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Subject COMMERCE

Paper No and Title 7: Marketing Management

Module No and Title 17: Channel Management Decisions

Module Tag COM_P7_M17_e-text

COMMERCE PAPER No. 7 : MARKETING MANAGEMENT

MODULE No.17 : CHANNEL MANAGEMENT DECISIONS
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2. Introduction

The distribution policy specifies what channels are involved in the process of
distributing goods. Channel management is a complex concept having various issues
attached to it. It focuses on what arrangements are to be focussed, what decisions are to
be taken and how to manage various channels.

3. Channel Behaviour and Channel Conflict

Each channel depends on the other, each playing a role that the channel is specialized in.
Preferably each channel member should work in coordination to facilitate smooth
functioning of an organization as success of individual channel depends on the success of
the entire channel.
Channel Conflict

Refers to disagreement among marketing channel members on goals and roles

i.e. who should do what and for what rewards.

COMMERCE PAPER No. 7 : MARKETING MANAGEMENT

MODULE No.17 : CHANNEL MANAGEMENT DECISIONS
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Channel
Conflict

Horizontal Vertical
Conflict Conflict

Channel conflict can be of two types:

1. Horizontal Conflict: takes place among firms at the same level of channel like
conflict among retailers.
2. Vertical Conflict: takes place between different levels of the same channel like
conflict between wholesaler and retailer.

4. Types of Channel Arrangements

The various types of channel arrangements are:

1. Conventional distribution channels: A channel consisting of one or more
independent producers, wholesalers, retailers, each having a distinct business and
seek to maximize their own profits even at the cost of the profits for the system as
a whole. Individual members perform their own function. It lacks strong
leadership, has damaging channel conflict and poor performance.

2. Vertical Marketing System: In this distribution channel producers, wholesalers

and retailers are structured as a unified system. One channel member retains the
others, contracts with them, or possess powers that they will cooperate.

COMMERCE PAPER No. 7 : MARKETING MANAGEMENT

MODULE No.17 : CHANNEL MANAGEMENT DECISIONS
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VMS

Corporate Contractual
VMS VMS

2 a) Corporate VMS: a VMS that integrates successive stages of production and

distribution under single ownership. Common ownership leads to the establishment of
channel leadership.
2 b) Contractual VMS: a VMS in which various independent firms operating at divergent
levels of production and distribution join hands together through contracts to gain more
economies or to create an considerable impact than they could have created individually.
3. Wholesaler sponsored voluntary chains: Wholesaler frames a program which
standardizes independent retailer operations.
4. Retail cooperatives: Retails organize themselves as a new, jointly owned business
to carry out wholesaling and possible production. Members buy most of their
goods through cooperatives and plan their promotional strategies collectively.
5. Franchise organizations: Channel member called franchiser connects several
stages in production-distribution process. LIKE manufacture sponsored retailer
franchise system (car dealers all over Moti Nagar area in Delhi), manufacture
sponsored wholesale franchise system (Coca Cola), Service-firm sponsored
retailer franchise system (McDonald’s)
6. Administered VMS: a VMS that coordinates successive stages of production and
distribution, not through common ownership or contractual ties but through the
size and power of one of the parties. Hence, in this system leadership is assumed
by one or few channel members. E.g. General Electric, Proctor & Gamble, Wal-
Mart, Barnes & Noble.
7. Horizontal marketing system: A channel arrangement in which two or more
companies at one level join each other to pursue a new marketing opportunity to
combine capital, production capabilities or marketing capabilities. This
arrangement can be between competitors or non competitors.
8. Hybrid marketing system: A multi channel distribution system in which a single
firm sets up two or more marketing channels to reach one or more customer
segments.

5. Channel Design Decisions

COMMERCE PAPER No. 7 : MARKETING MANAGEMENT

MODULE No.17 : CHANNEL MANAGEMENT DECISIONS
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Problem is usually not deciding what the best channel is – rather to convince one or a few
good intermediaries to handle the product line.

Analysing consumer service needs

Setting channel objectives and constraints

Identifying major alternatives

Evaluating the major alternatives

Designing international distribution channels

1. Analyse consumer service needs: It is important to find what the targeted

consumers want from the channel. Do they want to buy nearby or over the phone
etc? Consumers’ needs must be balanced against feasibility and price.
2. Setting channel objective and constraints: Channel objectives should be clearly
defined in terms of desired service level of target consumers. In each target
segment, the company is willing to minimize the channel cost of meeting the
objectives. Channel objectives are also affected by the nature of the company, its
products, competitors, environment etc. E.g. company financial situation may
dictate what functions of the marketing channel can be handled in company.
3. Identifying major alternatives: Company can distribute directly or indirectly by
wholesalers, retailers etc. Also decision whether to go for intensive, selective or
exclusive distribution needs to me finalized. Responsibilities of the channel
members like price policies, conditions of sales, territorial rights and specific
services to be performed are also finalized.

4. Evaluating the major alternatives: Major alternatives are evaluated on the

following criterions:

COMMERCE PAPER No. 7 : MARKETING MANAGEMENT

MODULE No.17 : CHANNEL MANAGEMENT DECISIONS
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Economic Adaptive
Control issues
criteria criteria
• Likely • Company • Company
profitability prefers to wants flexible
of differnt keep as much channels
channel control as
alternatives possible

5. Designing international distribution channels: Global marketers must

accommodate their channel strategies to the existing structures within each
country

6. Channel Management Decisions

Once a decision on channel is made, it is significant to manage the channels. Channel

management decisions can be of the various types:

1. Selecting Channel Members: Company should diagnose what characteristics a

good channel member, and evaluate. The following characteristics should be kept
in mind:
 Years in business
 Other lines carried
 Growth and profit record
 Cooperativeness
 Reputation
2. Motivating channel members: the company must not only sell through the
intermediate but to the intermediaries. Most of the companies see their
intermediaries as first-line customers. Positive motivators like high margins,
premiums, allowances can be used. Also, negative motivators such as alarming to
reduce margins, slow down delivery or end relationship can be used. More
advanced companies try to foster long term partnerships- meeting the needs of
both manufacturer and distributors.(win-win)
3. Evaluating channel members: Regular checks of members’ performance against
the following criterion should be done:

COMMERCE PAPER No. 7 : MARKETING MANAGEMENT

MODULE No.17 : CHANNEL MANAGEMENT DECISIONS
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Sales quota

Average inventory levels

Customer delivery time

Treatment
Services to of
thedamaged and lost goods
customer

Cooperation in company promotion and training programs

COMMERCE PAPER No. 7 : MARKETING MANAGEMENT

MODULE No.17 : CHANNEL MANAGEMENT DECISIONS
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7. Summary

It is significant that companies should decide on distribution channels after

deep analysis of various factors. Decisions regarding channels are analyzing
consumer needs, setting channel objectives, identifying alternatives, evaluating
alternatives, designing international distribution channels. After finalizing
channels it is equally significant to manage channels. Managing channels means
selecting channel members, motivating channel members and evaluating channel
members.

COMMERCE PAPER No. 7 : MARKETING MANAGEMENT

MODULE No.17 : CHANNEL MANAGEMENT DECISIONS