that allow airlines across the world to
work closely on codeshare agreements, as well as routes, schedules, facilities
and marketing.

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Codeshare agreements enable two or more airlines to share the same flight and
share revenue. This enables airlines to sell tickets for routes they do not serve
by offering seats on partner airlines. For passengers, this makes connections
simpler because they can make single bookings across multiple operators in a
seamless network.
Alliances became popular in the 1990s as a way for airlines to expand their
networks internationally and their importance is expected to grow, with
competition consolidating between the big three. These days, many frequent
international travellers book flights by choice of alliance, rather than by airline,
because of the convenience and ability to merge frequent flyer miles and
programmes.
Questions
Why have airline alliances been so successful in expanding international air
travel networks?
Can you envision any problems likely to be encountered by firms that enter
alliances in the future?
What about airlines that do not meet entry requirements for one of the big
alliances, or cannot afford the joining fee?
Adapted from Sharkey, J. (2011), Forget the Airlines Name; Its all About Alliances, New York Times
[online], available at: http://www.nytimes.com/2011/12/06/business/global/forget-the-airlines-nameits-all-about-alliances.html?_r=3&ref=business& [Accessed 18 September 2013].
__________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

8.2.3

Transnational Exchange Relationships


Transnational exchange relationships (TERs) essentially fall between the MERs and
GERs. Rather than engaging in country-by-country adaptation, TERs approach
international relationships from a regional perspective. TERs employ channel
strategies that have been tailored to the requirements of entire market regions. In
comparison to MERs, TERs are characterised by greater centralisation and fewer
exchange partners. TERs should only be used when each regional market of interest
constitutes a reasonably homogeneous market segment. Channel relationships can
then be adjusted to conform to needs and requirements of that particular segment.
For example, some chocolate bars are not designed with any single country in mind,
instead they are aimed at the entire Pan-European market.
TERs are becoming increasingly important as new regional markets emerge. The
European Union, for instance, comprises many diverse nations. The European
Union aims to unify distribution practices throughout Europe. Similarly, the North
American Free Trade Agreement (NAFTA) was designed to establish unencumbered distribution flows between the United States, Canada, and Mexico.
TERs are unique in several ways. While TERs involve fewer exchange partners
than MERs, these partners are larger in scope. TER exchange relationships tend to
be fairly consistent within a region. For example, a car company may have a host of
distribution and supplier relationships in Australia, but still treat the entire continent
as a single region, developing no separate strategies for the Melbourne, Sydney, or

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Queensland metroplexes. TERs also tend to develop in highly integrated operations.


Consequently, a high degree of dependency quickly emerges between firms engaged
in TERs.
Our typology is not intended to capture the universe of diverse exchange relationships that can develop in international marketing channels. The value of the
typology is its illustration of how an international channels macroenvironment
impacts different types of international exchange relationships in different ways.

8.3

Direct and Indirect International Marketing Channels


Entry-level international exchange relationships can assume many forms, and the
growth of e-commerce has facilitated their development. In broad terms, we can
classify these entry modes into direct and indirect methods. A direct marketing
channel is one in which the exchange partner takes a membership position in the
home country or region. A membership position implies that the exchange partner
actually becomes a player in the domestic economy. For example, Ford Motor
Companys operations in Australia managed local production, distribution, and
dealerships. Ford automobiles were manufactured and marketed locally, while
Australia was also used as a distribution base for shipments to other regional
markets, like New Zealand. (In 2013 Ford stopped making cars in Australia.) There
are several types of direct entry modes:
Local Facility. The local facility method involves the development of a company-based management team operating in the host country. The level of corporate
involvement tends to vary greatly based on the industry, channel function, and
market. This involvement may range from having a local manufacturing facility
to simply having a domestic salesforce. The host-country facility is usually controlled from a home-country location.
Marketing Subsidiary. In this mode, the channel member establishes a
subsidiary company in the host country or region. The subsidiary then behaves
as an essentially autonomous unit and tries to develop a strong local presence.
Subsidiary operations in international channels often operate under a different
name or different set of rules. The subsidiarys management is typically based in
the host country.
Foreign Sales Agents (FSAs). Foreign sales agents are company designates
that, for the most part, function as a sales and support staff for goods produced
in home-country locations. FSAs do not take title to goods; instead, they operate
fairly autonomously, arranging for the consummation of orders. In many cases,
FSAs also are responsible for managing return goods and customer satisfaction.
FSAs generally represent an entire portfolio of related products produced by
several competing firms, and they alone shape the degree of representation afforded to each channel members offering. Accordingly, FSAs have a great deal
of power because they become local industry referents to customers.
The other major international entry mode involves indirect marketing channels. When indirect entry is used, the domestic channel member manages the
distribution of products and/or services in a foreign target country or region

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through foreign designates. A foreign designate is any intermediary that contributes to


the distribution of domestically produced goods through some foreign target
market. Foreign designates are also responsible for ensuring local customer satisfaction. The most prevalent types of indirect entry modes are:
Export Management Companies (EMCs). Export management companies
offer the services of a manufacturers representative who specialises in cultivating international exchange relationships in particular locales. The manufacturers
representative is generally based in the country or region, and has expertise and
experience critical to the market of interest. A manufacturers representative
functions as a front person for the channel member. This individual essentially
controls the companys position in the marketplace. As its designate, the EMC is
charged with providing a domestic presence for the foreign channel member.
Piggybacks. Piggybacks involve a joint effort at international market entry
generally shared among several channel members. Piggybacking is a coordinated
effort in which different exchange partners perform their own specialised channel functions in a foreign market. One channel member may provide logistics
management and another inventory control, while still another provides customer service. The challenge lies in determining how best to coordinate the
piggybacked functions in an international domain. The goal is to synchronise
each function to assure smooth channel flows. While they do not currently account for a large percentage of new foreign market entrants, piggybacks are
increasing because of the growing influence of global alliances.
Foreign Distributors. Foreign distributors are the most common way for firms
to indirectly enter a foreign market. Here, an established domestically based
distributor operating at the wholesale or retail level is contracted to develop and
cultivate exchange relationships within the entry market. These distributors take
title to goods, usually stock inventories, and provide local marketing activities.
These marketing activities vary depending on the nature of the exchange relationship, but may include sales, sales support, and customer service. Foreign
distributors are valuable because they provide an immediate market presence.
Foreign distributors generally also have pre-existing customer contacts. The
disadvantage is that distributors have control over the channel members marketing efforts in the foreign country.
Trading Companies. Trading companies are large, international channel
members that have a worldwide presence. Companies like Japans Mitsubishi
trade a wide variety of products across the world. What separates trading companies from other types of indirect marketing channels is the expanse of their
market coverage. Trading companies engage in global distribution. They possess
a great deal of international marketing expertise and can provide rapid entry into
selected international markets.

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Although we categorised international market entry modes into direct and indirect methods, do not assume that all channel members seeking foreign expansion
are limited to one or the other broad entry option. Channel members may actually
use several direct and indirect entry modes simultaneously in a single international
market, depending on the level of market presence they wish to establish. Other
methods for entering foreign markets such as licensing also exist, but lie beyond the
scope of the present module. Exhibit 8.2 summarises the direct and indirect
international channel options.
Exhibit 8.2

Indirect and direct market entry strategies

Activities performed in host


country
Marketing only
Marketing and production

Companys involvement in activities


Indirect/Low
Indirect exporting
Contractual methods

Direct/High
Direct exporting
Foreign direct investment

Which entry mode is best? For any given firm the answer still lies in the extent to
which that channel member is willing to delegate control and responsibility to its
international exchange partners. In international markets, there is also a need to
adapt in the face of changing environmental circumstances.

8.4

Interface between International Marketing Channels and


the Environment
The influence of the macroenvironment on channel members operations and
performance was discussed in Module 5. The influence of the macroenvironment is
especially strong in international channel settings. Why is this so? For one thing, the
international environmental domain is much larger and more complex. For another,
channel members face a far more heterogeneous set of environmental influences in
international settings.
As we know, forecasts of the future are usually imperfect. For this reason, those
involved in international channel relationships inevitably encounter unexpected
changes in their environment. Kryptonite Corporation, an MNC that makes locks
for bicycles, cars, and motorcycles, established relationships with several foreign
distributors. Kryptonite has managed these relationships successfully even in
emerging markets such as Venezuela and China. Peter Zane, Kryptonites president,
suggests the successful management of international exchange relationships depends
on a combination of analysis and gut feeling.8
As Zane suggests, no precise formula exists for dealing with the complexity of
international channel relationships. However, it is still important to evaluate each
category of environmental conditions before international channel management
strategies are formulated. International environmental conditions can be classified
into five categories: economic, political/legal, sociocultural, technological, and

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physical/geographical factors. Notice that this classification is similar to the one


introduced in Module 5.

8.4.1

Economic Factors
The overall economic condition of the host country exercises a major influence on
international channel relationships. Unforeseen changes in inflation, employment
levels, monetary policy, or interest rates will each affect channel performance.
Unfavourable economic trends can often lead to the termination of international
relationships.
For example, in 1992 Germany decided to increase domestic interest rates to
combat the onset of inflation. When Italy and the United Kingdom refused to
follow Germanys lead, there was an overnight devaluation in the Italian lira and the
British pound sterling. While Germanys action improved its trade relationships with
the US, US exports became less attractive in the UK and Italy. This change in the
exchange rate proved especially important for US-based TERs who were pursuing
regional-oriented channel strategies in Europe.
Recall from Module 5 that a variety of economic indicators impact channel relationships. In the international arena, some of the most important indicators are
recessionary conditions, Gross Domestic Product (GDP), inflation levels, government spending and taxation, and currency availability.
Recessionary conditions usually uncover any underlying structural problems in an
economy, such as overregulation. This was the case in Spain, where channel partners
had to contend with overregulated service sectors, rigid labour markets, and
powerful professional unions. General Motors plant in Figueruelas, Spain, experienced a loss of competitiveness during much of the 1980s as its labour costs more
than tripled. But once the Spanish economys structural inefficiencies were uncovered by a recession, Spains socialist government was able to enact several labour
reform laws. MNCs were allowed more flexibility, and GMs Spanish operations
soon turned a profit.9
A falling Gross Domestic Product (GDP) often serves as an indicator of the level
of political risk. Despite opportunities for high returns, the threat of social unrest, a
military coup, or even war continue to make certain countries risky markets in which
to develop channel relationships.
In the EU, the annual average inflation rate was relatively constant between the
year 2000 and 2007 at around 2 per cent, but in 2008 it rose sharply to 3.7 per cent.
This can be largely attributed to rapid increases in energy and food prices. In
addition, consumer prices for food rose on average by 6.7 per cent. The increase
was particularly associated with steep price increases for dairy products, oils and
fats.10 In countries where inflation is high, companies may need to raise prices
frequently, as the currency is continually being devalued.
To bring inflation under control, governments sometimes resort to drastic
measures such as wage and price controls. Such was the case with the Cruzado Plan
implemented by the Brazilian government in the 1980s, or the wage and price
freezes enacted in the US by the Nixon administration in the early 1970s. History

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suggests that high inflation is often associated with political unrest in developing
nations. Unfortunately, such trends frequently inhibit the types of channel investments that would partially relieve the inflation.
The level of government spending and taxation in the local country of interest
should also be contemplated by those firms involved in or considering involvement
in international channel relationships. Governments have been known to run large
budget deficits. These deficits are basically financed by printing money on a needto-have basis. Over time, such fiscal mismanagement promotes inflation that, as
noted previously, further complicates exchange relations.
Even the largest corporations or strategic alliances will have little control over a
nations fiscal policies. Therefore, channel members should pursue any of several
methods available for hedging against unfavourable fiscal policies in target nations.
Richard Hall, a senior vice president in corporate risk management at MTB Bank,
offers several recommendations for overcoming the negative consequences otherwise
associated with unfavourable fiscal policies:11
Research Currency Histories. Channel members should be aware of historical
fluctuations in the currency of any country or region. American firms should not
be swayed by US dollar-only transaction terms. A currency exchange actually
takes place in all international trade regardless of the type of currency used.
Establish a Walk-Away Rationale. Because profit margins are allocated
among channel members, some pre-specified criteria should be in place for deciding when to maintain or forsake an international exchange relationship. If
profit margins fall below a pre-specified standard, the channel member should
withdraw from the channel relationship. The impact of negative fiscal policies
can often even be detrimental to channel relationships transpiring in other countries.
Develop Flexible Transaction Structures. Currencies are not the only options
available for consummating transactions. For example, Osbon Medical Systems,
a manufacturer of vacuum therapy devices for male impotency, cannot always
rely on the value of a countrys currency. Osbon willingly uses barter or merchandise exchanges to compensate distributors for returned goods in such
situations.
Select Experienced Exchange Partners. Prospective exchange partners
should demonstrate knowledge of or experience with the relevant economic
environment. Why would anyone initiate a relationship with an exchange partner
that possessed no specialised knowledge of the market area?
Finally, whether the host country is experiencing a trade surplus or deficit directly
influences the amount of currency available for the exchange partners. In the course
of conducting international business, each party to the exchange must possess some
confidence in the flow of currencies or other transaction assets. If a country is
running a trade deficit, its government is more likely to impose restrictions on
foreign channel members. These restrictions will probably involve the repatriation
of some profits. In effect, such restrictions impose higher tariffs on goods.

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8.4.2

Political/Legal Factors
The extent to which a host nations political/legal system promotes or represses
direct foreign investment or ownership in its local economy dramatically influences
international channel environments. Gus Tyler, a Senior Fellow at the Aspen
Institute, maintains that economic globalisation is leading to an imbalance of power
between international and domestic marketing channels.12 MERs, TERs, and GERs
are gaining power at the expense of national governments as countries pit themselves against one another. Furthermore, nations have been known to compete
against one another to obtain a particularly desirable MNC. These bidding wars
often become so fierce that the economic welfare of the winning nation is diminished. At other times, international exchange relationships undermine domestic
labour unions by moving operations to low-wage countries.
When the regulatory environment becomes uncomfortable for exchange partners, they can usually relocate to more favourable markets or select alternative
channels of distribution. The US mining industry provides an illustration. Environmental regulations and red tape have, on many occasions, delayed American mining
activity for years. While domestic court proceedings grind on, US mining companies
are increasingly pursuing alternative venues and international exchange partners
abroad.
The Crown Jewel Mine, a joint venture involving Battle Mountain, Inc., and
Crown Resources Corporation, illustrates the effect of this red tape. The Crown
Jewel Mine had to obtain 56 different permits from 32 agencies to begin its operations. The mines cost of complying with US regulatory requirements was a
staggering $5 million literally before the first spade was turned. An increasing
number of US mining companies are moving into Latin America in order to stay in
business. Ironically, the big US mining operations follow strict Environmental
Protection Agency standards in all of their overseas operations.13
Many countries view foreign investment as a necessity for their economic advancement. These nations encourage foreign investment through tax incentives or
providing breaks on infrastructure investment costs. The view that foreign investment is generally good for the host countrys economy was substantiated by a report
released by the Paris-based Organisation for Economic Co-operation and Development.14 Channel members operating in such nations usually find it easier to
coordinate their exchange relationships. The EU has a common currency and most
countries now deal in US dollars or a few other hard currencies.
In nations that have a historical basis for distrusting foreign corporations, attempts to restrict or curtail their involvement through regulations, punitive taxes, or
outright expropriation are often initiated. Such was the case in India. In the late
1970s, India required Coca-Cola to share its secret formula with the local subsidiary
if it wanted to continue doing business there. Coca-Cola refused and actually halted
operations in India for almost 16 years.15 No matter how large or powerful the
channel member is, it cannot always avoid the effects of punitive national policies.

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8.4.3

Sociocultural Factors
The beliefs, values, and lifestyles that prevail within a target nation should be
evaluated before an international marketing channel is developed. All exchange
activity occurs within the boundaries of a social system. That social system reflects
the norms and values native to the marketplace. Thus, all marketing channels are
affected by the social system in which they do business.
Too often, channel members treat an international market as a single entity to be
conquered. Doing so is usually a mistake. The fact is that virtually all countries
populations are made up of several different homogeneous consumer segments that
jointly define the social system of that country. These consumer segments often differ
from one another. International marketers must, therefore, deal with the norms and
values associated with the different market segments within the countries they pursue.
Because of the varying desires of these often different segments, international
exchange relationships become rather complex.16
To illustrate the effect of social systems, consider that Coca-Colas Diet Coke
product bears a different name in various parts of Europe. For example, in France,
it is called Coca-Cola Light. While the term diet appeals to the health-conscious
consumer movement in the US, a diet evokes different images in Europe. There,
diet connotes medicinal properties. Any misinterpretation of the meaning associated with this simple concept could jeopardise the relationship between Coca-Cola
and its consumers in France. This surprising inconsistency among US and French
consumers leads us to consider culture.
Culture is the shared meaning assigned to individuals beliefs, values, and customs that results from those individuals interactions with their social system. This
shared meaning allows members of the social system to feel unified as part of a
larger whole. Culture helps members of any society define the appropriateness of
their behaviours. It also simplifies behaviours by telling people what they can and
cannot do. Remember, however, that individual consumers do not have to follow
the behavioural instructions imposed by their culture. Culture has four basic
functions:17
Culture provides a way to classify exchange partners behaviours and events.
It provides appropriate codes or standards of behaviour among exchange
partners.
It prioritises codes or standards of conduct in exchange relationships.
Lastly, culture legitimises the use of certain proactive and reactive exchange
behaviours, while condemning the use of other exchange behaviours.
Culture can be viewed as both the lens and the blueprint. The lens analogy implies
that culture is a viewfinder through which all phenomena are seen. Culture influences how various symbols will be interpreted and assimilated by its members. In
turn, the blueprint analogy points toward the connection that exists between
culturally approved social activity and productivity. Culture essentially determines
how the world will end up being shaped by human effort.18 To successfully develop
international relationships, prospective exchange partners must adapt to the culture
of their new channel.

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By being sensitive to these socially and culturally based differences in international marketplaces, exchange partners have a better chance to cultivate long-term
relationships. Moreover, exchange partners enhance the efficiency with which they
utilise the local workforce by eliminating the ill will that would otherwise result if
local customs and norms were disregarded. Foreign markets can then be more easily
penetrated.
International exchange partners who fail to adapt to local sociocultural environments also will experience higher rates of turnover and burnout among international
employees.19 Even the largest domestic corporations sometimes underestimate the
potential cultural problems of globalisation. Time Out 8.3 shows a situation where
cultural influences need to be taken into account.

Time Out 8.3 ______________________________________________


Cinema Expansion in China
Founded over 50 years ago, UltraStar Cinemas operates a small chain of seven
theatres in Southern California and Arizona. UltraStar is recognised as an early
adopter of digital cinema, but faced with a saturated market at home, it is taking
steps to introduce its cinema technology overseas to China. In 2013 UltraStar
Cinemas formed a joint venture with Letian Entertainment to develop and
operate more than 40 theatres in China. The theatres will offer a range of
entertainment alongside movies, including concerts, sporting events, musicals,
operas and other cultural events on the big screen using digital cinema capabilities. The venture is favourable for both sides: UltraStar will bring industry
knowledge and resources to the partnership, and in return benefit from Chinas
rapidly growing demand for movies.
Questions
What are the cultural implications of this joint venture?
What problems might arise if the partners are insensitive to cultural differences, in terms of organisational culture and market segments targeted?
Adapted from Verrier, Richard (2013), UltraStar Cinemas Forms Joint Venture to Build Theaters
in
China,
Los
Angeles
Times
[online],
available
at:
http://www.latimes.com/entertainment/envelope/cotown/la-et-ct-ultrastar-china20130815,0,6696153.story [Accessed 19 September 2013].
__________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

8.4.4

Technological Factors
Technological advances can lead to a more efficient use of raw materials, improved
manufacturing productivity, and improved product quality. Such advances force
international exchange partners to monitor competitive technologies. Naturally, the
rate at which new technology is introduced and adopted will differ across markets.
Innovations diffuse more rapidly through the relevant social system in some nations
and regions than in others.
For example, the acceptance of innovations in the emerging economies of Eastern Europe has been much slower than was the case in the many emerging

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economies in South East Asia. The difference is partially due to the absence of a
sophisticated infrastructure to support the spread of new technologies throughout
the Eastern European region. The slower adoptions may also be linked to the
peculiarities of Eastern Europes sociocultural environment, which was dominated
by the Soviet Union for nearly 50 years.
The adoption of new technologies is not stagnant. It wasnt too long ago that
China produced nearly no televisions, while the US produced many brands of
televisions. Today, the opposite is true: the US does not have a single television
manufacturer, and China is among the worlds biggest television producers. China is
similarly competing in the computer circuitry industry a market that was long
dominated by neighbouring Taiwan. Indeed, China is now among the worlds fastest
growing consumer markets.
Technological advancements may also be adopted in different ways by different
cultures. While Japan openly embraced the advent of automated teller machines
(ATMs), it wasnt at all receptive to the Western ideal of more convenient banking.
Japanese ATMs do not all offer 24-hour banking. In fact, many Japanese ATMs
close at 7.00 pm because the Ministry of Finance feared that 24-hour banking would
contribute to unhealthy spending habits.20
How do new technologies spread throughout the marketplace? Since consumers
acquire goods and services through retailers, the retail sector is most often the
source of new technologies. Kacker identified four ways in which retail technology
is transferred internationally:21 (1) seminars and training programmes, (2) foreign
direct investment, (3) management contracts and joint ventures, and (4) franchising.
Changes in technology also influence how channel transactions are conducted.
Many new technologies have expedited communications between exchange partners. For example, tiny chips known as radio-frequency identification (RFID) tags
are now used in many industries to wirelessly transfer data. They can be used to
identify goods and track them through assembly lines and warehouses, for example.
Technological advances now afford faster deliveries, which have tended to upgrade
the exchange expectations among channel members. Still, the promise of technological improvements are always constrained by a given cultures willingness to adopt
innovative products and services.

8.4.5

Physical/Geographic Factors
The topography, natural resources, regional climate, and weather patterns of a target
country affect exchange relationships. For example, doing business in the Russian
Far East which stretches from the Sea of Japan to the Arctic Ocean, with a rugged
terrain and frigid weather frequently requires special adaptation from international
channel members. As trade between the Russian Far East and the Pacific Rim
region grows, interested exchange partners are adjusting their transportation and
logistics capabilities.22 FESCO, the Russian Far Easts largest commercial fleet, has
dramatically increased its profitability based on its ability to develop transportation
and logistics relationships with its nearby Asian neighbours. This regions seaports
often compete directly with Americas west coast ports. For example, the Port of
Nadhodka has emerged as a bulk cargo powerhouse operating in the Russian Far

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East. This otherwise desolate area is exploiting its geographic proximity to the
Pacific Rim nations to build a differential advantage as a channel of distribution.
In some ways, however, natural physical and geographic advantages are diminishing with the emergence of new distribution technologies.23 A country or regions
size is no longer so critical, either. For instance, the small Benelux region (Belgium,
The Netherlands, and Luxembourg) dominates European transportation. Twothirds of all goods shipped transnationally inside European borders during recent
years have passed through the Benelux region. The differential distribution advantage enjoyed by Benelux is based on its central location, excellent roads and
ports, and transportation savvy.24 But, above all, Beneluxs advantage is predicated
on its ability to develop friendly relationships.

8.5

Selecting International Exchange Partners


While an entire module is dedicated to the selection of channel partners, the process
by which international partners are chosen warrants special attention. International
relationships are particularly difficult to manage successfully because of the macroenvironments complex nature. This makes the channel member selection process
even more important. The overriding goal in selecting international exchange
partners should be to identify opportunities to develop and secure strategic alignments. The CRM indicates that channel member selection will impact both the
interaction process and the internal channel environment. If prospective partners
are pursuing goals that conflict with one another, there will be little opportunity for
the relationship to flourish. Indeed, the quality of the channel relationship is the
most important factor affecting the success with which new foreign markets can be
entered.25
Selecting the wrong channel partner invariably proves costly. In many instances,
the local exchange partner is held accountable for performance in the target
marketplace. Each firm taking part in an exchange relationship wields substantial
power because of the need for someone to have local market expertise. So even the
less powerful partner usually operating in the target country is still influential. To
illustrate, in recent years PepsiCo discontinued its relationship with Perrier, which
had been charged with handling the distribution of PepsiCo products in France.
When PepsiCos market share declined, it lay much of the blame at the feet of
Perrier.26 Although this relationship had spanned more than two decades, it was
summarily terminated. Perrier is now part of Swiss food giant Nestl, which is
counting on Perrier to help improve its market position in France and other
European nations. And, yes, Perrier now competes directly with PepsiCo.
Regardless of the care taken, the extraordinarily dynamic nature of international
channel environments guarantees that there is no way to ensure that firms will
successfully select their partners in international marketing channels. In most
instances, significant environmental circumstances lie beyond the control of either
partner. The process of selection, then, may be best approached as a refinement
process with multiple decisions.

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Several basic criteria need to be evaluated when international partnerships are


being initiated. We call these factors the Five Cs: Costs, Coordination, Coverage,
Control, and Cooperation. The Five Cs are useful for several reasons. First, they are
easily identifiable most exchange partners have access to this information in some
form. Second, these factors are applicable across all countries or regions. Finally,
firms can make quantitative assessments of each C prior to entering any international exchange relationship.

8.5.1

Costs
What costs are associated with the selection of a particular exchange partner? Three
types are especially germane. The first is initial costs, which involve those outlays
needed to set up the marketing channel. These outlays include the expenses of
identifying and initiating communications and negotiation with prospective exchange partners.
Preservation costs are the expenses of maintaining an exchange relationship.
They include the disbursements necessary to provide salespeople, promotional
materials, and accounting systems, as well as to cover travel expenses. Preservation
costs also include the allocation of profit margins between the exchange partners.
Preservation costs are often difficult to estimate. For example, new regulations,
technological changes, or the entry of new competitors would significantly influence
preservation costs.
The third major consideration is logistics costs. Logistics costs reflect the expenses related to transporting goods and managing inventories. Several questions
must be answered to calculate logistics costs. These include: Who will be responsible for stocking inventories? Who receives returned goods? Who is responsible for
making transportation arrangements?

8.5.2

Coordination
This factor requires that prospective partners estimate how each of the necessary
marketing functions (i.e., pricing, promoting, distributing, negotiating, etc.) will be
allocated among the channel participants. A preliminary description of which
partner will perform what channel function(s) should be derived for each potential
exchange partner. This preliminary description draws heavily on the expected
competencies that each firm brings to the international marketing channel. While a
firms distinctive competencies are usually easily identifiable, each partners competencies relative to the other partners can prove difficult to assess without prior
experience. It is not unusual for prospective exchange partners to provide evidence
of their role performance in previous or ongoing exchange activities.
Considerations of coordination also involve projecting how well the new exchange partner will fit within an existing channel system. International exchange
relationships often involve networks of exchange partners. It is imperative that
members of these networks be able to work well with one another.

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8.5.3

Coverage
The territorial coverage that a prospective exchange partner can comfortably handle
should be determined and agreed upon. Will a single exchange partner provide
sufficient coverage for the targeted market? Or, are several exchange partners
required? This criteria is not as easily evaluated as it might seem. Too many international exchange relationships are based on inappropriately loose assumptions about
the actual size of the target market. Realistic assessments of how much effort will be
required by each exchange partner to facilitate customer satisfaction, while achieving
reasonable profits, should be made.
The existence of special environmental circumstances that may inhibit a new
exchange partners ability to successfully service a trading area is another coverage
issue that merits attention. For example, channel ownership is regulated in many
parts of South East Asia. In Malaysia, a local distributor must have partial Malay
ownership in order to operate. The Malaysian constitution has designated Malays as
the chosen people, and they are given preferred status. On the other hand, neighbouring Singapore requires no Malay ownership in its businesses. Thus, one might
expect to find less restrictive distributors available from countries contiguous to
Malaysia than in Malaysia itself.

8.5.4

Control
Exchange partners must negotiate with one another to determine who will control
key channel resources. When an exchange partner demands an inappropriately high
level of control in certain areas, the chances for cultivating a long-term relationship
are dampened. The exchange partner targeted by such control efforts is likely to feel
less secure and optimistic. Feelings of vulnerability frequently exist within international exchange relationships anyway because the exporting partner likely already
feels a sense of dependency.
It is difficult to forecast precisely how power will be exercised in international
channels. Exchange partners may review their prospects history to assess the
prospective firms tendency to pursue control over channel relations. But questions
such as: what is the average length of this prospects current and past exchange
relationships? or: why did its previous relationships fail? should be answered. This
research should provide valuable insight into how the prospect is likely to exercise
power in future exchange relationships.

8.5.5

Cooperation
Finally, issues of cooperation are an important concern in the selection process,
although they may likewise prove difficult to assess. From the early stages of
negotiation, potential exchange partners receive cues from one another. These cues
can help indicate the degree to which a prospect will be flexible and cooperative in
the pursuit of mutually satisfying transaction terms. One such cue may be reflected
in a sixth C, namely, the level of Commitment the prospective channel partner has
toward the proposed relationship. A US multinational corporation may ultimately
select Firm A rather than Firm B as an international partner because Firm A is more

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committed to the internationalisation process. Such commitment also suggests Firm


A is more likely to be cooperative. Cooperation is essential because its presence
suggests an opportunity to attain strategic alignment in the prospective relationship.

8.6

International Exchange Relationships: Successes and


Failures
By now, you understand the complexity of successfully developing and maintaining
international exchange relationships. International exchange can occur at any
channel level and in a wide variety of modes. Still, there is one overriding concern at
all channel levels: the ability of the channel member to manage dynamic environmental factors. Failures in international relationships usually result from one or
more of the following factors:

Differing expectations among exchange partners.


Slow reactions to changing market conditions.
Clashes in exchange partners corporate cultures.
Prematurely developed international exchange relationships.
The only thing known for sure about international exchange relationships is that
their numbers are increasing rapidly. While international exchange relationships are
risky and often difficult to administer, they also provide opportunities or advantages
to those firms that elect to participate in them. Among other attributes, international
exchange relationships can help channel partners:
Address shortfalls in how a markets needs and wants are being satisfied by
current entrants.
Optimise their manufacturing and distribution capabilities.
Share the risks associated with entering new markets.
Facilitate new product innovation.
Gain and then exploit economies of scale.
Extend the market scope of their existing operations.

8.7

International versus Domestic Channel Relationships:


Some Perspective
Whether they are performed/made for an international or domestic market,
marketing channel tasks and management decisions remain fundamentally the same.
Product positioning, pricing, promotional, and distribution programmes must be
developed in either setting. The same knowledge- and experience-based expertise is
required for success in both market settings. The only real difference lies in the
context in which they occur.
When undertaking any marketing and/or channels planning effort, the primary
task is to learn how various markets differ in terms of consumer organisational
choice/patronage behaviour, market potential, infrastructure, institutions available
to perform marketing functions, and the receptivity of markets to a firms domestic

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or non-national marketing efforts. From this perspective, marketing to diverse


cultures in the US can prove just as challenging as marketing to foreign markets.
You can, for example, market to Hasidic Jews, Hopi Indians, Vietnamese, and
Lebanese-born consumers all living in the US. You may also take into consideration the fact that Hispanics living in Florida, New York, or California differ
substantially from one another in their tastes and preferences because of their
predominately Cuban, Puerto Rican, or Mexican origins. A unique marketing mix
package needs to be designed for each culturally diverse micro-market segment.
Nothing more, or less, is necessary in international markets.
In the years ahead, the US population and the demand for goods and services will
not grow at sufficient levels to support rapid growth in the domestic economy.
Therefore, the future growth and success of American business will depend on its
ability to compete vigorously in the international marketplace. From an economic
perspective, then, no topic should be viewed as more important as is international
marketing.

8.8

Key Terms
culture
direct marketing channel
global exchange relationship
indirect marketing channel
initial costs

logistics costs
multinational exchange relationships
preservation costs
strategic alignments
transnational exchange relationships

Learning Summary
Channels firms enter risky waters when they develop international exchange
relationships. Still, more firms than ever before are engaging in international trade.
The primary reasons for seeking membership in international exchange relationships
are to: facilitate market entry, boost market share while gaining synergistic advantages, introduce new products through existing channels, improve service
performance, or respond and adapt to changing local market conditions.
International channel arrangements can be characterised in many ways. The term
international merely suggests something is occurring between nations. Those firms
operating in different countries are generally called multinational corporations.
Several categories of international exchange relationships exist. The first is multinational exchange relationships (MERs). MERs occur between trading partners that
operate in foreign markets as if they were local concerns. MERs offer international
marketers an opportunity to engage in what might be described as a series of
domestic strategies executed in foreign markets or countries. MERs are based on
one exchange partners ability to effectively adapt to the environmental circumstances and opportunities prevailing in a market of interest. Each MER is
customised to satisfy the needs or master special environmental conditions associat8/22

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ed with a foreign market. Transnational exchange relationships (TERs) also exist.


Rather than engaging in a country-by-country adaptation, TERs approach international relationships from a regional perspective. TERs follow channel strategies
tailored to the requirements of entire market regions. While TERs generally involve
fewer exchange partners than do MERs, these partners are usually much larger in
scope. Global exchange relationships (GERs) are a third category. GERs involve
essentially boundaryless relationships among exchange partners. GERs do not
develop on the basis of markets; instead they result from the pursuit of strategic
alignments. Strategic alignments exist when there is an agreement or shared consensus between the organisational visions of two or more exchange partners. GERs
require the highest levels of integration among international partners.
Entry-level international exchange relationships can assume many forms. For
simplicity, we classify these entry modes into two opposing categories: direct and
indirect methods. The direct method is one in which the exchange partner takes a
membership position in the home country or region. A membership position
implies that the exchange partner actually becomes a player in the foreign economy.
When indirect entry is used, the channel member manages the distribution of
products in a target country through foreign designates. A foreign designate is any
intermediary that facilitates the distribution of domestically produced goods through
some foreign target market.
The repercussions of the macroenvironment are acute in international channel
relationships. No formula exists for dealing with the complexity of international
exchange relationships. It is nevertheless important to evaluate environmental
conditions before an international channel relationship is consummated. These
environmental conditions fit into five basic categories: economic, political/legal,
sociocultural, technological, and physical/geographical factors. Unforeseen changes
in economic cycles, monetary policy, and interest rates always influence channel
performance. Unfavourable economic factors often lead to the termination of
international relationships. The extent to which the political or legal systems of a
host nation promote or repress foreign investment in its local economy dramatically
influences international channel environments.
The beliefs, values and lifestyles that prevail in a target nation should be evaluated when international marketing channels are developed and executed. To develop
successful international relationships, prospective partners must adapt to any
cultural idiosyncrasies present in their new channel role expectations. By being
sensitive to these socially and culturally based differences in international marketplaces, exchange partners can better cultivate long-term relationships.
Technological advances are leading to more efficient use of raw materials, improved manufacturing productivity, and superior product quality in all marketing
channels. Changes in technology also influence how channel transactions are
conducted. The topographic layout, natural resources, regional climates, and weather
patterns of a target-country also affects the exchange relationships consummated
there.
The process by which international partners are chosen warrants special attention. The overriding goal in selecting international partners should be to identify
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Module 8 / Internal Channel Environment

opportunities to develop and secure strategic alignments. When prospective partners


pursue conflicting goals, the relationship is unlikely to flourish. International
channel environments are dynamic, and in many instances significant environment
circumstances lie beyond the control of either partner. The process of selection,
then, may be best approached as a refinement process. Several rudimentary factors
should be evaluated in this process. We call these factors the Five Cs: costs, coordination, coverage, control, and cooperation.
Three types of costs are germane. The first is initial costs involving outlays associated with setting up a marketing channel. Preservation costs address the forecasted
expenses of maintaining an exchange relationship. Finally, logistics costs reflect the
expenses related to transporting goods and managing inventories. The coordination
factor requires that prospective partners estimate how the necessary functional
operations will be allocated among the channel participants. The territorial coverage
that a prospective exchange partner is able to comfortably handle needs to be
determined and agreed upon, as well. A realistic assessment of how much effort will
be required by each partner to ensure customer satisfaction should also be launched.
Exchange partners likewise need to negotiate who will have control over key
channel resources. Issues of cooperation remain an important consideration in this
selection process. Cooperation is essential to attain strategic alignment in the
prospective relationship.
Failures in international relationships usually result from a breakdown in how one
or more of the following issues are handled: differing expectations among exchange
partners, slow reactions to changing market conditions, clashes in exchange partners corporate cultures, or prematurely developed international exchange
relationships.
While international relationships are risky and difficult to administer, they still
offer great promise. International relationships help channels partners to: address
current gaps in a markets needs or wants, optimise their manufacturing and
distribution capabilities, share the risks associated with entering new markets,
facilitate new product innovation, gain and then exploit economies of scale, or
extend the market scope of their existing operations.

Review Questions
Short-Answer and Essay Questions

8/24

8.1

The word national is a building block of this module. Its meaning changes as these
important prefixes multi-, trans-, inter-, and intra- are attached to the root word.
Define the prefixes.

8.2

If a company is multinational and has an international market orientation, how would


you describe its relationship orientation?

8.3

The relationship orientation of a global company is a channel network based on


boundaryless market. Describe its channel domain.

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Module 8 / Global Challenges and Opportunities

8.4

There are three criteria used to identify and characterise a multinational corporation
(MNC). Which of the criterion is the most difficult to apply?

8.5

When is the only time that transnational exchange relationships (TERs) are practical?

8.6

What is the most common method used by firms who want to enter a foreign market
indirectly?

8.7

List the three costs associated with the selection of a specific exchange partner.

8.8

Micah heard Ginny Hall, CEO of Hall & Hall Global Trading, speak at a luncheon
yesterday. She particularly impressed Micah when she said, Everything American is in
demand. From her speech, he has inferred that every American business should enter
the international arena. What is wrong with Micahs inference?

8.9

After 14 years of dazzling growth in the United States, most of the 60 million people
MTV-TV targeted were watching, and continued significant growth within the US
became an unrealistic goal. MTV had to start looking for international markets, and it
has been very successful in its quest. How would you define MTV in its role as international success story if you were told that MTV has multinational exchange relationships
(MERs) with its exchange partners?

8.10 The Little Fox Factory makes handcrafted cookie and canape cutters in original designs.
It has five employees, and is located in a small Ohio town. The more than 300 designs
that the company makes sell from $3.95 to $10.95. Visiting Canadians have been
particularly complimentary of the cookie cutters and have repeatedly asked if they were
available in Canada. The company does not have any money to invest in international
marketing, but it would like to sell its cutters in Canada. What is your recommendation?
Discuss both the advantages and the disadvantages associated with your recommendation.
8.11 Imagine that a company has developed a laundry detergent that is free of all chemicals
that are harmful to the environment and cleans as good as or better than any bleachadded detergent currently on the market. The detergent is concentrated and packaged
in bio-degradable tubs, and is priced as cheaply as ordinary detergent. The company
feels it has a mission to share its detergent with the world. It plans to set up marketing
subsidiaries in eastern European countries that were formerly part of the Soviet Union
bloc. How might international environmental factors adversely affect the companys
dream?

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Module 8 / Internal Channel Environment

Multiple Choice Questions


8.12 Why are international marketing channels developed?
A. To facilitate entry into new markets.
B. To boost market share.
C. To introduce new products through existing channels.
D. To respond and adapt to shifting market conditions.
E. To do any or all of the above.
8.13 Even though the Little Jalapeno Egg Factory has only been in business for a couple of
years, it already sells eggs in bars all over the eastern United States. A Canadian
restaurant supplier approached the owners of the company and asked if it could market
the eggs in Canada. Why might the owners of the Little Jalapeno Egg Factory consider
developing an international channel?
A. To increase the supply of jalapeno eggs.
B. To prepare for when sales start to decline in the US.
C. To allow it to introduce its new product through existing channels.
D. To extend the product life cycle for jalapeno eggs.
E. For any or all of the above reasons.
8.14 Three criteria have been proposed to identify and characterise multinational
corporations (MNCs). The ____ Criterion defines an MNC on the basis of its asset
holdings, employment base, net sales and/or profitability in a foreign country.
A. Performance
B. Behavioural
C. Financial
D. Channel
E. Activity
8.15 Multinational exchange relationships (MERs):
A. tend to be very centralised.
B. offer international marketers the opportunity to engage in different strategies
for each foreign market they do business in.
C. occur between trading partners who operate in foreign markets as if they were
local concerns.
D. are never customised to satisfy the needs or special environmental circumstances in a single foreign country or market.
E. are accurately described by none of the above.
8.16 Global exchange relationships (GERs):
A. require the highest level of integration of any of the exchange relationships.
B. are the focus of much controversy regarding their plausibility.
C. are not market-based.
D. develop through the pursuit of strategic alliances.
E. are accurately described by all of the above.

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8.17 When compared to multinational exchange relationships (MERs), transnational exchange


relationships (TERs):
A. tend to develop in more highly integrated operations.
B. involve more exchange partners.
C. have greater centralisation.
D. are becoming less important as new regional markets emerge.
E. are accurately described by all of the above.
8.18 Japans Nissan Motors Company used direct investment to establish Nissan Iberica SA in
Spain. The Spanish company behaves as an autonomous unit. Its Spanish-based management exports cars to other European countries and recreational vans to Japan. Nissan
Iberica SA is an example of a(n) ____.
A. foreign sales agent
B. trading company
C. marketing subsidiary
D. foreign distributor
E. export management company
8.19 US Steel (formerly USX) uses an independent sales and support staff for goods
produced in the United States and sold in foreign markets. This sales and support staff
operates in relative autonomy as it arranges for the delivery and use of its steel orders.
US Steel uses a form of direct entry called ____.
A. an export management company
B. a transnational distributor
C. a trading company
D. a foreign distributor
E. foreign sales agents
8.20 Bennett International headquarters is located in Miami, Florida. It specialises in serving
as a manufacturers representative in South America. It is an independent company that
provides a domestic presence for companies whose products it sells. Bennett International is an example of a(n) ____.
A. export management company
B. transnational distributor
C. trading company
D. foreign distributor
E. foreign sales agent
8.21 ____ involve a joint effort at international market entry generally shared among several
channel members. It is a coordinated effort in which different exchange partners
perform their own specialised channel functions in a foreign market.
A. Intermodal distributors
B. Export management companies
C. Piggybacks
D. Reciprocal exporting channels
E. Intramodal distributors

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8.22 Company X specialises in selling grain and processed grain. Because it is a trading
company, you know that the firm:
A. engages in global distribution.
B. is the most common way for a firm to seek direct entry into international
markets.
C. is a form of manufacturers representative.
D. has a perspective of the world similar to that of TERs.
E. is accurately described by all of the above.
8.23 Blue Bird Corporation, manufacturer of buses and recreational vehicles, chose to
export to Mexico when it learned that the bus market in Mexico City alone is much
larger than the entire bus market in the United States. The fact that lower-income
people are the typical bus patrons reveals an important ____ factor about Mexico.
A. legal
B. economic
C. geographical
D. technological
E. competitive
8.24 Before investing in a marketing subsidiary in any of the former Eastern bloc countries,
Denman Tire Company should:
A. research the historical fluctuations of the currency.
B. establish a walk-away rationale.
C. be willing to accept barter when hard currency is not available.
D. select experienced exchange partners.
E. do all of the above.
8.25 California Sunshine produces caviar from sturgeon it fishes from the Chinese side of the
Amur River. Its owner, Mats Engstrom, wanted to also be able to fish from the Russian
side of the river, which he couldnt do without permission from the Russian government. He wrote to the Ministry of Fisheries in Moscow and suggested a joint venture
that would allow him to expand his fishing to the Russian side of the river. After six
months, the ministry informed him that there were no fish in the Amur River, and the
joint venture offer was denied. Engstrom had a very good example of how the ____
factor of the international environment can negatively affect business.
A. legal/political
B. psychological
C. competitive
D. technological
E. physical/geographic
8.26 As a function of the ____ factor of the international market, OGara-Hess & Eisenhardt
has a very lucrative business selling armour-plated cars.
A. technological
B. competitive
C. physical/geographic
D. political/legal
E. psychological
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8.27 ____ is the shared meanings assigned to individuals beliefs, values, and customs
resulting from those individuals interactions with their social system.
A. Behaviour
B. Culture
C. Learning
D. Attitude
E. Perception
8.28 The BayGen Freeplay radio operates on a crank. The radio takes a minute to wind, and
then it will play for about 38 minutes. Its designed for areas of the world where there is
no electric power, and the people dont have sufficient money for batteries. The
existence of ____ factors created a need for such a radio.
A. technological, education, and social class
B. geographical and income
C. competitive, perceptual, and economic
D. education, geographical, and cultural
E. economic and technological
8.29 What is the most common method for new technologies to be introduced into the
marketplace?
A. Door-to-door selling.
B. Wholesalers.
C. Retailers.
D. Free demonstrations.
E. Trade shows.
8.30 The sociocultural factors that affect the international marketplace include:
A. climate and weather patterns.
B. language spoken.
C. types of produce grown.
D. methods of harvesting crops.
E. all of the above.
8.31 The three types of cost associated with the selection of an international partner are:
A. tactical, strategic, and operational.
B. initial, preservation, and logistics costs.
C. functional, strategic, and tactical.
D. introductory, growth, and maturity.
E. introductory, maintenance, and daily.

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8.32 There are three types of costs associated with the selection of an international partner.
Which of the following is an example of an initial cost?
A. The cost of hiring computer specialists to establish a computer network
between the exchange partners.
B. The salesforces commissions.
C. Transportation costs for inventory.
D. Costs of preparing a direct-mail marketing piece.
E. Warehouse storage fees for excess inventory.
8.33 There are three types of costs associated with the selection of an international partner.
Which of the following is an example of a logistics cost?
A. The cost of handling returned goods.
B. The cost of printing product brochures.
C. The fee charged for setting up a communications system.
D. The cost of negotiating with prospective exchange partners.
E. The allocation of profit margins between exchange partners.
8.34 Failures in international exchange relationships usually result from:
A. slow reactions to changes in market conditions.
B. prematurely developed international exchange relationships.
C. clashes between the corporate cultures of the exchange partners.
D. the exchange partners having differing expectations of what the exchange
relationship will accomplish.
E. any or all of the above.
8.35 How do international exchange relationships help channel partners?
A. By optimising their manufacturing and distribution facilities.
B. By facilitating their new product development.
C. By allowing them to gain and exploit economies of scale.
D. By sharing the risks with them associated with entering new markets.
E. By doing all of the above.

Discussion Questions
8.36 How does environmental uncertainty affect global channel strategies?
8.37 Discuss the five primary reasons for developing international marketing relationships.
8.38 How do multinational, transnational, and global channel relationships develop?
8.39 Describe the relationship between the macroenvironment and the international
strategy.
8.40 Describe the influence of economic environmental factors on international marketing
exchange relationships.

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Module 8 / Global Challenges and Opportunities

8.41 Discuss the impact of social systems and cultural environments on multinational
marketing channels.
8.42 How are international exchange relationships initiated? What are five key factors that
must be evaluated when entering into international exchange relationships?

References
1. Verrier, Richard (2013), UltraStar Cinemas Forms Joint Venture to Build Theaters in
China,
Los
Angeles
Times,
(15
August),
[online]
available
at:
http://www.latimes.com/entertainment/envelope/cotown/la-et-ct-ultrastar-china20130815,0,6696153.story [Accessed 20 August 2013].
2. Bogaisky, Jeremy (2008), InBev Bags Anheuser-Busch, Forbes, (14 July), [online]
available at: http://www.forbes.com/2008/07/14/inbev-anheuser-busch-marketsequity-cx_jb_0714markets1.html [Accessed 20 August 2013].
3. Ramanathan, Arundhati and Raj, Amrit (2013), Renault, Nissan Decide to Stop Sharing
Auto Models in India, Live Mint and the Wall Street Journal, (15 July), [online] available at:
http://www.livemint.com/Industry/LA6kcyDIoiuZwhGGmRbKTI/Renault-Nissandecide-to-stop-sharing-auto-models-in-India.html [Accessed 20 August 2013].
4. Smirnova, L. (2011), Snickers Takes on Soviet Chocolate, The Moscow Times, (2 August),
[online] available at: http://www.themoscowtimes.com/business/article/snickers-takeson-soviet-chocolate/441466.html [Accessed 20 August 2013].
5. Banerjee, Neela (1993), Russia Snickers After Mars Invades, The Wall Street Journal, (13
July), B1.
6. Welsh, Jonathan (1995), Armstrong Forms Alliance to Sell a Product in U.S., The Wall
Street Journal, (7 December), B6A.
7. Jacoby, Neil (1970), The Multinational Corporation, Center Magazine, (May), 37.
8. From An interview with Peter Zane: A Booming Market for Security Locks,
(1993/1994) in Trade & Culture: How to Make it in the World Market, 1(Winter), 10102.
9. Choi, Audrey and Carlta Vitzhum (1994), GMs Success in Figueruelas Shows How
Spain May Make Itself a Better Home for Auto Makers, The Wall Street Journal, (29
April).
10. European Commission, Statistics Explained (2013), Consumer Prices Inflation and
Comparative
Price
Levels,
[online]
available
at:
http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/Consumer_prices__inflation_and_comparative_price_levels [Accessed 9 September 2013].
11. Hall, Robert (1993/1994), Finance, in Trade & Culture, 1(Winter), 11.
12. Tyler, Gus (1993), The Nation-State vs. the Global Economy, Challenge, (MarchApril),
2632.
13. Charlier, Marj (1993), Going South: U.S. Mining Firms, Unwelcome at Home, Flock to
Latin America; Citing Environmental Woes, They Step Up Spending in Newly Friendly
Lands Richer Ores Also Play A Role, The Wall Street Journal, (18 June), A1.
14. Keatley, Robert (1994), International-World Economy: Japan, Please Note: Foreign
Investment Is Really Good for a Nations Economy, The Wall Street Journal, (8 April),
A10.
15. Dubey, Suman (1993), Coca-Cola Resumes Presence in India, Expects Profits in Two or
Three Years, The Wall Street Journal, (25 October), A15.

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16. Terpstra, Vern and Ravi Sarathy (1991), International Marketing, Fifth Edition, Chicago, IL:
Dryden Press.
17. Terpstra, Vern and Kenneth David (1991), The Cultural Environment of International Business,
Cincinnati, OH: South-Western Publishing, 68.
18. McCracken, Grant (1988), Culture and Consumption: New Approaches to the Symbolic Character
of Consumer Goods and Activities, Bloomington, IN: Indiana University Press, 73.
19. Moffett, Matt (1992), World Business: Moving to Mexico: Culture Shock; High Growth
Lures Business to Mexico, But Staying There Requires Determination, The Wall Street
Journal, (24 September), R13.
20. Shapiro, Joshua (1993), The ATM as Cultural Stereotype, Institutional Investor, 27(11),
192.
21. Kacker, Madhav P. (1985), Transatlantic Trends in Retailing, Westport, CN: Quorum Books.
22. Steele, Lawrence (1993), Transportation Key to Russian Far East, Global Trade &
Transportation, 113(December), 20, 22.
23. Sheppard, Matthew (1993), The Changing Face of Intermodalism, Global Trade &
Transportation, 113(July), 14.
24. Jacobs, Jon (1992), Europes Friendly Shipping Center, International Business, 5(August),
54, 56.
25. Jeannet, Jean-Pierre and Hubert D. Hennessey (1992), Global Marketing Strategies, Second
Edition, Boston, MA: Houghton-Mifflin, 385416.
26. Dawkins, William (1990), PepsiCo Gets Go-Ahead to End Perrier Contracts, Financial
Times, (28 November), 32.

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PART 3

Internal Channel Environment


Module 9

Channel Climate

Module 10 Conflict Resolution Strategies


Module 11 Information Systems and Relationship
Logistics
Module 12 Cultivating Positive Channel Relationships

Marketing Channels Edinburgh Business School

Part 3 / Internal Channel Environment

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Impressions

Conflict

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Cooperation

Coordination

Edinburgh Business School Marketing Channels

Module 9

Channel Climate
Contents
9.1 Channel Climate: When Relationships Get Heated ...........................9/1
9.2 Important Channel Climate Behaviours ..............................................9/3
9.3 Achieving Cooperative Channel Climates ...........................................9/9
9.4 Conflict Resolution and Channel Climate......................................... 9/10
9.5 Compliance Techniques ...................................................................... 9/12
9.6 Relationship Building in Marketing Channels ................................... 9/16
9.7 Nurturing Channel Relationships ....................................................... 9/18
9.8 Improving Channel Performance through Cooperation................. 9/19
9.9 Key Terms ............................................................................................ 9/21
Learning Summary ......................................................................................... 9/21
Review Questions ........................................................................................... 9/22
Learning Objectives
After reading this module, you should be able to:
Discuss the role that channel climate plays in establishing and maintaining
exchange relationships.
Describe the processes contributing to cooperation and coordination within
marketing channels.
Distinguish between the roles of power and dependence within marketing
channels.
Explain ways in which conflict in marketing channels may be resolved.
Distinguish between the various compliance techniques in channel relationships.
Understand the relationship-building process in marketing channels.

9.1

Channel Climate: When Relationships Get Heated


Donnes assertion that No man is an island every man is a part of the main,1 has
never been more appropriate than today in marketing channels. There are no islands
in marketing channels, no place where firms remain unaffected by the actions of
other channel members. The Channel Relationship Model illustrates how the
internal channel environment impacts the interactions between channel members.
To go it alone in business would require total backward and forward integration.
And to achieve such integration would require marketers to somehow acquire the
ability to do all things well. Given enough time, money, and luck, marketers might
create brands and establish customer loyalty, and, thus, build up their own distribu-

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Module 9 / Channel Climate

tion systems. However, going it alone is a difficult perhaps impossible task.


Instead, successful businesses rely on exchange relationships in the form of marketing channels.
With relationships, however, comes the potential for conflict, particularly in
relationships between channel intermediaries. Conflict is always possible because
each channel member has its own set of goals and objectives that are frequently
incompatible with those of other channel members. Conflict between manufacturers
and intermediaries may in fact be inevitable because of the productivity paradox:
Manufacturers see their primary job as cost reduction, while other members of
marketing channels see their primary job as pursuing strategies of market differentiation. Actions taken by manufacturers to reduce costs often suppress many of the
activities necessary for differentiation, such as flexible planning, active product
development, quality improvements, and high levels of customised service. Other
manufacturer intermediary conflicts include: quality of management, territory
boundaries, margin sizes, and whether the intermediarys primary obligations and
loyalties should lie with customers or with the manufacturer.2
It is fundamental to the successes of marketing channels that these patterns of
inherent conflict be converted into coordinated channel partnership behaviours.
Then, those inherently contradictory views of what is important will not undermine
the channels competitive performance. Left to their own devices, manufacturers
and retailers will make decisions that work against each other.
Most of the opportunity to remediate such conflicts lies within a channels climate.3 This channel climate emerges from the personal interactions of the various
people, called boundary personnel, who represent the individual firms in the channel
system.4 Identifying the influence that climate has on the behaviours within marketing channels helps members design strategies to get along, and the likelihood of the
channels success improves as a result.
Exactly what is channel climate? When describing the concept or discussing the
consequences of channel climate within marketing channel settings, terms such as
coordination, cooperation, conflict, power, and dependence are typically used.
Channel climate emerges from the nature of the environment that exists within
the channel. It reflects the channel members perceptions of the prevailing norms,
attitudes, and behaviours of the members of a channel. It describes how the
organisation treats its members and interacts with the boundary personnel of the
other channel members. Channel climate also reflects how role specifications,
authority and power systems, and reward structures are formed and administered
within marketing channels.
In short, channel climate may be defined as the characteristics of the channel as
reflected in the perceived level of consideration that exists in the exchange relationship. Consideration, in turn, is comprised of the behaviours that reflect the
presence or absence of mutual respect, trust, support, friendship, and a concern for
the welfare of ones channel counterpart. Channel climate symbolises the channels
internal environment and influences the level of satisfaction that individual members have with their channel arrangements and outcomes. Channel members are
more motivated and satisfied, and experience less conflict, when their channel
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Module 9 / Channel Climate

climate is characterised by a sense of consideration for members needs. Basically,


most channel members seek openness, mutually shared channel objectives, commitment, cooperation, and eventually trust in their exchange relationships.
Favourable channel climates help achieve these desirable outcomes. The elements
that make up channel climate are shown in Exhibit 9.1. We begin Part 3: Internal
Channel Environment with a look at that internal environment as a whole the
channel climate. In this module, we will discuss the role channel climate plays in
developing exchange relationships with other channel members. We will also
address the behaviours that are present in the channel climate, how to manage these
behaviours, and how to resolve conflict.
Exhibit 9.1

Model of channel climate and its components

Channel climate:
The internal environment

EXCHANGE RELATIONSHIP
Norms

Role specifications

Practices

Attitudes

Power sources

Consideration

Behaviour

Reward structures

Policy

Channel
member A

9.2

Channel
member B

Important Channel Climate Behaviours


Channel climate exercises a critical influence on the attitudes and behaviours of
firms involved in an exchange relationship. Among the most important of these
behaviours are cooperation, coordination, conflict, the use of power, and dependence.

9.2.1

Cooperation and Coordination


Workable relationships with channel partners are a critical asset for any channel
members. By building cooperative and coordinated relationships, a firm can leverage
its limited resources through joint efforts with channel partners. Each partner then
gains the benefit of the others experience and ideas, and garners higher profits
through additional value-added services.
The channel climate impacts the success or failure of channel member transactions. To illustrate, consider the case of a chemical company which sells speciality
chemicals to the textile industry in Spain. The marketplace for its customers
products is highly volatile because fashion trends impose frequent product changes.

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As a result, the best interests of the chemical company and its customers are served
by establishing cooperative and coordinated relationships so they can develop the
next generation of dyes and finishing chemicals in advance of new fashions. If the
chemical company is not in synch with its customers, it will fail. This example also
illustrates the fact that as any supplier firm advances from more transactional to
more collaborative relationships, its market offering changes from a core product,
which addresses customers basic quality, price, and availability requirements, to an
elaborated product. Elaborated products are customised in terms of physical and
service attributes to satisfy customer needs.5 The chemical companys products are
elaborated because they are designed to meet the customers exact needs.
Cooperation reflects a channel members motivation to collaborate with another
channel members policies, strategies, tactics, and procedures. When there is
cooperation within a marketing channel, all members are moving together in the
same direction. Cooperation, in turn, requires coordination a synchronised effort
between channel members activities to ensure that each party achieves the goals of
the channel.6 A cooperative channel climate, then, is reflected in the members
willingness to work together for a common purpose. Similarly, a coordinated
channel climate exists when the members are working together in a harmonious or
synchronised fashion. In the CRM, a cooperative and coordinated channel climate is
the crux of the internal channel environment.
The pursuit of cooperation and coordination represents a logical strategic marketing response to conditions of uncertainty and dependence.7 Uncertainty can be
reduced and issues of dependence (resulting from inequities in the distribution of
power between channel members) can be managed by establishing formal or
semiformal exchange relationships with other channel members. Problems of
uncertainty or dependence are minimised by increasing coordination within a
channel or creating negotiated alliances.
Most channel relationships fail to develop in a coordinated fashion because of
poor relationship planning or poor relationship management. Channel members
infatuated with the prospect of a relationship of convenience with few strings
attached are ignoring a characteristic of all relationships: there is no such thing as a
long-term, cooperative, coordinated, no-strings-attached, convenient, easily maintained, one-sided relationship. Moreover, effective communication is critical to
achieving coordination between channel partners; without communication, it is
harder to derive the benefits of cooperation and easier for conflict to emerge. Time
Out 9.1 illustrates just how far out these efforts at cooperation can take channel
partners.

Time Out 9.1 ______________________________________________


Africans Silicon Savannah
Konza Technology City is Kenyas vision for a 5000 acre site about 60km
outside Nairobi, the countys capital. Dubbed Africas Silicon Savannah, the
project is expected to cost over $10bn and take 20 years to build. The intended
outcome is an IT business hub creating thousands of jobs and domestic and
foreign investment.
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The project aims to capitalise on the growing number of software developers in


Kenya, as well as attract business process outsourcing, data centres, call centres
and light assembly manufacturing industries. There are also plans for a university
focused on research and technology, as well as hotels, housing, schools and
hospitals. By August 2013, several leading organisations had expressed an
interest in Konza Technology City, including Kenyan mobile network provider
Safaricom and international mobile phone manufacturer Samsung.
A public private partnership was established to develop Konza Technology City,
with the Government responsible for developing basic infrastructure and
regulatory guidelines and Konza Technopolis Development Authority overseeing the building of the city. In addition to business investment, planning and
implementing a project of this size and complexity will involve a host of international partner organisations, from architects to engineers, economists to
experts in environmental sustainability.
Questions
Why will cooperation and collaboration be central to the success of Konza
Technology City?
How might issues of uncertainty and dependency arise, and how would
cooperation and collaboration help alleviate these issues?
Adapted from BBC News (2013), Kenya Begins Construction of Silicon City Konza, [online]
available at: http://www.bbc.co.uk/news/world-africa-21158928 [Accessed 19 September 2013];
Wakoba, S. (2013), Uhuru Kenyatta Asks China to Invest in Kenyas $10 Billion Konza Technology City, TechMoran [online], available at: http://techmoran.com/uhuru-kenyatta-asks-china-toinvest-in-kenyas-10-billion-konza-technology-city/#sthash.jcebbRZk.dpuf [Accessed 19 September
2013].
__________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

9.2.2

Conflict
Conflict is tension resulting from the incompatibility of the desired responses.
Channel conflict exists when channel members sense that the behaviour of other
channel members is impeding their performance or the attainment of their goals. As
you know by now, channels are not just economic entities; they are also social
systems characterised by both conflict and cooperation. For instance, franchising
channels are based on the recognition by franchisees that they can benefit from
joining established systems designed on high levels of cooperation. One challenge
that franchisers confront is how best to maintain control over their franchisees
without excessively constraining their franchisees entrepreneurial spirit. The success
of franchisers, in large part, depends on their ability to manage the friction that
results from the franchisers need and desire for channel control and the franchisees
desire for self-governance.8
Channel conflict passes through two stages: an affective/perceptual stage, in which
one perceives that conflict exists, and a manifest stage, in which one acts upon this
perception of conflict. Manifest conflict involves those behaviours that occur
when one channel member is seen as frustrating another members efforts to

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achieve goals or protect interests. Manifest conflict usually takes the form of verbal
or written disagreements. Channel conflict can also be latent. In this case, conflict
exists and someone is upset, but elects not to express his or her dissatisfaction
externally.
Conflict does not necessarily have to be harmful to channel relations. In fact,
when properly managed, conflict can lead to more information exchange or more
goal congruency among channel members. The trick is keeping conflict at a functional level rather than letting it devolve into something negative.

9.2.3

Power and Dependence


One really should not discuss the role of channel conflict without also introducing
the related concepts of power and dependence. Channel power is the ability of one
channel member to evoke a change in another members behaviour. A conflict of
interests or values between two or more channel members must first exist for
meaningful power relations to occur.9 If channel members A and B are in complete
agreement, A will freely give in to Bs preferred course of action or vice versa.
Under such conditions, there is less opportunity for power relationships to develop.
In channel settings, power is secured through the ownership and/or control of
resources that are valued by some other channel member. The power enjoyed by
Sears only takes on meaning when compared to the power held by Briggs &
Stratton, Lego, Kodak, or other Sears suppliers. Sure Sears is powerful. But when
compared to General Electric, another Sears supplier, exactly how powerful is it? In
channel relations, power is always a relative thing.
A channel members power is derived from the power bases, or sources of
power of the member. The bases of power available to channel members traditionally include:10
Coercive base. This is power based on channel member As belief that member
B has the ability and willingness to punish it if A fails to yield to the influence
attempt. Examples of such punishment might include Bs decision to reduce As
margins, withdraw As exclusive territorial right, or delay a key shipment to A.
Expert base. This is power based on extent of knowledge and proficiency in a
given area which channel member A attributes to member B. Some organisations
provide guidance to retailers regarding how best to promote key products. This
gives the producer an expert base of power.
Legitimate base. This is power based on channel member As belief that
member B has a lawful, verifiable, or logical right to influence, and that A is
obligated to accede to this influence. In many channel settings, wholesalers are
generally considered to have legitimate authority over decisions relating to physical possession flows. In those same settings, retailers may enjoy legitimate power
over local promotion decisions.
Referent base. This is power based on channel member As identification with
or desire for affiliation with member B. Referent power has a significant presence in marketing channels, where manufacturers may take pride in having their
goods carried in certain exclusive stores, such as Saks Fifth Avenue or Barneys

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of New York. Just as likely, retailers may pride themselves as being the exclusive
outlets for certain manufacturers brands, such as DKNY or Hugo Boss clothing.
Reward base. This is power based on the belief held by channel member A that
member B has the ability to mediate or moderate rewards. For instance, many
US auto manufacturers now use single-sourcing agreeing to obtain most of key
manufacturing components or services from better-performing suppliers. This
decision creates a reward-based power structure in that suppliers will only receive contracts if they perform well.
Traditionally, these five power bases have been collapsed into two groups: coercive and non-coercive. The coercive category relates to the application of punishments
or sanctions by one channel member against another to get it to do or stop doing
something. This non-coercive category refers to the use of some type of rewardoriented power source. This category includes reward, legitimate, referent, and
expert power sources as shown in Exhibit 9.2.
Exhibit 9.2

Model of channel power

Channel member
power

Coercive
sources

Reward
bases

Non-coercive
sources

Expertise
bases

Legitimacy
bases

Referent
bases

It should be noted, however, that each of the non-coercive power sources can
potentially be used in coercive ways by more powerful channel members. In
particular, the use of legitimate power can be very coercive. For instance, many
retailers located in malls or shopping centres are forced to stay open because of
legitimate contract terms that are enforced. In addition, the use of power in channel
settings is not automatically harmful to channel relationships. Non-coercive power
sources can be applied to achieve influence or greater control.
Power can also be discussed in terms of the degree to which one channel member depends upon another. The dependence of any channel member can reflect a
power-submission dimension. A channel members dependence can serve as a
measure of a relative power. When viewed from this perspective, power and
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dependence appear as complementary concepts: power both results from and


strengthens the dependence of one party upon another within a relationship. The
more dependent channel member B is to channel member A, the more power A has
over B. Still, dependence should not directly imply submission. All channel relationships involve some form of dependence, yet total submissiveness only characterises
those relationships that are dysfunctional. Dependence within channel relationships
is not a bad thing, so long as the relationship is characterised by trust and cooperation.
Dependence and power are also part of a connected-disconnected continuum.11
All participants in a marketing channel are in a sense dependent because each
participant presumably has some power. In all but the rarest of instances, no channel
member is completely dominated by another, nor is any channel member ever
completely autonomous. Channels typically feature at least some agreement on
business issues or instances of reciprocity.12 Dependence implies shared reliance
where one firm supports the functioning of another, perhaps through the provision
of products contributing to the profitability of another.13
Dependency among channel members also provides a basis for conflict. The use
of non-coercive power, for example, in the form of a suppliers assistance and
support for its distributors, generally lowers conflict. When a manufacturer acts
positively to reinforce a channel relationship, as when it provides a product line that
aids the dealers success, conflict should ease. This sort of mutual reliance can be
beneficial to channel relations. By contrast, one channel members power-driven
efforts aimed at gaining control over another by increasing their dependence often
causes conflict.14 The distributor that believes a manufacturer is attempting to
influence or dictate its strategy is also likely to perceive that such actions are
impeding its goal attainment. Time Out 9.2 describes how Microsoft learned a
lesson about the effects of dependence in channel relationships.

Time Out 9.2 ______________________________________________


Microsoft and Nokia Join Forces to Challenge Duopoly
Microsoft might be the worlds biggest producer of computer software, but it
missed a trick with the large and fast-growing smartphone market. The American software giant is a leader in the PC operating system and office suite
markets (well known for Microsoft Office). But its platform-only approach
meant it found itself almost completely reliant on Finnish manufacturer Nokia
for mobile phone devices. Microsoft did not introduce its Windows Phone until
late 2010, and by then rivals were firmly established.
Meanwhile, Nokia, despite being an industry pioneer, dramatically lost market
share to rivals such as Samsung. The smartphone sector is dominated by the
Apple iPhone and handsets running Googles Android software (particularly
Samsungs Galaxy range). In the face of such stiff competition, Nokia struggled
with a lack of resources to adequately promote Lumia smartphones, which use
Microsofts Windows Phone operating system.
In September 2013, Microsoft agreed to buy Nokias mobile phone design,
manufacturing and sales operations, and as part of the agreement could also use
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Nokias brand on handsets for 10 years. Apple and Google both make their own
mobile hardware. Now Microsoft hopes to more effectively compete against the
two leaders with its own manufacturing capabilities.
Questions
How have issues of power and dependence contributed to Microsofts failure
to break into the mobile computer market?
How has Microsofts acquisition of Nokia changed the dynamics of power
and dependence?
Adapted from Williams, C. (2013), Microsoft Buys Nokia Mobile Business to Challenge Apple and
Google,
The
Telegraph
[online],
available
at:
http://www.telegraph.co.uk/technology/microsoft/10283087/Microsoft-buys-Nokia-mobilebusiness-to-challenge-Apple-and-Google.html [Accessed 19 March 2013].
__________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

9.3

Achieving Cooperative Channel Climates


Channel relationships are unlikely to flourish in the absence of cooperative decision
making or coordinated actions. The development of long-term channel relationships
usually requires consensus-building activities and the use of non-coercive power or
logical persuasion rather than coercive power or manipulation. American business
culture has traditionally valued individualised, quick-thinking, competitive management styles. Firms often find it difficult to shift their orientation toward cultivating
and sustaining channel relationships.
To avoid undesirable outcomes from unbalanced dependence relationships, marketers need to realise that power in channel alliances has less to do with the relative
size of the members balance sheets than it does with feelings of mutual dependency.
When channel partners rely on each other for some commodity or service known as
mutual reliance they are likely to share power successfully. On the other hand, when
one partner is completely dependent on the other, power is unequally distributed. While the
latter situation may be successful in some instances, mutual reliance is usually a far
more stable sort of business association.
Marketers benefit when they identify which of their assets are potentially attractive to other channel partners. One of the best ways to gain a cooperative channel
climate is to tap into knowledge or resources that lie outside the boundaries of each
firm on its own. Information is too often overlooked as a non-coercive source of
channel power. Two types of information are required for effective channel
relationships.15 The first is technical knowledge, which allows bilateral contributions to and involvement in channel decision making. The second type,
relationship knowledge, permits a better understanding of ones partner and
contributes to an understanding of partnership activities and political realities. Both
of these information types provide the groundwork for successful negotiation.
Japanese firms have used information power successfully in the US for decades.
By knowing more about their partners than their partners knew about them, they
have wielded a subtle form of power in their channel alliances that is not easily

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understood by Americans, who have tended to define power in terms of toughmindedness or ownership.
In the absence of relatively complete and accurate information concerning ones
channel counterparts, it is difficult to know whether or not everybody is playing on
a fair field. It is also much harder to empower others or open oneself up to potential
vulnerability in the absence of information. Knowing ones partners offers power,
albeit a gentle sort, and American companies would undoubtedly benefit from using
more of this power source.
In pursuit of greater cooperation with a key supplier, Ford Motor Co., the more
powerful channel member, established a knowledge link with ABB Oakville Paint
Finishing, Inc. Their relationship focused on reducing the automakers costs and the
suppliers risk. Their cooperation required the exchange of considerable amounts of
what was sometimes sensitive information. Managers from both sides reported that
this cooperative climate required the acceptance and appreciation of the companies
differences in power and expertise, and a mutual resolve to work through these
differences.16
To shift the balance of power and dependence between channel members in
ways that contribute to a relationships well-being, each partner should:17
Explicitly identify what each partner brings to the relationship prior to entering
the relationship.
Ensure that each partner is flexible in terms of interests, needs, understanding,
and a willingness to explore alternative approaches to problems prior to entering
the relationship.
Work to develop a culture of cooperation and mutually beneficial coordination
after the relationship is joined.
When near-equivalence in investment is not possible, strive to ensure that there
is a sense of equity in terms of concern for partner benefits.
When such actions are possible, delegate authority and empower others.

9.4

Conflict Resolution and Channel Climate


Although we have emphasised the negative outcomes of conflict to this point,
remember that conflict can be handled in ways that lead to constructive outcomes
for channel members. Since conflict is unavoidable in channel relationships, positive
outcomes should be pursued through conflict resolution strategies. Module 10
provides a comprehensive discussion of conflict resolution strategies. In the
meantime, we will present a short overview here as it pertains to channel climate.
There are two broad approaches to conflict resolution. One involves institutional
mechanisms such as joint memberships in trade associations, distributor councils,
executive exchange, or arbitration/mediation boards. These methods are aimed at
increasing the interaction and communication among channel members.18 A mutual
understanding of each firms unique needs and problems is presumably promoted as
a result of the interaction, allowing firms to avoid some potential conflicts. The
other approach involves behaviourally oriented strategies that facilitate these conflict

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resolution mechanisms. These strategies can be classified into four distinct processes: problem solving, persuasion, bargaining and politics.19
When problem solving conflict resolution behaviours are used, additional information is sought by one or both channel members, while at the same time
attempts are made to resolve the conflict through deliberation, reflection, and
discussion centred around this information. Problem solving is most likely to be
used when the channel partners already agree on common goals and objectives. The
use of problem solving generally results in concessionary behaviour and the development of new alternatives. Unless the channel members trust one another going
into the conflict, problem-solving behaviours are not likely to occur.
Persuasion is similar to problem solving in that high-risk coordinated behaviours
such as the exchange of information and agreed-upon goals already exist. When
persuasion is used to resolve channel disputes, activities centre around one partys
effort to demonstrate to its counterpart how a new set of decision criteria or the
adaptation of another perspective is likely to help reach channel goals. Persuasive
tactics are then required to validate the importance and character of these new goals.
Persuasion differs from problem solving, however, in that disagreements regarding the
nature of appropriate decision criteria may exist.
Bargaining involves inflexible, non-concessionary behaviours, promises, positional commitments, and general gamesmanship. This strategy searches for a
tolerable mix of gains and losses for each party. Common goals are not expected in
bargaining. Instead, disagreements over channel objectives are viewed as fixed.
These disagreements are resolved through one channel members agreement to give
in on the issue in conflict in exchange for some future consideration. Bargaining is
often used when partners acknowledge basic differences in their views that are not
likely to be modified.
The conditions that encourage bargaining are also associated with politicking.
However, in politics, the conflict arena expands to include the people involved,
including third parties. These third parties may be either potential allies or adversaries, depending on the channel members perspective. Politically oriented conflict
resolution strategies focus on power-oriented tactics. These tactics involve pursuing
allies, employing coercive methods, or the use of legitimate authority to impose
outcomes.
The use of problem solving or persuasion as a conflict resolution device is generally
beneficial to the relationship. The favourable results from the tension associated with
conflict clarification of issues, expanded insight into alternatives, discussion of
competing solutions are not undermined by either strategy. Increased cooperation,
understanding, and commitment to the relationship usually result from the use of
either strategy. Still, when viewed from the perspective of the more dependent
channel member, problem solving and persuasion are high risk because each involves
information exchange. In channel relationships, high levels of financial and social risk
are generally associated with information exchange.
Conversely, the use of bargaining or politicking to settle conflicts is typically
harmful to channel relationships. In each, one party gains at the expense of the
other. The use of either strategy denies the channel members the benefits of group
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effort or synergy. Each typically leads to a reduction in harmony, creativity, and


mutual commitment to the ultimate solution. However, from the perspective of the
more dependent channel member, the tougher negotiating associated with either
bargaining or politicking is low risk because the potential exposure to social or
financial risks associated with information exchange is minimised.
Regardless of which conflict resolution approach a channel member chooses, a
variety of compliance strategies is available. These are discussed in the next section.

9.5

Compliance Techniques
The goal of most intrachannel influence attempts is to change the targeted firms
or persons behaviour. These intrachannel influence attempts generally involve
efforts to alter the perception of the desirability of an intended behaviour. Seeking
compliance in this way is appropriate when the behaviour is related to shared goals
and/or has positive implications for the channel partners.
Understanding how key boundary personnel think or feel about the issues in
conflict prior to any attempts to change their perceptions is crucial to the success of
influence attempts. The process of cultivating compliance, as opposed to trowellingout instructions to less powerful partners, requires taking the time to create a
compatible personal style and disposition.20 This kind of long-run orientation
lessens the need to use power.

9.5.1

Rapport Building
The pursuit of intrachannel compliance begins with building rapport within the
channel. Rapport building, or the process by which harmonious or sympathetic
relations are established, is based on subtle cues. Cues swapped between the
respective firms boundary personnel perhaps having little to do with the object of
exchange often speak loudest in the rapport-building process. From beginning to
end, attention must be paid to differences in perspectives and style. Only by
understanding similarities and differences can reasonable expectations concerning
the channel relationship be derived. Moreover, compliance can only be achieved
when expectations are realistic. Some questions to be answered during the rapportbuilding process are:21
Have we developed or are we developing a climate of trust?
Are our mutual levels of commitment to this relationship satisfactory?
How similar are our corporate cultures? If they are not similar, is our cultural
adaptation possible and desirable?
Do we have a strategy for merging different management styles? If not, is such a
strategy possible?
If the answer to any of these questions is no, the likelihood that suitable levels of
rapport can be developed within the marketing channel is doubtful. Compliance will
then be difficult to achieve without the use of power. Still, a certain amount of
tension will always be present within channel climates. Similarly, there will always be
some differences in style or motivation between channel members.

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Once rapport is established or is well underway, there are several strategies to


achieve influence.22 Two of the more common are the information exchange and
recommendations strategies. Both of these strategies are based on the desirability of
the intended behaviour. Three other strategies requests, promises, and threats
are not always consistent with the relational spirit, but they may be necessary in
situations requiring prompt compliance or where the source firm is seeking compliance with actions not directly in the targets interests. Naturally, the appropriateness
of a given strategy varies according to channel climate and the nature of the
compliance sought. Exhibit 9.3 shows all five strategies and their likely outcomes.
Exhibit 9.3

Influence strategies appropriate for use in channel settings

Influence strategy

Likely outcome

Information exchange
Recommendations

Target firm compliance

Requests

Promises
Threats

9.5.2

Target firm compliance


(subject to diminishing returns)
Dysfunctional relations

Information Exchange
In the information exchange strategy, the source firms boundary personnel initiate a
discussion on general business concerns and operating policies to change the
perceptions of how the target firm might be more effectively operated. No specific
action is requested. This compliance strategy is based on the assumption that
changing the channel members operating philosophies, decision criteria, and
decision-making style will eventually translate into a broadly desirable set of behaviours. Franchisee advisory councils have proven useful in facilitating information
exchange in franchising channel systems.

9.5.3

Recommendations
In the recommendations strategy, the source firms boundary personnel communicate the view that the target firms future will brighten if it complies with the
sources suggestions regarding some action. The point is made that this brighter
future could result either from the avoidance of negative consequences or the
receipt of beneficial consequences. The source clearly communicates to the target
the type of behaviour expected. If used within a climate of rapport, the recommendations strategy requires less time and effort than the information strategy to

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achieve the objectives sought. Firms that establish favourable reputations enhance
their ability to successfully use recommendations and information exchange
compliance strategies as long as the area of compliance relates to those areas of
expertise.

9.5.4

Requests
Requests occur when the source firm simply informs the target firm of the actions it
would like the target to take, without referring to any specific consequences of
compliance or non-compliance. The incentive for compliance often results from a
desire for participation in a reciprocal, give-and-take relationship. The strength of
the motivation to comply with requests depends on the degree to which the target
finds the channel relationship satisfactory from an economic and interpersonal
standpoint. Source firms should measure the character of their channel relationship
prior to using a request strategy.
Requests will generally achieve compliance when a cooperative relationship has
already been developed and the value of the compliance is substantially greater than
the corresponding costs.23 The mutual use of requests will result in net gains for
both firms. Their relationship should also strengthen since a sense of mutual trust,
cooperation, and personal identification between the boundary personnel of the two
firms will likely follow. On the other hand, the excessive unilateral use of requests
may eventually be perceived by the target as interference in their operations. Target
resistance will increase, as will resistance to future compliance attempts. Request
strategies can sometimes involve legalistic pleas. When a legalistic plea is used, the
source firm asserts that the target firms compliance is required based on a formal
agreement.24 Such declarations may prove effective, but they are generally not in the
best interests of the channel relationship itself.

9.5.5

Promises
When promises are used, the source firm commits to a specified reward upon
compliance from the target. Here, the consequences of compliance are directly
influenced by the source member. Each party gains to the extent that the benefits
derived by the target from the reward exceeds the cost. Use of the reward strategy
over time should increase the targets dependence on the source. However, one
should tread carefully when offering rewards for the conduct of business, since the
way in which rewards are offered may increase conflict. For example, offering
rewards contingent upon the performance of one of the targets specific role tasks
may be perceived as suggesting their current performance is inadequate. Or, the
target may perceive rewards as bribes and, thus, unprofessional or insulting. Finally,
as is true with all forms of compensation, the provision of rewards is subject to
diminishing returns over time.

9.5.6

Threats
A threat strategy is employed when the source informs the target that sanctions will
be applied should the target fail to perform the desired action. Threats are a high-

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cost compliance technique. For one, surveillance costs to ensure compliance and the
cost to implement the negative sanctions may be high. Also, threats reduce the net
benefits received by the target, thereby reducing their economic or psychological
dependence on the source firm. But the most significant costs associated with
threats involve the effect on the relationship. Remember: Coercion expands conflict. As
a result, the future effectiveness of other compliance strategies will be reduced
because the other strategies are at least partially based on trusting channel climates.
Relationship marketing has been a buzzword in consumer marketing for several
years now. Time Out 9.3 offers a brief introduction of how and why the relationship
marketing concept also has a home in marketing channels. As discussed below, the
development of ongoing relationships provides what is perhaps the surest means to
positive channel climate.

Time Out 9.3 ______________________________________________


Relationships: A Key Marketing Tool
Relationship marketing is now increasingly recognised as an important and basic
ingredient in any recipe aimed at attracting, building and, perhaps most importantly, keeping customers. More than ever before in industries from
insurance to soft drinks, agents are keeping track of customer interests, products previously bought, and previous conversations with each prospect and
client. An accumulation of little things over time, such as wishing a client or
prospect a happy birthday, can give the agent a competitive advantage. If a client
mentions needing something that the agent does not sell, he or she might refer
them to a source even a direct competitor who can better satisfy their
current need. These kinds of actions lie at the heart of relationship marketing.
Just like customers want to be remembered after the sale, exchange partners in
marketing channels want to be remembered after the first item is shipped or
delivered. Beyond handling the issues that may arise regarding a specific product
or service, relationship building can be accomplished by activities as simple as
staying in touch with a channel member after an exchange is completed. Staying
connected with a client not only produces greater customer satisfaction, but
may also eventually lead to the development of new prospects new relationships. In channels, staying connected should lead to the development of a better
relationship. In either setting, a failure to follow up can erode relationships.
Questions
In addition to those listed in this example, what are other ways that stronger
and longer-lasting channel relationships can be promoted?
How has increased Internet use, from e-commerce to social networking,
helped and hindered relationship marketing?
What effect do you think the financial crisis of 2008 and the following
economic hardship might have had on relationship marketing efforts?
Adapted from Benjamin, Carolin D. (1993), Relationships: A Marketing Tool for the Nineties,
Broker World, 13(10), 2224 and Evans, Joel and Richard L. Laskin (1994), The Relationship
Marketing Process: A Conceptualization and Application, Industrial Marketing Management, 23(5),
439452.
__________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

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9.6

Relationship Building in Marketing Channels


How do cooperative and coordinated channel relationships get built? By employing
hard work and dedication and developing trust. Exchange has long been embraced as the basic purpose of marketing. This view has been criticised, however,
for only considering exchange as a one time only sort of act and for failing to
recognise the importance of long-term, ongoing exchange relationships. Those who
continue to view exchange as a discrete act will perform at a lower level.
The process of building a relationship in marketing channels consists of four
basic stages: awareness, exploration, expansion, and commitment.25 These four
stages of relationship development and the key developmental processes that unfold
within each stage are shown in Exhibit 9.4. It is important to remember, however,
that there is no guarantee that the relationship will pass through all of these stages.
Exhibit 9.4

The four stages of relationship development

Stage
Awareness

Key developmental processes


Cognisance of other partys existence
Investigate potential relationship benefits

Exploration

Expansion

Growth of value-added benefits from relationship


Growth of interdependence

Commitment

Attraction
Communication and bargaining
Development and use of power
Norms and expectations development

Loyalty
Shared values, objectives, and expectations
Willingness to overlook partners temporary shortfalls
Trust
Future orientation

During the awareness stage the prospective channel partners become aware of
one another and investigate the benefits of establishing a relationship.26 From the
perspective of an individual manufacturer, this awareness and investigation entails
identifying and evaluating the qualifications of various distributors as prospective
channel partners.
As they move toward the exploration stage, the manufacturer and distributor
begin to interact. The exploration stage consists of five subprocesses: attraction,
communication and bargaining, development and exercise of power, norm development, and expectations development. Attraction involves an assessment of the
potential benefits and costs associated with the relationship. These benefits could be
tangible the receipt of a new product or potential resources for instance or
intangible as in a favourable match between values and personalities. The explora9/16

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tion stage also involves initial communication and bargaining between the channel
members. The quality of this communication and the prospect of this relationship
developing further is indicated by the willingness of each partys boundary personnel to negotiate and disclose specific information about themselves or their firms.
This self-disclosure could relate to ones specific interests, experiences, and objectives. For the relationship to develop, disclosure must be reciprocated. The firms
develop a sense of the relative power they enjoy or must endure with respect to one
other, and one or both may elect to exercise this power at this point. Norm development refers to the appearance, over time, of standards of expected conduct. At the
beginning of the relationship, norms are based on the channel members previous
experiences. As the relationship unfolds, a new set of norms develops based on the
needs and abilities of the individual parties. The final subprocess of the exploration
stage is expectations development, which focuses on the concept of trust. Trust may be
the most important ingredient in any channel relationship. Higher levels of trust lead
to more cooperation and greater concession to the requirements of the relationship
in a negotiation. These outcomes, in turn, lead to higher coordination among the
channel members.
If things have worked out well to this point, and expectations continue to be honoured, the relationship will expand and eventually move toward a state of
commitment. The third stage in relationship development, the expansion stage,
refers to the escalation of value-added benefits received by the respective channel
members. Their interdependence also expands.
An understanding between the channel partners that there will be relational continuity should emerge by the fourth stage, known as the commitment stage. Here, the
channel partners have achieved a level of fulfilment from their relationship. Loyalty
has been achieved between the channel partners, and will likely remain in place unless
norms or expectations are violated. Once channel partners have committed to one
another, they also achieve a sense of openness and cooperation. Each members
behaviours toward the other will then be shaped by mutually shared objectives and
values, and a sense of trust will emerge. Truly successful, long-term relationships are
built on trust and all that is embedded within it.
Smaller companies such as EBC Industries, an entrepreneurially oriented export
firm, are benefiting from a concept known as vertical partnering. EBC and its partners
share the sorts of equipment, customer lists, and information that channel members
rarely shared in the past. As a result, EBC has formed complex bonds with larger
companies to their mutual advantage. Cooperation and trust remain the keys in such
arrangements.27 It should be clear that channel climates are predicated on building
cooperation and coordination among exchange partners while reducing channel
conflict. The CRM positions the cultivation of positive channel climates as the core
of the internal channel environment. Our attention now turns to a discussion of
how channel members can nurture exchange relationships.

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9.7

Nurturing Channel Relationships


Channel partnerships often fail to develop because too little attention is paid to
matching expectations after the relationship has been firmly established. Future or
current partners must understand each others goals whenever those goals relate to
their channel relationship. Checkpoints should be established so that channel
members have a way of determining whether their initial expectations are being met,
or whether they were realistic in the first place. Take Coca-Cola, for instance. Years
ago, before entering the Japanese market, Coca-Cola knew it could not penetrate the
market quickly. The traditional channels of distribution in Japan were far more
complex than those elsewhere and not easily penetrated by foreign companies. Coke
courted local distributors and adjusted its normal expectations downward to manage
the channel relationships for the long run. Cokes work paid off: the company
eventually developed a significant market share in Japan.28
Before engaging in a channel relationship, certain questions regarding expectations should be asked:

Have our objectives been realistically linked to our respective resources?


Have all key business risks been uncovered?
Have we adequately analysed our potential partners strengths and weaknesses?
Does our potential partner understand our expectations and we theirs?
Communication is perhaps the most important element during the early stages of
alliance formation. Establishing a relationship requires trust and mutual respect.
Neither element is possible unless the players clearly represent their intentions early
on in the process. Too many partnerships fail because channel members become
annoyed with a lack of communication. The root causes of such problems lie in not
anticipating coordination-oriented communicative problems. Successful channel
alliances require communication strategies that deal specifically with potential and
current inconsistencies between member expectations. Certain questions need to be
asked and answered here, as well, including:
How often should we communicate?
Who will communicate with whom?
What medium of communication (i.e., phone, face-to-face, mail, email) is
appropriate?
What types of information are proprietary?
What parts of our respective corporate cultures might hinder interfirm communication?
A sensitivity to the nuances of interfirm communication is critical to success.
One company may find memos offensive and, therefore, will respond less favourably to boundary personnel who believe memos provide the optimal way to convey
information. Or, if current or potential partners are always looking over the shoulders of one another to see who within their distributions systems might be stealing
ideas from the other, failure is likely.
When Ford Motor Company and IVECO began a joint truck venture in Great
Britain, joint and individual responsibilities were made clear from the start. Key
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positions were given to individuals who could effectively manage the interface
between the two corporations. The close, trusting relationships that developed
helped establish a pattern for subordinates to follow. Plans were developed from the
beginning to facilitate flows of information at all critical junctures. Several other
ways channel members might use to nurture relationships are shown in Exhibit 9.5.
Exhibit 9.5

Other ways to sustain relationships in marketing channels

Pull promotional campaigns:


might be directed at your partners customers.
Warranty, maintenance, and repair agreements:
can be offered to channel partners to reduce the risk associated with committing to
the exchange process.
Cooperative advertising and promotional allowances:
serve the dual purpose of enabling smaller customers to advertise regularly and
coordinating their role relationships with the source firm.
Coordinated cost-reduction programmes:
dramatically pare your channel partners real costs of doing business with your
company. Joint material requirements planning systems, computer-to-com