Lesson 39 channel management

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  • 1. Marketing Management Unit 4 Delivering Marketing Programs Chapter 13 - Distribution Decisions and Strategies Lesson 39 - Channel ManagementLet us study about various aspects of channel Selecting channel members would therefore in-management. volve evaluate experience,WHAT ARE CHANNEL- number of lines carried,MANAGEMENT DECISIONS growth and profit record solvency, cooperativeness, and reputationWhat does channel managementinvolve ? Do you have any idea ? 2. Training channel membersChannel management calls for selecting particu- Companies need to plan and implement carefullar middlemen and motivating them with a cost- training programs for their intermedi-aries, be-effective trade relations mix. The aim is to build cause they will be viewed as the company bya “partnership” feeling and joint distribution pro- end users .gramming. Individual channel members must beperiodically evaluated against their own past sales They prepare the channel member employees toand other channel members’ sales. Channel modi- perform more effectively and efficiently The com-fication must be performed periodically because pany should provide training programs, marketof the continuously changing marketing environ- research programs, and other capability-buildingment. The company has to evaluate adding or programs to improve intermediaries’ perfor-dropping individual middlemen or individual chan- mance.nels and possibly modifying the whole channelsystem. 3. Motivating channel members1. Selecting Channel Members A.company needs to view its intermediaries in2. Training Channel Members the same way it views its end users. It needs-to3. Motivating Channel Members determine intermediaries’ needs and construct a4. Evaluating Channel Members channel positioning such that its, channel offer-5. Modifying Channel Arrangements ing is tailored to provide superior value to these intermediariesLet us discuss this in detail :- Producers vary in their ability to attract interme-1. Selecting Channel Members diaries . They can exercise the following types of powerCompanies need to select their channel memberscarefully. To customers, the channels are the Coercive powercompany. Consider the negative impression you Reward powerwould get of McDonald’s, , or Hyundai if one or Legitimate powermore of their outlets or dealers consistently ap- Expert powerpeared dirty, inefficient, or unpleasant. Referent power16.101G © Copy Right : Rai University 411
  • 2. Marketing ManagementMore sophisticated companies try to form part- wholesaling and retailing institution emerge,nerships and can evolve into long-term distribu- and new channel systems evolve. We will looktion programming. at the recent growth of vertical , horizontal, and multi channel marketing systems.3. Evaluating channel membersProducers must periodically evaluate intermedi- Marketing channels are characterized by continu-aries’ performance against such stan-dards as ous and sometimes dramatic change, especiallysales-quota attainment, average inventory levels, with the changes brought by the growth of thecustomer delivery time Internet as a major marketing tool and channel of distribution. For example, the new competitiontreatment of damaged and lost goods, and coop- in retailing no longer involves competition be-eration in promotional and training programs. A tween individual firms but rather between retailproducer will occasionally discover that it is pay- systems. Three of the most significant trends areing too much to particu-lar intermediaries for the growth of vertical, horizontal, and multichan-what they are actually doing. One manufacturer nel marketing systems. All channel systems havethat was com-pensating a distributor for holding a potential for vertical, horizontal, and multinventories found that the inventories were ac- ichannel conflict stemming from such sources astual _.-held in a public warehouse at its expense. goal incompatibility, unclear roles and rights, dif-Producers should set up functional discounts in ferences in perception, and high dependence.which they pay specified amounts for the trade Managing these conflicts can be sought throughchannel’s performance of each agreed-upon ser- super ordinate goals, exchange of persons, co-vice. Under performers need to be counseled, optation, joint membership in trade associations,retrained, re motivated, or terminated. diplomacy, mediation, and arbitration. Market- ers should continue to explore and respond to theThey are evaluated on the following parameters legal and moral issues involved in channel devel- sales quota attainment, opment decisions. average inventory levels, customer delivery time, A. Conventional Marketing treatment of damaged and lost goods, System and cooperation in promotional and training A channel consisting of one or more independent programs producers, wholesalers, and retailers each a sepa- rate business seeking to maximize its own profits4. Modifying channel arrangements even at the expense of profits for the system as a whole .A producer must periodically review and modifyits channel arrangement. Modification becomes B. Vertical Marketing Systemnecessary when the A distribution channel structure in which produc- distribution channel is not working as planned, ers, wholesalers, and retailers act as a unified consumer buying patterns change, the mar- system. One channel member owns the others, ket expands has contracts with them, or has so much power new competition arises, that they all cooperate. innovative distribution channels emerge, and the product moves into later stage in the VMS s arose as. result of strong channel mem- product life cycle. bers’ attempts to control channel behavior and eliminate the conflict that results when indepen-Therefore the system will require periodic modi- dent members pursue their own objectives. VMSfication to meet new conditions in the market- achieve economies through size, bargainingplace . power, and elimination of duplicated ser-vices.Channel Dynamics A. Vertical marketing system comprises ofIt would be of great interest to know that dis-tribution channels do not stand still. New i. Corporate VMS412 © Copy Right : Rai University 16.101G
  • 3. Marketing Managementii. Administered VMS ii. Planning channel architecture (companiesiii. Contractual VMS thinking through their channel architecture— which are efficient and not, and developingi. Corporate VMS new means)A vertical marketing system that combines suc- iii. Roles of individual firms in a multi channelcessive stages of production and distribution un- system: (insiders, strivers, complementers,der single ownership—channel leadership is es- transients, outside innovators)tablished through common ownership. Why Do We Have Channel Conflicts?ii. Administered VMS CHANNEL CONFLICTA vertical marketing system that coordinates suc-cessive stages of production and distribution, not Disagreement among marketing channel mem-through common ownership or contractual ties, bers on goals and roles—who should do whatbut through the size and power of one of the par- and for what rewards.ties. Types of conflictiii. Contractual VMS Let us Know why conflicts occur ?A vertical marketing system in which indepen- i. Vertical channel conflict - means conflictdent firms at different levels of production and between different levels within the samedistribution join together through contracts to ob- channeltain more economies or sales impact than they ii. Horizontal channel conflict- conflict in-could achieve alone. volves conflict between members at the same le’e: within the channel.Contractual VMS could have the following forms iii. Multi channel conflict- exists when thea Wholesaler-sponsored voluntary chains manufacturer has established two or moreb. Retailer cooperatives channels that sell to the same marketc. Franchise organizations Knowing Causes of channel conflictd. Manufacturer-sponsored retailer franchise or manufacturer-sponsored wholesaler fran- It is important to identify the causes of chan- chise nel conflict. Some are easy to resolve, others are not.C. Horizontal Marketing Systems One major cause is goal incompatibility. ForA channel arrangement in which two or more example, the manufacturer may want to’ achievecompanies at one level join together to follow a rapid market penetration through a low-pricenew marketing opportunity. policy. Dealers, in contrast may’ prefer to worki. Two or more unrelated firms put together re- with high margins and pursue short-run profit- sources or programs. ability. Sometimes conflict arises from unclearii. Each firm lacks the capital, technology, mar- roles and rights. keting resources or other variables to take on the venture alone Conflict can also stem from differences in per-iii. Can be permanent or temporary ception. The manufacturer may be opti-mistic about the short-term economic outlook and wantD. Multichannel Marketing Systems dealers to carry higher inven-tory. Dealers mayA distribution system in which a single firm sets be pessimistic. Conflict might also arise becauseup two or more marketing channels to reach one of the intermediaries’ dependence on the manu-or more customer segments. facturer.i. Multi channel marketing—single firm uses two or more marketing channels to reach one Following highlight the common causes of con- or more customer segments—advantages: flict :- increased coverage, lower cost, customized Goal incompatibility selling Unclear roles and rights16.101G © Copy Right : Rai University 413
  • 4. Marketing Management Differences in perception In brief we can say following can be used as “Over” dependence conflict resolving methods i. Adoption of superordinate goalsHow to manage channel conflict ii. Exchange of people between channel levels(responses) iii. Co-optation—winning support at differentSome channel conflict can be constructive and levelslead to more dynamic adaptation to a changing iv. Joint membership in and between trade as-environment, but too much is dysfunc-tional sociationsThe challenge is not to eliminate conflict but to v. Diplomacy, mediation, arbitrationmanage it better. There are several mechanismsfor effective conflict management . Legal and ethical issues in channel relationsOne is the adoption of superordinate goals. Chan- For the most part, companies are legally free tonel members come to an agreement on the develop whatever channel arrange-ments suitfundan1ental goal they are jointly seeking, them. In fact, the law seeks to prevent compa-whether it is survival, market share, high quality, nies from using exclusionary tactics that mightpr customer satisfaction. They usually do this keep competitors from using a channel. Here wewhen the channel faces an outside threat, such briefly consider the legality of certain practices,as a more efficient competing channel, an ad- including exclusive dealing, exclusive territories,verse piece of legisla-tion, or a shift in consumer tying agreements, and dealers’ rights.desires. i. Exclusive dealing- Many producers like toA useful step is to exchange persons between develop exclusive channels for their products. Atwo or more channel levels Hopefully, the partic- strategy in which the seller allows only certainipants will grow to appreciate the other’s point outlets to carry its products is called exclusiveof view. dis-tribution, and when the seller requires thatCo-optation is an effort by one organization to these dealers not handle competitors’ products,win the support of the leaders of another organi- this is called exclusive dealing. Both parties ben-zation by including them in advisory councils, efit from exclusive arrange-ments: The sellerboards of directors, and the like. As long as the obtains more loyal and dependable outlets, andinitiating organization treats the leaders seriously the dealers obtain a steady source of supply ofand listens to their opinions, co-optation can re- special products and stronger seller support. ex-duce conflict, but the initiating organization may clusive arrangements are legal as long as they dohave to compromise its policies and plans to win not substantially lessen competition or tend totheir support. create a monopoly, and as long as both parties enter into the agreement voluntarily.Much can be accomplished by encouraging jointmembership in and between trade associations. ii. Exclusive territories - Exclusive dealingWhen conflict becomes acute or chronic, the often includes exclusive territorial agreements.parties may have to resort to diplomacy, medi- The producer ma_’ agree not to sell to other deal-ation, or arbitration. Diplomacy takes place when ers in a given area, or the buyer may agree to selleach side sends a person or group to meet with only in its own territory. The first practice in-its counterpart to resolve the conflict. Mediation creases dealer enthusiasm and commitment. It ismeans resorting to a neutral third party who is also perfectly legal-a’ seller has no legal obliga-skilled in conciliating the two parties’ interests. tion to sell through more outlets than it wishes.Arbitration occurs when the two parties agree The second practice, whereby the producer triesto present their arguments to one or more arbi- to keep a dealer from selling outside its territory,trators and accept the arbitration decision. Some- has become a major legal issue.times, when none of these methods proves effec- iii. Tying agreements- Producers of a strongtive, a company or a channel partner may choose brand sometimes sell it to dealers only if they willto file a lawsuit.414 © Copy Right : Rai University 16.101G
  • 5. Marketing Managementtake some or all of the rest of the line. This prac- but they cannot drop dealers if, for example, thetice is called full-line forcing. Such tying agree- dealers refuse to cooperate in a doubtful legalments are not necessarily illegal, but they do vio- arrangement. such as exclusive dealing or tyinglate. laws if they tend to lessen com-petition sub- agreements .stantially. APPLICATION EXERCISE :Producers are free to select their dealers, but their Find out cases of channel channel conflict in anyright to terminate dealers is some-what restricted. FMCG . Find out reasons of conflict and waysIn general, sellers can drop dealers “for cause,” to overcome them. Point to remember16.101G © Copy Right : Rai University 415
  • 6. Marketing Management416 © Copy Right : Rai University 16.101G
  • 7. Marketing ManagementCHAPTER SUMMARY Channel management calls for selecting particu-Value network and marketing channel decisions lar middlemen and motivating them with a cost-are among the most complex and challenging effective trade relations mix. The aim is to builddecisions facing the firm. Each channel system a “partnership” feeling and joint distribution pro-creates a different level of sales and costs. gramming. Individual channel members must beMiddlemen typically are able to perform channel periodically evaluated against their own past salesfunctions more efficiently than the manufactur- and other channel members’ sales. Channel modi-ers. The most important channel functions and fication must be performed periodically becauseflows are information, promotion, negotiation, or- of the continuously changing marketing environ-dering, financing, risk taking, physical possession, ment. The company has to evaluate adding orpayment and title . dropping individual middlemen or individual chan- nels and possibly modifying the whole channelManufacturers face many channel alternatives system.for reaching a market. They can choose sellingdirect or using one, two, three or more intermedi- EXCERCISESary channel levels. Channel design calls for de- MULTIPLE CHOICE QUESTIONStermining the service outputs (lot size, waiting time,spatial convenience, and product variety), estab-lishing the channel objectives and constraints, 1. ________ are ideally suited for carrying high-identifying the major channel alternatives (types value, low bulk goods.and number of intermediaries, specifically inten- Truckssive, exclusive, or selective distribution), and thechannel terms and responsibilities. Each channel Water carriersalternative has to be evaluated according to eco- Air carriersnomic, control, and adaptive criteria. PipelinesRetailing and wholesaling consists of many orga- 2. Which of the following is not one of the crite-nizations designed to bring goods and services ria used to evaluate channel alternatives?from the point of production to the point of use. . ControlRetailers can be classified in terms of store re- Adaptivetailers, nonstore retailing, and retail organizations. SelectiveStore retailers include many types, such as spe- Economiccialty stores, department stores, supermarkets,convenience stores, superstores, combination 3. A ________ Marketing System occurs whenstores, hypermarkets, discount stores, warehouse two or more companies at one level join togetherstores, and catalog showrooms. Nonstore retail- to follow a new marketing opportunitying is growing more rapidly than store retailing. It Horizontalincludes direct selling (door-to-door, party sell- Virtualing), direct marketing, automatic vending, and Integratedbuying services. AdministeredWholesaling includes all the activities involved in 4. A ________ VMS integrates successiveselling goods or services to those who are buying stages of production and distribution under singlefor the purpose of resale or for business use. ownershipWholesalers help manufacturers deliver their Contractualproducts efficiently to the many retailers and in- Conglomeratedustrial users across the nation. Wholesalers per-form many functions, including selling and pro- Contextualmoting, buying and assortment-building, bulk- 5. Physical Distribution as a marketing channelbreaking, warehousing, transporting, financing, function involvesrisk bearing, supplying market information, and the development and dissemination of per-providing management services and counseling.16.101G © Copy Right : Rai University 417
  • 8. Marketing Management suasive communications about the offer two-level the searching out and communicating with direct-leve prospective buyers the assumption of risks in connection with 11. Which of the following major types of retail- carrying out channel work ers would be described as offering several prod- the transportation and storage of the goods. uct lines-typically clothing, home furnishings, and household goods- with each line operated as a6. Christine Robert, a fashion designer and pro- separate department managed by specialist buy-ducer of women’s fashions, sells her creations ers or merchandisers?through her own chain of boutiques (retail out- Specialty storelets). Christine Robert, as both the producer and Department storeretailer is an example of Convenience store Corporate VMS Superstore Administered VMS Contractual VMS 12. Which of the following is not one of the four Conventional VMS major categories of non-store retailing that is part of the retail industry?7. Iron City Beer is brewed in Pittsburgh, Penn- Direct sellingsylvania and is sold throughout the northeast by Direct marketingindependent beverage wholesalers. Each whole- Automatic vendingsaler attempts to have Iron City sold in as many All of the above are categoriesgrocery stores, taverns, and convenience storesas possible. The strategy for distributing Iron City 13. Retailers must decide on the services mix tois ________ distribution offer customers. Which of the following is not an selective example of the services mix? intensive Pre-purchase services, like mail orders exclusive Post-purchase services, like gift wrapping interdependent Ancillary services, like check cashing All of the above make up the services mix8. Which of the following is not one of the keyfunctions performed by members of marketing 14. Wholesalers are used when they are morechannels? efficient in performing one or more of the fol- Production lowing functions except which one? Contact Buying and assortment building Promotion Warehousing Risk taking Atmospherics in a store Bulk breaking9. In a direct marketing channel the manufacturer sells directly to the con- 15. Which of the following is not one of the mar- sumers keting decisions that a wholesaler needs to be a wholesaler must be present. concerned with while marketing their products? a retailer or wholesaler is between the pro- Human Resources at the retailer ducer and consumer. Target Market none of the above. Price Decision Promotion Decision10. Kevin Stiles is a farmer who sells his pro-duce directly to a supermarket chain, which in ESSAY QUESTIONSturn, sells it to customers. This is an example of a Discuss the alternatives available when de-________ ________ marketing channel system ciding on the number of marketing interme- zero-length diaries one-level Compare and contrast conventional and ver-418 © Copy Right : Rai University 16.101G
  • 9. Marketing Management tical marketing systems. product, comment on the pros and cons of What is the difference between the product an outlet of this kind? Would such outlets assortment breadth and depth decision that alone enhance sales? Explain your answer. retailers make Wholesalers differ from retailers in a num- Application ber of ways. State three ways in which they Exercise – 3 differ from retailers Elder Pharmaceuticals Ltd launched Tiger Oil as an extension of Tiger Balm. Tiger Oil is an Tutorial - K analgesic available at Rs. 35 for a 25 ml bottle and it can be used for relief from joint poins, back-Application aches, sprains and bruises. It has berbal ingredi-Exercise – 1 ents. Tiger Oil will bank on the credibility of Tiger Balm. The target segment consists of con-Washing machines have been in the Indian mar- sumers above the age of 40 years. Research hadket for over a decade. The market is around one shown that consumers associate oil with case oflakh units per year, and about 75% of the market application and effectiveness. The paiin balmconsists of semi-automatic machines in which market is around Rs. 216 crores and Tiger BalmVideocon is the leader. Fully automatic machines has around three per cent share of the market.are marketed by Videocon, BPL, IFB and Whirl- Iodex, Moov, Bio, Life and Deep Heat are somepool, Siemens well known brand in the indus- of the brands which will be competing with Tivertrial segments has entered the market. Leading Oil. The brand is distributed through a networkbands like BPL and Videocon market a number of 850 stockiest.of durables and have a wide distribution network. Taking into consideration the market tar-A leading brand should have a network of around get segment and competition, what kind3000 to 4000 outlets to perform well in the mar- of retail outlets should the brand focusket. on? Should it be different in different geo- As a consultant what kind of distribution graphical areas? Give reasons. strategies would you recommend for a brand like Siemens after taking into ac- Application count the target segment for fully auto- matic machines and the established net- Exercise –4 work of competitive brands? Piaget International is a watch manufactur- ing company which was established a centuryApplication ago and the brand ( Piagel) has also enteredExercise – 2 thee Indian market. The price range of this brand is between Rs. 1.5 lakhs and Rs. 11.5ACC is a well known brand in he category of crores. The company produces just 20,000cements. It has a large distribution network of pieces every year and the watch is perceivedaround 7000 stockists and 120 C and F agents. almost as a jewellery. Indian consumers haveIn 1995, the company’s market share declined to a strong liking towards gold, and gold watchesfifteen per cent from the earlier thirty per cent. from the brand are likely to be sold in theAbout three years back the brand opened its first market. A number of consumers buy the brandcompany-owned retail outlet called “ACC Ki during their visits abroad. The sale target isDuniya” ( World of ACC). The outlet reassures around 400 watches in India. The brand willthe customer about the genuine material, and be sought after by lifestyle oriented consum-encourages interaction besides displaying a range ers who may be from the upper-upper socio-of refractory and aluminum based products. This economic class and also by collectors whotype of outlet is also likely to enhance the would be leading the same kind of lifestyle.company’s image. There seems to be no competition for a brand Taking into consideration the cement mar- of this kind in the Indian market ( grey mar- keting and the commodities nature of the16.101G © Copy Right : Rai University 419
  • 10. Marketing Managementket may be bringing in completion). Hertal are the competing brands in the respec- What kind of retail outlets will be most ap- tive categories. All products of Handy Maid propriate for the brand? Analyse different are priced at a premium of around 30% to 40% distribution alternatives.) over the competing brands. The products were initially available in Bombay through 15 distribu-Application tors covering around 1500 outlets in the city. The company competes with HLL and RCI and henceExercise – 5 building a network is one of the important as-The household cleaning products market is esti- pects for the success of the brand.mated to be around Rs. 500 crores. SMZS Chemi- As a consultant to the brand what kind ofcals has launched household cleaning products distribution plan would be recommendlike dishwashing liquid , ( which could also be among the three choices given ( I) Coverused for glassware and metal utensils), glass and all zones in the country (ii) Confine themulti-surface cleaner, floor cleaner, fabric bright- brand only to one zone (iii) Cover onlyener, fabric softener and a cleaning gel for major cities and towns. Give reasons (clothes. All these products were launched under collect information on the consumption ofthe brandname Handy Maid. HLL’s Vim, Com- these product categories before decidingfort and Ala and other brands Bambi, Colin and your answer).420 © Copy Right : Rai University 16.101G