CHAPTER 5

MARKETING CHANNEL

Marketing Channel Concept

Marketing Channel Participants

The Environment of Marketing Channels

Behavioral Processes in Marketing Channels

Strategy in Marketing Channels

 CHAPTER 5
MARKETING CHANNEL

MARKETING CHANNEL CONCEPT

Growing Importance of Marketing Channels

A) Explosion of Information Technology and E-Commerce

The explosion of information technology and E-commerce in recent years has focused attention to
“channel” as a means for sustainable competitive advantage. Marketing channel strategy and
management must now deal with E-commerce technology as an integral part of marketing channels
and distribution systems.

The reasons for this attention to channel, as a means of differentiation is a function of:
a) Explosion of information technology and E-commerce
b) Greater difficulty of gaining a sustainable competitive advantage
c) Growing power of distributors, especially retailers in marketing channels
d) The need to reduce distribution costs.

Key Terms and Definitions

 Disintermediation: Shorthand for a metamorphosis that would allow hundreds of thousands of
producers to be connected directly with millions of consumers without the help of middlemen.
This phenomenon did not occur as predicted.

 Reintermediation: Occurred as new types of middlemen called infomediaries such as eBay and
Yahoo! emerged to connect producers to consumers.

B) Difficulty in Gaining Sustainable Competitive Advantage

Companies struggle to find a sustainable competitive advantage that cannot be easily or quickly
copied by competitors. In recent years, the finding of such an advantage is far more difficult using
pricing, product, or promotion strategies. Place or marketing channel strategy, does offer greater
potential for a competitive advantage because it is more difficult for competitors to copy.

Key Terms and Definitions

 Sustainable competitive advantage: A competitive edge that cannot be quickly or easily copied by
competitors.

 Product strategy: Whereby a company creates or modifies a product offering for new or current
markets through the use of product innovation, augmentation or line extensions. Rapid technology
transfer and global competition has made Parity in product designs, features, and quality easier for
competitors to copy thus reducing a firm’s competitive advantage through product.

 Pricing Strategy: Gaining a competitive advantage through pricing strategies is even less feasible
than through product development. Pricing strategy is defined as using price as an element in the
marketing strategy to gain or hold market share.
 Promotion: The integration of personal selling, advertising, public relations, price discounts, and
trade allowances designed to entice the consumer to purchase. The sheer amount of advertising
messages to which consumers are exposed to on a daily basis dramatically reduces the time limit
promotion provides a firm a competitive advantage.

 Place: The where and how the product or service is delivered to the consumer, the fourth element
in the marketing mix, does offer greater potential for a sustainable competitive advantage.

C) Growing Power of Distributors

Economic power has shifted from the producers of goods to the distributors of goods. These
distributors now form and play a role as “gatekeepers” for the consumers acting as buying agents
and selecting what products the consumer “sees”. Examples include: Home Depot, Toys ‘R’ Us,
and other “category killers”.

D) Need to Reduce Distribution Costs Distribution costs for many manufacturing firms often
meet or exceed the costs of manufacturing or raw materials. In order to reduce these costs
manufacturers must begin the process of focusing attention on marketing channel structure more
than they have in the past.

The Marketing Channel Defined

The definition of “marketing channel” is based upon one’s perspective – that of a consumer
versus that of a manufacturer.

From the perspective of a marketing manager, the marketing channel is viewed and defined
as: “the external contractual organization that management operates to achieve its distribution
objectives”.

Key Terms and Definitions

 External: Marketing channel exists outside of the firm. Firms must use inter-organizational
management rather than intra-organizational management.
 Contractual Organization: Refers to those firms or parties who are involved in the negotiatory
functions. Negotiator functions include: buying, selling, or transferring title from one firm to
another.
 Operates: Involvement by management in the affairs of the channel
 Distribution objectives: Management has certain distribution goals in mind such as distribution to
particular retail stores of key products at or near key times.

Marketing Channels and Marketing Management Strategy

The marketing mix model portrays the marketing management process as a “strategic
blending” of the four controllable marketing variables (product, price, promotion, and place).
 External uncontrollable elements include the economy, technology, government, sociocultural
patterns of buyer behavior and competition.

Channel strategy fits under “place” in the marketing management strategy and managers
must operate their marketing channels in such a way as to support and enhance the other strategic
variables in the marketing mix.

The example of Coors® used at this point in the chapter serves to illustrate the importance
of strategic alliances or partnerships between manufacturer and distributor as a source of
sustainable competitive advantages.

Strategic alliances or partnerships have specific advantages:

 Long-term viability
 Cannot be copied quickly
 Cannot be duplicated with price
 Cannot be substituted with a clever idea or short-term promotional program(s)

Channel Strategy versus Logistics Management

Channel strategy and logistics management comprise the distribution variable of the
marketing mix. Channel strategy is concerned with the entire process of setting up and operating
the contractual organizations that are responsible for meeting the firm’s distribution objectives.

Logistics management more narrowly focuses on providing product availability at the

appropriate place and time in the marketing channel.

Channel strategy must first be established before logistics management should be

considered. Logistic management is a subsidiary of channel management.

Flows in Marketing Channels

1. Product flow
2. Negotiation flow
3. Ownership flow
4. Information flow
5. Promotion flow

1. Product flow is the actual physical movement of the product from the manufacturer through all
of the parties to the consumer.
2. Negotiation flow represents the interplay of the buying and selling functions associated with the
transfer of title or rights of ownership. Negotiation is a two-way process involving mutual
exchange between buyer and seller.
3. Ownership flow is the movement of the title of the product from one stage in the process to
another.
4. Information flow involves two directions – from the manufacturer to the consumer and from the
consumer to the manufacturer. This flow includes transportation as information deemed
necessary for the actual delivery of the product is communicated to the transportation agents.
5. Promotion flow refers to the flow of persuasive communication in the form of advertising,
personal selling, sales promotion and publicity. This flow adds the advertising agency as an
element of promotion.

Distribution through Intermediaries

Economic considerations are very important in determining what form intermediaries will
have in their appearance in marketing channels. Two important concepts are introduced:
specialization and division of labor and contractual efficiency.

 Specialization and Division of Labor When applied to distribution, the concept is that of
breaking down complex tasks into smaller, less complex ones and allocating them to parties who
are specialists at performing them at greater efficiencies.
 Contractual Efficiency From a channel manager’s viewpoint, contractual efficiency is the level
of negotiation effort between sellers and buyers relative to achieving a distribution objective.

Channel Structure

The concept of channel structure as shown in other marketing books (Figure 1.7) fails to
suggest the relationship between channel structure and channel management.

Key Term and Definition

 Channel structure: The group of channel members to which a set of distribution tasks has been
allocated.

The channel manager is faced with allocation decisions, how to allocate or structure the
task of distribution.

Multi-channel strategy is when the firm has chosen to reach its target consumer through
more than one channel. With the advent of E-commerce, many firms have opted to use multi-
channel strategies to reach their target market.

Ancillary Structure

While so far we have included in the channel management only those participants who
perform the negotiator functions of channel management (buying, selling, transferring title,
distribution, etc.). There are others that are not members of the channel structure that assist in the
process. These other members will be defined as ancillary structure.

Key Term and Definition

 Ancillary structure: The group of institutions (facilitating agents) that assist channel members in
performing distribution tasks.
 These ancillary members provide services to the channel members after the basic channel
decisions have already been made.

Examples of ancillary members include: Banks, Insurance Agents, Storage Agents, Contractors,
Repair Shops, etc.

Channel management must also deal with these ancillary members who do not have as
great a stake in the channel as channel members but who are nevertheless key components in
ensuring that the product is available to the consumer.

MARETING CHANNEL PARTICIPANTS

An Overview of Channel Participants

The three basic divisions of the marketing channel are: producers and manufacturers,
intermediaries and final users.

 Channel participants are defined as participants that engage in negotiators functions linked
together by the flows of negotiation or ownership.
 Producers and manufacturers and intermediaries are further broken down into wholesale and retail
intermediaries and consumer and industrial users.
 Final users are defined as target markets and are excluded from further discussions of channel
members.

Producers and Manufacturers

Producers and manufacturers consist of firms that are involved in the extracting, growing,
or making of products. For the needs of the customers to be satisfied products must be made
available to customers when, where and how they want them.

This theme is expanded to illustrate that producers and manufacturers often do not have
the expertise in distribution as they do in manufacturing or producing. The section then goes into
a detailed explanation regarding the firm Binney & Smith, the makers of Crayola® crayons. Figure
2.2 deals with hypothetical average cost curves for Binney & Smith.

The message to be derived from Figure 2.2 is that Binney & Smith would never be able to
sell enough crayons to individual consumers to absorb the enormous fixed costs associated with
the performance of the distribution task.

Intermediaries then because they distribute the products of many producers are able to
spread their fixed costs and achieve the desired economies of scale. Producing and manufacturing
firms often face high average costs for distribution tasks when they attempt to perform them by
themselves.

Intermediaries

Key Terms and Definitions

 Intermediaries: Are independent businesses that assist producers and manufacturers in the
performance of negotiators functions and other distribution tasks.
 Wholesalers: Consist of businesses that are engaged in selling goods for resale or business use to
retail, industrial, commercial, institutional, professional, or agricultural firms, as well as to other
wholesalers.
A) Types and Kinds of Wholesalers

Three major types of wholesalers as defined by the Census of Wholesale Trade. These are:

1. Merchant Wholesalers
2. Agents, Brokers, and Commission Merchants
3. Manufacturer’s sales branches and offices

1. Merchant Wholesalers are firms engaged primarily in buying, taking title to, usually storing,
and physically handling products in relatively large quantities and then reselling the products in
smaller quantities to others. They go under many different names such as: wholesaler, jobber,
distributor, industrial distributor, supply house, assembler, importer, exporter, and others.

2. Agents, brokers, and commission merchants are independent middlemen who do not take title
to the goods in which they deal, but who are actively engaged in the buying and selling functions
on behalf of others. They are usually compensated in the form of commissions on sales or
purchases. They also go under other names such as selling agents and import and export agents.

3. Manufacturer’s sales branches and offices are owned and operated by manufacturers but are
physically separated from the manufacturing plants.

B) Structure and Trends in Wholesaling

Figures 2.4 and 2.5 show the trends in wholesaling. The key point to emphasize here is that the
absolute sales of all three types of wholesalers increased substantially over a tenyear period from
1987 – 1997.

C) Size and Concentration in Wholesaling

Most wholesalers (40%) are small businesses with sales less than $1,000,000 in annual revenue.

D) Distribution Tasks Performed by Merchant Wholesalers

Modern well-managed merchant wholesalers perform the following types of distribution tasks for
producers and manufacturers:

1. Providing market coverage

2. Making sales contacts
3. Holding inventory
4. Processing orders
5. Gathering market information
6. Offering customer support

1. Market coverage is performed because the market for products consists of many customers
spread across large geographical areas. Table 2.4 shows the percentage of manufacturers use of
merchant agents.
 2. Making sales contact is a valuable service provided because the cost of maintaining an outside
sales force for many firms is prohibitively high. This becomes even more apparent if the firm
wishes to sell outside of the United States.

3. “Holding” inventory is when the wholesaler takes title to and possession of the producer and
manufacturer’s product. This can help the producers and manufacturer’s financial burden and help
their production process.

4. Processing orders is very helpful to producers and manufacturers because many customers
purchase in small quantities. The wholesaler can “break down” a large order of product into
smaller more manageable pieces.

5. Gathering market information: Wholesalers are close to their customers through frequent sales
contacts. As such, they are in a good position to learn about a customer’s product or service
requirements. Such information then can aid producers and manufacturers in their product
planning, pricing, and the development of new products.

6. Customer support is the final distribution task performed for producers and manufacturers on
their behalf. Products may need to be assembled, set up or require technical assistance. This
allows the wholesaler to provide “value added services” to the customer thus increasing the
competitive advantage of one wholesaler over another. This extra support plays a crucial role in
making wholesalers vital members of the marketing channel from the standpoint of both the
producers and manufacturers and the customers they serve.

In addition to the above services, merchant wholesalers are equally well suited to perform the
following distribution tasks for their customers:

1. Assuring product availability

2. Providing customer service
3. Extending credit and financial assistance
4. Offering assortment convenience
5. Breaking bulk
6. Helping customers with advice and technical support

1. Assuring product availability: Assuring that both the quantity and the variety demanded by the
customer is available to them when needed.

2. Providing customer service: Services such as delivery, repairs or warranty work saves the
customer time and effort.

3. Extending credit and financial assistance: Wholesalers provide this service in two ways. First
by extending “open” accounts to customers on products sold to them and second by stocking the
needed inventory for the customer, thus reducing the financial and space expenses for the
customer.

4. Assortment convenience: By bringing together a variety of products from hundreds of

manufacturers, the customer need only place one order for many products.
 5. Breaking bulk: Shipping costs dictate the shipment of many products by rail or truckload
quantities. Most customers order in single units; thus, the large loads must be “broken” down into
single unit sales. A wholesaler provides this service to its customers.

6. Helping customers with advice and technical support: Even the most unsophisticated product
may require setup or technical support. The wholesaler, being closer to the customer than either
the producer or manufacturer is better able to fulfill this service. This also allows the wholesaler
to differentiate its firm from others by these “valueadded” services.

E) Distribution Tasks Performed by Agent Wholesalers

These wholesalers do not take title to the products they sell and as a rule do not perform as
many distribution tasks as a typical merchant wholesaler. They do however perform a variety of
key functions.

Manufacturer’s agents (manufacturer’s representatives) specialize in performing the

market coverage and sales contact and distribution tasks for manufacturers. Manufacturing agents
generally represent several manufacturers at the same time and operate in a wide range of product
and service categories.

Selling agents are another type of agent wholesaler performing more distribution tasks than
manufacturing agents. Selling agents may perform many, if not most, of the other distribution
tasks such as: market coverage, sales contacts, order processing, marketing information, product
availability and customer services.

Brokers, the second major category of non-title-taking wholesalers offers another example
of the wide deviation between definitions based on performance presented in marketing literature
and actual practice. Figure 2.9 lists the distribution tasks commonly performed by food brokers
and serves as an example of the wide range of distribution tasks actually performed.

Finally, the third major category of agent wholesalers, the commission merchant, is mainly
significant in the agricultural markets. Their distinction from the other merchant agents is that
commission merchants typically take possession of the goods although not title.

The key points of these definitions of agents is that the terminology used to define an agent
is often misleading as to the actual services provided by the agent.

Retail Intermediaries

Key Term and Definition

 Retailers: Consist of business firms engaged primarily in selling merchandise for personal or
household consumption and rendering services incidental to the sale of goods.

A) Kinds of Retailers
 Retailer in the United States comprise an extremely complex and diverse conglomeration ranging
from mom-and-pop neighborhood stores to giant mass merchandising chains such as Wal-Mart®.

B) Structure and Trends in Retailing

Here it is important to note that in 1997 (latest year for which data are available) there were
1,118,447 retail establishments in the United States. This was a decline from 1992 of
approximately 27% but sales increased from $1.9 trillion to $2.5 trillion dollars a 32% increase in
that same time period. This indicates that the size of the retail establishments has increased
significantly. (See Table 2.7)

C) Concentration in Retailing

From strictly an economic standpoint, large firms increasingly dominate retailing in the United
States.

D) Retailers’ Growing Power in Marketing Channels

The power and influence of retailers in marketing channels have been growing mainly due to three
major developments:

a) Increase in size and thus buying power

b) Application of advanced technologies
c) Use of modern marketing strategies

Since size translates into power, the largest retailers have the capacity to influence the
action(s) of other channel members, wholesalers and manufacturers. In many cases, the giant
retailers can literally dictate to the manufacturers (most manufacturers are considerably smaller
than the large retailers) the terms of sale they want and the product offering they require. These
large retailers are referred to as “power retailers” and “category killers”.

Growing size and concentration of retailers is the most fundamental reason for greater
retailer power in marketing channels. But two other factors, advanced technology and uses of
modern marketing strategies are also important.

Modern retailers have become astute followers and ardent users of many new technologies
such as the Internet, scanners, sophisticated inventory management software, shelf management
software, forecasting, and consumer shopping trip studies.

Perhaps the most exciting technological development being embraced by retailers is their
growing use of the Internet to enhance the shopping experience. Conventional retailers are
integrating Internet-based E-commerce with their store and catalog operations. A new term called
three tailing has emerged to describe the convergence of in-store, catalog, and online channels.

Turning now to retailers’ growing emphasis on marketing, a fundamental change has been
evolving in thinking by leading retailers about the application of marketing strategy in a retail
setting. In the past, retailers have been more supplier (vendor) driven than market driven.

To sum up, retailers in the United States have become much larger, more concentrated,
more technologically adept, and more sophisticated marketers. As a result, they have become far
 more powerful members of marketing channels and indeed have come to dominate many of the
marketing channels.

The implications of the retailer’s new position are potentially ominous. A producer or
manufacturer’s marketing strategies in the areas of product planning and development, pricing,
and promotion will be increasingly constrained and shaped by the considerable demands of the
powerful retailers.

E) Distribution Tasks Performed by Retailers

Retailers are especially suited to the following distribution tasks:

1. Offering manpower and physical facilities that enable producers/manufacturers and wholesalers to
have many points of contact with consumers close to their places of residence
2. Providing personal selling, advertising, and display to aid in selling supplier’s products
3. Interpreting consumer demand and relaying this information back through the channel
4. Dividing large quantities into consumer-sized lots, thereby providing economies for suppliers and
convenience for consumers
5. Offering storage, so that suppliers can have widely dispersed inventories of their products at low
cost and enabling consumers to have close access to the products of producers/manufacturers and
wholesalers
6. Removing substantial risk from the producer/manufacturer by ordering and accepting delivery in
advance of the season

Facilitating Agencies

Key Term and Definition

 Facilitating agencies: Are business firms that assist in the performance of distribution tasks other
than buying, selling, and transferring title.

By properly allocating distribution tasks to facilitating agencies, the channel manager will
have an ancillary structure that is an efficient mechanism for carrying out the firm’s distribution
objectives.

Some of the more common types of facilitating agencies:

 Transportation agencies such as United Parcel Service (UPS®) and common carriers
 Storage agencies which consist mainly of public warehouses that specialize in the storage of goods
on a fee basis
 Order processing agencies which are firms that specialize in order fulfillment tasks
 Advertising agencies which offer the channel member expertise in the development of promotion
strategy
 Financial agencies such as banks, finance companies and factors that specialize in discounting
accounts receivable
 Insurance companies providing the channel member with means for shifting the risks associated
with the industry
 Marketing research firms to help the channel member gain relevant marketing information

BEHAVIORAL PROCESSES IN MARKETING CHANNELS

The Marketing Channel as a Social System

Key Term and Definition

 Social System: The system generated by any process of interaction on the sociocultural level
between two or more actors. The actor is either a concrete human individual (a person) or a
collectivity.

When these individuals or collectivities (firms or agencies) interact as member of the

marketing channel, an inter-organizational social system exists.

Conflict in the Marketing Channel - Conflict exists when a member of the marketing
channel perceives that another member’s actions impeded the attainment of his or her goals.

A) Conflict versus Competition -

Conflict in the marketing channel should not be confused with competition. Competition
is behavior that is object-centered, indirect, and impersonal.

Conflict, on the other-hand, is direct, personal, and opponent-centered behavior.

B) Causes of Channel Conflict

Analysis and research have pointed to many possible causes of channel conflict. These are:

a) Misunderstood communications
b) Divergent functional specializations and goals of channel members
c) Failings in joint decision-making
d) Differing economic objectives
e) Ideological differences of channel members
f) Inappropriate channel structure

Although there are many causes of channel conflict most can be placed into one or more
of the following seven categories:

1. Role incongruities
2. Resource scarcities
3. Perceptual differences
4. Expectational Differences
5. Decision domain disagreements
6. Goal incompatibilities
7. Communication difficulties
 1. Role Incongruities: Members of the marketing channel have a series of roles they are expected
to fulfill. If a member deviates from the given role, a conflict situation may result.

2. Resource Scarcities: Sometimes conflict stems from a disagreement between channel members
over the allocation of some valuable resources needed to achieve their respective goals. A common
example is between manufacturers and retailers over “house accounts”. Another example involves
site selection in franchised channels.

3. Perceptual Differences: Perception refers to the way an individual selects and interprets
environmental stimuli. The way such stimuli are perceived are often quite different from objective
reality.

4. Expectational Differences: Various channel members have expectations about the behavior of
other channel members. These expectations are predictions or forecasts concerning the future
behavior of other channel members. Sometimes these forecasts turn out inaccurate, but the channel
member who makes the forecast will take action based upon the predicted outcomes – thus channel
conflict.

5. Decision Domain Disagreements: Channel members explicitly or implicitly carve out for
themselves an area of decision-making that they feel is exclusively theirs. Hence, conflicts arise
over which member has the right to make what decisions.

The area of pricing decision has traditionally been a pervasive example of such conflict.

6. Goal Incompatibilities: Each member of the marketing channel has his or her own goals. The
opening vignette of the chapter concerning Amazon.com is an example of such incompatible goals.

Amazon is trying to sell as much merchandise as possible from whatever sources provide the most
revenue and profits to them. The CD, book or electronics firm who advertises through
Amazon.com wants Amazon.com to sell their new products.

7. Communication Difficulties: Communication is the vehicle for all interactions among channel
members, whether such interactions are cooperative or conflicting. Any foul up or breakdown in
communications can quickly turn cooperation into conflict.

C) Channel Conflict and Channel Efficiency

Key Term and Definition

 Channel efficiency: The degree to which the total investment in the various inputs necessary to
achieve a given distribution objective can be optimized in terms of outputs.

The Greater the degree of optimization of inputs in carrying out a distribution objective,
the higher the efficiency and vice versa.

D) Managing Channel Conflict

There are four generalizations regarding channel conflict:

1. Conflict is an inherent behavioral dimension in the marketing channel.

2. Given the numerous causes from which conflict may stem, it is a pervasive phenomenon in
marketing channels.
3. Conflict can affect channel efficiency.
4. Various levels of conflict may have both negative and positive effects on channel efficiency, or
possibly no effect.

Channel managers must:

1. Detect conflicts or potential conflicts

2. Appraise the possible effects of conflicts
3. Resolve channel conflict

1. Detect Channel Conflict: Channel managers can detect potential conflict areas by surveying other
channel members’ perceptions of his or her performance. Such surveys can be conducted by
outside research firms, or trade associations.

The marketing channel audit is another possible approach of uncovering potential conflict between
channel members. The term channel audit suggests a periodic and regular evaluation of key areas
of the relationship of a given channel member with other members.

Distributors’ advisory councils or channel members’ committees offer another approach to early
conflict detection. These groups consist of top management representatives from each level of the
channel distribution system.

The common theme of early detection of channel conflict is this: channel managers need to make
a conscious effort to detect conflict or its potential if they expect to deal with it before it develops.
2. Appraising the effect of conflict: A growing body of literature has been emerging to assist the
channel manager in developing methods for measuring conflict and its effect on channel efficiency.
For the present, most attempts to measure conflict and appraise its effects on channel efficiency
will still be made at a conceptual level that relies on the manager’s subjective judgment.
3. Resolving Conflict: When conflict exists in the channel, the channel manager should take action
to resolve the conflict if it appears to be adversely affecting channel efficiency.

Three techniques are suggested:

 A channel wide committee, a sort of “crisis management team”

 Joint goal setting by committee
 A distribution executive position created for each major firm in the channel. The individual(s)
filling this position would be responsible for exploring the firm’s distribution-related problems.

Another approach to resolving channel conflict is by arbitration.

What is more important than the specifics of any of these particular approaches is the underlying
principle common in all of them: creative action on the part of some party to the conflict is needed
if the conflict is to be successfully resolved. Conversely, if conflict is simply “left alone” it is not
likely to be successfully resolved and may get worse.
 Power in the Marketing Channel

Key Term and Definition

 Power: When we use this term in a marketing channel context, we are referring to “the capacity of
a particular channel member to control or influence the behavior of another channel member(s)”.

1. Bases of Power for Channel Control

A. Reward
B. Coercive
C. Legitimate
D. Referent
E. Expert

A) Reward Power

This source of power refers to the capacity of one channel member to reward another if the
latter conforms to the influence of the former. This power base is present in virtually all channel
systems.

Channel members – whether at the producer, wholesale, or retail levels – will in the long
run remain viable members only if they can realize financial benefits from their channel
membership.

B) Coercive Power

Coercive power is essentially the opposite of reward power. In this case, a channel
member’s power over another is based on the expectation that the former will be able to punish
the latter upon failure to conform to the former’s influence attempts.

The firms that are able to use it are either large or in a very advantageous position – one resulting
from a near monopoly or formal contractual status.

C) Legitimate Power

This power base stems from internalized norms in one channel member which dictate that
another channel member has a legitimate right to influence the first, and that an obligation exists
to accept that influence.

Given that many channels are comprised of independent business firms, there is no definite
superior-subordinate relationship, and there are no clear-cut lines of authority or chains of
command. It is only in contractually linked channels that anything approaching an organizational
structure based on legitimate power exists.

In general, then, the channel manager operating a loosely aligned channel cannot rely on a
legitimate power base to influence channel members.
D) Referent Power

When one channel member perceives his or her goals to be closely allied to, or congruent
with, those of another member, a referent power base is likely to exist.

Hence, when this situation prevails, an attempt by one of the channel members to influence
the behavior of the other is more likely to be seen by the latter as beneficial to the achievement of
his or her own goals.

E) Expert Power

This base of power is derived from the knowledge (or perception) that one channel member
attributes to another in some given area. In other words, one channel member’s attempt to
influence the other’s behavior is based upon superior expertise.

Expert power is quite common in the marketing channel.

In franchised channels, expertise is a crucial power base for the franchisor to influence franchisees.

2. Using Power in the Marketing Channel

From the standpoint of the channel manager in the producing or manufacturing firm, power
must be used to influence the behavior of channel members toward helping the firm to achieve its
distribution objectives.

The questions facing the channel manager are: which power bases are available and which
base or bases should be used?

A) Identifying the Available Power Bases

This issue is usually straightforward because they can be readily identified. Generally,
they are a function of the size of the producer or manufacturer relative to channel members, the
organization of the channel or a particular set of circumstances surrounding the channel
relationship.

With respect to size, typically a large producer or manufacturer dealing with relatively
small channel members at the wholesale or retail level has high reward and coercive power bases
available and vice versa.

Such difference in the amount of power available does not mean that automatically they
will take advantage of this power. It merely indicates that they have the potential to do so.

B) Selecting and Using Appropriate Power Bases

Which bases should be used to exercise power in the marketing channel is a more difficult
and complex issue for the channel manager to deal with than the previous issue.

So, in order to use power to enhance rather than inhibit channel relationships, the channel
manager needs to know how effective the various power bases are in influencing channel members
to carry out the firm’s distribution objectives, what possible reactions the channel members might
 have to the use of different power bases, and how the use of various power bases will affect the
overall channel relationship.

Although no exact channel management implications on the use of power in the marketing
channel are available, several general inferences can be derived:

 Some form of power must be exercised.

 The effectiveness of the various power bases in influencing channel member behavior is probably
situation-specific.
 The exercise of power as well as how it is used can affect the degree of cooperation, conflict and
satisfaction within channel relationships.
 The use of coercive power appears to foster conflict and promote dissatisfaction to a greater degree
than other power bases.
 The use of coercive power can reduce the stability and viability of the channel and is likely to
increase the probability that the coerced channel members will seek outside assistance

While not “carved in stone” these generalizations do offer the channel manager some
degree of research-based guidance on the use of power in the marketing channel.

Role in the Marketing Channel

Key Term and Definition

 Role: A set of prescriptions defining what the behavior of a position member should be.

Roles in the marketing channel do not necessarily stay the same.

From the channel manager’s standpoint, the key value of role concept is that it helps to
describe and compare the expected behavior of channel members and provides insight into the
constraints under which they operate.

Channel managers can use the concept of role to formulate such questions as:

 What role do I expect a particular channel member to play in the channel?

 What role is the member (potential or existing) expected to play by his/her peers (other firms of a
similar type)?
 Do my expectations for this member conflict with those of his/her peers?
 What role does this member expect me to play?

Communication Processes in the Marketing Channel

Communication has been described as “the glue that holds together a channel of distribution”.

Communication activities undertaken by channel members create a flow of information

within the channel, which is necessary for an efficient flow of products or services throughout the
channel.

Consequently, the channel manager must work to create and foster an effective flow of
information within the channel.

1. Behavioral Problems in Channel Communications

A. Differences in goals between channel members
B. Differences in the kinds of language used to convey information

A) Differing Goals

Corporate management in large manufacturing firms is characterized by a growth

psychology, which translates into aggressive effort to build sales volume. This growth goal may
not be shared by small to medium size retailers and/or wholesalers who might be more static
orientated in their approach to sales volume.

Channel members should attempt to understand the goals of their channel members to learn
whether they are much different from those of their own firms.

B) Language Differences

The other basic communication problem between the manufacturer and channel members
stems from the terminology or jargon used by professional corporate management. The channel
manager has to ensure that the language used in channel communications is well understood by all
channel members.

2. Other Behavioral Problems in Channel Communications

Three other behavioral problems that can inhibit effective channel communications are:

A) Perceptual differences among channel members

B) Secretive behavior
C) Inadequate frequency of communication

A) Perceptual Differences

Perceptual differences may occur among channel members on a wide variety of issues. It
is therefore important that channel managers spell out such issues as delivery time, margin and
discounts, return privilege, warranty provisions and so forth, so that channel members have the
same understanding as the channel manager.

Avoiding such phrases as: “everybody knows” or “standard industry practice” will enhance
channel communications and minimize potential conflicts.

B) Secretive Behavior By not divulging information, such as an upcoming promotional plan,

manufacturers fail to get potentially valuable feedback from channel members (middlemen) on
whether or not the plan will be effective.

A certain amount of secrecy is often necessary because a firm needs the element of surprise or
members of the channel are also members of competing channels or stock competing items.

A channel manager must decide these issues on an individual basis.

C) Inadequate Frequency of Communication

The association of infrequent communication with lower quality communications applies. A

channel manager must ensure that they communicate as frequently as necessary with all channel
members to ensure that quality of communication is not compromised.

STRATEGY IN MARKETING CHANNELS

Channel Strategy Defined

Key Term and Definition

 Marketing channel strategy: The broad principles by which the firm expects to achieve its
distribution objectives for its target markets.

This definition focuses on the principles or guidelines for achieving the firm’s distribution
objectives rather than on its general marketing objectives. Thus marketing channel strategy is
concerned with the place aspect of marketing strategy.

To achieve its objectives a firm will have to address six basic distribution decisions:

1. What role should distribution play in the firm’s overall objectives and strategies?
2. What role should distribution play in the marketing mix?
3. How should the firm’s marketing channels be designed to achieve its distribution objectives?
4. What kinds of channel members should be selected to meet the firm’s distribution objectives?
5. How can the marketing channel be managed to implement the firm’s channel design effectively
and efficiently on a continuing basis?
6. How can channel member performance be evaluated?

A sound approach to dealing with distribution decisions is to formulate marketing channel

strategy to provide the guiding principles for dealing with distribution decisions on a proactive
rather than a reactive basis.

Marketing Channel Strategy and the Role of Distribution in Corporate Objectives and
Strategy

The most fundamental distribution decision for any firm or organization to consider is the
role that distribution is expected to play in a company’s long-term overall objectives and strategies.
The role of distribution should be considered by the highest management levels of the organization.

When this three-cycle planning process is undertaken in a large and diversified firm, all
three levels (corporate, business, and program and functional departments) will become involved
in the strategic planning process.

A) Determining the Priority Given to Distribution

The question of how much priority to place on distribution is one that can be answered only
by the particular firm involved. While there are no general guidelines and no body of empirical
 research to indicate when distribution should be viewed as a critical factor in a firm’s long-term
strategic objectives, there is however, a growing belief among top management experts that
distribution does warrant the attention of top management, because competition has made the issue
too important to ignore.

What is fair to say, however, is that to automatically dismiss distribution as a decision area
for top management concern in formulating corporate objectives and strategies limits the firm’s
ability to compete effectively in today’s global markets.

Marketing Channel Strategy and the Marketing Mix

The role of distribution must be considered in the marketing mix along with price, promotion, and
product. How much emphasis to be placed on place has no general answer. Each firm or marketing
manager must make that determination for his or her self.

What we do know is that a general case of stressing distribution strategy can be made if any one
of certain conditions prevails:

1) Distribution is the most relevant variable for satisfying target market demands.
2) Parity exists among competitors in the other three variables of the marketing mix.
3) A high degree of vulnerability exists because of competitors’ neglect of distribution.
4) Distribution can enhance the firm by creating synergy from marketing channels.

1) Distribution Relevance to Target Market Demand

As firms have become more orientated to target markets over the past two decades by
listening more closely to their customers, the relevance of distribution has become apparent to an
increasing number of companies because it plays such a key role in providing customer service.

Why are Marketing Channels so closely linked to customer need satisfaction? Because it
is through distribution that the firm can provide the kinds of levels of service that make for satisfied
customers.

2) Competitive Parity in Other Marketing Mix Variables

It is increasingly more difficult for a company to differentiate its marketing mix from that
of the competition. Price, product, and promotional strategies can easily and quickly be copied.

Distribution (place), the fourth variable of the marketing mix, can offer a more favorable
basis for developing a competitive edge because the advantages achieved in distribution are not as
easily copied by competitors as the other three. Why is this the case? Distribution advantages, if
manifest in a superior marketing channel (rather than just the logistical aspects of distribution), are
based on a combination of superior strategy, organization, and human capabilities. This is a
combination not easily or quickly imitated by competitors.

3) Distribution Neglect and Competitive Vulnerability

 Neglect of distribution strategy by competitors provides an excellent opportunity for those
companies who are willing to make the effort to develop distribution as a key strategic variable in
the marketing mix.

But to pursue this approach, the channel manager has to make a conscious effort to analyze
target markets to determine if distribution has been neglected by competitors and whether
vulnerabilities exist that can be exploited.

4) Distribution and Synergy for the Channel

By “hooking up” with the right kind of channel members, the marketing mix can be
substantially strengthened to a degree not easily duplicated with other variables.

The most obvious example of this is when a channel member’s reputation or prestige is
stronger than the manufacturer’s. By securing distribution of its products through such channel
members at the wholesale or retail levels, the manufacturer immediately upgrades its own
credibility. In effect, the manufacturer’s products handled by the famous retailers or well-
established wholesalers become “anointed” as superior products to a degree beyond what the
manufacturer could have accomplished on its own.

Synergy through distribution goes well beyond the enhancement of the manufacturer’s
image. Strong and close working relationships between the manufacturer and channel members –
which in recent years have been referred to increasingly as distribution partnerships, partnering,
strategic alliances or networks – can provide a substantial strategic advantage.

Channel Strategy and Designing Marketing Channels

Channel strategy should guide channel design to help the firm attain a differential advantage.

1) Differential Advantage and Channel Design

Key Term and Definition

 Differential advantage: Also called sustainable competitive advantage, this refers to a firm’s
attainment of an advantageous position in the market relative to competitors – a place that enables
it to use its particular strengths to satisfy customer demands better than its competitors on a long-
term (sustainable) basis.

The entire range of resources available to the firm and all of its major functional activities
can contribute to the attempt to create a differential advantage.

Channel design, though just one component of this attempt to gain a differential advantage
should nevertheless be viewed as a very important part.

A differential advantage based on the design of a superior marketing channel can yield a
formidable and long-term advantage because it cannot be copied easily by competitors.

2) Positioning the Channel to Gain Differential Advantage

Key Terms and Definitions

 Channel position: “The reputation a manufacturer acquires among distributors (channel members)
for furnishing products, services, financial returns, programs, and systems that are in some way
superior to those offered by competing manufacturers.”

Channel positioning: “What the firm does with its channel planning and decision making to attain
the channel position.”

The key is to view the relationship with channel members as a partnership or strategic
alliance that offers recognizable benefits to the manufacturer and channel members on a long-term
basis.

By thinking in terms of channel positioning, the channel manager takes a longer-term

strategic view of channel design and is more likely to ask the question: How can I design the
channel so that channel members will view my firm as having done a better job than the
competitive manufacturers they represent?

Channel Strategy and the Selection of Channel Members

The approach taken to channel member selection and the particular types of intermediaries
chosen to become channel members should reflect the channel strategies the firm has developed
to achieve its distribution objectives.

Moreover, the selection of channel members should be consistent with the firm’s broader
marketing objectives and strategies and may also need to reflect the objectives and strategies of
the organization as a whole.

This follows because channel members, thought independent businesses, are from the
customer’s perspective an extension of the manufacturer’s own organization.

Channel Strategy and Managing the Marketing Channel

Channel management from the manufacturer’s perspective involves all of the plans and
actions taken by the manufacturer aimed at securing the cooperation of the channel members in
achieving the manufacturer’s distribution objectives.

The channel manager attempting to plan and implement a program to gain the cooperation
of channel members is faced with three strategic questions:

1. How close a relationship should be developed with the channel members?

2. How should the channel members be motivated to cooperate in achieving the manufacturer’s
distribution objectives?
3. How should the marketing mix be used to enhance channel member cooperation?

1) Closeness of Channel Relationships

How close a channel relationship any given manufacturer should develop with its channel
members is really a question of strategy.
 If a channel member believes that a close working relationship will help him or her do a
better job of managing the channel and achieve the distribution objectives, then closeness should
be emphasized. On the other hand, if the channel manager believes that closeness is not necessary
for effective management of the channel, then it is probably a waste of time and money to do so.
As a rough strategic guide for dealing with the closeness question, the channel manager can relate
it to the degree of distribution intensity needed for the manufacturer’s products.

Distribution intensity is not, of course, the only factor to consider in deciding how close a
relationship the manufacturer should develop with the channel members. Many other factors, such
as markets being targeted, products, company policies, middlemen, environment, and behavioral
dimensions can play a role.

2) Motivation of Channel Members

When motivating Channel Members, whether at the wholesale or retail levels, the strategic
challenge is to find the means to secure strong channel member cooperation in achieving
distribution objectives. Channel strategy in this context involves whatever ideas and plans the
channel manager can devise to achieve that result.

From the diverse array of channel tactics shown, the channel manager must decide which
to use to effectively motivate the channel members.

The distribution portfolio analysis (DPA) has been borrowed from finance and applied in
the context of marketing channels. While DPA provides a comprehensive method for categorizing
channel members, the essence of DPA is that it can help the channel manager focus more
insightfully on the channel members by viewing all of the channel structures and/or channel
members as the portfolio.

The essential idea behind the portfolio approach to channel member motivation is that
different types and sizes of channel members participating in various channel structures may
respond differently to various motivational strategies. Although the channel portfolio concept
provides a useful framework for determining which motivational approaches might be useful for
various classes of channel members, the channel manager should not lose sight of the final
customer which, after all, is the real reason for developing an appropriate mix of channels and
strategies in the first place!

3) Use of the Marketing Mix in Channel Management

Optimizing the marketing mix to meet the demands of the target market requires not only
excellent strategy in each of the four strategic variables of the marketing mix, but also an
understanding of the relationships or interfaces among them. From the standpoint of distribution
and particularly of managing the marketing channel, the channel manager should keep the strategic
concept of developing synergy clearly in mind.

Channel Strategy and the Evaluation of Channel Member Performance

 At this point in the text, we are concerned only with the underlying strategic significance
of channel member performance evaluation, which in practice is concerned with one overriding
question: Have provisions been made in the design and management of the channel to assure that
channel member performance will be evaluated effectively?

This question will direct the channel manager’s attention toward viewing performance
evaluation as an integral part of the development and management of the marketing channel rather
than as an afterthought.