Part 1: Marketing Channel Systems

CHAPTER 1

MARKETING CHANNEL
CONCEPTS
 ① The growing importance of marketing channels
② The definition of marketing channels
Learning Objectives

③ How marketing channels relate to strategic

variables in the marketing mix

④ The flows in the marketing channels and their

relationship to channel management

⑤ The principles of specialization, division of labor,

and contactual efficiency

⑥ The difference between the concepts of channel

structure and of ancillary structure

2
The multi-channel challenge
Section 1

3
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

4
The explosion of information
technology and E-commerce
THE PREDICTION THE REALITY

• Disintermediation • Reintermediation
– reduction of – evolution of a
number of new type of
intermediaries intermediary

5
A greater difficulty in gaining a
sustainable competitive advantage
Place (distribution), or
Marketing Channel
Sustainable Strategy
competitive
advantage
Potential for gaining
competitive advantage
because place is more
difficult for competitors
to copy

6
The growing power of distributors,
especially retailers in marketing channels

Power retailers as Gatekeepers of consumer

markets

Act as buying agents for customers rather than

as selling agents for manufacturers
The need to reduce distribution
costs
Marketing channels are the most
recent target for
reducing distribution costs.

The focus is on
channel structure and
management.
The marketing channel
DEFINED
Section 2

9
What is a marketing channel?
Outside Firm involved in
the firm negotiatory Management’s
functions involvement
in the process

External contactual organization that management

operates to achieve its distribution objectives

Goals that change, causing variations in

contactual organization & the way in
which management operates it 10
What is a channel manager?

• Anyone in a firm or
organization who is
involved in marketing
channel decision
making.
 How does marketing channel strategy
3 relate to the
rest of the marketing mix?
Marketing
Mix
or Challenges
the four Ps
Product Limited ability to gain and hold competitive
advantage
Price Price wars erode profitability & provide unstable
basis for sustaining competitive advantage
Promotion Expensive and short-lived

Place Marketing channels support & enhance other Ps

(Distribution) to meet demands of target markets
The change of focus to
channel strategy
• Creates competitive advantage with long-
term viability
• Builds strong relationships between
manufacturers and channel members
• Based on trust, confidence, and people
power

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 Channel Strategy and Logistics
Management

Part of distribution variable

Logistics
Channel strategy
management

Concerned with Focused specifically

entire process of Formulated before on providing product
starting and logistics availability at
operating contactual management appropriate time &
organization place
 Marketing Channel Flows
4

Production Negotiation Ownership Information Promotion

Flow flow Flow Flow flow
Product Flow Negotiation Flow Ownership Flow Information Flow Promotion Flow

Manufacturer Manufacturer
Manufacturer Manufacturer Manufacturer

Transportation Transportation Advertising

company company Company

Wholesaler
Wholesaler
Wholesaler Wholesaler Wholesaler

Retailer Retailer Retailer Retailer Retailer

Consumer Consumer Consumer Consumer

Consumer
Section 3

Specialization and division of labor &

contactual efficiency
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5 Distribution through intermediaries

Factors that determine

the role of intermediaries

Technology The Internet

Economic Specialization &

Considerations Division of
Labor

Contactual
Efficiency
Specialization & Division of
Labor

Distribution Tasks Production Tasks

Distributed Distributed
Inter-organizationally intraorganizationally
Contactual Efficiency for Distributing
Through Retailers Only
(Granada Guitar Co.)
Negotiation Effort Estimated Dollar Distribution Contactual
Costs of Inputs Objective Efficiency
(Output)
1,500 sales visits @ $50 = $75,000 Get 500 Negotiation
1,000 phone calls @ 3 = 3,000 music effort in
10 magazine ads @1,000 = 10,000 stores to dollar terms
carry new relative to
$88,000
guitar line achieving
the
distribution
objective =
$88,000
Contactual Efficiency Distributing Through
Wholesalers
Granada Guitar Co.
Negotiation Estimated Dollar Distribution Contactual
Effort Costs of Inputs Objective Efficiency
(Output)
100 sales visits @ $50 = $5,000 Get 500 Negotiation
100 phone calls @ 3 = 300 music effort in
20 magazine @1,000 = 20,000 stores to dollar terms
carry new relative to
ads $25,300
guitar line achieving
the
distribution
objective =
$25,300
 Channel Structure v. Ancillary
6 Structure

Channel Structure
Why are single-
channel
The group of channel members to
structures currently
which a
the exception?
set of distribution tasks has been
allocated

Ancillary Structure Why is managing

The group of institutions that
assist channel members in performing
distribution tasks
the ancillary
structure most likely
to be less complex
than managing the
channel structure?
The end

23
Discussion Question #1
ROCKAUTO.COM is a leading online auto parts
store that prides itself for offering a huge selection of
auto parts, everyday low prices, fast shipping, and an
easy-to-use Web site. Some ROCKAUTO.COM
advertisements have even claimed that this online
auto parts store is “head and shoulders” above any
brick and mortar auto parts store. The company’s
slogan, “All The Parts Your Car Will Ever Need,”
suggests that customers have all the choice they
could possibly want from ROCKAUTO.COM and that
they need look no further than this online auto parts
store to satisfy all their needs.

Do you agree with ROCKAUTO.COM’s claim?

Might customers seeking auto parts need other
channel options? Explain.
Discussion Question #3
Growth in online retail sales has been
outstripping conventional sales in retail stores. This
online sales growth might be enhanced significantly by
the latest online sales phenomenon of mobile
commerce—shopping via mobile smart phones such as
Apple’s iPhone, Research in Motion’s Blackberry, or
Google’s NexusOne. But so far, of the almost 50 million
smart phone users that have access to the Internet,
only about 7 million (under 15%) have actually bought
something through their phones during the course of a
year.

Do you think mobile commerce via smart phone

will grow rapidly in the future? Why or why not?
Discussion Question #5
One of the major themes presented in this chapter is the
need for choice as to how products and services are made
available to customers. Thus, multi-channel strategies that
provide a wide range of channels including an Internet based
online channel option have become imperative. Yet there are
very successful firms that take a virtually opposite view by
purposely limiting choice. A case in point is Edward Jones, a
financial services company with the largest network of brokerage
offices in the U.S.—more than 10,000 and still growing. Edward
Jones has a Web site that its customers can visit but it does not
offer its customers the option of trading online. Instead, all
transactions must take place
through an Edward Jones broker. Even with this single channel
strategy, the company is still growing and is very profitable.

Why do you think Edward Jones has been able to “buck

the trend” toward multi-channel strategy that would include an
online channel as a key option?