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  • 1. SALES AND DISTRIBUTION MANAGEMENT LESSON 25: CHANNEL DESIGN Learning Objectives beachieved by having the channels. All firms seek to realise On completion of this lesson,you should be able to certaincommon objectives by having the channel. In addition, • Explain the concept of channel design theymay also have some specific objectives depending on theirunique circumstances. • Designing of a channel system • Relationship between PLC and choice of chanel Channel Objectives will Decide Channel Design What is the best marketing channel for a particular product or Channel objectives will determine the channel design the service? firmshould adopt. This question is well worth asking, given the great expense Objectives, Firms Commonly Seek from Channels ofestablishing (or changing) marketing channel and the high costof • Effective coverage of the target market. poor decision making in this area. The marketing channelchallenge • Efficient and cost-effective distribution. involves two major tasks: • Ensuring that consumers incur minimum exertion inprocuring 1. To design the rightchannel and the product. 2. To implement that design. The design stepinvolves segmenting • Helping the firm to carry on manufacturing the market, identifying optimal positioningresponses to uninterrupted,confident that the channels will take care of sales. segments’ demands, targeting the segmentson which to focus • Partnering the firm in financing and sub-distribution tasks. the channel’s efforts, and establishing (in theabsence of a preexisting channel) or refining (in the presence ofa preexisting Channel Objectives Differ from Firm to Firm; channel) the channels to manage in the marketplace.The Consequently, their Channel Designs Differ implementation step requires an understanding ofeach channel We see that often channel designs of firms differ from member’s sources of power and dependence, anunderstanding oneanother. Even within a given industry; different firms of the potential for channel conflict, and aresulting plan for havedifferent channel designs. This is so. because their channel creating an environment ‘where the optimalchannel design can objectives differ. Even in respect of those objectives, which be effectively executed on an ongoing basis.This outcome is areby and large common for all firms, we can see variations called channel coordination. inemphasis from firm to firm. For example, intensity of market Designing a Channel System coverage sought from the channels and extent of convenienceto We have observed that a firm can take its product to the user be provided to the customer will vary from firm to firm. inmore ways than one. It can use different types of Theweightages will flow from the marketing objectives of intermediaries;it can also structure its channel in different ways. therespective firms. For example, it can have a single-tier or a two-tier or a three- Distinctive Characteristics of Industrial Products tierchannel structure. It can reach different market segments • Buyers are few. withdifferent channel arrangements or with the same channel • Size of at-a-timepurchase is large. arrangement. It can also use different channel arrangements forreaching a single market segment. The options are indeed many. • Have high unit value. • How does the firm make the choice? How does itdetermine • Purchased only once ina while, as theirreplacement rate is low. which one is the best? • They are complex,technical, and often asper buyers’specifications. • Should it go for own channels-company showrooms 2. Identifying Channel Functions anddepots-or prefer conventional intermediaries, i.e. Identification of the functions to be performed by the channelis thewholesale/retail trade? How many levels/tiers shouldthere the next step in designing channel system Channel be in the chosen channel design. How manywholesale points designdepends on the functions expected of the channel and should it have to ensure satisfactorymarket coverage? Where that channel functions must be identified in the specific context should they be located? ofthe firm in order to get practical direction in designing • How many retail points should it have? Which are theplaces thechannel system. where it should have them? 3. Linking Channel Design to Product Characteristics • What should be the relationship between the wholesalersand Different products require different channel systems. The the retailers? firmshould analyse the characteristics of the product and choose 1. Formulating the Channel Objectives thechannel system that matches the product best. Consumer Formulation of channel objectives is the first step in designinga and industrial goods, for example, need different channels. channel system. The objectives clarify what is sought to Andwithin the category of consumer goods, different sub- © Copy Right: Rai University 88 11.623.2
  • 2. categoriessuch as convenience goods, shopping goods and conveniencegoods. Often, in these cases, the number of tiers in SALES AND DISTRIBUTION MANAGEMENT specialty goods may need different channel systems.Industrial the channelcan be less than those for convenience goods. The and Consumer Products Need Different ChannelsIndustrial number ofoutlets too can be far lesser. In the matter of location and consumer products usually need differentchannels as they of theoutlets too, the requirements will be different in respect differ from each other in several vital respects. ofconvenience goods on the one hand, and for shopping andspecialty goods, on the other. Obviously, there is a needChannels for Industrial Products forproduct-channel matching. .Industrial products need extensive pre-sale service(installationand commissioning service ) and post-sale service The Product’s PLC Stage too Influences Channel(maintenanceservice).Consumer products on the contrary, are Choicemass products. nontechnicaland least most of them are of a We have seen that the concept of PLC helps productlow unit value; theyare regularly consumed and replaced; and management.PLC also helps channel management. Differentrequire nil or limitedafter-sale service. It is in view of these channelsfit different stages of PLC.A product in thedifferences that the twocan need different channel systems. introduction stage will be relatively unknownto the market; itsOnly Some Industrial Products are Amenable for customer base small; and its sales volume low.At this stage, itSelling Through Channels may be advantageous to sell the product directlyto theFirst of all, among industrial products, only some are customer, dispensing with the channels. Such a move willenableamenablefor selling through channels. The firm should check the manufacturer to get direct market feedback on thenewwhether itsitems are appropriate for selling through channels / product and thereby improve the product as required.distributors.And, if the answer is ‘yes’, it must find out which Alternatively, a specilised channel could be used in this stage.type ofdistributors will be appropriate for the items under Aspecialised distributor will be in a better position to introducetheconsideration.Chart below presents some useful guidelines for product in the market and also provide the required technicaltesting theamenability of a given industrial product for support to the user.When the product moves into the growthmarketing throughchannels/distributors. and maturity stages, the requirements of distribution will be different. In thesestages, the product is almost an off-the-shelfNeed for Specialist Distributors item. Now,convenience in delivery and price competitiveness areThe firm finds that a givenindustrial product lends itself for more important factors.marketing through channels;the firm may proceed to select anappropriate channel. It must remember that: Therefore, conventional/general purposedistributors would be more suitable. Producers usually appointa number of generali. Industrial products as a general rule require specialistdistributors. purpose distributors at this stage and alsomake more and more Entrusting the products with the traditionalconsumer product territories non-exclusive. Some pushingbecomes necessary at this distributors does not bring in the bestresults. stage and conventional marketchannels admirably suit thisii. Different industrial products need different types ofdistributors. requirement.In the decline stage in the PLC, the market for the For example, some industrial products have to be productusually gets reduced to select groups of customers and it demonstratedto the customers. Here, specialist distributors maybe advantageous to revert back to direct marketing to with therequired demonstration facility will be more suitable. customersat this stage. Alternatively, the firm may serve the select Some industrial products are hazardous from the point of groupsof customers through a minimal use of middlemen. view ofdistribution. Petroleum products, explosives and Product Influences Type and Number of Channel Members certainindustrial chemicals are examples of this category these aswellProduct characteristics influence not merely the channel productsneed specialised distributors, who command designto be opted for; they often influence even the type and specialisedtransportation and storage facilities. Similar is the numberof intermediaries needed. For example, for textiles or case ofproducts that require extensive servicing. They need shoes,franchisees, who can run showrooms, may be an effective specialistdistributors, who command the required service type of intermediary. For a product like detergents, facilities. conventionalwholesaler-retailer arrangement may be theEven within Consumer Products, Channel appropriate one.Requirements of Different Products may Vary 4. Evaluation of the Distribution EnvironmentWe come across three distinct categories of products While selecting the channel design, the firm should also takeintowithinconsumer goods-viz., account the distribution environment obtaining in thecountry/i. Convenience goods, territory. It should evaluate the vital features of the distributionii. Shoppinggoods, and environment and ensure that the proposed channeldesign is compatible with them. Distribution environment inthe broaderiii. Speciality goods. sense includes the trade related legal environment aswell. AWe have seen that the differentcategories of goods require different mention about the legal environment relating tomarketing andchannel systems, sincebuying behaviour and buying habits differ, trade matters has been made in the chapter onThe Marketingdepending on thecategory Convenience goods require intensive Environment. The legal implications of channeldesign mustmarket coverageand, therefore, need a comprehensive and high be carefully examined before taking a final decision.penetrationchannel arrangement. Shopping goods and speciality 5. Evaluation of Competitor’s Channel Designsgoodsneed lesser intensity of coverage, compared to © Copy Right: Rai University11.623.2 89
  • 3. The firm should also study the competitor’s channel One of the fundamental principles of marketing isSALES AND DISTRIBUTION MANAGEMENT patternsbefore deciding its channel design. While the firm may thesegmentation of the market. Segmentation means the notnecessarily follow the competitors in channel design, it splitting,of a market into groups of end-users who are should analyse the plus and minus of the channel patterns 1. Maximally similar within each group and adopted byeach of its major competitors.Quite a number of 2. Mmaximally different betweengroups. But maximally similar firms dosettle down for a ‘follow the leader’ policy in channel or maximally different based onwhat criterion? For the channel design.They find it an easy route. But such an approach may manager, segments are best defined on the basis of demands deprivethem of the chance to score an edge over competition for the outputs of themarketing channel. A marketing channel throughthe channel strategy. is more than just aconduit for product; it is also a means of 6. Matching the Channel Design to Company Resources adding value to the product marketed through it. In this sense, Choice of channel is also governed by the resources availablewith the marketingchannel can be viewed as another “production the organisation. line” engaged inproducing not the product itself that is sold, Firms with Limited Resources Settle for but the ancillary services that define how the product is sold. Conventional Channels These value addedservices created by channel members and Firms with limited resources and small volume ofbusiness will consumed by endusersalong with the product purchased are normally find it difficult and uneconomical to opt,for own called service outputs. Service outputs include (but may not be channels. For such firms, establishing branch showrooms/ limited to)bulk-breaking, spatial convenience, waiting and depots/retail outlets of their own will result in a highunit cost delivery time,and assortment and variety.End-users (be they of distribution, which they cannot afford. They arebetter off by final consumers or business buyers) havevarying demands for depending on conventional channels. In fact, theyare usually these service outputs. Consider, for example, two different content with a small network of conventionalintermediaries. soft drink buyers: an office employee atwork, looking for a soft drink during her afternoon coffeebreak, and a family buying Firms with Larger Resources have More Options for at-home consumption. Firms withlarger resources and larger marketing operations can Channel Design: Positioning go in forvaried distribution channels. In fact, in India, in When the market has been segmented into groups of severalbusinesses, firms which are strong in resources, usually endusers,each of which can be described by a set of service operatetwo parallel channels, one reaching out to the customer outputdemands, the channel manager should next define the throughcompany depots and showrooms, and the other optimal channel to serve each segment. We call this exercise through conventional intermediaries. The textile business is a positioningor configuring the channel (positioning to parallel goodexample of this phenomenon. Firms like Reliance the segmentation-targeting-positioning paradigm in marketing Industries,Bombay Dyeing, DCM and Mafatlals, have all gone management). Just as positioning a product means setting in for such atwo-pronged channel design. In some cases, itsproduct attributes, price, and promotional mix to best fit however, evenlarge firms prefer a distribution arrangement thedemands of a particular segment, so also positioning refers wherein they willnot be required to pump in much of their to the design of the distribution channel to meet the resources. segment’sdemands. They are content with entrusting their distribution job to some This exercise should be done, even if the channelends up not distributionhouses, appointing them either as the sole-selling selling to some of the segments in the end. The channel analyst agent oras marketers. Many manufacturers of pharmaceuticals, may then discover that some segments simplydo not make good machinetools, agricultural equipment, electric motors and targets because their demands cannot beadequately met with the householdappliances have adopted this route. channel’s current resources. Alternatively,the positioning exercise 7. Evaluating the Alternatives and Selecting the Best may reveal some unexpectedlyattractive segments to target. Unless With the completion of the foregoing steps, the number the optimal channel isdefined for each segment, it is impossible ofalternatives would have narrowed down considerably; the to make a thoroughdecision about what segments to target.The firmmust evaluate these alternative designs and choose the optimal channel is defined first and foremost by thenecessary best among them. channel flows that must be performed in order to generate the Keeping the System Flexible specific segment’s service output demands.Channel flows are all The physical distribution system should also be kept the activities of the channel that add valueto the end user. In flexible.Marketing is never static. Thus, in keeping with the enumerating the list of channel flows, we go beyond the concept dynamicnature of marketing, the physical distribution system of the mere handling of the product toinclude issues of should remain, flexible. At the same time, flexibility has an promotion, negotiation, financing, orderingand payment. For associatedcost. Often, that is why, issue of economy vs. instance, our office employee looking for a soft drink on her coffee flexibility is raisedwhile designing a physical distribution system. break (see Above Table) has a highdemand for spatial convenience Even at the cost of economy; some flexibility must be retained. and minimal tolerance for outof-stock product. This means that It would cometo the help of the firm in the future.Why do we the channel How of physicalpossession (the physical holding of need to segment, position and target in channeldesign? inventory) takes on greatimportance for such end-users. Each product or service-sellingsituation can have its unique set of service Channel Design: Segmentation output demands bysegment, implying that the differential © Copy Right: Rai University 90 11.623.2
  • 4. importance of different sets of channel flows depends on the 2. That they are met at minimum total channel cost. SALES AND DISTRIBUTION MANAGEMENTsegment.Further, the channel analyst must identify the optimal- Channel Design: Targetingchannelstructure to produce the necessary channel flows, At this stage of the analysis, the channel manager is equippedwhichthemselves, of course, result in the generation of the todecide what segments to target. Note carefully that thisrequiredservice outputs that are demanded by a particular segment alsomeans that the channel manager is now equipped to decideofend-users in the market. The design of the channel structure what segments not to target! Knowing what segments toignoreinvolves two main elements. First, the channel designer mustdecide in one’s channel design and management efforts iswho are to be the members of the channel. For example,will a veryimportant, because it keeps the channel focused on theconsumer packaged-goods manufacturer sell its groceryproducts keysegments from which it plans to reap profitable sales.Whythrough small independent retailers with in-citylocations, or not target all the segments identified in the segmentationandthrough large chain stores that operate discountwarehouse stores? positioning analyses? The answer requires the channelmanagerOr will it use an outlet such as Indiangrocer.com, an on-line seller to look at the internal and external environment facingtheof Indian’ food andhousehold products that operates no retail channel. Internally, managerial bounds may constrainstores at all? Movingup the channel from the retail level, decisions thechannel manager from implementing the zero-basedmust be made whether to use independent distributors, channel.For example, top management of a manufacturing firmindependent salesrepresentative companies (called “reps” or “rep may beunwilling to allocate funds to build a series of regionalfirms”),independent trucking companies, financing companies, warehousesthat would be necessary to provide spatialexport management companies, and any of a whole host of conveniencein a particular market situation. Externally, bothotherpossible independent distribution channel members that environmentalbounds and competitive benchmarks maycouldbe incorporated into the channel design.Beyond this decision, suggest somesegments as higher priority than others. Forthe channel manager must also decide theexact identity of the example, legalpractices can constrain channel design and hencechannel partner to use at each level of thechannel. For example, if targetingdecisions. Many countries restrict the opening of largeit is deemed advisable to sell a line offine watches through retail massmerchandisestores in urban areas, to protect smallstores, should the outlets chosen bemore upscale, such as Tiffany’s, shopkeeperswhose sales would be threatened by larger retailers.or should they are familyownedlocal jewelers? The choice can have Such legalrestrictions can lead to a channel design that does notimplications both forthe efficiency with which the channel is run appropriatelymeet the target segment’s service output demands,and the imageconnoted by distributing through a particular kind andmay cause a channel manager to avoid targeting thatof retailer.In a different context, if a company seeks distribution segmententirely.for its products in a foreign market, the key decision may bewhichdistributor is appointed to carry the product line into Of course, the corollary of this statement is that whentheoverseas market. The right distributor may have much better superiorcompetitive offerings do not exist to serve arelationships with local channel partners in the target marketand particularsegment’s demands for service outputs, the channelcan significantly affect the success of the foreign marketentry. manager may recognize an unexploited market opportunity and create anew channel to serve that underserved segment.The other main element of the channel structure is the decisionof Meetingpreviously unmet service output demands can be ahow many of each type of channel member will be in thechannel. powerful competitive strategy for building loyal and profitableThis is the channel intensity decision. In particular, should the consumerbases in a marketplace. But these strategies can best bechannel for a consumer good include many retailoutlets (intensive identifiedwith knowledge of what consumers want to buy, anddistribution), just a few (selective distribution),or only one importantly,how they want to buy it, and the necessary response(exclusive distribution) in a given market area? The answer to this interms of channel flow performance and channel structure.Wequestion depends both on efficiencyand on implementation have now identified a subset of the market’s segments thatthefactors. More intensive distribution may make the product more channel plans on targeting, using the segmentation andpositioningeasily available to all target endusers,but may create conflict among insights derived earlier.the retailers competing tosell it.The channel structure decisions oftypes, identity, and intensityof channel members all should be Channel Design: Establish New Channelsor Refinemade with the minimizationof channel flow costs in mind. That Existing Channelsis, each channel member isallocated a set of channel flows to Now, the channel manager has identified the ‘optimal wayperform, and ideally theallocation of activities results in the reliable toreach each targeted segment in the market, and hasperformance of allchannel flows at minimum total cost. This is a alsoidentified the bounds that might prevent the channel fromnontrivial task,particularly because it involves comparing activities implementing. the zero-based channel design in the market.acrossdifferent companies who are members of the channel. Ifno channel exists currently in the market for this segment,Intuitively,an activity-based costing (or ABC) sort of analysis thechannel manager should now establish the channel designisuseful to establish the best allocation of channel flowsThis exercise that comes the closest to meeting the target market’s demandsresults in one channel profile for each segment thatis identified in for,service outputs, subject to the environmental andthe market segmentation stage of the exercise.Each of these managerialbounds constraining the design.If there is achannel profiles is called a zero-based channel,because it is designed preexisting channel in place in the market, however,the channelfrom a zero base of operations that is, asif no preexisting channel manager should now perform a gap analysis. The differencesexists in the market. The concept of azero-based channel means between the zero-based and actual channels on thedemand and supply sides constitute gaps in the channel design.Gaps can1. That the segment’s service outputdemands are met and © Copy Right: Rai University11.623.2 91
  • 5. exist on the demand side or on the supply side. power “is its ability to control the decision variablesin theSALES AND DISTRIBUTION MANAGEMENT On the demand side, gaps mean that the service outputdemands marketing strategy of another member in a given channelat a is not being appropriately met by the channel. Theservice output different level of distribution.” These sources of channelpower in question may be either undersupplied or oversupplied. The can of course be used to further one channel problem is obvious in the case of undersupply:The target segment member’sindividual ends. But if channel power is used instead is likely to be dissatisfied becauseend-users would prefer more toinfluence channel members to do t_ jobs that the service than they are getting. Theproblem is more subtle in the optimalchannel design specifies that they do, the result will be a case of oversupply. Here, targetend-users are getting all the service channelthat more closely delivers demanded service outputs, at they desire-and then some.The problem is that service is costly to a lowercost. supply, and therefore,supplying too much of it leads to higher Channel Implementation: Identifying Channel prices than the targetend-users are likely to be willing to pay. Clearly, Conflicts more than oneservice output may be a problem, in which case Channel conflict is generated when one channel several gaps mayneed attention.On the supply side, gaps mean member’sactions prevent the channel from achieving its goals. that at least one. flow in thechannel of distribution is carried out Channelconflict is both common and dangerous to the success at too high a cost. Thisnot only wastes channel profit margins, of distribution efforts. Given the interdependence of all but can result in higherprices than the target market is willing to channelmembers, anyone member’s actions have an influence pay, leading toreductions in sales and market share. Supply-side on thetotal success of the channel effort, and thus can harm gaps can resultfrom a lack of up-to-date expertise in channel now total channel performance managementor simply from waste in the channel The challenge in Channel conflict can stem from differences between closing a supply-side gap is to reduce cost without channelmembers’ goals and objectives (goal conflict), from dangerous])’reducing the service outputs being supplied to target disagreementsover the domain of action and responsibility in end-users.When gaps are identified on the demand or supply thechannel (domain conflict), and from differences in sides, several strategies are available for closing the gaps. But once perceptionsof the marketplace (perceptual conflict). These achannel is already in place, it may be very difficult and costly conflicts directlycause a channel member to fail to perform the toclose these gaps. This suggests the strategic importance ofinitial flows that theoptimal channel design specifies for them, and channel design. If the channel is initially designed in ahaphazard thus inhibit totalchannel performance. The management manner, channelmembers may have to live with asuboptimal problem is twofold.First, the channel manager needs to be able channel later on, even after recognizing channel gapsand making to identify thesources of channel conflict, and in particular, to best efforts to close them differentiatebetween poor channel design and poor performance Channel Implementation: Identifying Power Sources due tochannel conflict. Second, the channel manager must Assuming that a good channel design is in place in the decide onthe action to take (if any) to manage and reduce the market,the channel-manager’s job is still not done. The channel conflicts that have been identified.In general, channel channelmembers now must implement the optimal channel conflict reduction is accomplished throughthe application of designand indeed must continue to implement an optimal one or more sources of channel power. designthrough time. The value of doing so might seem to be Forexample, a manufacturer may identify a conflict in its selfevident,but it is important to remember that a channel is independent-distributor channel: madeup of multiple interdependent entities (companies, The distributorship is exerting toolittle sales effort on behalf of agents,individuals). But they mayor ma)’ not all have the the manufacturer’s product line and therefore sales of the product sameincentives to implement the optimal channel are suffering. Analysis mightreveal that the effort level is low because design.Incompatible incentives among channel members would the distributorshipmakes more profit from selling a competitor’s not bea problem if they were not dependent upon each other. product than from selling this manufacturers product. There is But bythe very nature of the distribution channel structure and thus a goalconflict. The manufacturer’s goal is the maximization design,specific channel members are likely to specialize in of profitover its own product line, but the distributorship’s goal particularactivities and flows in the channel. If all channel is themaximization of profit over all of the products that it members donot perform appropriately, the entire channel effort sellsonlysome of which come from this particular manufacturer. suffers. Forexample, even if everything else is in place, a poorly Toresolve the goal conflict, the manufacturer might use one of performingtransportation system that results in late deliveries thefollowing strategies: (or nodeliveries) of product to retail stores prevents the channel 1. It might use some of its power to reward the distributorby fromsucceeding in selling the product. The same type of increasing the distributor’s discount, thus increasing theprofit statementcould be made about the performance of any channel margin it can make on the manufacturer’s productline. Or memberdoing any of the flows in the channel Thus, it is apparent thatinducing all of the channel members to 2. The manufacturer may invest in developing brand equityand implement the channeldesign appropriately is critical.How, then, thus pull the product through the channel. In thatcase, its can a channel captain implement the optimalchannel design, in brand power induces the distributor to sell theproduct more the face ofinterdependence among channelpartners, not all of aggressively because the sales potential forthe product has risen. whom have the incentive to cooperate in theperformance of In both cases, some sort of leverage or power on the part ofthe their designated channel flows? The answer liesin the manufacturer is necessary to change the distributor’sbehavior possession and use of channel power. A channelmember’s and thus reduce the channel conflict. © Copy Right: Rai University 92 11.623.2
  • 6. Channel Implementation SALES AND DISTRIBUTION MANAGEMENTThe Goal of Channel CoordinationNow channel has been designed with target end-usersegments’service output demands in mind, and channel powerwill beappropriately applied to ensure the smooth implementationofthe optimal channel design. When the disparate members ofthechannel are brought together to advance the goals of thechannelrather than their own independent (and likely conflicting)goals,the channel is said to be coordinated. This term isused to denoteboth the coordination of interests and actionsamong the channelmembers who produce the outputs of themarketing channel,sand the coordination of performance of channel flows with theproduction of the service’ outputsdemanded by target end-users.This is the end goal of the entirechannel management process. Asconditions change in the marketplace, the channel’s design andimplementation may needto respond; thus, channel coordinationis not a one-timeachievement, but an ongoing process of analysisand responseto the market, the competition, and the abilities ofthe membersof the channel.Questions• What are the steps in channel design?• How does product life cycle influence channel choice?• What do you mean by segmentation, positioning and targeting in channel design?• How do you refine existing channel?• How is channel conflict managed?Notes: © Copy Right: Rai University11.623.2 93