Marketing Channels

A Strategic Tool of Growing Importance for the Next Millennium by Dr. Bert Rosenbloom

A: Over the past three decades, the overwhelming emphasis in the Marketing Mix has been on: Product Strategy with Pricing Strategy and Promotional Strategy also being stressed.

But.....

Marketing Channel Strategy (Place); the fourth P in the Marketing Mix has been largely neglected

But this is changing....

Marketing Channel Strategy is Growing in Importance. Why?

Five Reasons
(1) Search for Sustainable Competitive Advantage (2) Growing Power of Retailers in Marketing Channels (3) The Need to Reduce Distribution Costs (4) The Increased Role and Power of Technology (5) The New Stress on Growth

I. The Search for Sustainable Competitive Advantage

Sustainable Competitive Advantage:

A competitive advantage that cannot be quickly and easily copied by competitors

A sustainable competitive advantage is becoming more difficult to attain through:

Product Strategy- rapid technology transfer enables competitors to quickly produce similar products Pricing Strategy- global economy allows competitors to find low cost production to match prices Promotion Strategy- high cost, clutter, and short life promotional campaigns limit competitive advantage

Competitive Advantage Based on

Superior Marketing Channel Strategy is More Difficult for Competitors to Copy Because:

 Channel

Strategy is Long Term Requires a Channel Structure Depends on Relationships and People Requires Effective Interorganizational Management

II. Growing Power of Retailers in Marketing Channels

Retailers

Retailers....
Are Growing Larger Enjoy Substantial Channel Power Act as Buying Agents for Customers Rather than Selling Agents for Suppliers Often Operate on Low Price / Low Margin Model Operate in Saturated Markets and Fight for Market Share

Retailers Are Growing Larger

Concentration of Sales Among the Top 50 Retail Firms

77.6%

22.4%

Top 50 Rest

Kinds of Retailers Where Largest Four Firms Account for At Least 50% of Total Sales
44% 56%
21%
45%

79%

55%

Conventional Department Stores

31%

Discount Mass Merchandisers

36%

Variety Stores

42%

69%

65%

58%

Four Largest Firms All Other Firms

Misc. General Merchandisers

Athletic Footwear

Toy Stores

Percentage Distribution of Retail Firms and Sales by Size of Firms

83.5

62.8

Sales as a percentage of the total Firms as a percentage of the total

15.6 13.1 7.0 1.8 $10,000,000 or more 1.6 $5,000,000 to $1,000,000 to $9,999,999 $4,999,999

14.6

Less than $1,000,000

Enjoy Substantial Channel Power

Retailer

 Retailers

Act as Buying Agents for Customers Rather than as Selling Agents for Suppliers

Retailers Often Operate on Low Price / Low Margin Model

 Retailers

Operate in Saturated Markets and Fight for Market Share

Power or Dominant Retailers are therefore the Gatekeepers into the Consumer Marketplace

Thus, Effective Channel Strategy for Dealing with Power Retailers is Crucial

III. The Need to Reduce Distribution Costs

Distribution Costs

Distribution Costs Often Account for a Significant Percentage of the Final Price of Products Sometimes Distribution Costs are Higher than the Manufacturing Cost or the Costs of Raw Materials and Component Parts

Some Examples...
Autos Distribution Software Gasoline Fax Machines Packaged Foods

15%

25%

28%

30%

41%

Manufacturing

40%

65%

19%

30%

33%

Raw Materials and Components

45%

10%

53%

40%

26%

While terms such as restructuring, flattening out, downsizing, and rightsizing have usually been mentioned in the context of corporate organizations, they also apply to Marketing Channels. The latest term....

Disintermediation

IV. Increasing Role and Usefulness of Technology

Technology has the power to greatly enhance the effectiveness and efficiency of Marketing Channels and could potentially change the entire structure of distribution around the world.

Some Examples...
The Internet Wireless Communications B2C and B2B E-Commerce Cell Phones Global Telecommunications Robotics & Automated Warehousing Computerized Salespeople

Firms that make effective use of these technologies in their channel strategy can gain a substantial competitive advantage

Competition

V. The New Stress on Growth Strategy

In American Business Circles Growth has Overtaken Restructuring as the #1 Buzzword Out
Reengineering Restructuring Downsizing Flat Organizations Lean and Mean

In
Growth Expansion New Markets Market Share Top Line Revenue

QUESTION In a relatively slow growth economy, how can an individual company selling mature products in mature markets grow?

ANSWER Share of Mind = Share of Market

Translation By getting channel members to focus on your products to a greater extent than your competitors, you gain market share and growth

Summary
(1) Search For Competitive Advantage (2) Growing Size and Power of Retailers (3) Need to Reduce Distribution Costs (4) Power and Potential of Technology (5) Stress on Growth Instead of Downsizing

Bottom Line

Marketing Channel Strategy Has Become Critically Important For Most Businesses

Strategy in Marketing Channels

Channel Strategy
The broad principles by which a firm expects to achieve its distribution objectives for satisfying its customers

Basic Strategic Questions

(1) What role should distribution play in the firms overall objectives and strategies? (2) What role should distribution play in the marketing mix? (3) How should the firms marketing channels be designed to achieve its distribution objectives? (4) What kinds of channel members should be selected to meet the firms distribution objectives? (5) How can the marketing channel be managed to implement the firms channel design effectively and efficiently on a continuing basis?

The Relationship between customer satisfaction and the companys marketing mix can be represented as:
Cs = f (P1, P2, P3, P4)
where: Cs= degree of customer satisfaction P1= product strategy P2= pricing strategy P3= promotional strategy P4= place (channel strategy)

Distribution Channel Strategy should receive especially heavy emphasis if one or more of the following conditions prevails:
Distribution appears to be the most relevant variable for satisfying customers Parity exists among competitors in the other three marketing mix variables High degree of vulnerability exists because of competitors neglect of distribution Distribution channel strategy can foster synergies

Classic Marketing Channel Strategies Still Relevant Today

Dual

Distribution Exclusive Dealing Full-Line Forcing Price Differentiation Price Maintenance Refusal to Deal Resale Restrictions Tying Agreements

The Most Basic Questions in the Design of Marketing Channels

When

Do Customers Buy? Where Do Customers Buy? How Do Customers Buy? Who Buys? Who makes the actual purchase? Who uses the product? Who takes part in the buying decision?

Supply Chain Management

QUESTION
Is this just another buzzword for logistics - getting the right product in the right quantity, at the right time and right place?

OR
Is there something more substantive to this term?

ANSWER
There is something more than semantics here:
Supply Chain Management takes a broader perspective by viewing logistics as an integral part of the marketing channel relationship

Supply Chain Management Can Therefore be Defined as:

A long-term partnership among marketing channel participants aimed at reducing inefficiencies, costs, and redundancies in the logistical system in order to provide high levels of customer service

Contrasts Between a Traditional Logistics System and Supply Chain Based System

Factor
Inventory Management Total Cost Approach Time Horizon Information Sharing and Monitoring

Traditional
Logistics System Independent Effort

Supply Chain Mgmt. System

Joint Effort to Reduce

Channel Inventories Channel-Wide Cost Efficiencies

Long-Term

Joint Planning Compatibility of Corporate Philosophies Channel Leadership

Sharing of Risks and Rewards Inventory Flow

Minimize Firm Costs Short-Term Limited to Needs of Current Transaction Transaction Based Not Relevant
Not Needed Each Channel Member on Their Own Warehouse Mentality Storage Safety Stocks

Continuous Effort to Gather and Monitor Ongoing Important for Major Initiatives
Required for Coordination and Focus Risks and Rewards Shared over Long-range Distribution Center Orientation-JIT, Quick Response, Cross Docking

Common Issues in Supply Chain Management

1. Order Processing Time 2. Order Assembly Time 3. Delivery Time 4. Inventory Reliability 5. Order Size Constraints 6. Consolidation Stipulation 7. Consistency of Delivery 8. Frequency of Sales Visits 9. Ordering Convenience 10. Order Progress Information 11. Inventory Backup During Promotion 12. Invoice Formats 13. Physical Condition of Goods 14. Claims Response 15. Billing Procedures 16. Average Order Cycle Time 17. Order Cycle Time Variability 18. Rush Service 19. Product Availability 20. Competent Technical Reps 21. Equipment Demonstrations 22. Availability of Literature 23. Accuracy in Filling Orders 24. Terms of Sale 25. Protective Packaging 26. Degree of Cooperation

Strategic Alliances and Partnerships in Marketing Channels

Definition:
Continuing and mutually supportive relationship between the manufacturer and its channel members in an effort to provide a more highly motivated team, network, and alliance of channel partners

Traditional us-against-them mentality is replaced with a new cooperative perception of us in an effective channel partnership or strategic alliance Thus, partnerships or strategic alliances go well beyond the adhoc, on-again / off-again interactions typical of traditional relationships among channel members

Requirements for Partnerships or Strategic Alliances in Marketing Channels

(1) Recognition of interdependence of channel members (2) Close cooperation between channel members (3) Careful specification of roles, rights, and responsibilities in the relationship (4) Coordinated effort focused on common goals (5) Good communications and trust between channel members

Relationship Marketing via the Marketing Channel

Relationship Marketing
The practice of building long-term relations with key parties - customers, suppliers, distributors- in order to retain their longterm preference and business

Because of the importance of channels of distribution, building good relationships in the marketing channel is key to successful relationship marketing

Building Relationships with Channel Members

Find Out the Needs and Problems of Channel Members -informal information system (grapevine) -research studies of channel members -research studies by outside parties -marketing channel audit -distributor advisory councils

Offer Support to Channel Members that is Consistent with Their Needs and Helps Solve their Problems -cooperative arrangements -partnerships and strategic alliances -distribution programming Provide Leadership to Motivate Channel Members -use power effectively -recognize causes of conflict -resolve conflicts

Bases of Power in the Marketing Channel

Reward

Power Coercive Power Legitimate Power Referent Power Expert Power

Effective Channel Management Depends on How Well These Power Bases are Combined and Used

Causes of Marketing Channel Conflict

Role

Incongruities Resource Scarcities Perceptual Divergencies Expectational Differences Decision Domain Disagreements Goal Incompatabilities Communication Difficulties

Ten Trends in Marketing Channels as We Move into the Next Millennium

1. Growing Emphasis on Marketing Channel Strategy 2. More and More Stress on Technology 3. Focus on Efficiency and Reducing Distribution Costs 4. Shortening and Flattening of Distribution Channels (Disintermediation) 5. Development of New Types of Intermediaries in Channels (Reintermediation)

Trends Continued...
6. Continued Growth in Partnerships and Alliances (Relationship Marketing) 7. Increasing Power for Retailers and Wholesalers (Gatekeepers) 8. Mergers and Acquisitions to Gain Distribution Clout 9. Flexible and Focused Distribution to Match Micro, Niche, and Database Marketing 10. Attention to the Behavioral Dimensions of Distribution to Augment Technology