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Lecture 26 selection of appropriate channels



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  • 1. SALES AND DISTRIBUTION MANAGEMENT LESSON 26: SELECTION OF APPROPRIATE CHANNELS Learning Objective • Participate working conditions • To know how environmental factors affect channel selection. Political Environment • SWOT Analysis of company for channel selection The political environment is subject to • To understand dealer selection process.Let us study the • Nationalism versus grouping of industries environmental factors which will affect channel selection. • Higher government intervention/trade and jobprotection. The New Business Environment • Price control and income equalisation Conditions are changing simultaneously in different • Political instability/wars fields,social, political, economic and technological, and they are oftenin conflict. It is difficult to forecast the area where changes Relative importance of the external factors willmost affect business. For each specific business, it is Generally speaking, the changes in social environment and importantto keep in touch with the key changes in each area of tosome extent the political factors will play a much larger part thebusiness environment and to update the forecast. inshaping the business environment than they did in the past. Technological Environment General Impact of Environmental Changes on This is probably the easiest to identify: Business Coping with the changing environment is already a difficulttask; • Accumulated technical knowledge (general exponentialcurve) the difficulty appears larger when it is realised that not onlyis the • World-wide communications system (transport, satellites,etc.) number of changes high, but the difference in ‘quality’ iseven • Data processing (mini-computers, data banks, officesystems, more striking. Most conditions show fundamentaldifferences electronic mail (E-mail)) with past history and knowledge, as well as the pastand even • New processes aimed at lower energy consumption andhigher the current approach to business theories andmanagement. feed/raw material utilization, new energy sources . Things are not only drastically different, theychange quickly, much faster than they did in the industrialrevolution during the • High investment cost. 19th century. These fast changes aretherefore very difficult, if not • New technology for basic human needs impossible, to foresee; they createbusiness turbulence and (biotechnology,synthetic food, genetic engineering) unexpected crises at short notice;instability, discontinuity and Economic Environment uncertainty seem to characterise thepresent years and this This changes in the following areas: situation will continue until the worldreaches a new period of stability in all these respects. • Obsolescence of all past theories • Irrelevance of past extrapolation Evaluation All these changes can be frightening and leave one • World-wide population growth, but concentrated in certainareas wonderingwhether the ordinary business executive can cope • High energy/raw material costs with them;whether the ‘human gap’ is not too great. However, • Inflation coupled with lower economic growth (stagflation) there is nochoice, so one might as well adopt a responsible and • Monetary instability and disparity between developedcountries positiveattitude instead of a passive and negative one.The ‘serenity prayer’ says:In most businesses, a change in • (DC)/Organization of Petroleum-Exporting environment can be consideredeither as a threat or as a new Countries(OPEC) and LDC. opportunity depending on the point of view. A newly • Shortage of capital, credit squeeze, very selectiveinvestments industrialised nation can be consideredas a threat (cheap • Shortage of people able to understand the newenvironment competition) or an opportunity (new market). • Potential shortage of food world-wide While excessive inflation is a nightmare for most governments,it Social Environment is viewed as an opportunity by many businesses. Increasingcrime Changes occur in is a frightening trend to most people; but securitycompanies consider it as an opportunity for more business.It is important to • Collapse of tradition and structures conduct a rational and systematic analysis ofthe future impact of • New education, new expectations, new motivations. each environmental factor on a specificbusiness; and to avoid being • New life styles, mobility, quality of life, health care. trapped in a last minute crisis,under the pressure of events, when • Consumerism/ecology/anti-business it may be too late to adjustto them. This analysis can be set out in attitudes?Unemployment and shorter working time the following manner. • Crime/terrorism 1. Environmental Factor: Technological a. Degree of change: high/low © Copy Right: Rai University 94 11.623.2
  • 2. Intermediaries are preferable own sales forcewhen the line is SALES AND DISTRIBUTION MANAGEMENT b. Probability of occurrence: high/low short. Decisions must be made whether’to use a single channel c. Implication: opportunity or threat for the entire line or split the lineand use multiple channels.2. Environmental Factor: Economic etc. 4. Market position: An established product made andpromoted The probability level associated with each factor is a by a reputable manufacturer may have a highdegree of market basicingredient of any potential ‘environment scenario’ and acceptance and can be readily soldthrough more channels than concernsthe risk evaluation of each future business strategy. a lesser known product. Thus thesystematic evaluation of opportunities and threats is Market Factors a key partof the overall process of strategic business planning. 1. Existing market structure: This includes traditional modesofThe Importance of Swot Analyses operation, geographical factors, size and placement oftheAnswers to the following five essential questions, population, etc.askedperiodically, will provide clues to gaining advantage over 2. Nature of the purchase deliberation: The amountcompetitors: ofdeliberation by the buyer before purchase differs fromproduct• What are our company’s unique strengths or aspects to product. Frequent purchases need more buyersellercontacts• Which give us competitive advantage over our and intermediaries are indicated. Formalspecifications and closecompetitors’? competitive bids may be used inpurchasing certain industrial products.• What are our relative strengths in comparison to ournearest competitors? 3. Availability of the channel: Existing channels may not beinterested in new products. The promoter can eitherpersuade• What are our weak flanks which we have to guard? them or use aggressive promotion to stimulateconsumer• What are the weak points of our competitors which wecan demand on the theory that this will force theintermediaries to attack? carry the product in order to satisfy thecustomers.• What ideas do the foregoing give us in terms ofopportunities? Institutional Factors To do this, it is necessary to make an analysis of the strengths,weaknesses, opportunities and threats (SWOTs) faced 1. Financial ability of channel members: Manufacturers mayfind by thecompany and the distributor. Since the market-place, the it necessary to aid their retailers through directfinancing; conditions and the competitors may be different as far as willingness to extend credit can influence channelacceptance. eachdistributor is concerned, it is important to start afresh in Conversely, mass retailers sometimes financetheir suppliers. eachcase. This analysis must be undertaken at least once a year. 2. Promotional ability of channel members: Wholesalerscannot aggressively promote particular products, butexclusiveMarketing and Channel Flows distributors usually join the manufacturer indoing so.The above analysis of a company’s SWOTs must be Manufacturers assume this function in the caseof nationalaugmentedby similar analyses of the other channel members. brands, while the promotion of private brands usually restsThe numberof members in a particular channel can vary on the mass retailer or wholesaler whoestablishes the brandaccording to thelength and width of the channel strategy a adopts. 3. Post-sales service ability: The after-sales service, with orwithoutA Checklist for Selecting the MostAppropriate a warranty, may be performed by the manufacturer,the retailChannels: distributor or an independent service organization. This abilityProduct Factors affects channel selection.Four product variables must be weighed in channel selection. The Channel Decision1. Physical nature: the variations that influence the decisionare: This is made by a combination of intuition and analysis, a. Perishability of the product, whether physical or due andthe exercise of judgment. The decision is complicated by tofashion; theinterdependencies existing between relevant factors. While it b. Seasonal variation, causing inventory problems; isdifficult to quantify the many trade-offs associated with channeldecisions, certain tools can be applied to them. Cost c. Unit value of the product; analysistechniques will give reasonable estimates of each channel d. Inventory investment required; and cost.System analysis involves trade-offs in time, service and e. Customer service requirements. costs inorder to maximize profits in the long run.2. Technical nature: whether Quantitativecomparisons are made between alternative production runs,inventory holding levels, transport modes, a. A simple or complex product; customer servicestandards, order transmission, processing b. Advice is needed on product use; systems, etc. Thismust involve computer-oriented modelling c. Installation is needed or techniques owingto the large number of variables to be d. Special training is needed., considered.In recent years, significant environmental changes have takenplace:3. Length of product line: This consists of a group ofproducts related either from a production or a marketingstandpoint. 1. Trend towards a short-order economy - the increase ininventory © Copy Right: Rai University11.623.2 95
  • 3. has meant that the best decision is to orderfrequently, forcing productcharacteristics, the marketing environment and theSALES AND DISTRIBUTION MANAGEMENT the primary supplier to carry thenecessary inventory. objectives ofthe firm.In practice, however, it is difficult for any 2. Rapid expansion of product lines - this generatesobsolescence firm to locate dealerspossessing all the qualifications and and stock availability problems as well asinventory imbalance. attributes enumerated inthe chart. Obviously, one has to compromise. Out of theavailable candidates, the firm has to 3. Price differentials and discounts - legally speaking, thesehave to select those who have thepotential to be a good dealer. Then, it be cost-justified. should build them intoeffective and strong dealers through a 4. Competitive strategies - at one time they centered onproduct sustained process ofdevelopment. If the product requires a features and price; now the emphasis is on indirectcompetition specialised distributor,as in the case of industrial products, the such as outperforming competitors on logisticplanning and choice must be madeaccordingly; Firms which are well customer service. established in the market and those thatwhich possess certain The members of a marketing channel are interconnected byseveral unique strengths in terms of product,brand, service, etc., will different factors: enjoy a wider choice when they set outto appoint dealers. Their 1. The product line from manufacturer to end-user reputation and brand equity will pullin a large number of applicants who are above average in therequired attributes. In 2. The flow of ownership from member to member contrast, for firms yet to be established,the choice base will be 3. The cash flow as payments are made by one member toanother small. Such firms may have to initiallyaccept those who prepared 4. The exchange of information between channel members to take up the dealership and build agood network over a 5. The advertising and sales promotion directed by period of time. channelmembers towards other members or end-users. The Net must be Cast Intelligently Now we will study how a dealer is selected? Effective dealer recruitment depends in the first place on thefirm’s ability to attract applications from the right Qualifications/Attributes to be Looked for in candidates.Advertisements will no doubt be of help in this Prospective Dealers regard. Butthey must be developed carefully. The companies Qualifications/ Attributes to be Looked for in and adagencies must have the expertise needed for developing ProspectiveDealers effectivedealer recruitment ads. • Business reputation/standing ‘Dealer Wanted’ Ads • Business capacity The first test of a good ‘dealer wanted’ ad is no doubt • Salesmanship its‘attention grabbing’ strength among the prospects. The • Expertise / experience in theline secondtest is the ad’s ability to coax the stronger ones among • Financial capacity andwillingness to invest in the line them torespond to the proposition being made. In the present times,with more brands crowding the marketplace, the • Creditworthiness premium ondealers’ shelf space is increasing exponentially; It • Capacity to offer assortmentsof products andservices required needs a wellthoughtout and well-written dealer ad to bring in by thecustomers the rightresponse. The communication must put across the • Capacity and willingness toextend credit to customers propositionforcefully; while many companies give ‘dealer • Capacity to providestorage facilities,showrooms, shops, wanted’ ads, onlya few do a good job of it. Cited below are a serviceworkshops, salesmen andservice personnel few effective ‘dealer wanted’ ads. commensurate with thebusiness Nanz ‘Dealer wanted’ Ad • Positive attitude towardsthe company • Good relations with:ConsumersOpinion leaders in the areaGovernment officials and others (as applicable,depending on the nature ofthe business. Dealer Selection Dealer selection is the first task in the process of dealer management.It is obvious that a firm has to be very careful in selectingits dealers. It has to ensure that those selected for dealershippossess certain essential qualifications. Some of these qualificationsare common ones, irrespective of the product linesinvolved; others are product specific. Financial strength,business capacity, creditworthiness and salesmanship form partof the common qualifications. Qualifications/Attributes to be Looked for A detailed checklist of the qualifications/attributes to be lookedinto while selecting dealers is furnished in above chart. Thecriteria can be modified appropriately, depending on the © Copy Right: Rai University 96 11.623.2
  • 4. The Nanz Ad stations acrossIndia. Mitsubishi has not gone in for similar SALES AND DISTRIBUTION MANAGEMENTThe Nanz ad is another example. The NanzLobill chain stores intensity.were to be run by franchisees. The approachof Escorts-Nanz in In fact, a firm would be ill-advised to adopt without questionthethis regard could be understood from theads put out by them channel intensity of another firm, even if the latter were theindustrytowards locating prospective franchisees. leader. What suits one may not suit the other. BlindlyfollowingEvaluating the Alternatives and Selecting the Best another firm’s channel pattern and intensity will landthe firm inWith the completion of the foregoing steps, the number trouble. Recent experience of some well-knownMNC FMCG firmsofalternatives would have narrowed down considerably; The in India will clearly amplify this point.Below table shows howfirmmust evaluate these alternative designs and choose the choosing channel intensity wronglylanded P & G and Nestle inbestamong them. Actually, two distinct evaluations-an trouble.economicevaluation and a conceptual evaluation-may benecessary.Economic Evaluation; Balancing Cost, Efficiency andRisk:Cost and efficiency are the two main parameters ineconomicevaluation. Often, though not necessarily, the two aredirectlyproportional. The firm has to rate the risk associatedwith thedifferent alternatives. The firm’s choice is a compromiseamongthe three parameters. The first step here is thedetermination ofthe sales volume that can be obtained througheach alternativedesign. Second, the costs of selling that volumethrough thatalternative have to be assessed. In other words, thefirmdetermines the unit cost of selling in each of thealternatives.The firm chooses the one, which is attractive fromthe cost vsefficiency angle and is also relatively less risky.Conceptual evaluation; flexibility and controllabilityConceptual evaluation is also equally important. It has tobeused for assessing the flexibility and controllability ofthealternative. It is possible that economic evaluation points tooneparticular alternative as superior, while conceptualevaluationgives it a low rating. For example, a marketer-orientedchanneldesign may show merit in terms of unit cost of selling,butmay show severe limitations from the standpoints ofcontrollability/flow of market feedback as well as requirementsoflong-term market development. With conceptualevaluation,the firm can also check out whether the alternative iscompatible with its business objectives.Some Vital Aspects in Finalising the ChannelThe job is not over with the selection of the basicchanneldesign. Within a given design, .different arrangementsarepossible. It means that further decisions are needed.Theimportant aspects to be decided are:• Channel intensity• Number of tiers• The appropriate variant within the designChoosing the Channel IntensityWhile two firms may go for the same channel design, theymayneed different intensities. It depends on the position ofthefirm its objectives and strategies, its sales, profits, andmarketcoverage, present and projected, and its resources. Forexample,Maruti and Mitsubishi India, being passenger carfirmsoperating in the same market, may opt for similarchanneldesign. But they may settle for different channelintensity;Maruti has a massive network consisting of 144 sales Choosing the Number of Tiers Correctly:outlets,175 dealer workshops and 750 authorised service The second decision concerns the number of tiers. How manytiers should the channel have? This issue is related in a way © Copy Right: Rai University11.623.2 97
  • 5. tochannel intensity; In a majority of cases, the choice will So, the choice depends on the context. The governing principleisSALES AND DISTRIBUTION MANAGEMENT bebetween single tier and two tiers, while in a few cases, firms that the chosen channel must have the capability to sell theproduct mayfind it necessary to go in for a three-tier channel. When a and to provide the required market coverage. It shouldalso ensure firmopts for a sole-selling agencyor marketer, the latter will be that the user gets the products with the minimumof effort or havetheir own channel arrangement and the tiers that operate strain on his part. And it must be cost-effective.The channel must underthem automatically become a part of the firm’s also be amenable to the control of the company to the extent channel.The decision depends on a number of factors. In a required for operating the marketingsystem.In recent years, as a givenbusiness, a particular channel pattern might have taken general trend, the number of tiers in thedistribution channels is rootsand there may be some advantage in going along with getting shorter. Businesses that used tohave a three-tier structure theestablished trade pattern. The product characteristics are earlier now have a two-tier structureand those with a two-tier perhapsthe most important consideration. For example, for structure earlier are now trying tomanage with a single- tier channel. sellingpassenger cars, a firm need have only a single-tier And often, the axe falls onthe stockists. Asian Paints, again, is an distributionchannel. Here, the intermediaries at one level can example. It chose, as amatter of conscious policy, a single-tier effectively linkthe maker buyer. In a product like toothpastes, or channel-going directly tothe retail trade. cosmetics, orcigarettes it may be necessary to have a two or Selecting Appropriate Variant within a Given Design three-tier channelpattern in view of the mass nature of the Usually, within a given channel design different variants can product. It may bedifficult to achieve adequacy of market bethought of. For example, firm I: A and firm B may opt for coverage in suchproducts, with just a single tier of marketing thesame channel design consisting of conventional intermediaries. wholesalersand retailers. Still, their approaches within the model Comparative Merits of Single-tier and Two-tier can varyfrom one another. Firm A may opt for a wholesaler- Channel weightedsystem, while firm B for a retailer-weighted system. The single-tier and two tier channel patterns have their Forexample, Nirma Chemicals distributes Nirma soap with associatedadvantages and disadvantages. The single-tier awholesaler-weighted system. In contrast, HLL distributes patternprovides better motivation to each member in the itsLifebuoy in the same market through a retailer- channel, as insuch a pattern, the trade discount is available in full weightedsystem. Nirma off-loads the product on the measure to the retailer. The pattern also brings in savings to the wholesalers at alarger discount; the retailers buy the product firm by theavoidance of multiple transport and handling. The from the wholesalers.HLL reaches out directly to a large number firm can alsoservice all the outlets directly in this pattern. But, of retailers,using wholesalers! C&F agents to the extent the patterninvolves greater administrative burden for the firm. necessary: It will haveto perform many functions that could otherwise be The two variants have their associated advantages and passed onto the channel. It will have to increase the number of disadvantages.For instance. the wholesaler-oriented system fieldstorage points and the size of sales force to make up for obviates theneed for a large sales force, thereby resulting in theabsence of the wholesale middlemen. The pattern may considerablesavings in related costs. But, brand building may alsosometimes result in inadequate market coverage. The two- suffersomewhat in that system. The firms have to study in tierpattern helps quicker outflow of stocks and more detail thetrade-off between the two approaches and have to see intensivecoverage of the market. But, it results in lower profits whichone would best suit the firm. toretailers as the available trade margin has to be shared betweentwo tiers. It also weakens the principal’s control over An Eye on the Future is Essential the outfitcompared with a single-tier pattern. Once a channel structure is created and channel members are putin place and channel compensations are streamlined, it will bedifficult for the firm to exit from that structure and put analternative in its place. Therefore, as a general rule, an eye on thefuture is essential while adopting a channel system and structure.Exhibit illustrates this point with the ‘ example of P&G.The example clearly illustrates the difficulties involved in altering an ongoing channel structure. One Unified System We saw in the preceding chapter that for the optimisation ofthe physical distribution task, all elements of physical distribution/ marketing logistics, such as transportation, warehousingand inventory management, must be handled as a single,unified system. In the same way. the firm has to handlewholesaling, retailing and other forms of selling as one unifiedsystem and not as separate entities. The linkage among them interms of functions, costs and efficiency being quite strong,looking at them as independent entities will lead to suboptimisationof the channel management task as a whole.Compensation provided to the different tiers has also to beproperly © Copy Right: Rai University 98 11.623.2
  • 6. intertwined, since the functions performed by the different tiers SALES AND DISTRIBUTION MANAGEMENTare inter. twined.Building Channel System by Bottom-up MethodThe purpose of having marketing channels is to servecustomerneeds effectively. This means that the prime task inchanneldesign is to determine the type of retailers who are bestsuitedto serve customer needs in the specific context anddevelop thedistribution system by the bottom-up method.Once the typeof retailers suited for the context is determined,the wholesalingarrangement that would best suit the chosenretail arrangement can be chosen and put in place.Creating and Administering the ChannelFixing the channel design is only one part of channelmanagement.Creating the channel and administering iteffectively is the other, and bulkier, part of the job. Afterdeciding the design of the channel and the number of tiers inthe channel, the firm has to decide the number of membersneeded in each tier and their locations. It has to select suitablepersons establishments and appoint them as stockists,distributors and dealers, as the case may be. It has to administerthem, service them and motivate them.ConclusionHerein we studied about selection of appropriate channels.Theselection of channels depends upon the business environmentboth internal and external.The external environment consists oftechnological,economic,social and political environment.Theselection of channel depends upon product factors,marketfactors,institutional factors.Once the channel has beenselected,the next task is to select the dealer.Questions• What environmental factors affect channel selection?• Why should companies go for SWOT analysis for channelselection?• Describe how a dealer is selected?Notes: © Copy Right: Rai University11.623.2 99