COURSE MATERIAL

UNIT - I
 Introduction
Distribution refers to the development of
arrangements necessary to transfer ownership of a
product and its transportation from where it is
produced to where it is finally consumed.
In other words, it deals with movement of goods
from place and form; it has no commercial value to
the place and form, where it has commercial value.
For this purpose, marketing channel management
and logistics management fit under the distribution
variable of marketing mix. These two functions of
marketing are closely related.
 Distribution Strategy

Marketing Channel Logistics

Management Management

These two functions of marketing are closely related. Marketing channel management
is concerned with the entire process of setting up and operating the contractual
organization that is responsible for meeting the distribution objectives of firms.
Logistics management on the other hand, is more focused on providing product
availability at the appropriate times and places in the marketing channel.
Distribution Channel / Marketing Channels
It is a group of individuals and organizations that
direct the flow of products from producers to consumers.
It is an application of motion to materials as they move
from the times, places, forms and conditions where they
have no value to the times, places, forms and conditions
where they have value.
Marketing channels are set of interdependent
organizations involved in the process of making
products / services available for use or consumptions.
Logistics Management
In marketing perspective, it deals with the movement
of finished goods from the last point of production to
the point of consumption.
It includes several sub-functions such as
transportation, order processing, warehousing,
protective packaging, inventory management, and
related information and services.
It makes available right quantity of right quality
product at the right time and place, in the right
physical form, and at the right costs.
Physical distribution/out-bound logistics has made
overwhelming contribution in the containment of
costs, rendering superior customer services as well
as enhancement of core competency.
Its scope has become wider over a period of time,
by incorporating movement of all types of goods
other than only finished goods such as, movement
of raw-materials from sources to production facility
and movement of work-in-process throughout the
production function.
 Landscape of Market Scenario
Globalization & Information Technology are two major drivers of
prevailing landscape of market scenario

Globalization resulted into

# Increased Competition
# Commoditization of
Products
# Global Market Information Technology facilitates firms in
# Empowerment of Consumer
# Enhancement of Productivity,
Transparency and Efficiency
 Success Factors
Old Economy
Meeting Customer Expectation
Selling Price = Costs + Profit
Value Creation
Push Strategy
Transactional Channel Relationships
Make-and-sell strategy
Branding through Advertising
Standardization
Static Pricing
Demand Forecasting accuracy
Supply Chain Management
Information-centric Decisions
Competitive Advantage
Just-In-Time Availability
Intermittent Replenishment in large
Quantity
Inventory Management
Size
New Economy
Exceeding Customer Value
Profit = Selling Price Cost
Value Delivery
Pull Strategy
Partnering Channel Relationships
Sense-and-Respond Strategy
Branding through Performance
Customization
Dynamic Pricing
Demand Fulfillment Capability
Demand Chain Management
Knowledge-centric Decisions
Superior Market Responsiveness
Real Time Availability
Continuous Replenishment in
Small Quantity
Information Management
Speed
 Strategic Importance of Distribution in New
Environment

There is shift of power and responsibility from manufacturers to channels because

product differentiation becomes increasingly problematical;

companies look to continually streamline sales and
marketing; and
new product development and brand extensions continue to
proliferate.
Business dynamics and emerging technologies make new approach to distribution both
essential and feasible. Tough competition is forcing managers to scrutinize every aspect
of their operation. Increasingly, they are recognizing that distribution channels
represent an untapped opportunity for major cost savings and productivity
improvements (Narus and Anderson, 1996).

According to Stern and Weitz (1997) design and management of effective and efficient
distribution channels offer significant, frequently untapped, opportunities for firms to
create unique, long-term strategic advantages. Superior performance of channel
activities has become a major route to providing extraordinary value to end-users
 Reasons for Strategic Significance of Distribution

1. The New Stress on Growth and Long- term Performance of

Business
2. Gaining Sustainable Competitive Advantage
` # Channel strategy usually requires a structure
# Channel strategy is long-term
# Channel strategy is based on relationships
3. Greater Market Coverage and Penetration
4. Need to Reduce Distribution Cost
5. Changing Formats of Branding and Promotion Mix
6. Extensive Use of Information Technology in Distribution
Management
IT specially Internet have transformed the classical channel structure.. The World Wide Web
enabled firm to have high speed of information transfer, more interaction, overcome
limitations of physical space and time, and high level of flexibility in channel management.
IT and managerial innovations have developed and refined cooperation between them to sell
products more profitably by integrating redefining pull and push strategies. There is a
possibility of pull strategy in between them and push strategy in between channel members
and consumers

Integrated Pull-Push Strategy

Product Flow Product Flow
Manufacturer Negotiation Flow Channel Negotiation Flow
Consumers
Information Flow Members Information Flow

PULL PUSH
 Information Technologys Opportunities and
Challenges for Organizations
Firms can sell their products to consumers directly on the Internet
so reducing transaction cost significantly.
IT provides new markets for the products of the enterprise due to
global accessibility of the customers more direct, close, and
personalized interactivity with them.
It is new and powerful information medium for producers,
wholesalers and retailers to conduct business among each other
enhancing interactivity, productivity, transaction efficiency, and
relationships.
It facilitates firms in optimization of resources and containment of
total cost.
 It can redefine the conventional way of doing various business
functions into a new integrated business process.
One of the major challenges is in terms of quantum of competition.
When it allows a firm to have a reach of global market, it also
allows global players to enter in your markets. Thus, IT further give
pace to the dynamics of markets.
Due to easy accessibility of information, IT empowers consumers to
become faster, smarter, intelligent, adaptive, and responsive.
The Internet has really enhanced the alertness of mind of
consumers, which ultimately make them more sensitive while
making purchase decisions.
That is why, consumers are more demanding and companies are
continuously under pressure to meet their expectations in cost
efficient way failing which, out of market within a very short span of
time.
 Introduction

The very purpose of marketing is to satisfy human needs by

delivering products to buyers when and where they want them
and at a reasonable cost.
A key element in this statement of marketing is delivery.
All marketing efforts do not contain any value unless products
are placed in the hands of those who need them.
Marketing intermediaries are exclusively responsible for the
performance of this critical function of delivery of products to
customer.
 Marketing channel members perform
a number of key functions:
1. They gather information about potential and current
customers, competitors, and other actors and forces in
the marketing environment.
2. They develop and disseminate persuasive
communications to stimulate purchasing.
3. They reach agreements on price and other terms so that
transfer of ownership or possession can be affected.
4. They place orders with manufacturers.
5. They acquire the funds to finance inventories at different
levels in the marketing channel.
6. They assume risks connected with carrying out channel
work.
7. They provide for the successive storage and movement
of physical products.
8. They provide for buyers payment of their bills through
banks and other financial institutions.
 LOGISTICS FUNCTIONS
Breaking Bulk:

Manufacturer Marketing Consumer / Retailer

(Products in bulk (Products in Small
Intermediary
Quantity) Quantity)

Accumulating Bulk:
Producer-1
(Product in X Quantity)
Consumer
Producer-2 Marketing (Product in X+Y+Z
(Product in Y Quantity) Intermediary Quantity)

Producer-3
(Product in Z Quantity)
Creating Assortments:

Manufacturer-1
Customer-A
(Product-X)
(Product-X&Y)

Manufacturer-2 Marketing
Customer-B
(Product-Y) Intermediary
(Product-Y& Z)

Manufacturer-3 Customer-C
(Product-Z) (Product-X,Y& Z)
Transaction Efficiency:
M M M M
R R R R
Number of transactions needed
for all Manufacturers (M) to
transact all Retailers (R )
= Number of Manufacturers
Number of Retailers
= 4 4 = 16 Transactions
M M M M
R R R R
Number of transactions needed
for all Manufacturers to transact
all Retailers
= Number of Manufacturers +
Number of Retailers
= 4+4 = 8 transactions
 COMMUNICATION FUNCTIONS
Information provided to Supplier Information provided to Consumer
# Consumer Profile # Upgraded product configuration & features
- Expectation, taste and preference # Comparative analysis of alternative
- Reaction towards competitors # Products and brands
action and reaction # Mechanism to maximize value for money
- Reaction in the stock-out situation # Dynamic pricing policy
- Brand loyalty and reasons for # Promotion schemes
brand switching # DIWA policy
# Product performance # Payment policy
# Promotion policy effectiveness # Support and care policy
# Pricing policy effectiveness # Product availability
# DIWA policy effectiveness # Order fulfillment and replenishment (demonstration,
installation, warranty & after-sales service) schedule
# Present stock level and # Settlement of defective delivery
requirement
# Expected Next requirements
# Payment schedule
# Defective delivery (if any) and
reverse logistics schedule
 FACILITATING FUNCTIONS
Augmented Services: It include
# Local brand building,
# Push-efforts for generation of additional sales volume, #
Market coverage, # Prominent
display and most pleasant purchase environment, # DIWA, and
# Trust building.
Credit Services
Risk Taking
 Strategic Role of Marketing Intermediaries in
Value Chain Perspectives
Porters Model Supporting
Activities
Technology Development (Product & Process R&D)

Human Resource Management

Accounting and Finance

Corporate administration and infrastructure

Procurement VALUE/
Margin

Primary Activities
Value Chain Model is all about Long Term Competitive Advantage
in the eyes of Consumers either by
1. Cost Advantage
2. Benefits Advantage
Efficient Distribution Management facilitates in this endeavor as
both out-bound logistics and channel fall under primary activities
Zone of the Value Chain.
Nowadays, major value addition is made by distribution as
product, price and promotion no more bring sustainable
competitive advantage in most of the cases.
Walters (2002), customer value criterion is an attribute (or
characteristics) of a product or service considered by a purchaser to
be a primary reason for selecting a specific product (or service)
because it enhances the value of the purchasers output or
improves their lifestyle.
It is much wider and dynamic than the basis economic utility
characteristics of form, ownership, time, and so on. It includes
features like

Security : Warranties, price guarantees

Convenience : Reduced preparation and search
times, availability
Performance : Consistency and reliability,
enhancement of customers own
market and time advantages
Economy : Relative price advantage,
upgradation, value for money
Aesthetics : Design leadership
Emotional : Pleasant purchase experience
 Product
Differentiation

Augmented Benefits
# Extended Warranty
# Buy-back/Trade-in
# Financing
Value # On-spot Breakdown Service
Proposition
Basic Benefits
Powerful Engine Wide Tires
Music System Back Space

Core Benefits (SUV)

Transportation
 Value Adding Role of Marketing Intermediaries

Logistical Value Addition

1. Breaking Bulk
2. Accumulation
3. Assortment
4. Systematic Settlement of Exchange
5. Timely, Intact movement & Delivery of Products
6. Availability & Proper Storage of Products
7. Order Processing & Fulfillment
8. Economies of Scale in Physical Distribution of
Products
Marketing Value Addition
1. Market Coverage & Penetration
2. Facilitating Buyers in Information Search
3. Supporting Buyers in their Purchase Decision
4. Product Holding & Risk-sharing
5. Local Brand Building
6. Prominent Display
7. Pleasant Purchase Environment
8. Local Credit (if any)
9. Push Effort to generate Sales Volume
10.Trust Building
11. Information sharing with firms about
# Product Performance
# Market Knowledge
# Changing Consumer Tastes and Preferences
# Dynamic Price Effectiveness
# Competitors Actions and Reactions
# Effectiveness of Current Promotional Strategy
Role of Marketing Intermediaries in e-Environment

1. Product Flow Improvement

2. Title/Ownership Flow Replacement
3. Negotiation Flow Replacement
4. Information Flow Replacement
5. Promotion Flow Replacement
6. Risk Flow Improvement
7. Payment Flow Improvement
8.Service Flow Improvement
 Introduction

Distribution Channel / Marketing Channels

It is a group of individuals and organizations that
direct the flow of products from producers to
consumers.
Distribution channel structure refers to a network of
interdependent organizations involved in the process
of making products / services available for use or
consumptions.
TYPES OF DISTRIBUTION SYSTEMS

MANUFACTURER/ SERVICE PROVIDER

Direct Indirect
Distribution Distribution Broker

Wholesaler Wholes
Direct aler
Call by
Mfg. Field or Tele-
Web Phone Market Own Retail
Reps Store Store Retailer Retailer
Site ing

CONSUMER
 Distribution Systems Adopted ion by Various Industrial Sectors

1. Company Customer
Capital intensive industrial products, Value-added service, and
digital product
2. Company C&F Stockiest Retailers Customers
FMCG, Consumer durable, Fertilizer, Pharmaceutical, Cement,
paint, Branded Food, etc.
3. Company CA Wholesaler Retailers Customer
Food grain, Textiles & Garments
4. Company Depot Stockist Retailers Customers
FMCG, Consumer durable, Fertilizer, Pharmaceutical, Cement,
paint, Branded Food, etc.
5. Company Wholesaler Retailers Customer
Food grain, Textiles & Garments, FMCG
6. Company Dealer Customer
Automobile, Consumer Durable, Branded Textile &
Garments, Computer, Business Products
7. Company Own Retail Outlet / Franchised Show-
room Customer
Consumer Durable, Standard Service Products,
Automobile, Standard Digital Products
8. Company Distributor Wholesaler Retailers Customer
FMCG, Consumer durable, Fertilizer, Pharmaceutical,
Cement, paint, Branded Food
9. Company Authorized Representative
Commission Agent Customer
Standard Service Products
10. Company Direct Sales Associate Customer
Standard Service Products
1. DIRECT CHANNEL
Personal Selling
Mail selling
Tele Marketing
E-Commerce
Owned show-rooms

2. INDIRECT CHANNEL
One Tier / Level
Two Tier / Level
Three Tier / Level (Multi-tier )
 Multiple Channels System (MCS)
In the prevailing and emerging market scenario, multiple channels system is a new buzzword in
the corporate circle.
It refers to adoption of more than one channel structure by firms to reach their consumers.
For instance, automobile component manufacturers have adopted dual-distribution strategies
in general. They sell their products to automobile manufacturers directly, also to wholesalers
and/or retailers for meeting the demand of replacement market. In addition, automobile
manufacturers also sell same component in the replacement markets as genuine spare parts.
Most of the corporate enterprises are involved in multiple channels for distribution of their
products.
 Heightened competition drives firms to use different channels that focus around
customized market offerings to unique customer segments.
Involvement of multiple channels system is a direct reflection of firms market
fragmentation strategy.
Fragmented markets make it harder to serve different customers groups through only one
channel system.
Technological advancements have made it feasible to manage a far more complex channel
structure with the emergence of e-commerce, m-commerce and online sales during
recent times; many firms have adopted multiple channel structures.
Manufacturing firms prefer to adopt multiple channels system to have greater market
coverage and penetration.
 In this system, different channel members are bound to compete with each other and
suppliers consider this competition as a healthy move as consumers will be serviced in
better way that facilitates firms in growth in sales and profitability along with retaining
them longer.
In both B2C and B2B sectors, McKinsey research indicates that within 2 to 3 years, over 50
percent of customers and typically the highest value customers will be using multiple
channels for shopping and purchasing. These channels include store, telephone,
ATM/kiosk, catalog, and online.
The ability to master multiple channels system is becoming increasingly vital for firm
determined to be leading players in the New Economy.
 Consumers who actively purchase through multi-channels, multimedia touch points
spend anywhere from three to five times more than single-channel shoppers. They
also purchase higher margin products that generate higher profits numbering in the
range of five to seven percent (www.aberdeen.com, 2002).
In contrast of above advantages, it leads a danger of conflicts that may result in lose of
motivation and push efforts. When a firm distributes its products through multiple
channels, antitrust controversies may arise.
It may leads towards competition among channels as well as channel and firm
resulting into lose of sales and corporate image.
For instance, in 1999, when Compaq Australia goes directly to customers with a customizable,
price-competitive product eliminating reseller margins and utilizes the savings, resellers had
shown their displeasure and all Compaq products were tossed out of the countrys leading
retail outlets. The cost to Compaq Australia of the debacle is estimated at A$100 million in
lost revenue. In April 2001, Compaq Australia reopened discussions with leading retailers with
the goal of having its products put back on their shelves.
(Coltman et al. 2001)
 Managing Multiple Channels System

For successful development and implementation of multiple channels system, firms need
to define distinctive value propositions targeted to high-value customer segments and
avoid providing Everything to Everyone Everywhere in order to prevent conflicts with its
entrenched channel members. For this purpose, they need to develop and follow a four
steps strategic action plan.
 Multiple Channels System Action Plan

Targeted to high-end
Acquisition of new skills to sense
customer segments based on
customers requirements, order
their value models & Unique
capturing, processes & fulfillment
benefits

Define Develop a Redefine value Reallocate

MCS and MCS delivery ability organizational,
its value network to targeted marketing, and
proposition architecture customers IT resources

Specify exclusive role, Trade-off between various MCS & their

investment priorities & integration in achievement of objectives
Conflict prevention of value maximization
 Strategic Designing of Channel Structure
It is a FOUR steps process
1. Definition of Distribution Objectives: It may includes
# Customers Service Objectives (No frill/Low-Cost Channel vs Full-
Service/Full-Cost Channel)
# Higher growth and long-term performance of business;
# Greater market coverage, dominance and penetration;
# Sustainable competitive advantage;
# Distribution cost containment;
# Development and maintenance of partnering channel
relationships for qualitative outcomes of marketing;
# Improvement of economic and social welfare
2. Distribution System Alternatives:

Various distribution system alternatives:

# Direct distribution system

# One-tier distribution system
# Two-tier distribution system
# Multi-tier distribution system
# Multiple channels system
3. Determining Intensity of Distribution:

While designing the channel structure, the firms have to decide how many middlemen
should be in the channel. In other words, they need to decide the intensity of distribution
to be used at the wholesaling and retailing levels channel structure.
Firms have three options
# Intensive Distribution
# Exclusive Distribution
# Selective Distribution

Channel Number : Number of intermediaries to be used

Channel Length : Type of channels (C&F agent, wholesaler,
retailer, agent, or a combination) to be used
Channel Width : Number and type of channels deployed in each
marketplace
4. Factors Affecting the Choice of Distribution
Channels
A. Market Variables
The nature of the market
Number and Location of Markets
Size and Frequency of Purchase
Customer value models
Buying habits and preferences
B. Product Variables
Size of the product (Bulk and Weight)
Unit Value
Perishability
Standardization
Technical nature
Nature of the Product
Product Line The broader the product line, the shorter shall be
the channel.
Phase of Product life cycle
C. Marketing Intermediaries Variables
Availability of Middleman
Attitude of Middleman
Services required and provided by them
Sales potential
Relationships dynamics
D. Firm / Company Variables
Market Standing
Financial Resources
Volume of Output
Direct distribution strengths
Degree of Control Desire
Managerial Competence
Channel costs
Quantum of Competition