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Chapter 15 Channels of Distribution: Conflict, Cooperation, and Management



Ninth Canadian Edition

Presentation by

Karen A. Blotnicky Mount Saint Vincent University, Halifax, NS

Copyright 2001 by McGraw-Hill Ryerson Limited

Chapter Goals
To gain an understanding of: The nature and importance of intermediaries What a distribution channel is and does The decisions involved in designing a channel of distribution Major channels used to distribute consumer goods, business goods, and services Vertical marketing systems Intensity of distribution Choice of intermediaries and conflict management Legal considerations and channel arrangements
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The Distribution Function

distribution is about getting the product or service to the customer as conveniently as possible; it deals with access and availability intermediaries perform many of the distribution functions on behalf of suppliers merchant intermediaries actually take title to physical products that they distribute agents do not ever own the products, but they arrange the transfer of title
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Distribution Channels
The role of distribution entails: Arranging for its sale and transfer of title Promoting the product Storing the product Assuming some risk during distribution. Intermediaries often perform these activities for producer or consumer.
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Definition A direct channel of distribution describes a situation in which the producer sells a product directly to a consumer without the help of intermediaries. A direct chain of distribution may involve face-to-face sales, computer sales or mail order but does not involve any form of distributor other than the original producer. Chains of distribution that involve nonaffiliated retailers or wholesalers cannot be described as direct channels of distribution and are instead classified as indirect chains of distribution.

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Examples Although major retailers and indirect channels of distribution are everywhere in the United States, there are many examples of direct distribution in our economy. Farmers who sell produce on site or at farmers markets use a direct channel of distribution. A company that produces its own products and sells them directly to the consumer in its own retail stores is using a direct chain of distribution. Producers frequently connect directly to consumers through company websites or assisted marketing systems such as eBay or Etsy.

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Advantages Using a direct channel of distribution to connect consumers with your product, especially a Webbased channel, can have several benefits. Most importantly, web-based selling has low overhead and gives your product a potentially global reach. Because no intermediaries share the profits, most direct distribution channels tend to have higher rates of profit than indirect distribution channels. Direct distribution via the Internet is convenient for customers and available 24 hours a day. Lastly, many customers appreciate the opportunity to give profits directly to producers and artists

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Disadvantages The most obvious disadvantage is that a direct distribution channel cannot compete with the geographical reach and business volume of a distribution channel that includes major wholesalers and retailers. If you make specialty coffee, you cannot sell as much product over your company website as you can if you sell through major grocery store chains. Some consider another downside to direct distribution of tangible products by phone, mail or Internet is that customers are often asked to shoulder the burden of shipping costs.

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The Distribution Functions

SALES SPECIALIST FOR PRODUCERS Provides market information Interprets consumers wants Promotes producers products Creates assortments Stores products Negotiates with customers Provides financing Owns products Shares risks


PURCHASING AGENT FOR BUYERS Anticipates wants Subdivides large quantities of a product Stores products Transports products Creates assortments Provides financing Makes products readily available Guarantees products Shares risks

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Designing the Channel

Channel design is a strategic marketing tool. Four decisions can be help a firm design a distribution channel: what role distribution is to play in achieving objectives what type of channel is needed? with or without intermediaries? what level of intensity of distribution? which specific intermediaries to use? which will be best suited to achieve objectives?
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The Well-Designed Distribution Strategy

Specify the role of distribution within the marketing mix Select type of distribution channel Determine appropriate intensity of distribution

Choose specific channel members

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Selecting the Type of Channel

some firms will distribute directly; others will use a number of intermediaries: Producer--consumer (direct) Producerretailer--consumer Producerwholesalerretailer-consumer Produceragentretailer--consumer Produceragentwholesaleretailer-consumer when would each of these be considered?
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Major Distribution Channels

For distribution of consumer goods, five different types of channels are widely used. Business goods are normally distributed through four major types of channels. There are only two common channels of distribution for services. Some producers are not content to use only a single distribution channel and use multiple channels (a.k.a dual distribution) Multiple channels can aggravate middlemen and cause conflicts in the channels.
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Consumer Channels

Merchant wholesalers

Merchant wholesalers





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Business Channels



Merchant wholesalers (industrial distributors)

Merchant wholesalers (industrial distributors)

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Service Channels



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Multiple Distribution Channels

some firms will use several distribution channels to reach specific markets or segments dual distribution is used, for example, to reach business and consumer markets, or to carry different groups of products or may be used to reach different segments of the sellers market; different sizes of buyers or different regions of the country some companies operate their own stores
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Vertical Marketing Systems (VMS)

a tightly coordinated distribution channel designed to improve operating efficiency and marketing effectiveness. Corporate VMS: One firm owns other firms in channel or the entire channel-- Goodyear, Roots. Contractual VMS: Independents work together for much greater effectiveness: IGA, IDA. Administered VMS: Relies on economic power of one channel member-- Rolex, Kraft General Foods..
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Intensity of Distribution

INTENSIVE Distribution through every reasonable outlet in a market

SELECTIVE Distribution through multiple, but not all, reasonable outlets in a market

EXCLUSIVE Distribution through a single wholesaling middleman and/or retailer in a market

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Considerations in Channel Choice

Market Considerations: Type of market, concentration, potential customers, order size. Product Considerations: Consider unit value, perishability, technical nature of product. Intermediaries Considerations: Services offered, availability, attitude, dominance. Company Considerations: Desire for channel control, management, money and services seller can provide to support sales.
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Conflict and Control in Channels

Channel conflict exists when channel members interfere with each others objectives. Horizontal conflict involves firms on same level-grocery store vs. drug store. Vertical conflict involves firms at different levels producer versus wholesaler producer versus retailer Channel Power is the ability to influence or determine behaviour of others in channel. Based on expertise, rewards and sanctions.
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Producer/Retailer Conflict
Small suppliers complaints about large department stores:
Onerous logistical demands. Pressure to cut prices. Demands to give the stores exclusivity. Forcing suppliers to contribute advertising and promotional dollars to the stores. Requiring suppliers to invest in elaborate computerized inventory systems.
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More Complaints
Small suppliers complaints about discounters: Being asked to supply their goods on consignment. Being asked to deal directly with the retailers headquarters and to give to the retailer an amount equal to the commission that would have gone to manufacturers agents. Responses from smaller suppliers: Quit doing business with big retailers whose demands are too strict and outlandish. Become a retailer. Merge with another manufacturer.
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Legal Considerations
Dealer Selection: Refusing to sell to some firms. Can be done carefully. Exclusive Dealing involves shutting out competitors, giving most business to one firm. Tying Contracts involves providing one item on condition other lines be carried as well. Exclusive Territories can create monopolies.
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Exporting, through: An export merchant in the manufacturer's country that buys goods and exports them. An export agent located in either the manufacturer's or the destination country. A companys sales branches. Contracting, via: Licensing: Right to use production process, patents trademarks, or other assets. Franchising. Contract manufacturing: having a foreign-based manufacturer produce the product
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Channels for Entering Foreign Markets

More Foreign Market Entry Channel Options

Direct investment, including: Joint venture or partnership with a foreign company. Strategic alliance. Wholly-owned subsidiaries. Multinational corporation, in which the foreign and domestic operations are integrated and are not separately identified.
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The Changing Face of Distribution

Internet (click and mortar vs. brick and mortar) a major factor-- where is it heading? Direct Response TV sales are growing in popularity, especially for timestarved shoppers The worlds largest bookstore is on the Internet! (
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