Channel Evolution: A Framework
for Analysis
Arun Sharma
University of Miami
Luis V. Dominguez
University of Miami
This article proposes a comprehensive model for analyz-
ing the environmental forces that affect channel length. The
marketing literature regards channel length as a succinct,
key measure of channel structure. Transactional cost analy-
sis offers an integrative explanation of the seemingly con-
tradictory phenomena and varied interpretations found in
the channels literature. The central thesis of this article is
that the developmental process alters the balance between
performing channel tasks externally and internally and
thereby channel structure. The article also interprets from a
transactional cost perspective how selected cultural, politi-
cal, and urban market concentration factors account for
enduring differences in channel structure among nations at
similar levels of development.
INTRODUCTION
Understanding the factors that give rise to and affect the
evolution of channel structure is considered among the fun-
damental tasks of channel research. In recent years there has
been a rekindling of interest in channels research. However,
most studies have taken the perspective of the individual
firm's strategy. Very little is known about the factors that
shape a nation's channel system: "Apparently, the relation-
ship between a country's channel structure and its environ-
merit remains largely undefined. How else to explain the
channels of distribution in a country remains a matter of
speculation" (Jain 1990, p. 488).
Journal of the Academy of Marketing Science ISSN: 0092-0703
Volume 20, Number 1, pages 1-15.
Copyright 9 1992 by Academy of Marketing Science.
All rights of reproduction in any form reserved.
This article was accepted by the previous editor.
JAMS
This paper presents a conceptual framework based on
transactional cost analysis (Williamson 1975, 1981)which
suggests how a nation s economic evolution affects channel
length, a key aspect of channel structure. Channel length is
defined as the configuration of institutions, agencies, and
establishments through which products move to their final
users (Stern and E1-Ansary 1988). The proposed framework
makes several contributions. First, it resolves a number of
inconsistencies found in the literature on channel length.
Second, and perhaps most importantly, the framework en-
compasses the range of partial explanations for channel
length found in the literature, integrating them within a
make-or-buy transactional cost framework. Third, in con-
trast with prior research, which has tacitly assumed a uni-
directional and universal evolution of channels, the frame-
work accounts for: (a) factors that may accelerate, slow, or
even reverse thre evolution of channel length; and (b) evolu-
tionary patterns specific to countries with certain environ-
ments. Finally, whereas most transactional cost analysis has
focused on micro-level decisions of individual firms, the
proposed framework extends transactional cost analysis to
the macro or societal level.
The article begins with a discussion of the importance of
channel length in the marketing literature. This is followed
by an examination of the range of alternative findings and
explanations of the relationship between economic develop-
merit and channel length. The third section presents a trans-
actional cost explanation of how the major forces associated
with the developmental process affect channel length. The
next two sections explain how transactional costs affect the
evolution of channel length in developing and developed
countries, respectively. The following section explains how
key cultural and political factors as well as urban market
concentration account for enduring differences in channel
structure among nations at similar levels of development.
The final section discusses implications for channel policy
and research.
1 WINTER, 1992
CHANNEL EVOLUTION:A FRAMEWORKFOR ANALYSIS
IMPORTANCE OF THE TOPIC
It is expected that increased global competition will ac-
celerate the evolution of channels of distribution around the
world as multinational firms achieve closer and more inte-
grated relationships with their final clients (Terpstra 1987,
p. 58). Buyers and sellers are reportedly entering into long-
term contractual relationships and strategic alliances that in
effect restructure channels of distribution and internalize
transactions (Arndt 1979). Countervailing this tendency to-
ward increased vertical integration is the greater investment
in financial and managerial resources involved in managing
foreign channels in unknown settings (Anderson and
Coughlan 1987).
Moreover, vertical integration decisions are akin to fixed
capital investments in that once made, they are difficult to
reverse. For example, firms tend to pyramid new products
into existing channels (Anderson and Coughlan 1987).
Managers need frameworks not only for understanding the
present costs of alternate degrees of vertical integration but
also to envision the direction in which channel structures
will evolve in different countries around the world and the
forces inducing or impeding change, so that they can design
channels that will remain efficient over a long planning
horizon.
A decade ago, responding to institutional research which
he termed "primarily descriptive and classificatory rather
than explanatory and theoretical," Arndt (1981, pp. 36-37)
called for a new institutionalism, based on the political
economy approach (Stern and Reve 1980; Zald 1970), shed-
ding the assumptions of pure competition, perfect informa-
tion, and costless transactions found in the neoclassical
model and its concern with equilibrium states. Rather, he
believed that institutionalism should be intimately involved
with transaction costs and the processes of change (Arndt
1981, p. 39). Much progress has been made since then in
gaining a better understanding of the forces shaping channel
structure. Transactional cost studies have examined vertical
integration decisions from the standpoint of market failure.
Under pure competition and perfect information, channel
functions are most efficiently performed in the open market;
transaction costs are incurred only when market imperfec-
tions make it necessary to monitor and enforce the behavior
of channel members, opening the possibility that firms
might perform some or all of those functions more effi-
ciently (e.g., Anderson and Coughlan 1987; Anderson and
Gatignon 1986; John 1984; John and Weitz 1988; Klein
1989).
Unfortunately, this research has remained rather narrow
in scope, focusing on domestic or export channels of
developed-country firms. There have been few exceptions
(e.g., Etgar 1983; Frazier, Gill, and Kale t989; Kale 1986;
Klein 1986). Frazier, Gill, and Kale (1989, pp. 66-67) have
argued that "increased attention must be directed in the
future to international channel issues to promote progress in
the channels area. Continuing to study domestic channels
almost exclusively will yield little, if any, insight into how
channel relationships operate in foreign countries. Addition-
al research on channels in developed countries is needed,
but such research is also needed in underdeveloped coun-
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SHARMA AND DOMINGUEZ
tries . . . . newly industrialized countries . . . . and com-
munist countries."
Understanding the factors that give rise to differences in
channel structure among countries and the forces that may
induce or hinder channel evolution is considered among the
fundamental tasks of channel research (Anderson 1985;
Dwyer and Welsh 1985; John and Weitz 1988; Klein,
Frazier, and Roth 1990; Stern and Reve 1980). Market
structure has been described as the configuration or length
of the channel (i.e., the number of channel members in-
volved) and the allocation of functions among channel
members (Rosenbloom 1987, pp. 155-158; Stern and E1-
Ansary 1988, pp. 10-11). Channel configuration (i.e.,
length) represents the complexity of the channel system,
reflecting the external environment of the channel and influ-
encing as well as being influenced by its internal polity, i.e.,
its centralization, formalization, and participation in the al-
location of channel functions (Dwyer and Welsh 1985;
Dwyer and Oh 1988; John and Reve 1982). Thus, channel
length is a concise and influential characteristic of channel
structure.
Shorter channels suggest some degree of vertical integra-
tion and the presence of large scale intermediaries, most
likely wholesalers (Bucklin 1970a) or large multinational
enterprises engaging in forward integration (Anderson and
Coughlan 1987; Klein 1986, 1989). Vertical integration oc-
curs when channel members feel that they can increase effi-
ciency of or control over channel functions by circumvent-
ing other channel members (Anderson 1985; Day and Klein
1987; Etgar and Zusman 1982; John and Weitz 1988;
McGuire and Staelin 1983a, 1983b). On the other hand,
longer channels indicate that a larger number of firms are
involved in the distribution function. This suggests that in-
termediaries are being integrated into wider geographic net-
works (Bromley 1971) or that channel functions are being
spun off to additional intermediaries (Mallen 1975) because
increased market size permits greater specialization in the
open market. These intermediaries are being added be-
cause of their specialized skills, e.g., for their ability to
efficiently serve large urban centers (Dannhauser 1981;
Forman and Riegelhaupt 1970; Guiltinan 1974; Kaynak
1982, pp. 162-165).
Channel length is also an important public policy issue.
Governments in many developing countries have instituted
centrally administered vertical distribution systems, bypass-
ing traditional channels. These efforts have not been suc-
cessful in many instances because policy makers over-
looked the value of individual entrepreneurship and the
forces that created indigenous channels in the first place
(Dahringer 1983; Etgar 1983; FAO 1982; Kumcu and Kum-
cu 1987; Savitt 1988) and because the ramifications of pub-
lic policy decisions were not anticipated (Dholakia and
Kurana 1983; Riley and Statz 1981). Striking the proper
balance among economic and social goals, vertical coor-
dination, and entrepreneurial initiative has been a continu-
ing theme of policy-oriented channel studies, particularly
for essential consumption items (e.g., Dholakia and Kurana
1983; E1-Ansary 1984; Meissner 1987; Slater 1970; Slater
et al. 1969; Varadarajan 1984).
Channel length has also been regarded as a major focal
2 WINTER, 1992
CHANNEL EVOLUTION:A FRAMEWORKFOR ANALYSIS
point of comparative analysis of marketing systems; it is
often cited in the comparative literature as a succinct indica-
tor of channel structure (Boddewynn 1981; El-Ansary and
Liebrenz 1982; Kaynak 1982, pp. 112-116; Kaynak and
Hudanah 1987; Mallen 1975).
Finally, channel length is an important strategic decision
for the firm. Much of the literature on channel length ad-
dresses the conditions under which vertical integration re-
duces costs or improves profitability (e.g., Anderson and
Coughlan 1987; Bhasin and Stem 1982; Buzzell 1983;
Dwyer and Welsh 1985; Klein, Frazier and Roth 1990;
Stem and Reve 1980). In the international arena, global
firms are seeking closer linkages with channels and with
9final customers that will allow faster introduction of suc-
cessful brands into other countries (Business Week 1990a,
1990b; Terpstra 1987).
In summary, channel length is strategically significant at
the micro level to individual finns and hierarchies attempt-
ing to enhance profits and lower costs. It is important at the
macro level to researchers and public policy officials trying
to better understand the forces that shape the organization of
the exchange system. This article is primarily concerned
with macro level issues. Its goal is to develop a framework
that spans the patterns of differences and regularities found
in different nations' channel structures. It is concerned with
such questions as: Why have channels shortened in some
nations, e.g., Australia (Layton 1989)? Why have some
studies (e.g., Wadinambiaratchi 1965) suggested that chan-
nels lengthen as countries develop? Why are Japanese chan-
nels longer than those found in the U.S., despite the fact
that both nations are at comparable levels of development
(Shimagushi and Lazer 1979)?
AN ASSESSMENT OF THE LITERATURE
ON CHANNEL LENGTH
Consistent with the goals of the study, the relevant litera-
ture is that which seeks to explain how external environ-
mental forces affect the internal structure of the channel and
more specifically, channel length. However, as Stem and
Reve (1980) argue, external forces are best understood
when they are related to the manner in which they affect and
work through the internal political economy of the channel.
Therefore, the discussion particularly emphasizes the inter-
nal mechanisms through which environmental influences
effect differences in channel length.
Table 1 describes each of the studies, its predicted rela-
tionship between development and channel length, whether
focusing on developed or developing countries, and the sup-
porting evidence and/or theoretical explanation for channel
length. Selection of studies was guided by two criteria: (a)
the studies either focused on the channel system of one or
more countries or on a prototypical channel environment;
and (b) the studies focused on the configuration of the entire
channel, rather than on a particular dyad.
Table 1 therefore excludes studies of vertical integration
which take the perspective of a single finn's strategy, since
they do not address evolution or cross-national differences
in aggregate marketing channels (e.g., Anderson 1985; An-
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SHARMA AND DOMINGUEZ
derson and Coughlan 1987; Dwyer and Welsh 1985; John
and Weitz 1988; Klein 1989; Klein, Frazier and Roth 1990).
Also excluded, because of their limited scope, are studies
which deal with individual channel dyads found only in
certain industries or activities, e.g., insurance agencies
(Etgar 1974, 1978) or hardware cooperatives and voluntary
groups (Dwyer and Oh 1988). Similarly excluded are stud-
ies addressing the number of outlets of a certain type within
a channel level, since they do not deal with channel length
per se (e.g., Corstjens and Doyle 1979).
Two channel studies in Table 1 employ mathematical
analyses to derive propositions about the effects of the de-
velopmental process on channel structure under certain re-
strictive assumptions (Bucklin 1970b; Preston 1970). Two
other papers by McGuire and Staelin (t983a, 1983b) and a
subsequent generalization and empirical test by Coughlan
(1985) are included as tangentially relevant to the effects of
development on channel length. 1 McGuire and Staelin
(1983a, 1983b) employ game theoretic approaches assum-
ing certain restrictive channel conditions (i.e., one-level
channel, bilateral monopoly, retailers sell exclusively one
manufacturer's or wholesaler's product, no scale or scope
economies, and no transaction costs) to test the effect of
product substitutability on individual or collective profit
maximization. Their models and a subsequent extension
and empirical verification by Coughlan (1985) conclude
that high substitutability makes it more desirable for man-
ufacturers to work through contracted retail outlets than to
own company stores. Channel disintegration is favored in
highly price-competitive environments on the ground that it
isolates producers (or wholesalers) from end-market price
competition (Coughlan 1985). Although McGuire-Staelin-
Coughlan do not directly address the developmental pro-
cess, discussion later in this article argues that more intense
competition and a wider range of product alternatives are
conditions associated with buyers' markets (Frazier, Gill,
and Kale 1989; Kale 1986) found in highly developed
market economies. It could therefore be reasoned from
McGuire-Staelin-Coughlan that channels should lengthen as
economies develop, contrary to most of the empirical evi-
dence from developed countries presented in Table 1.
As can be seen in Table 1, the studies make divergent
predictions. Some conclude that channels lengthen as na-
tions develop; others conclude just the opposite; still a third
group asserts that channels first lengthen, then shorten. Fur-
ther examination of the literature raises additional issues
which underlie these contradictory claims.
The nature of the evidence. About half of the studies are
conceptual developments not subjected to any formal test;
the rest employ widely different methodologies, ranging
from field observation to game theory. Among the studies
that employ any statistical measurement or analysis,
Wadinambiaratchi (1965) selects only less developed coun-
tries (LDCs); Livesay and Porter (1969) study the U.S.; and
Douglas (1971) and Layton (1989) span both developed
countries and LDCs. Of those studies, only Layton's (1989)
and Livesay and Porter's (1969) analyze time-series data.
Such differences in methodology may account for the appar-
ent differences in empirical findings (Boddewyn 1981; E1-
Ansary and Liebrenz 1982).
3 WINTER, 1992
CHANNEL EVOLUTION: A FRAMEWORK FOR ANALYSIS SHARMA AND DOMINGUEZ

TABLE 1
Relationship Between Channel Lengths and Economic Development
Level of
Development
Claims/ Addressed/
Author Results Theoretical Support Empirical Test
Bucklin (1970b) Lengthen* Specialization of functions due to increases in volume; number of services All levels/No empirical
performed; opportunity costs of performing alternate activities; breadth of analysis.
product assortment; market decentralization and heterogeneity.
McGuire and Staelin Lengthen Product substitutability; channel disintegration isolates producers from retail Not specified/Tested
(1983a, 1983b); competition. against U.S. sample
Coughlan (1985) by Coughlan (1985).
Wadinambiaratchi Lengthen Separation of functions; emergence of large-scale retailing; decline in the LDCs/Cross-sectional
(1965) role of traditional merchants. data on eight
countries.
Livesay and Porter Shorten Forward integration of manufacturers brought about by intensified Historical records of
(1969) competition and by failure of open market transactions to provide matched set of
broadened distribution; need for greater technical support to customers; vertically integrated
need to provide consumer credit. and nonintegrated
U.S. finns.
Shimagushi and Shorten Factors that propel shorter channel of distribution: large-scale retail chains; Interviews with
Lazer (1979) expanding capacity of manufacturers. Japanese and foreign
Factors that arrest channel evolution: geographic market fragmentation; executives in Japan.
prevalence of small retailers; political clout of small retailers; financial
role of trading houses and interlocking system of mutual obligations; role
of harmony and tradition.
Preston (1970) Shorten Aggregate market size; larger firm sizes; market decentralization and All levels/No empirical
heterogeneity; increased product-related services; shift towards analysis.
bureaucratic management structures; larger size of channel members.
Fonnan and Inverted Marketing systems built around major distribution centers and urban Tracing of production
Riegelhaupt (1970) U-shape population will ultimately lead to restructuring of agricultural production and distribution of
systems. basic food stuffs in
Factors lengthening the channel: concatenation of local distribution systems; Northern Brazil.
use of middlemen at distribution fairs.
Factors shortening channels: middlemen go to source in order to buy in
larger quantities; high degree of middleman capitalization; reliance on
large-sale producers.
Douglas (1971) Inverted U- Limited market opportunities and small size of firms lead to predominantly All levels/Analysis of
shape/ local markets with wholesalers playing a dominant role. cross-sectional data
Found no Channels lengthen with increased market size, larger firms, sellers' market on six countries.
relation- conditions.
ship
Guiltinan (1974) Inverted Evolving competitive objectives of channel members. Not empirical/U.S.
U-shape Factors lengthening channel: increasing customer contact and market historical experiences
coverage. and perspective.
Factors shortening channel: reducing channel costs and increased monitoring
of channel services lead to administered channels; need to further reduce
costs and need for more coordinated effort ultimately lead to vertical
integration.
Layton (1989) Inverted Entropy in channels: tendency of exchange systems to evolve toward greater Time-series data on
U-shape degree of internal organization, trade flows in
Australia and Java.
Mallen (1975); Inverted Functional spin-off theory based on Stigler ( 1951). All levels/Not
Carson (1967) U-shape Factors lengthening channel: market size allows firms to spin off functions empirical.
to specialists.
Factors shortening channel: at high levels of demand and throughput, large
merchants begin to reintegrate.
Mittendorf (1978)** Inverted Theory based on magnitude of consumer demand, size of urban market All levels/Not
U-shape demand, scale advantages of large supermarket chains, empirical.
Factors lengthening channel: increases in income and size of urban market
lead to specialization and increasing advantage of large supermarkets.
Factors shortening channel: achievement of economies of scale and
competitive advantage of supermarkets lead to more direct channels.

*To be read: direction of the relationship between channel length and degree of economic development; as an economy develops, channel will lengthen.
**As reported in other sources.

JAMS 4 WINTER, 1992

CHANNEL EVOLUTION: A FRAMEWORK FOR ANALYSIS
Lack of a unifying framework. There seems to be univer-
sal consensus that (a) changes in the size of market demand
have much to do with the extent of specialization and the
evolution of channel length; (b) efficiency (low-cost perfor-
mance of functions) and effectiveness (market coverage,
assured delivery of a desired level of service) are key con-
siderations in the choice of intermediary; and (c) channels
of distribution are highly complex organizational forms that
are expressive not only of the degree of economic develop-
ment achieved in a nation but of a host of other social,
political, and historic factors. However, each study suggests
its own array of variables that somehow intervene to facili-
tate or impede the evolution of marketing channels. No one
study offers a comprehensive framework that reconciles all
of the seemingly different forces shaping channel evolution.
Teleological assumption. A number of the studies imply
a unidirectional and deterministic model of evolution to-
ward a certain channel organization, e.g., as a society be-
comes more developed, there will be fewer intermediaries
and channels will shorten. However, there is evidence that
this unidirectional evolution may be reversed or in fact need
not hold. As an example, a study of several decades of
evolution of distribution channels for electrical appliances
in the Philippines found that the channel lengthened, short-
ened and again lengthened in response to the shifting bal-
ance of forces for import liberalization and domestic indus-
try protection (Dannhauser 1981). What is lacking is an
explanation of the general set of forces that might bring
about such a reversal.
CONCEPTUAL FRAMEWORK
Transactional cost analysis offers an integrative theoreti-
cal explanation of the seemingly contradictory phenomena
and wide-ranging relationships found in the channels litera-
ture. Transactional cost analysis examines "the comparative
costs of planning, adapting, and monitoring task completion
under alternative governance structures" (Williamson 1983,
p. 104). The central thesis of this article is that the develop-
mental process alters the balance between performing chan-
nel tasks externally and internally. Shifts in the relationship
between external and internal transaction costs explain why
channel length does not grow monotonically with develop-
ment. A number of studies have shown that channel struc-
ture in some countries (e.g., in Japan) shows a longevity
which cannot be explained solely by economic develop-
ment. The paper also incorporates socio-political, cultural,
and market concentration factors to explain, within the
transactional cost framework, why channels may evolve at a
faster pace in some countries and remain more invariant in
others. The discussion results in a series of verifiable propo-
sitions. The methodological appendix reviews measurement
approaches to verifying the propositions.
The analysis proceeds from the micro level to an explana-
tion of the aggregate implications of individual behaviors.
Although such aggregation entails some ambiguities (Ven-
katesh and Dholakia 1986), it is more than compensated by
the richness of understanding that it yields on how forces
within and outside the channel shape its evolution. For ex-
ample, Klein (1986) employed transactional cost analysis to
JAMS
SHARMA AND DOMINGUEZ
make a case that LDCs should encourage domestic firms to
integrate backward into the import channel.
Channel Transaction Costs and the Development
Process
There is a growing body of transactional cost analysis of
domestic channels (Anderson 1985; Day and Klein 1987;
Dwyer and Oh 1988; Dwyer and Welsh 1985; Heide and
John 1988; John and Weitz 1988) and international channels
(Anderson and Coughlan 1987; Anderson and Gatignon
1986; Bello and Williamson 1985; Etgar 1983; Klein 1986,
1989; Klein, Frazier, and Roth 1990). Channel decisions
may be regarded as a make-or-buy choice that hinges on
transactional costs (Anderson and Coughlan 1987; William-
son 1981). The decision for a channel member is to either
perform that function internally (make) or to add an external
channel member (buy). The channel make-or-buy decision
ranges from hierarchical to open-market structures with
firms placing channel decisions on this continuum (Ander-
son and Coughlan 1987; Klein 1989; Williamson 1981).
The underlying principle is that a firm will perform a task
internally if it has a total cost advantage over the mar-
ketplace. Transactional cost analysis explicitly recognizes
governance costs in addition to distribution costs. Distribu-
tion costs are those associated with the performance of
channel functions, e.g., transportation, credit, and transfer
of title. Governance or "control" costs are those associated
with planning, executing, and monitoring performance of
channel functions. The make-or-buy decision hinges on the
balance between internal and external costs in these two
categories, i.e.,
AC = Internal distribution costs - External distribution
costs
AG = Internal governance costs - External governance
costs
When the sum of these categories is positive, i.e., when
AC + AG > 0
it will be more costly to assume channel functions; those
will be assigned to the marketplace. However, when the
sum is negative, i.e., when
AC + AG < 0
firms will internalize channel functions.
Since channel functions are generally performed more
efficiently by the marketplace (Anderson and Coughlan
1987; Williamson 1981), it is expected that AC > 0. Hence,
channels will lengthen as long as AG is either positive or not
sufficiently negative for AC + AG to be negative.
Three factors related to the developmental process drive
the value of AC + AG and hence the direction of change in
channel length. They are asset specificity, volume, and ex-
ternalities of "quality debasement" or product/service quali-
ty control (Williamson 1983). Their effects are explained
next.
5 WINTER, 1992
CHANNEL EVOLUTION:A FRAMEWORKFOR ANALYSIS
The first is asset specificity. Intermediaries have certain
specialized tangible and intangible assets that are critical to
a manufacturer (Anderson and Coughlan 1987; Williamson
1983). These specialized assets are advantageous site or
location, specialized physical facilities (e.g., repair/
maintenance/service facilities), and human assets (e.g.,
sales personnel with specialized skills). When assets are
very non-specific, producers can easily replace intermedi-
aries, and the latter can turn to alternate sources of supply.
The more specific assets required, the lower the value of AC
+ AG, giving the marketer an incentive to perform the
function internally (Williamson 1981). The reasons for this
are: the cost of specific assets cannot be shared with other
products, thereby reducing the cost advantage of the mar-
ketplace; and specific assets increase the need for control,
increasing the cost of external governance. Recent studies
have found that asset specificity leads to increased internal-
ization of channel functions (Anderson 1985; Anderson and
Coughlan 1987; John and Weitz 1988; Klein, Frazier, and
Roth 1990).
The second factor is channel volume. Increased channel
volume stimulates internalization of functions (Anderson
1985; Klein, Frazier, and Roth 1990). Transactional cost
analysis accounts for this phenomenon through two mecha-
nisms: (a) with increasing volume, individual firms can at-
tain sufficient economies of scale that the difference be-
tween internal and external distribution costs diminishes,
thereby reducing AC (Klein, Frazier, and Roth 1990;
Williamson 1981); and (b) economies of scale reduce the
cost of internal governance (Anderson 1985).
Quality debasement externalities arise with branded prod-
ucts that are expensive and complex, requiring specialized
service, installation, and technical expertise. It is much
more difficult to monitor intermediaries' compliance with
producers' service standards. As a result, external gover-
nance costs will rise for those products (Anderson 1985;
Bowen and Jones 1986; John and Weitz 1988), thereby re-
ducing the value of AG, and thus AC + AG. Hence, chan-
nels of distribution are expected to shorten and become
more vertically integrated with increasing demand for goods
that involve high asset specificity and quality debasement
externalities.
The tendency for channels to first lengthen and then
shorten as development proceeds can be explained in terms
of the relative importance of asset specificity, channel vol-
ume, and quality debasement externalities. The next two
sections discuss their roles in developing and developed
economies, respectively.
CHANNEL LENGTH IN DEVELOPING ECONOMIES
In the initial stages of a primitive economy, communities
are largely self sufficient, consuming for the most part what
they produce and having very little need for middlemen.
With further development, monetary units are introduced
and there is increasing division of labor. Craftsmen and
small businessmen increase their sales by trading beyond
their own communities. Small trading centers emerge, with
communities selling to as well as provisioning from other
communities and urban centers.
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SHARMA AND DOMINGUEZ
The spread of the market system, linking local markets
into regional networks, increases the separation between
producer and ultimate consumer. It also provides an oppor-
tunity for astute producers to increase sales by expanding
the number of people and communities reached. This corre-
sponds to what Guiltinan (1974) terms the coverage/
capacity stage of channel evolution.
In the initial stages of development, marketers will re-
spond to the widening scope and rising purchasing potential
of the domestic market by employing a wider network of
intermediaries rather than by performing those distribution
functions themselves, e.g., storing, transporting, financing,
wholesaling, and retailing (Mallen, 1977). Increased vol-
ume also means that firms can achieve significant econo-
mies through specialization, so that functions will be spun
off to specialized intermediaries (Mallen 1975; Stigler
1951). As a result of increased volume and opportunities for
greater economies through the use of intermediaries, chan-
nels will lengthen (Carson 1967, p. 482; Mallen 1977, pp.
1t7-120). This phenomenon has been observed in Africa
(Hill 1963), Jamaica (Katzin 1959), India and Mexico (FAO
1982), and other developing countries (Wadinambiaratchi
1965).
Transactional cost analysis provides an integrative expla-
nation of the various forces lengthening the channel. There
are well documented reasons to expect that the cost of per-
forming distribution functions internally will be much high-
er than the cost of delegating them to intermediaries, and
hence that AC will be highly positive. First, numerous small
intermediaries are available to perform functions at very
low cost. As a small intermediary, barriers to entry into
distribution within primitive societies are quite low (FAO
1982; Katzin 1959; Kaynak 1982, pp. 20-21); hence dis-
tribution serves as an employer of last resort, attracting the
unemployed and marginally employed, who earn little more
than average wages for their activities (Harrison et al. 1974;
Kaynak 1982, pp. 108-110; Keegan 1974, p. 344; Slater et
al. 1969, p. 74). Second, intermediaries will be in a better
position than producers to achieve volume economies. The
reason is that intermediaries can readily increase volume by
widening their scope (variety of goods handled). William-
son argues from a transactional cost perspective that a man-
ufacturer is more likely to diversify into production of other
products--where its expertise lies--than to both integrate
forward and handle a wider variety of goods as an inter-
mediary (Williamson 1983, pp. 106, 109-113; also see
Douglas 1971). Extensive evidence from early American
industrialization supports this point (Chandler 1977; Live-
say 1979; Porter and Livesay 1971).
On the other hand, z~G is expected to have a small posi-
tive or negative value. Low asset specificity and low quality
debasement externalities are expected in early stages of de-
velopment. Complex and highly technical products repre-
sent a relatively small portion of the total demand for con-
sumer and producers' goods, so that the requirements for
specialized assets--specialized capital goods, personnel,
and skills--and problems of adequate dealer support for
complex, service-intensive products are kept to a small sec-
tor of the total economy. Furthermore, competition is limit-
ed by the scarcity of goods and typically prevailing sellers'
market conditions. Since most goods enjoy little differentia-
6 WINTER, 1992
CHANNEL EVOLUTION: A FRAMEWORK FOR ANALYSIS SHARMA AND DOMINGUEZ

tion in early stages of development, effective management

FIGURE 1
of the marketing mix aimed at consistent product differ-
Economic Development and Channel Length
entiation is not a major concern of the producer. Whatever
control losses might be experienced by relinquishing mar-
keting activities to intermediaries are offset by the pro-
ducers' own limited managerial resources. r
Hence a high positive value of AC and low positive or c
negative value of AG will result in AC + AG > 0; channels
are expected to lengthen in early stages of development.
...J

t-
/
t-
t-
Proposition 1: In a developing economy, channel O
length will increase as a country develops
economically.
EconomicDevelopment

CHANNEL LENGTH IN ADVANCED ECONOMIES

As countries industrialize, firms have access to higher

Environment
technology, better transportation and communication facili- Developing Economies Developed Economies

ties, greater financial resources, and more sophisticated hu- 9 LOW Volume of 9 High Volume of
man resources (Carson 1967; Mallen 1977). Competition Transactions Transactions
9 Small number of Suppliers 9 Large Number of Suppliers
intensifies as hitherfore regional and local marketers be- (Sellers ~ Market) (Buyers' Market)
come fully integrated into a unified market system. In the 9 Low Customer Service 9 Higher Customer Service
Expectations
Expectations
face of greater supply, increased choice, and more discre- 9 Marginal-Wage Earning 9 Sophisticated Transport
Retailers and Communication
tionary demand, firms which can more effectively control 9 Deficient Transport and Infrastructure
channel functions stand to achieve significant competitive Communication 9 Easy Availability of
Infrastructure Financial Resources
advantages by offering better service to their customers 9 Restricted Availability of
(Guiltinan 1974), i.e., characteristics associated with the Financial Resources

transition from a preponderance of sellers' to one of buyers'

market conditions (Frazier, Gill, and Kale 1989; Kale
1986). A number of studies have reported shorter channels
in industrialized or industrializing nations--in Europe Transactional Costs
(Arndt 1972); Australia (Layton 1989); the U.S. (Davidson
IAC+AG>0 [ aC+AG<0
1970; Livesay and Porter 1969; Moore 1972); Japan (Busi-
ness Week 1988a and 1988b; Dowd 1959; Shimagushi and
Lazer 1979); and Venezuela (Dominguez and Vanmarcke
1987).
Transactional cost analysis provides a comprehensive in- Distribution Costs
tegrative framework that incorporates both distribution and AC is High and Positive AC is Low end Positive
control cost considerations working toward channel reduc- 9 LOW Volume--No 9 High Volume--Economies
tion. First, AC, the difference between internal and external Economies of Scale of Scale
9 Retailer Willing to Work 9 Increased Retail Margins
distribution costs, is reduced. This is because the size of the with Slim Margins 9 High Customer Service
market allows firms to achieve considerable economies of 9 Low Customer Service Expectations
Expectations 9 High Asset Specificity
scale, so that distributive functions can be performed at 9 Low Asset Specificity Requirements
costs comparable to those of intermediaries in the open Requirements

market. Performance of these specialized functions also re-

suits in greater asset specificity which reduces the value
of AC.
Second, greater product complexity and heightened com- Governance Costs
petition increase the need to exercise control over all facets AG is Positive AG is Negative
of the marketing mix in order to avoid quality debasement
Major Objective--Market 9 Major Objective--
externalities. Independent channels increase the costs of 9

Coverage Competitive Advantage

channel governance because intermediaries handle other 9 LOW Product Differentiation 9 Sophisticated
9 Large Number of Small Competitions
products, and incentives have to be provided in order to Intermediaries available 9 Product Differentiation
carry out a marketer's policies. Long channels worsen the and used 9 High Degree of Control
9 Low need for control needed
situation because of the added costs of controlling and 9 High Internal Monitoring 9 Organizational
Costs due to deficient Infrastructure Allows Easy
motivating a labyrinthic network of independent-minded in- Organizational Internal Monitoring
termediaries. Use of such channels in buyers' markets im- infrastructure 9 High Quality Debasement
9 Low Quality Debasement Externalities
plies loss of sales due to inconsistent or poorly implemented Externalities
marketing practices. Further, better technology and greater
availability of financial and human resources reduce inter-

JAMS 7 WINTER, 1992

CHANNEL EVOLUTION: A FRAMEWORK FOR ANALYSIS
nal control costs, while increased volume reduces the cost
of internal governance (Anderson 1985). Thus, AG, the
difference between internal and external governance costs,
becomes highly negative, so that AC + AG becomes in-
creasingly negative, making consolidation of channel func-
tions increasingly attractive. Several studies of indus-
trialized economies have found direct evidence of a
relationship between increased external governance costs
and reduced channel length (Anderson 1985; Anderson and
Coughlan 1987; John and Weitz 1988; Klein, Frazier, and
Roth 1990). 2
A proposition regarding the relationship between devel-
opment and channel length for advanced economies can be
stated as the following.
Proposition 2: In an advanced economy, channel
length will decrease as a country develops
economically.
The relationship between development and channel
length suggested by Propositions 1 and 2 is akin to an
inverted "U". Channels first lengthen and then shorten with
further development. The point where the direction of
change in channel length is reversed occurs when a society
has begun to achieve a high level of income and wealth
accumulation and has moved from sellers' to buyers' market
conditions so that issues related to the governance of com-
petitive strategy and customer service take precedence over
distribution cost issues, and a marketer's internal scale
economies and managerial controls operate more efficiently
and at a higher level of customer service than through open-
market transactions. Propositions 1 and 2 are summarized in
Figure 1.
DEVIATIONS FROM THE PATTERN
OF CHANNEL EVOLUTION
Deviations from the standard pattern of channel evolution
will be detected when comparing a nation's channel system
over time, and when comparing nations that have attained
similar levels of development. For example, after experi-
encing increased vertical integration, distribution channels
in a newly-industrialized nation may once again lengthen,
contrary to Proposition 2. Such a phenomenon was ob-
served in a number of industrializing Latin American na-
tions that sustained a loss of income and employment during
the 1980s. They experienced a parallel rise in the impor-
tance of informal distribution, which implies that their
channels once again lengthened. This has been attributed to
the fact that distributive activities are often a source of
income of last resort to the chronically unemployed and
underemployed.
Transactional cost analysis provides a more comprehen-
sive explanation. A prolonged recession marked by sus-
tained losses in real income and demand reduces channel
throughput, severely lessening internal economies of scale.
At the same time, the costs of external distribution are re-
duced by the availability of people who are willing to per-
form these functions at little above minimal wages. As a
result, AC will become much more positive. A prolonged
JAMS
SHARMA AND DOMINGUEZ
recession will have offsetting effects on AG: intensified
competition for dwindling demand will increase external
control costs while a reduction in channel volume will re-
duce internal economies of scale. Therefore, AC + AG is
expected to be positive during a prolonged recession (be-
cause of the rise in AC), so that channels will tend to length-
en once again.
The preceding example illustrates how channel evolution
may be arrested or even reversed in response to a reversal of
economic development. But even if economic development
proceeds, or when comparing nations at similar stages of
development, there wilt be deviations from the standard
pattern predicted by Propositions 1 and 2. Cultural, politi-
cal, and geographic factors are among the most widely cited
determinants of channel structure (Kaynak 1986). Each of
the following sections first discusses the importance of each
selected factor, then traces its effect on distribution and
governance costs, and concludes with a proposition on its
relationship to channel length. The major emphasis is on
environmental determinants that would leave channel length
invariant as nations move to advanced stages of
development.
Cultural Factors
Cultural values may significantly foster or delay adoption
of new distributive institutions and practices. Two major
elements of culture explored in the literature are the shop-
ping behavior of consumers and the decision-making cul-
ture of organizations.
Shopping Behavior
Shopping behavior in a country affects retail institutions
and thereby channel length. Irrespective of development, in
many countries, small stores are seen to provide products
and services that larger stores cannot. As a result there is a
preponderance of small neighborhood stores. For example,
Turkish homemakers visit local stores for their fresh pro-
duce (Kaynak 1978), credit, bargaining (Kumcu and Kum-
cu 1987), and the "they know me" factor (Yavas, Kaynak
and Borak 1982). The desire for daily fresh produce in a
location close to the shopper is one explanation for the
dominance of small retailers in Japan (Shimagushi and
Lazer 1979). In such environments, there is less propensity
to reduce channel length than predicted by Proposition 2
alone.
Transactional cost analysis makes it possible to trace the
effects of culturally-bound shopping behavior on both dis-
tribution and governance costs. The preference of con-
sumers for shopping at neighborhood stores reduces volume
per outlet and thus diminishes the potential for realizing
economies of scale through vertical integration. Neighbor-
hood retailers operate at very small margins (e.g., Kaynak
1982, pp. 140-141; Keegan 1974). As a result, the internal
costs of distribution are higher than those of distribution
through independent retailers; AC can be expected to be
highly positive.
Cultural preferences for small stores also raise internal
governance costs. Highly idiosyncratic customer behavior
complicates the task of understanding local preferences and
customs; quality debasement losses may be incurred. The
8 WINTER, 1992
CHANNELEVOLUTION:A FRAMEWORKFOR ANALYSIS
difficulty of translating those differences into coherent pol-
icies and procedures is one of the reasons why forward
integration was discouraged in a number of key retail sec-
tors in the U.S. (Williamson 1983). Retailers' ability to
personalize efforts and add customer services (e.g., liberal
returns or credit) can act as a powerful deterrent to forward
integration (Dannhauser 1981; Heide and John 1988). It
remains a major hurdle for U.S. exporters wishing to side-
step Japan's labyrinthic channel system (Lazer, Murata and
Kosaka 1985).
It is expected that preference for traditional retailers will
make AG highly positive and hence AC + AG lessening the
tendency to consolidate.
Proposition 3: The more culturally entrenched tra-
ditional shopping behavior in a country, the more
likely that long channels will persist as a country
develops.
Organizational Culture
Comparative management studies show that national cul-
tural characteristics can give rise to important cross-national
differences in organizational structure and processes (Desh-
pande and Webster 1989; Kogut and Singh 1988; Pascale
and Athos 1981; Slocum 1971; Yau 1988). Where consen-
sual management values prevail, longer channels of dis-
tribution will be found. For example, in Japan very strong
channel ties have allowed traditional long channels of dis-
tribution to continue to play a major role despite the inroads
of innovative firms (Czinkota 1985; Ross 1983; Shimagushi
and Lazer 1979). And, in Australia, self-service stores were
adopted slowly because there were "social pressures against
strong business competition and a history of cooperative
action among retailers and manufacturers to oppose changes
that might change the status quo" (Cundiff 1965).
Organizational culture will affect governance costs. Con-
sensual management styles emphasizing the attainment of
common goals tie parties into a web of loyalties, norms, and
behaviors that effectively reduce the scope of opportunism,
moderating the costs of enforcing compliance with man-
ufacturer policies (John 1984), i.e., reducing quality de-
basement losses from external governance. Also, to main-
tain their viability, consensual groups work to raise the costs
of entry to outsiders (Tse et al. 1988, pp. 82-83). In other
words, consensual management styles raise the costs of
internal governance and lower those of external gover-
nance. As a result, AG is expected to be highly positive in
consensual cultures, and long channels will tend to persist.
From this discussion, the following proposal ensues.
Proposition 4: The more consensually oriented the
management style of a society, the more likely long
channels will persist as a country develops.
Distribution Policy
There is a tong standing recognition in the marketing
literature of the importance of channel policy to the devel-
opment process. Researchers have argued that government
policy can have a significant role in determining the evolu-
tion of marketing systems (Dahringer 1983; Harrison et al.
JAMS
SHARMAAND DOMINGUEZ
1974; Izraeli, Izraeli and Zif 1977; Slater et al. 1969). There
is growing recognition among international agencies that
distribution policy can affect not only physical distribution
itself but production growth and income distribution
(Meissner 1987; Riley and Statz 1981).
It is well accepted that severe market imperfections
characterize the exchange systems of underdeveloped na-
tions (i.e., deviations from the classical economic model of
pure competition and perfect flow of information and re-
sources) (e.g., Frazier and Kale 1988; Klein 1986). Public
policy has sought to regulate away the effects of market
imperfections that may result in supply shortages, excessive
profits, or "excessive consumption" of some goods, e.g.,
imported luxuries (Sorensen 1978). Price support programs
and state-run processing and manufacturing plants turn gov-
ernments into owners of large stocks of goods which they
must sell; as a result, governments often enter directly into
distribution (Dholakia and Kurana 1983). In addition, as
buyers, sellers, and allocators of resources, governments
indirectly alter channel structures (Aharoni 1977).
Policy decisions, of course, are not solely guided by
economic efficiency considerations; the government's social
agenda must be considered as well (e.g., Dahringer 1983;
Etgar 1983). Since the distributive trades are labor-intensive
employers of last resort, states often intervene to preserve
traditional labor-intensive distributive institutions (Riley
and Statz 1981). Legislation supporting small retailers is
popular and widespread. Small retailers have successfully
lobbied to restrict the operation of supermarkets in a number
of LDCs such as Turkey (Kumcu and Kumcu 1987) and
even in advanced countries, e.g., in Italy, Norway, and
Sweden (Cateora 1985). In some countries, taxes are im-
posed on large retailers to help small retailers, as in the case
of Switzerland (Cateora 1985).
Transactional cost analysis provides a unified framework
for tracing the possible effects of different types of state
intervention on distribution and governance costs. Govern-
ment regulation and intervention can reduce the volume of
throughput in private sector channels, reducing the oppor-
tunity for internal distribution costs to approximate those of
the open market. It does this by limiting promotion and
price competition that may stimulate demand for certain
goods, by diverting demand and supply to state-controlled
channels, and by diverting sales to small retailers (as ex-
plained in the previous section, the presence of many small
retailers reduces scale economies). As a result, AC is ex-
pected to be higher in more highly regulated economies.
Internal governance costs are also adversely affected.
Limits on the scope of competitive activity reduce the op-
portunity for product differentiation. As already explained,
quality debasement externalities that encourage internal dis-
tribution exist to the extent that there is intense competition
and products can be differentiated (Williamson 1983). Leg-
islation that prevents firings or maintains artificially high
wages in the distributive sector discourages vertical integra-
tion. Not only does it raise internal distribution costs; it also
raises the costs of monitoring, supervising, and motivating
the labor force. It may also have a detrimental effect on the
quality of service that may be expected.
Lastly, a complex and changing web of regulations raises
the level of uncertainty (e.g., Riley and Statz 1981). Em-
9 WINTER, 1992
CHANNEL EVOLUTION: A FRAMEWORK FOR ANALYSIS
pirical studies have shown consistently that environmental
instability discourages vertical integration when channel
members must invest in highly specific assets (Dwyer and
Welsh 1985; John and Weitz 1988; Klein 1989).
As a result, it is expected that market regulation will raise
AG, further discouraging vertical integration. In the follow-
ing propositions, we separate market regulation and protec-
tion of small retailers.
Proposition 5: The more pervasive and unpredict-
able state intervention into channel pricing, market-
ing, and labor hiring and firing practices, the more
likely it is that long channels of distribution will
persist.
Proposition 6: The more that government policies
favor small retailers, the more likely it is that long
channels of distribution will persist.
Urbanization
The rapid pace of urbanization is one of the most signifi-
cant aspects of contemporary economic geography, particu-
larly so in the developing areas. In 1960, there were t10
cities of more than 500,000 people in low- or middle-
income countries. By 1980, there were 278. Likewise, by
1980 the number of people living in cities of more than
500,000 had risen to 44 percent of the population of low and
middle-income countries; the percentages are higher still in
Asia and Latin America (World Bank 1990). Urbanization is
expected to continue at a rapid pace (United Nations 1989).
Many factors account for this (Byerlee 1974; Sabot 1982).
In most developing areas, rural-urban migration has ac-
counted for nearly half of all urban population growth. It is
generally agreed that rural-urban wage differentials are the
main contributor. Urban wage rates have risen at a much
faster rate than agricultural wages. Enduring wage rate dif-
ferentials are abetted by protection of domestic industry,
which allows wage raises to be passed on to consumers, and
by labor policies favoring unionization and minimum sal-
aries for unskilled jobs while neglecting agricultural wages
(Meier 1984, pp. 193-195).
Urbanization, and more specifically, concentration of
population in large cities, has significant transactional cost
implications. Large urban centers pose distribution chal-
lenges and opportunities that small ones do not. Small urban
centers can be provisioned directly from surrounding areas,
whereas large cities require a vast array of producers from
farther distances (e.g., Forman and Riegelhaupt 1970).
Large urban centers afford producers and intermediaries the
opportunity to achieve sufficient economies of scale that
their internal distribution costs will approximate those of the
marketplace. High urban concentration accentuates the ad-
vantages of internal governance to large producers and in-
termediaries. Large intermediaries are no longer content to
rely on small suppliers; they prefer to work directly with
large producers and intermediaries in order to be assured of
supply continuity (Forman and Riegethaupt 1970). Large
urban centers make it easier to reduce quality debasement
externalities through internal governance.
JAMS
SHARMA AND DOMINGUEZ
In summary, it is expected that the presence of large
urban markets will spur the growth of large scale intermedi-
aries and of shorter channels, where there is already a suffi-
cient level of development and competition.
Proposition 7: Compared to other nations at similar
levels of development, those with a greater prepon-
derance of large urban markets will possess shorter
channels of distribution.
Note, of course, that other environmental factors will
help determine the impact of large urban centers. Specifi-
cally, culturally-entrenched shopping patterns, consensual
management styles, and government regulation will miti-
gate the effects of urban concentration. Conversely, where
these factors have played a minor role, e.g., in the United
States, the distributive system evolved in the direction pre-
dicted by Proposition 7 from the early stages of industrializ-
ation beginning in the latter half of the nineteenth century
(see Chandler 1977; Porter and Livesay 1971; Williamson
1983).
DISCUSSION
The issues raised in this article address an important but
inadequately developed topic. From its inception, market-
ing has regarded the enhancement of exchanges as one of its
central concerns. Transaction-related issues, including the
efficiency and effectiveness of channel systems, are there-
fore at the core of marketing scholarship. Channel length is
a parsimonious and widely used indicator of market
structure.
The channel literature has offered incomplete and
seemingly contradictory explanations of changes in channel
length. Transactional cost analysis can significantly in-
crease the explanatory insight and predictive ability of stud-
ies of channel evolution. Applying a make-or-buy frame-
work that focuses primarily on asset specificity, channel
volume, and quality debasement externalities, it has been
shown why the relationship between economic development
and channel length is nonmonotonic. Channels lengthen in
the early stages of development and tend to shorten after-
ward. The reason for this reversal is a fundamental shift in
the balance of forces determining internal and external dis-
tribution and governance costs.
The analysis also identified country-specific conditions
that help define, accelerate, or even reverse channel evolu-
tion. These factors include consumer shopping behavior,
organizational culture, governmental intervention, and ur-
banization. These forces account for important and
seemingly intractable differences among countries that are
not explained by development alone.
Nations concerned with their global competitiveness and
export ability are well advised to examine the structure and
efficiency of their channel systems. Economists have
pointed out that to the extent that exporter firms must rely
on domestically supplied inputs (Balassa 1980), inefficien-
cies of internal market systems amount to a tax on exports
and potential exporters. Governmental intervention in chan-
10 WINTER, 1992
CHANNEL EVOLUTION: A FRAMEWORK FOR ANALYSIS
nel systems, especially in the Third World, is widespread.
This has had unfortunate results in many instances, largely
because marketing considerations have been unanticipated
or altogether ignored. The propositions in this article afford
a better understanding of the forces with which policy
makers must contend in effecting channel change. Those
forces impact not only traditional distribution costs, but
governance costs, whose important role in the dynamics of
channel evolution has been emphasized throughout the
discussion.
Although the propositions advanced in this article are
consistent with the patterns of regularity and variation re-
ported in the literature, their validation requires empirical
testing. The Appendix suggests specific measures of differ-
ent constructs. Hopefully, the article will encourage much
needed rigorous testing of an important underlying charac-
teristic o f channel systems.
APPENDIX
Measurement of Constructs
There are some difficulties associated with measuring the con-
structs employed in this article. Development of more precise
estimators would be a significant contribution to the literature.
Nonetheless, adequate measures of each are available. The Appen-
dix suggests appropriate methods. The discussion is keyed to each
proposition.
Propositions 1 and 2
The constructs of economic development and channel length are
the most crucial, since the former is featured in many of the
propositions and the latter in all of them. Both constructs present
some measurement difficulties, the former because of its multidi-
mensionality, the latter because, at least in principle, it encom-
passes all domestic channel transactions.
Gross Domestic Product (GDP) per capita is the simplest mea-
sure of development. It is employed by the World Bank to categor-
ize nations (World Bank 1990). Two problems are associated with
it. First, GDP fails to take into account other aspects of economic
development, e.g., degree of industrialization and diversity of
economic activity. A number of studies have devised multidimen-
sional measures of development. These include telephones per
thousand people, agricultural and manufacturing shares of employ-
ment, manufacturing share of GDP, energy consumption per
capita, and number of TV sets per thousand, in addition to GDP
per capita.
A second objection, which is shared by a number of marketing
scholars, is that development is not solely an economic phenome-
non; political and socio-cultural dimensions must be considered as
well (Barnes 1980; E1-Ansary and Liebrenz 1982; Liander et al.
1967; Savitt 1988). Factors such as ethnic and religious hetero-
geneity, female labor force participation, and availability of health
and educational services are included in these approaches. Adel-
man and Morris (1968, 1973)employed factor analysis to group
twenty-four measures of the political and socio-cultural environ-
ment. Many of their measures were derived from a cross-national
sample of experts. Three factors representing attitudinal and in-
stitutional change, political decentralization/liberalization, and
commitment to change were closely correlated with GDP level and
growth. More recently, Scholing and Timmermann (1988) utilized
causal analysis to derive factors related to economic growth and
development. Their model may be used to rank nations according
JAMS
SHARMA AND DOMINGUEZ
to the combined role of labor growth, quality of human capital,
real capital formation, international competitiveness, and political
instability. In addition to being more up to date, the Scholing-
Timmermann model has the advantage that it employs secondary
data from published sources. The authors ranked 70 nations; others
can be ranked using their causal equations.
A number of marketing authors have also developed their own
estimation procedures of economic development (Douglas 1971;
Liander et al. 1967; Mentzer and Samli 1981; Wadinambiaratchi
1965). Kaynak and Hudanah's (1987) study is noteworthy for its
emphasis on advertising and retailing measures. It ranks countries
on the basis of several macro-marketing indicators: per capita pro-
motion expenditures, retail employment, per capita R&D expendi-
tures, and supermarkets per thousand people. In general, some
care needs to be exercised when utilizing the measures of develop-
ment found in the marketing literature. Some are very old; others
lack the extensive validation procedures employed by the leading
economic studies described above. On balance, Rummel's (1972)
and Scholing and Timmermann's (1988) are recommended.
Strictly speaking, the length of a nation's aggregate channel
system is the composite of all channel lengths. As a result, direct
measurement is infeasible. Layton (1989) has suggested a method
for estimating aggregate channel length based on trade flow meth-
odology. The approach originates from Cox et al.'s (1965) use of
input-output tables to measure trade flows from/to producers,
wholesalers, intermediaries, and households. Layton has shown
that channel length corresponds to the ratio of all intermediate
transactions to all final transactions as derived from input-output
tables. The accuracy of this method depends on the availability of
transaction values measured in producers' prices at intermediate
and final consumption levels, so that distortions due to margins
can be eliminated. Layton has conducted a number of replications
in Australia and Java (Layton 1981; 1989).
Other, less accurate approaches are available. One is to employ
proxies for channel length. For example, the percentage of pro-
ducers' total sales that is accounted for by direct-to-retailer sales is
an indicator of the extent to which intermediaries are being by-
passed. Another method is to measure the average size of man-
ufacturing, wholesaling and retailing firms (Douglas 1971).
Proposition 3
This proposition concerns the effects of adherence to culturally-
entrenched shopping values and behavior. A number of objective
and subjective predictors of adoption of non-traditional retailing
institutions have been employed. Among the objective measures
are Goldman's (1982) correlates of adoption of supermarkets. He
related supermarket shopping to consumers' average distance to
supermarkets, automobile ownership, educational level, house-
hold socioeconomic status, and number of family members per
room. Barnes (1980) suggested that the importance of certain retail
institutions (e.g., supermarkets) is a function of their number and
selling space per thousand people. Kaynak and Hudanah (1987)
proposed a number of additional measures.
"Subjective" measures gauge consumers' perceptions of the ex-
tent to which traditional retail institutions offer unique services,
e.g., fresher products (Kaynak 1978; Shimagushi and Lazer
1979), credit, and the opportunity to bargain (Kumcu and Kumcu
1987), and personal knowledge and attention (Yavas et al. 1982).
A scale may be constructed to measure consumers' belief of the
availability of these services, and their importance to the
consumer.
Proposition 4
As discussed in the text, a number of studies have argued that
consensual management style affects channel characteristics and
evolution. Two basic approaches may be used to measure consen-
11 WINTER, 1992
CHANNEL EVOLUTION: A FRAMEWORK FOR ANALYSIS
sual s t y l e - - o r other organizational cultural characteristics (Desh-
pande and Webster 1989). Ethnographic or phenomenological re-
search employs a two-stage process. In the first stage, cases which
embody the phenomenon under study are identified (e.g., indus-
tries or companies that employ long channels). The second stage
constitutes an in-depth analysis of performance and decision mak-
ing within the companies involved. This approach was employed
by Porter (1990a, 1990b) to study innovativeness.
As its name indicates, the cross-sectional approach is to mea-
sure a wide-ranging sample of managers on a number of charac-
teristics and to compare these across nations or cultures.
Hofstede's (1980) studies of work-related values among employ-
ees of a multinational corporation in forty countries exemplifies
this approach. Hofstede's scales pertaining to autocratic vs. con-
sensual management styles are directly pertinent to Proposition 3,
as are Kelly et al.'s (1987) measures. A variant of the cross-
sectional approach is Tse et al.'s (1988) in-basket simulation of
management situations. They presented executives with risky de-
cision making scenarios which a cross-cultural panel had validated
as addressing specific cultural characteristics. A similar approach
might be employed to measure consensual management
preferences.
Proposition 5
Government policies on state intervention into channel pricing,
marketing, and hiring and firing practices are very hard to measure
because of the difficulty of assessing the myriad of regulations,
particularly if this is to be performed in a manner that makes the
data comparable across nations (World Bank 1988, p.45). How-
ever, surrogate measures are available. A recent study measured
state intervention as the ratio of public sector expenditures to the
value of domestic production. This measure was correlated with a
number of descriptors of economic progress (World Bank 1988). A
more specific measure of intervention was employed by Agarwala
(1983). The study compared variations in real wages (adjusted for
changes in terms of trade) versus variations in labor productivity.
Based on this ratio, the study estimated the cost of government
intervention in terms of additional labor costs.
Proposition 6
Examples abound of government policies favoring small re-
tailers. As with Proposition 5, no direct measures were found of
the magnitude of such government policies. The support for the
ruling party among specific constituencies, e.g., small retailers'
support for Japan's LDP party (Kacker 1988), is indicative of the
extent of their influence, It has been suggested that the degree of
political influence which can be exercised by a constituency such
as small retailers is a function of the size of the group, the degree
of mobilization of support within this group, and its social rank or
prestige (Hutt et al. 1986). The potential influence of small re-
tailers along these three dimensions can be gauged by means of a
cross-national expert opinion panel. The panel might also be asked
to assess the severity and degree of enforcement of specific stat-
utes that might be deemed protective of small retailers. Either the
panel's numerical ratings or content analysis of their comments
(Kassarjian 1977; Krippendorf 1980) may be used to rank
countries.
Proposition 7
Urbanization is the most easily measurable construct. The
United Nations and a number of other institutions regularly update
estimates of the number of major urban centers and their popula-
tion. Accurate measures from the most primitive societies may be
a problem.
JAMS
SHARMA AND DOMINGUEZ
ACKNOWLEDGEMENTS
T h e a u t h o r s g r a t e f u l l y a c k n o w l e d g e the h e l p f u l c o m -
m e n t s o f M i c h a e l Levy, H o w a r d M a r m o r s t e i n , W a l t e r Z i n n
a n d t w o a n o n y m o u s r e v i e w e r s . T h i s r e s e a r c h was partly
f u n d e d b y a S u m m e r A w a r d in B u s i n e s s a n d Social Sci-
e n c e s , U n i v e r s i t y of M i a m i .
NOTES
Several other mathematical modeling papers tangentially address
channel length. However, they offer no propositions that are di-
rectly relevant to the relationship between economic development
and channel length. Richartz (1970) proposed a general game the-
oretic framework for predicting channel length, indicating condi-
tions under which Nash equilibrium structures might be obtained.
The paper stopped short of deriving specific predictions on channel
length. The same is true of a number of decision optimization
models (e. g., Rangan 1987). Other papers have analyzed the impor-
tance of role uncertainty and information (Zusman and Etgar 1981)
and vertical coordination (Jeuland and Shugan 1983; Norton 1987)
in maximizing channel profits. However, these studies assumed a
given channel configuration and hence offer no propositions on
channel length, except to hypothesize that the more intertwined and
inseparable manufacturers and intermediaries' production, cost, and
demand functions become, the greater the incentive to vertically
integrate (Norton 1987). A more recent paper by Moorthy (1988) is
discussed in note 2.
2. McGuire-Staelin-Cougblan argue that under high product/brand
substitutability, manufacturers would be better off relying on inde-
pendent retailers. Their argument only looks at the advantage to
manufacturers from isolating themselves from retail competition; on
the surface, this would support the contention that channels would
be longer in sellers' markets. However, two factors mitigate against
this argument. Firstly, and most importantly, they explicitly assume
away governance costs and quality debasement externalities under
consideration (Coughlan 1985, p. 128). Secondly, a recent exten-
sion of McGuire-Staelin adds key limiting conditions to their claim
(Moorthy 1988). The relevant condition for our purposes is that
disintegration makes sense for a manufacturer only if substitute
products' or brands' prices are expected to rise or fall in unison with
said manufacturer's. Moorthy does not speculate on the conditions
that may bring this about. One would be when a market leader is
able to exercise oligopolistic control over prices and supply. An-
other condition, most likely to be associated with early stages of
development, is that of sellers' markets. Essentially, under sellers'
market conditions, manufacturers derive little advantage from price
competition, since demand is assured; there is little incentive to
lower prices under conditions of supply scarcity. However, should a
manufacturer raise prices, the competition would likely follow suit.
Thus, channel disintegration makes the most sense in the early
stages of development (sellers' marke~ conditions, low product dif-
ferentiation and asset specificity, low quality debasement exter-
nalities, and negligible external governance costs). Conversely, un-
der buyers" market conditions, the circumstances would not favor
channel disintegration.
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ABOUT THE AUTHORS
Arun Sharma is Assistant Professor of Marketing in the
School of Business at the University of Miami. He received
his Ph.D. in Marketing from the University of Illinois at
Urbana-Champaign. Professor Sharma's current areas of in-
terest are in organizational decision making, sales manage-
ment, and international marketing. He has published in the
Journal of Personal Selling and Sales Management, Indus-
trial Marketing Management, and the International Journal
of Physical Distribution and Logistics Management.
Luis V. Dominguez is Professor of Marketing in the School
of Business at the University of Miami. He received his
Ph.D. in Marketing from Northwestern University. His re-
search interests are in the areas of international marketing
and marketing strategy. His most recent publications have
appeared in the Journal of Advertising Research, the Jour-
nal of Macromarketing, and the Journal of Global Mar-
keting.
15 WINTER, 1992