Chapter 1

CHAPTER 1
Marketing Channel
Concepts
Dr. Abdelhamid Kotb

MSc, Cairo university, Egypt.
PhD, University of Granada, Spain.
1
Chapter Topics
1) The Marketing Channel Defined
2) Growing Importance of Marketing Channels
3) Use of the term Channel Manager
4) Marketing Channels and Marketing Management
Strategy
5) Channel Strategy versus Logistics Management
6) Flows in Marketing Channels
7) Distribution through Intermediaries
8) Channel Structure
9) Ancillary Structure
2
Learning objectives
1) Realize that new Internet‐based technologies have
created a metamorphosis in marketing channels
and distribution systems.
2) Recognize that today’s customers expect more
choices as to how, when, and where products and
services are made available to them.
3) Be aware of the need for multi‐channel strategies
and structures to satisfy heightened customer
expectations for channel choice.
4) Understand the definition of the marketing channel
from a managerial perspective.
3
Learning objectives
5) See how marketing channels relate to the other
strategic variables in the marketing mix.
6) Know the flows in marketing channels and how
they relate to channel management.
7) Understand the principles of specialization and
division of labor as well as contactual efficiency in
marketing channels.
8) Be familiar with the concepts of channel structure
and ancillary structure and recognize the difference
between them
4
5
The concept of the marketing channel can be

confusing.
 Often it is thought of as the route taken by a
product as it moves from the producer to the
consumer or other ultimate user.
 Marketing Channel (Distribution Channel) is a set of
interdependent organizations that help make a
product or service available for use or consumption
by the consumer or business user.
 Much of the confusion stems from differing
perspectives or viewpoints.
6
Marketing channel perspectives
Manufacturers : Define the marketing channel in terms of the

movement of the products through various intermediaries.
Intermediaries: the flow of the title (right of ownership) to the

goods
Consumers: the collection of Web sites that they use when

shopping online, or in the case of conventional channels, the
stores they patronize
7
From the perspective of a marketing manager, the
marketing channel is viewed and defined as:
 “the external contactual organization that
management operates to achieve its distribution
objectives”.
 Four terms in this definition should be especially
noted:
 external,
 contactual organization,
 operates,
 distribution objectives.
8
External:
 Marketing channel exists outside the firm.
 Management of the marketing channel therefore
involves the use of interorganizational management
(managing more that one firm) rather than
intraorganizational management (managing one
firm).
Contactual organization:
 refers to those firms or parties who are involved in
negotiatory functions as a product or service moves
from the producer to its ultimate user.
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Operates:
 involvement by management in the affairs of the
channel (This involvement may range from the initial
development of channel structure all the way to day‐
to‐day management of the channel).
Distribution objectives:
 means that management has certain distribution
goals in mind such as distribution to particular retail
stores of key products at or near key times.
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2) Growing Importance of Marketing Channels
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Growing Importance of Marketing Channels
Why the growing importance of marketing channels?
1) The explosion of information technology and

E‐commerce
2) A greater difficulty in gaining a sustainable
competitive advantage
3) The growing power of distributors, especially
retailers in marketing channels
4) The need to reduce distribution costs
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1) The explosion of information technology and E‐

commerce
o The explosion of information technology and E‐
commerce in recent years has focused attention to
“channel” as a means for sustainable competitive
advantage.
o Marketing channel strategy and management must
now deal with E‐commerce technology as an integral
part of marketing channels and distribution systems.
13

o Companies struggle to find a sustainable
competitive advantage that cannot be easily or
quickly copied by competitors.
o In recent years, the finding of such an advantage is
far more difficult using pricing, product, or
promotion strategies.
o Place or marketing channel strategy, does offer
greater potential for a competitive advantage
because it is more difficult for competitors to copy.
14
Marketing Mix Challenges
(4Ps)
Product Limited ability to gain and hold competitive advantage
With a few notable exceptions, product differences, whether based
in design innovation, technological advances, quality, or brand
identity, can be copied, matched, and even improved upon by
competitors in a relatively short period of time.
Price Price wars erode profitability & provide unstable basis
for sustaining competitive advantage
Promotion Expensive and short-lived
Place Marketing channels support & enhance other Ps to

(Distribution) meet demands of target markets
15
 Creates competitive advantage with long-term

viability
 Builds strong relationships between manufacturers

and channel members
 Based on trust, confidence,

and people power
3) The growing power of distributors, especially

retailers in marketing channels
o Economic power has shifted from the producers of
goods to the distributors of goods.
o These distributors now form and play a role as
“gatekeepers” for the consumers acting as buying
agents and selecting what products the consumer
“sees”.
17
4) The need to reduce distribution costs

o Distribution costs for many manufacturing firms
often meet or exceed the costs of manufacturing or
raw materials.
o 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.
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3) Use of the term Channel Manager
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Use of the term Channel Manager
 What is a channel manager? Channel manager refer

to anyone in a firm or organization who is involved in
marketing channel decision making.
 Few firms actually use this term in their job title
descriptions.
 In fact, many different executives are involved in
making channel decisions.
20
Use of the term Channel Manager
For example
• In large consumer products companies, the people
involved can include the V.P. of Marketing, general
marketing manager, product or brand managers,
sales managers, or regional sales manager.
• For industrial products, it might be the V.P. of Sales
and V.P. of Marketing.
• For small business or franchisees, it might be the
V.P. of Franchising or small business owner.
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4) Marketing Channels and Marketing
Management Strategy
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Marketing Channels and Marketing Management Strategy
How does marketing channel strategy relate to the

rest of the marketing mix?
 The classic marketing mix strategy model provides

the framework for viewing the marketing channel
from a marketing management perspective.
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Marketing Channels and Marketing Management Strategy
 The major tasks of marketing management are to seek

out potential target markets and to develop appropriate
and coordinated product, price promotion, and
distribution strategies to serve those markets in a
competitive and dynamic environment.
 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
in order to meet the demands of the firm’s target
markets..
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5) Channel Strategy versus Logistics
Management
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5. Channel Strategy versus Logistics Management
Channel strategy and logistics management comprise the

distribution variable of the marketing mix.
FIGURE 1.6
Marketing Mix
Strategic Variables with
Distribution Variable
Divided into Channel
and Logistics
Components
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Part of distribution variable
• Concerned with entire process

of starting and operating Focused specifically on
contactual organization providing product availability at
• Formulated before logistics appropriate time & place
management
Channel strategy and logistics management are closely

related, but channel strategy is a much broader and
more basic component than is logistics management.
 Channel strategy is concerned with the entire
process of setting up and operating the contactual
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.
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 Channel strategy must first be established before

logistics management should be considered, but
effective logistics management is vital to the
success of the firm's overall distribution strategy.
 Logistic management is a subsidiary of channel
management.
 In recent years, the importance of building strategic
relationships among channel members to enhance
and facilitate the logistical process has been
captured in the term “supply chain management”
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6) Flows in Marketing Channels
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6. Flows in Marketing Channels
When a marketing channel has been developed, a

series of flows emerges.
 These flows provide the links that tie channel
members and other agencies together in the
distribution of goods and services.
 From the standpoints of channel strategy and
management, the most important of these flows are:
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Product Flow
Negotiation Flow
Ownership Flow
Information Flow
Promotion Flow
Product Flow: Refers to the is the actual physical

movement of the product from the manufacturer
through all of the parties to the consumer.
36
Manufacturer
Transportation Company
Wholesalers
Retailers
Consumers
Negotiation Flow: Represent the interplay of the buying
and selling functions associated with the transfer of title
( right of ownership)
 Transportation firm not included in this flow
because it doesn't participate in the negotiatory
functions
 Notice also the arrows flow in both directions
(mutual exchange between buyers and sellers at
all levels of the channel).
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Manufacturer
Wholesalers
Retailers
Consumers
Ownership Flow: Shows the movement of the title to

the product as it passed along from the manufacturer to
final consumer (one stage in the process to another).
 Transportation firm is not included because it
does not take title to the product
40
Manufacturer
Wholesalers
Retailers
Consumers
Information flow: The flow of information from the
manufacturer to consumers are two directional ‐ from
the manufacturer to the consumer and from the
consumer to the manufacturer.
 All parties participate in the exchange of
information, and the flow can be either up or
down.
 This flow includes transportation as information
deemed necessary for the actual delivery of the
product is communicated to the transportation
agents.
42
Manufacturer
Transportation Company
Wholesalers
Retailers
Consumers
Promotion flow: refers to the flow of persuasive
communication in the form of advertising, personal selling,
sales promotion and publicity.
 Here, a new component, the advertising agency, is included
in the flow because the advertising agency is actively
involved in providing and maintaining the promotion flow,
especially the advertising element of promotion.
 The two directional arrow between the manufacturer and
the advertising agency meant that they work together to
develop promotional strategy.
 All other arrows show one directional flow from the
advertising agency or directly from the manufacturer to the
other parties in the marketing channel.
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Manufacturer
Advertising Agency
Wholesalers
Retailers
Consumers
 The concept of channel flows provides another basis for
distinguishing between channel strategy and logistics
management.
 channel strategy and management involve planning
for and managing all of the flows, whereas logistics is
concerned almost exclusively with the management of
the product flow.
 Further, the concept of channel flows provides a good
basis for separating channel members from
nonmembers.
 Only those parties who participate in the negotiation
or ownership flows would be members of marketing
channel
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7) Distribution through Intermediaries
47
7. Distribution through Intermediaries
 The term disintermediation, a fancy way of saying

“eliminate the middleman,” has become popular jargon
in the business lexicon.
 The thinking underlying disintermediation is based on
the awesome technological capacity of the Internet to
connect everybody to everybody else, including all
producers with final consumers.
 But so far, disintermediation has not occurred on a
major scale.
48
 Why do intermediaries so often stand between

producers and the ultimate users of products?
 Why does a producer delegate some of the selling
job to intermediaries, relinquishing control over how
and to whom its products are sold?
 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
 Contactual efficiency.
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 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.
• The only difference in the application of the
specialization and division of labor concept, as
applied to production versus distribution is that the
production tasks have been allocated
intraorganizationally whereas the distribution tasks
have been allocated interorganizationally.
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 Contactual Efficiency
• From a channel manager’s viewpoint, contactual
efficiency is the level of negotiation effort between
sellers and buyers relative to achieving a distribution
objective.
• The use of additional intermediaries will often
increase the level of contactual efficiency. This
principle is illustrated in Figure 1.9
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 Contactual Efficiency
52
8) Channel structure
A‐ Multi‐channel strategy
B‐ Ancillary structure
53
8. Channel structure
Channel structure: refers to 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.
 Thus, the structure of the channel will reflect the
manner in which he or she has allocated these tasks
among the members of the channel.
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length—the number of levels of intermediaries in the channel
55
56
A‐ Multi‐channel strategy
 In many cases, a particular firm might use a combination
of different channel structures to implement its
distribution strategy.
 This approach is now frequently referred to as a multi‐
channel structure, especially when one of the channel
structures involves E‐commerce via online sales in
addition to conventional channels.
 A multi‐channel marketing strategy naturally results in a
multi‐channel structure because distribution tasks have
been allocated among more than one channel structure.
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A. Multi‐channel strategy
 In fact, firms that sell all of their products through a
single‐channel structure are the exception today rather
than the rule. Most firms already have or soon will use a
multi‐channel strategy.
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Multi‐channel strategy
59
60
61
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8. Channel structure : Multi
B. Ancillary structure
 Ancillary structure is the group of institutions (facilitating
agencies) 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, , repair shops, etc.
64
B. Ancillary structure
 The basic decision facing the channel manager in
attempting to develop ancillary structure is the same for
developing channel structure; that is, he or she must
attempt to allocate distribution tasks to those parties
best suited to performing them.
 Because the channel manager is dealing with
nonmember channel participants, however, the
problems faced in developing and managing the
ancillary structure are likely to be less complex than
those encountered in developing (and managing)
channel structures.
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9. The Multi‐Channel Challenges
66
9. The Multi‐Channel Challenge
The Multi‐Channel Challenge

 The expectations of today’s customers both at the
business‐to‐consumer (B2C) and business‐to‐business
(B2B) levels, for high channel choice, flexibility, and an
excellent buying experience is less likely to be satisfied
by any one channel structure.
 To meet these expanded customer expectations, a
variety of different channels, often both land based and
Internet‐based, is needed.
 an effective multi‐channel strategy raises four key
challenges that need to be addressed:‐
67
1. Finding the optimal multi‐channel mix
2. Creating multi‐channel synergies
3. Avoiding multi‐channel conflicts
4. Gaining a sustainable competitive advantage via

multi‐channel strategy
68

1. Finding the optimal multi‐channel mix
o In a very real sense, the firm’s channel mix can be viewed
as a channel portfolio, That may use (Internet‐based
online channels, Retail store channels, Mail order
channels, Wholesale distributor channels, Sales
representative channels, Call center channels, Company
sales force channels, Vending machine channels,
Company‐owned retail store channels).
o The well‐designed channel portfolio would attempt to
provide access to a range of customer segments while
achieving channel diversification.
69

o synergy means using one channel to enhance the
effectiveness and efficiency of other channels in the mix.
o Using online channels to obtain information about a
product before purchasing it in conventional “brick and
mortar” channels is a common example of multi‐channel
synergy.
 Most customers buying new cars, for instance, use online
channels to learn about product features, make
comparisons to other brands, check on pricing, and find
dealers before going to the auto‐dealer channel to actually
buy a car.
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o Multi‐channel synergies can also emerge when different
channels in the mix “help each other out,” and in doing so,
create synergies that result in better customer service.
 This would occur, for example, when a customer confronted
with a stockout from, say, a retail store channel is
conveniently served by another channel from the mix.
71

3. Avoiding multi‐channel conflicts
o Rather than viewing the multiple channel strategy as a
means for providing more choice and flexibility to
customers, it is viewed by the independent distributors
as a zero‐sum game: if one channel gains customers, then
another channel must have lost customers.
72
4. Gaining a sustainable competitive advantage via multi‐
channel strategy
o channel strategy and particularly multi‐channel strategy
have attracted increased attention as a means for gaining
a sustainable competitive advantage.
o The main reason for this is that well‐formulated channel
strategies are more difficult for competitors to quickly
copy.
o Developing effective channel strategies often requires a
long‐term commitment and significant amounts of
investment in infrastructure and in the development of
human skills.
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CHAPTER 1

Dr. Abdelhamid Kotb

The concept of the marketing channel can be

Marketing channel perspectives

Manufacturers : Define the marketing channel in terms of the

Intermediaries: the flow of the title (right of ownership) to the

Consumers: the collection of Web sites that they use when

Why the growing importance of marketing channels?

1) The explosion of information technology and

1) The explosion of information technology and E‐

2) A greater difficulty in gaining a sustainable

Place Marketing channels support & enhance other Ps to

 Creates competitive advantage with long-term

 Builds strong relationships between manufacturers

 Based on trust, confidence,

3) The growing power of distributors, especially

4) The need to reduce distribution costs

 What is a channel manager? Channel manager refer

How does marketing channel strategy relate to the

 The classic marketing mix strategy model provides

 The major tasks of marketing management are to seek

Channel strategy and logistics management comprise the

Part of distribution variable

• Concerned with entire process

Channel strategy and logistics management are closely

 Channel strategy must first be established before

When a marketing channel has been developed, a

Product Flow: Refers to the is the actual physical

Ownership Flow: Shows the movement of the title to

 The term disintermediation, a fancy way of saying

 Why do intermediaries so often stand between

 Specialization and Division of Labor

Channel structure: refers to the group of channel members

length—the number of levels of intermediaries in the channel

The Multi‐Channel Challenge

The Multi‐Channel Challenge

1. Finding the optimal multi‐channel mix

2. Creating multi‐channel synergies

3. Avoiding multi‐channel conflicts

4. Gaining a sustainable competitive advantage via

The Multi‐Channel Challenge

The Multi‐Channel Challenge

The Multi‐Channel Challenge

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