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Part Six Distribution Decisions

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Marketing Channels and Supply Chain Management

Objectives 1. To describe the nature and functions of marketing channels 2. To explain how supply chain management can facilitate distribution for the benefit of all channel members, especially customers 3. To identify the types of marketing channels 4. To examine the major levels of marketing coverage
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Objectives (contd) 1. To explore the concepts of leadership, cooperation, and conflict in channel relationships 2. To specify how channel integration can improve channel efficiency 3. To examine the legal issues affecting channel management

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Chapter Outline The Nature of Marketing Channels Types of Marketing Channels Intensity of Market Coverage Supply Chain Management Legal Issues in Channel Management

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The Nature of Marketing Channels Distribution


The activities that make products available to customers when and where they want to purchase them

Marketing Channel
A group of individuals and organizations directing products from producers to customers
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The Nature of Marketing Channels (contd) Marketing Intermediary


A middleman linking producers to other middlemen or to ultimate consumers through contractual arrangements or through the purchase and resale of products
Producer Direct Channel Indirect Channel Producer Intermediary C ustomer
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C ustomer

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The Nature of Marketing Channels (contd) Marketing Channels Create Utility


Time utility: have products available when the customer wants them (newspaper delivery). Place utility: making products available in locations where the customers wish to purchase them (convenience stores). Possession utility: the customer has access to the product to use or to store for future use (raincoats).
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The Nature of Marketing Channels (contd) Marketing Channels Facilitate Exchange Efficiencies
Reduce the overall costs of marketing exchanges Reduce search costs for customers Maintain order in the marketplace

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Efficiency in Exchanges Provided by an Intermediary

FIGURE 15.1
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Marketing Channels Form a Supply Chain


Supply Chain Management
Long-term partnerships among marketing channel members that reduce inefficiencies, costs, and redundancies and develop innovative approaches to satisfy customers Optimizes costs throughout the whole channel for efficiency and service Includes all entities that facilitate product distribution and benefit from cooperative efforts Arises from the need to achieve a more competitive position
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Typical Marketing Channels for Consumer Products

FIGURE 15.2
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Typical Marketing Channels for Business Products

FIGURE 15.3
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Distribution Intermediaries
Industrial Distributor
An independent business that takes title to business products and carries inventories Advantages
Perform needed selling activities in local markets Are aware of local needs and can pass market information on to producers Reduce producers capital requirements by holding inventories for local markets.

Disadvantages
Difficult to control Stocking of competing brands Less likely to handle bulky and slow-selling items Lack of technical knowledge
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Distribution Intermediaries (contd)


Manufacturers Agent
An independent businessperson who sells, on commission, the complementary products of several producers; does not take title to or hold inventories. Advantages
Possesses technical and market information Has an established set of customers Serves as a substitute for a sales force

Disadvantages
Difficult to control Concentration on only large accounts Sales focus limited to commission-related activities
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Debate Issue Does cutting out the intermediary cut costs?

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Multiple Marketing Channels and Channel Alliances Dual Distribution


The use of two or more channels to distribute the same product to the same target market

Strategic Channel Alliance


An agreement whereby the products of one organization are distributed through the marketing channels of another

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Is This Product Distributed Through Multiple Marketing Channels?

Courtesy of Neutrogena Corp.

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Intensity of Market Coverage Intensive Distribution


Using all available outlets to distribute a product.
Convenience products with high replacement rates

Provides availability and reduces search time Availability is more important than outlet type

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Intensity of Market Coverage (contd) Selective Distribution


Using only some available outlets to Tuscaloosa distribute a product
Shopping products and durable goods with low replacement rates
s Only Authorized Dealer

High qualification requirements for intermediaries to distribute, sell, service, and support products
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Intensity of Market Coverage (contd) Exclusive Distribution


Using a single outlet in a fairly large geographic area to distribute a product
Expensive, high-quality products purchased infrequently

Exclusive outlets provide an incentive to sellers in limited markets Dealers carry complete inventory and have trained staff for sales and service

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Are iPods Distributed Through Intensive, Selective, or Exclusive Distribution?

Reprinted with permission of Apple Computer, Inc. All rights reserved.

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Class Exercise Identify the intensity of market coverage for each of the following products:
1.Potato chips 2.Gucci handbags 3.Large-screen televisions 4.Rolex watches 5.Clinique cosmetics 6.Carbonated beverages 7.Range Rover vehicles
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Class Exercise (contd)


1.Stereo systems 2.Levi jeans 3.IBM personal computers 4.Gasoline 5.Cannondale bicycles 6.Jaguar automobiles 7.Nintendo video games 8.Reebok shoes

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Supply Chain Management: Channel Leadership Channel Captain


The dominant member (producer, wholesaler, or retailer) of a marketing channel or supply chain
Establishes channel policies and coordinates development of the marketing mix

Channel Power
The ability of one channel member to influence another members goal achievement
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Supply Chain Management: Channel Cooperation Benefits of Cooperation


Speeds up inventory replacement Improves customer service Reduces distribution costs

Improving Channel Cooperation


Unifying channel to maintain market order Agreeing to direct efforts toward common objectives Precisely defining each channel members tasks
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Supply Chain Management: Channel Conflict


Sources of Channel Conflict
Disagreements arising among channel members Communication difficulties jeopardizing coordination Increased use of multiple distribution channels by manufacturers creating conflicts with distributors and retailers Intermediaries diversifying into and offering competing products Producers attempting to circumvent intermediaries and dealing directly with retailers
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Net Sights The Stanford Global Supply Chain Management Forum website (www. stanford.edu/group/scforum /Welcome/index.html) promotes excellence in global supply chain management. It is an example of cooperation between industry and academia to improve the way business is conducted on an international scale.
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Supply Chain Management: Channel Integration


Vertical Channel Integration
Two or more stages of the marketing channel are under one management Channel members coordinate their efforts to reach a target market

Vertical Marketing System (VMS)


A marketing channel managed by a single channel member to achieve efficient, low-cost distribution
Corporate VMS Administered VMS Contractual VMS
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Legal Issues in Channel Management


Dual Distribution
A producer can use two different channels to reach the same target market as long as it is not trying to engage in unfair competition and put its independent distributors out of business

Restricted Sales Territories


Granting exclusive sales territory rights to distributors is permissible if the rights do not restrain trade

Tying Arrangements
Requiring a channel member to buy additional products from the supplier in order to purchase a particular product from the supplier
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Legal Issues in Channel Management (contd)


Full-Line Forcing
Requiring a channel member to carry a suppliers entire product line to obtain any of the suppliers products

Exclusive Dealing
Forbidding an intermediary to carry products of a competing manufacturer Is anticompetitive if
it blocks competitors from 10% of the market sales revenues are sizable the manufacturer is larger than the dealer
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Class Exercise
Many manufacturers sell products in outlet stores at 25% to 70% off retail prices. Retailers do not like the added competition from their own suppliers despite manufacturers claims that they are only selling last seasons merchandise.
1. How could business objectives, buyer behavior, product attributes, or environmental forces affect a manufacturers decision to distribute through outlet stores?

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Class Exercise (contd)


1.By selling in outlet stores, how have these manufacturers changed their intensity of market coverage? How is customer service different at an outlet store? 2.Which of the following may be responsible for the conflict between manufacturers and retailers?
Lack of clear communication Deviation from role expectations Diversification into product lines traditionally handled by other intermediaries
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Class Exercise (contd)


1. Should retailers develop store brands, refuse to stock certain items, or focus their buying power on one supplier or group of suppliers? How should the conflict be resolved?

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Legal Issues in Channel Management (contd) Refusal to Deal


Suppliers can choose their distributors and refuse to deal with others so long as their decisions are not based on anticompetitive motives or are not part of an organized refusal-to-deal with certain channel members.

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After reviewing this chapter you should: Be able to describe the nature and functions of marketing channels. Be able to explain how supply chain management can facilitate distribution for the benefit of all channel members, especially customers. Be able to identify the types of marketing channels. Be familiar with the major levels of marketing coverage.
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After reviewing this chapter you should: Understand the concepts of leadership, cooperation, and conflict in channel relationships. Be able to specify how channel integration can improve channel efficiency. Be aware of the legal issues affecting channel management.
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Chapter Quiz
1. In a simple economy of five producers and five consumers, there would be _________ transactions possible without an intermediary and _________ transactions possible with one intermediary.
a. ten; twenty-five b. thirty; ten c. twenty-five; fifteen d. sixteen; eight e. twenty-five; ten
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Chapter Quiz (contd)


1. Nationally distributed consumer convenience products are most likely distributed through which of the following channels?
a. Producer, consumers b. Producer, agents, wholesalers, retailers, consumers c. Producer, wholesalers, consumers d. Producer, wholesalers, retailers, consumers e. Producer, industrial distributor, wholesalers, retailers, consumers

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Chapter Quiz (contd)


1. Honey Farms is a maker of fine chocolates. The companys latest product, Fudge-Dipped Strawberries, is the premier product in its FudgeDipped line. The product is very expensive and targeted to upscale consumers. Which form of distribution would Honey Farms be likely to use for its new product?
a. Intensive b. Selective c. Targeted d. Exclusive e. Premier
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Chapter Quiz (contd)


1. Goodyear allows companies like Sears and Discount Tire to distribute and discount its tires. This action significantly increases the possibility of channel _________ with independent Goodyear dealers.
a. understanding b. power c. leadership d. communication e. conflict
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