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  • 1. PowerPoint Slides to Accompany Marketing Channels , 7 th Edition Anne T. Coughlan, Northwestern University Erin Anderson, INSEAD Louis W. Stern, Northwestern University Adel I. El-Ansary, University of North Florida
  • 2. Chapter 1 Marketing Channels: Structure and Functions
  • 3.   FIGURE 1-1: CONTACT COSTS TO REACH THE MARKET WITH AND WITHOUT INTERMEDIARIES Selling Directly Manufacturers Retailers 40 Contact Lines Selling Through One Wholesaler Manufacturers Wholesaler Retailers 14 Contact Lines Selling Through Two Wholesalers Manufacturers Wholesalers Retailers 28 Contact Lines
  • 4. FIGURE 1.2: MARKETING FLOWS IN CHANNELS           Physical Physical Physical Possession Possession Possession Ownership Ownership Ownership   Promotion Promotion Promotion   Negotiation Negotiation Negotiation Consumers Producers Wholesalers Retailers Industrial Financing Financing Financing and Household Risking Risking Risking   Ordering Ordering Ordering   Payment Payment Payment     Commercial Channel Subsystem  
  • 5.       FIGURE 1-3: FRAMEWORK FOR CHANNEL DESIGN AND IMPLEMENTATION   INSIGHTS FOR SPECIFIC CHANNEL INSTITUTIONS: Retailing, Wholesaling and Logistics, Franchising Channel Design Process: SEGMENTATION: Recognize and respond to target customers’ service output demands Decisions About Efficient Channel Response: CHANNEL STRUCTURE: What kinds of intermediaries are in my channel? Who are they? How many of them? SPLITTING THE WORKLOAD: With what responsibilities? DEGREE OF COMMITMENT: Distribution alliance? Vertical integration/ownership? GAP ANALYSIS: What do I have to change? Channel Implementation Process: CHANNEL CONFLICT: Identify actual and potential sources MANAGE/DEFUSE CONFLICT: Use power sources strategically, subject to legal constraints GOAL: Channel Coordination CHANNEL POWER: Identify sources for all channel members
  • 6. TABLE 1-1: SERVICE OUTPUT DEMAND DIFFERENCES (an example of segmentation in the book-buying market) Browser buying best-sellers to take on vacation Student buying textbooks for fall semester at college Descriptor Service Output Demand Level Descriptor Service Output Demand Level Bulk-breaking “ I’m looking for some ‘good read’ paperbacks to enjoy.” Medium “ I only need one copy of my Marketing textbook!” High Spatial convenience “ I have lots of errands to run before leaving town, so I’ll be going past several bookstores.” Medium “ I don’t have a car, so I can’t travel far to buy.” High Waiting and delivery time “ I’m not worried about getting the books now… I can even pick up a few when I’m out of town if need be.” Low “ I just got to campus, but classes are starting tomorrow and I’ll need my books by then.” High Assortment and variety “ I want the best choice available, so that I can pick what looks good.” High “ I’m just buying what’s on my course reading list.” Low Customer service “ I like to stop for a coffee when book browsing.” High “ I can find books myself, and don’t need any special help.” Low Information provision “ I value the opinions of a well-read bookstore employee; I can’t always tell a good book from a bad one before I buy.” High “ My professors have already decided what I’ll read this semester.” Low
  • 7. FIGURE 1-4: ORGANIZATION OF THE TEXT
    • Channel Design
    • Process:
    • SEGMENTATION: Chapter 2
    • Decisions About
    • Efficient Channel Response:
    • CHANNEL STRUCTURE:
      • Chapter 4
    • SPLITTING THE WORKLOAD:
      • Chapter 3
    • DEGREE OF COMMITMENT:
      • Chapters 8, 9
    • GAP ANALYSIS:
      • Chapter 5
    Channel Implementation Process: CHANNEL CONFLICT: Chapter 7 MANAGE/DEFUSE CONFLICT: Chapters 6, 7, 8, 9, 10 GOAL: Channel Coordination CHANNEL POWER: Chapter 6 INSIGHTS FOR SPECIFIC CHANNEL INSTITUTIONS: Chapters 11, 12, 13
  • 8. Chapter 2 Segmentation for Marketing Channel Design: Service Outputs
  • 9. TABLE 2-1: ESTIMATED NUMBER OF U.S. CONSUMERS USING ONLINE BILL PAYMENT, VARIOUS YEARS Notes: 1998: in 1998, just 2% of U.S. households used online bill payment, according to Tower Group (Bielski 2003). From U.S. Census data, in 1998, there were 100 million households in the U.S., with an average of 1.7 adults per household; thus, 2 million households or 3.4 million adults were using online bill payment in 1998. 2001: A Forrester Research report said that nearly 17 million U.S. households will pay bills online in 2002, up 41 percent from 2001 numbers (Higgins 2002). Thus, in 2001, 12 million U.S. households paid bills online. From U.S. Census data, there were 108 million households in the U.S., with an average of 2.58 adults per household; thus, there were 20.4 million adults using online bill payment in 2001. 2002: The same Forrester Research report said that nearly 17 million U.S. households will pay bills online in 2002 (Higgins 2002), while a Tower Group report said that 13.7% of U.S. households did pay bills online in 2002 (Bielski 2003). The table therefore reports the numbers from Bielski. There were 109 million households in the U.S. in 2002; thus, 15 million households paid bills online. Further, there were an average of 2.58 adults per household in the U.S. in 2002 (from U.S. Census data), yielding the estimate of 25.5 million adult online bill payers in 2002. 2003 and 2004: A Gartner study cites 65 million U.S. consumers paying at least some bills online, and reports this is almost twice as many as in 2003 (Park, Elgin et al. 2004). We therefore estimate that 35 million U.S. consumers paid bills online in 2003. YEAR # U.S. CONSUMERS PAYING AT LEAST 1 BILL ONLINE (millions, est.) % OF U.S. POPULATION (est.) 1998 3.4 1.3% … … … 2001 20.4 7.3% 2002 25.5 9.1% 2003 35 12.5% 2004 65 23%
  • 10. TABLE 2-2: ONLINE BILL PAYMENT: THE CONSUMER EXPERIENCE OPTION: Paper Bill Payment Direct Biller Online Pay Third-Party Online Bill Payer (e.g. bank, Quicken) SET-UP PROCESS: None Consumer logs on to biller’s website; Enters information about account, name, bank account fr/which payment will be made, etc.; Picks a password, specific to this website , to gain access in future; Activation usually occurs within 24 hours Consumer logs on to third-party website; Enters information about each account individually ; Picks a password, specific to this site but common across all bills paid at this site , to gain access in future BILL PRESENT-MENT TO CONSUMER: Consumer receives bill through U.S. mail in envelope containing summary of bill charges & due date, payment stub, & payment envelope Either through U.S. mail (see paper bill) or electronic bill presentment through e-mail alert; both note payment due date Arrival of electronic bill noted through e-mail alert; Third party may/may not offer actual bill presentment CONSUMER BILL REVIEW AND PAYMENT AUTHOR-IZATION: Consumer reconciles bill with paper receipts; fills out payment stub; writes paper check; inserts check and stub in envelope; puts U.S. first-class stamp on envelope; mails payment Consumer reconciles bill with receipts; Visits biller website’s payment page; Enters amount and date of payment; [website indicates how fast payment will be made] Consumer visits third party’s website to view bill (if no presentment by third party) and reconcile; Enters amount and date of payment (may need up to 5 days to clear payment) CONFIRMA-TION OF PAYMENT TO CONSUMER: Only when next bill is received does consumer learn if previous payment was received in time (unless consumer telephones biller) Typically, e-mail confirmation of payment receipt the day payment is recorded Typically, e-mail confirmation that payment was made COST TO CONSUMER: Cost of first-class stamp; No cost to learn system; Cost of time to process bill & write check; Cost of paper check; Risk-adjusted cost of late payment (perceived very low) No monthly fee for payment processing No stamp; Initial learning time, for each biller’s system ; Cost of time to check bill’s accuracy; No check writing or cost; Risk-adjusted cost of late payment (perceived low); No monthly fee for payment processing No stamp; Initial learning time, once for whole system ; Cost of time to check bill’s accuracy; No check writing or cost; Risk-adjusted cost of late payments (moderate: up to 5 days to clear payment) May be a monthly fee (e.g., Quicken: $9.95/month for up to 20 bills, plus $2.49 per 5 bills thereafter; but many banks now do not charge for service); May be low cost to integrate with home financial records (e.g., Quicken financial software program)
  • 11. TABLE 2-3: BUSINESS-TO-BUSINESS CHANNEL SEGMENTS FOR A NEW HIGH-TECHNOLOGY PRODUCT = Additional Important Attributes = Greatest Discriminating Attributes Respondents allocated 100 points among the following supplier-provided service outputs according to their importance to their company: Source: Reprinted with permission of Rick Wilson, Chicago Strategy Associates,  2000. Possible Service Output Priorities Lowest Total Cost/ Pre-Sales Info Segment Responsive Support/ Post-Sales Segment Full-Service Relationship Segment References and Credentials Segment References and Credentials 5 4 6 25 Financial Stability and Longevity 4 4 5 16 Product Demonstrations & Trials 11 10 8 20 Proactive Advice & Consulting 10 9 8 10 Responsive Assistance During Decision Process 14 9 10 6 One-Stop Solution 4 1 18 3 Lowest Price 32 8 8 6 Installation and Training Support 10 15 12 10 Responsive Problem Solving After Sale 8 29 10 3 Ongoing Relationship with a Supplier 1 11 15 1 Total 100 100 100 100 % Respondents 16% 13% 61% 10%
  • 12. FIGURE 2-1: IDEAL CHANNEL SYSTEM FOR BUSINESS-TO-BUSINESS SEGMENTS BUYING A NEW HIGH-TECHNOLOGY PRODUCT Manufacturer (New High Technology Product) Full-Service Responsive Support References/ Credentials Lowest Total Cost Pre-Sales Sales Post-Sales VARs Associations, Events, Awareness Efforts Third-Party Supply Out-source Dealers TeleSales/ TeleMktg Internal Support - Install, Training & Service Group Segment Source : Reprinted with permission of Rick Wilson, Chicago Strategy Associates,  2000.
  • 13. TABLE 2-4: SHIPPING CHARGES FOR $150 PURCHASE OF SHIRTS FROM LAND’S END Source: www.landsend.com website. Buyer’s Location Shipping Method Shipping Charge Time to Delivery United States Standard UPS $11.95 3 to 5 business days Mexico Surface Mail $20.00 8 to 12 weeks Mexico Priority Air $30.00 2 to 4 weeks Mexico UPS $50.00 1 to 2 weeks
  • 14.   FIGURE 2-2: ADVERTISING COPY FOR AN AD FOR BN.COM Source: advertisement for bn.com in Wall Street Journal , November 20, 2002, p. A11. Advertising Copy Service Output Offered “ Really free shipping”: offers free shipping if 2 or more items are purchased. “We make it easy and simple.” Customer service “ Fast & easy returns”: end-user can return unwanted books to a bricks-and-mortar Barnes & Noble bookstore. “Just try and return something to a store that isn’t there.” Quick delivery (for returns), spatial convenience; note implicit comparison with amazon.com, the pure-play online bookseller “ Books not bait”: promises no additional sales pitches to buy non-book products. Assortment/variety: just books (targeting the book lover). Again, note implicit comparison with amazon.com. “ Same day delivery in Manhattan”: delivery by 7:00 p.m. on any item(s) ordered by 11:00 a.m. that day. “No other online bookseller offers that.” Quick delivery: the offer is possible because of Barnes & Noble’s warehouses in New Jersey, near Manhattan. Note direct comparison with other online booksellers (notably, amazon.com) “ The gift card that gives more”: can be used either online or in the bricks-and-mortar bookstores, nationwide. Spatial convenience, assortment/variety: when buying a gift for a friend, this provides virtually limitless assortment, and does so anywhere the recipient lives in the United States. “ bn.com – 1,000,000 titles; amazon.com – 375,000 titles” Assortment/variety: direct comparison with amazon.com, offering a broader assortment of titles to the consumer
  • 15. TABLE 2-5: THE SERVICE OUTPUT DEMANDS (SOD) TEMPLATE INSTRUCTIONS: If quantitative marketing-research data are available to enter numerical ratings in each cell, this should be done. If not, an intuitive ranking can be imposed by noting for each segment whether demand for the given service output is high, medium, or low . SERVICE OUTPUT DEMAND: SEGMENT NAME/ DESCRIPTOR BULK BREAKING SPATIAL CONVENIENCE DELIVERY/ WAITING TIME ASSORTMENT/ VARIETY CUSTOMER SERVICE INFORMATION PROVISION 1. 2. 3. 4. 5.
  • 16. Chapter 3 Supply Side Channel Analysis: Channel Flows and Efficiency Analysis
  • 17. FIGURE 3-1: MARKETING FLOWS IN CHANNELS Physical Physical Physical Possession Possession Possession Ownership Ownership Ownership Promotion Promotion Promotion Negotiation Negotiation Negotiation Consumers Producers Wholesalers Retailers Industrial Financing Financing Financing and Household Risking Risking Risking Ordering Ordering Ordering Payment Payment Payment Commercial Channel Subsystem The arrows above show flows of activity in the channel (e.g. physical possession flows from producers to wholesalers to retailers to consumers). Each flow carries a cost. Some examples of costs of various flows are given below: Marketing Flow Cost Represented Physical possession Storage and delivery costs Ownership Inventory carrying costs Promotion Personal selling, advertising, sales promotion, publicity, public relations costs, trade show costs Negotiation Time and legal costs Financing Credit terms, terms and conditions of sale Risking Price guarantees, returns allowances, warranties, insurance, repair, and after-sale service costs Ordering Order-processing costs Payment Collections, bad debt costs
  • 18. TABLE 3-1: PRODUCT RETURNS: A LARGE-SCALE PROBLEM Furthermore, returns are very significant in many industries. In a survey of over 300 reverse logistics managers in 1998, researchers found the following ranges for return percentages: TABLE 3-2: PRODUCT RETURNS: PERCENTAGE RANGES Product Returns: A Large-Scale Problem
    • The value of returned goods is close to $60-100 billion annually in the U.S.
    • Web returns alone had value between $1.8 and $2.5 billion in 2002
    • Estimates are that the cost of processing those Web returns is twice as high as the merchandise value itself!
    • U.S. companies are estimated to spend $35 billion to more than $40 billion per year on reverse logistics
    • The average company takes 30-70 days to move a returned product back into the market
    • The estimated number of packages returned in 2004 is 500 million
    Industry Return % Ranges Magazine Publishing 50% Catalog Retailers 18-35% Book Publishers 20-30% Greeting Cards 20-30% CD-ROMs 18-25% Computer Manufacturers 10-20% Book Distributors 10-20% Mass Merchandisers 4-15% Electronic Distributors 10-12% Printers 4-8% Auto Industry (Parts) 4-6% Consumer Electronics 4-5% Mail Order Computer Manufacturers 2-5% Household Chemicals 2-3%
  • 19. TABLE 3-3: DIFFERENCES BETWEEN FORWARD AND REVERSE LOGISTICS Factor Difference Between Forward and Reverse Logistics Volume forecasting More difficult for returns than for original sales of new product Transportation Forward: ship in bulk (many of one SKU), with economies of scale. Reverse: ship many disparate SKUs in one pallet, no economies of scale. Product quality Forward: uniform product quality. Reverse: variable product quality, requiring costly evaluation of every returned unit. Product packaging Forward: uniform packaging. Reverse: packaging varies with some like-new, some damaged – no economies of scale in handling. Ultimate destination Forward: clear destination – to retailer or industrial distributor. Reverse: many options for ultimate disposition of product, necessitating separate decisions. Accounting cost transparency Forward: high. Reverse: low, because activities are not consistently tracked on a unified basis.
  • 20. FIGURE 3-5: POSSIBLE PATHWAYS FOR RETURNED PRODUCT Key: solid lines denote product to be salvaged for subsequent revenue. Dotted lines denote non-revenue-producing product flows.
  • 21. FIGURE 3-6: THE EFFICIENCY TEMPLATE * Entries in column must add up to 100 points. ** Entries across row (sum of proportional flow performance of channel members 1 through 4) for each channel member must add up to 100 points. *** Normative profit share of channel member i is calculated as: (final weight, physical possession)*(channel member i's proportional flow performance of physical possession) + … + (final weight, payment)*(channel member i's proportional flow performance of payment). Entries across row (sum of normative profit shares for channel members 1 through 4) must add up to 100 points. WEIGHTS FOR FLOWS: PROPORTIONAL FLOW PERFORMANCE OF CHANNEL MEMBER: COSTS* BENEFIT POTENTIAL (High, Medium, or Low) FINAL WEIGHT* 1 2 3 4 (end-user) TOTAL PHYSICAL POSSESSION** 100 OWNERSHIP 100 PROMOTION 100 NEGOTIATION 100 FINANCING 100 RISKING 100 ORDERING 100 PAYMENT 100 TOTAL 100 N/A 100 N/A N/A N/A N/A N/A NORMATIVE PROFIT SHARE*** N/A N/A N/A 100
  • 22. FIGURE 3-7: THE BULLWHIP EFFECT Source: Results of Beer Game simulation played at T.A. Pai Institute of Management, Karnataka, India
  • 23. TABLE 3.APP3A-1 BUILDING MATERIALS COMPANY EFFICIENCY TEMPLATE FOR CHANNEL SERVING END-USERS THROUGH RETAILIERS: UNDISGUISED DATA WEIGHTS FOR FLOWS: PROPORTIONAL FLOW PERFORMANCE OF CHANNEL MEMBER: COSTS BENEFIT POTENTIAL ( High, Medium, or Low ) FINAL WEIGHT Mfgr. Retailer End-user TOTAL PHYSICAL POSSESSION 30 High 35 30 30 40 100 OWNERSHIP 12 Medium 15 30 40 30 100 PROMOTION 10 Low 8 20 80 0 100 NEGOTIATION 5 Low/Medium 4 20 60 20 100 FINANCING 25 Medium 29 30 30 40 100 RISKING 5 Low 2 30 50 20 100 ORDERING 6 Low 3 20 60 20 100 PAYMENT 7 Low 4 20 60 20 100 TOTAL 100 N/A 100 N/A N/A N/A N/A NORMATIVE PROFIT SHARE N/A N/A N/A 28% 39% 33% 100
  • 24. TABLE 3.APP3A-2 BUILDING MATERIALS COMPANY EFFICIENCY TEMPLATE FOR CHANNEL SERVING END-USERS THROUGH RETAILERS: RANK-ORDER DATA WEIGHTS FOR FLOWS: PROPORTIONAL FLOW PERFORMANCE OF CHANNEL MEMBER: COSTS BENEFIT POTENTIAL ( High, Medium, or Low ) FINAL WEIGHT Mfgr. Retailer End-user TOTAL PHYSICAL POSSESSION 30 High 35 2 2 2 100 OWNERSHIP 12 Medium 15 2 2 2 100 PROMOTION 10 Low 8 1 3 0 100 NEGOTIATION 5 Low/Medium 4 1 2 1 100 FINANCING 25 Medium 29 2 2 2 100 RISKING 5 Low 2 2 2 1 100 ORDERING 6 Low 3 1 2 1 100 PAYMENT 7 Low 4 1 2 1 100 TOTAL 100 N/A 100 N/A N/A N/A N/A NORMATIVE PROFIT SHARE N/A N/A N/A ? ? ? 100
  • 25. TABLE 3.APP3A-3 BUILDING MATERIALS COMPANY EFFICIENCY TEMPLATE FOR CHANNEL SERVING END-USERS THROUGH RETAILERS : TRANSFORMED RANK-ORDER DATA WEIGHTS FOR FLOWS: PROPORTIONAL FLOW PERFORMANCE OF CHANNEL MEMBER: COSTS BENEFIT POTENTIAL ( High, Medium, or Low ) FINAL WEIGHT Mfgr. Retailer End-user TOTAL PHYSICAL POSSESSION 30 High 35 33 33 33 100 OWNERSHIP 12 Medium 15 33 33 33 100 PROMOTION 10 Low 8 25 75 0 100 NEGOTIATION 5 Low/Medium 4 25 50 25 100 FINANCING 25 Medium 29 33 33 33 100 RISKING 5 Low 2 40 40 20 100 ORDERING 6 Low 3 25 50 25 100 PAYMENT 7 Low 4 25 50 25 100 TOTAL 100 N/A 100 N/A N/A N/A N/A NORMATIVE PROFIT SHARE N/A N/A N/A 32% 38% 29% 100
  • 26. Chapter 4 Supply-Side Channel Analysis: Channel Structure and Intensity Learning Objectives
  • 27. FIGURE 4- 1: SAMPLE REPRESENTATIONS OF THE COVERAGE/MARKET SHARE RELATIONSHIP FOR FAST MOVING CONSUMER GOODS Based on Reibstein, David J., and Paul W. Farris (1995), "Market Share and Distribution: A Generalization, A Speculation, and Some Implications," Marketing Science , 14 (3), G190-G202.
  • 28.       FIGURE 4- 2: : SELECTIVE COVERAGE--THE MANUFACTURER’S CONSIDERATIONS
  • 29.     FIGURE 4- 3: CATEGORY SELECTIVITY: THE DOWNSTREAM CHANNEL MEMBER’S CONSIDERATIONS
  • 30. Chapter 5 Gap Analysis
  • 31. FIGURE 5-1: THE GAP ANALYSIS FRAMEWORK SOURCES OF GAPS Environmental Bounds: Local legal constraints Local physical, retailing infrastructure Managerial Bounds: Constraint due to lack of knowledge Constraint due to optimization at a higher level TYPES OF GAPS Demand-Side Gaps: SOS < SOD SOS > SOD Which service outputs? Supply-Side Gaps: Flow cost is too high Which flow(s)? CLOSING GAPS Demand-Side Gaps: Offer tiered service levels Expand/contract provision of service outputs Change segment(s) targeted Supply-Side Gaps: Change flow responsibilities of current channel members Invest in new low-cost distribution technologies Bring in new channel members
  • 32. FIGURE 5-2: ONLINE BILLING AND PAYMENT: GAP ANALYSIS BOUNDS GAPS CLOSING THE GAPS
    • Environmental:
    • Technology infrastructure:
    • takes time to fully develop
    • initially endowed benefits more on billers than on payers
    • is not universally available
    • is characterized by high fixed set-up costs, but low marginal implementation costs and thus is not attractive unless significant scale is achieved
    • Demand-side:
    • Assortment/variety (one-stop bill payment site not available)
    • Waiting time too long (some e-bills took 5 days to pay)
    • Information provision poor (thus e-bill payment viewed as risky)
    • Supply-side:
    • Clear lowering of many channel flow costs
    • But consumer (as a channel member) bears more perceived risk, with no compensating price cut
    • Cost cuts initially much more available to biller than to payer (asymmetric cost efficiencies that hamper adoption)
    • Relax environmental bounds:
    • Build software applications to generate back-office benefits for B2B players
    • Presentment technology eventually developed to improve assortment/variety for consumer payers
    • Increase promotional efforts  generate information for consumers
    • Add new specialist channel members
    • New specialists develop new technology to provide integrated benefits to consumers and B2B payers
  • 33. FIGURE 5-3: ONLINE BILLING AND PAYMENT: A VIRTUOUS CYCLE Note: the B2B process exhibits a similar path, with the added inducement to payers of the development of technologies to integrate bill payment information with back-office (accounts payable, inventory management, and ordering) processes.
  • 34. FIGURE 5-4: APPLYING THE GAP ANALYSIS FRAMEWORK TO REVERSE LOGISTICS Sources of Gaps: Environmental Bounds: Managerial Bounds: Infrastructure for managing returns is not as well developed as for forward logistics. Many manufacturers lack information about scope of problem and how much money they are losing by not managing it better.  Types of Gaps: Demand-Side Gaps: Supply-Side Gaps: Customer service : end-users may be dissatisfied when charged a restocking fee, as many are not widely publicized. Quick delivery : end-users fail to get their desired product quickly when they have to return it for exchange or refund. Physical possession, ownership, and financing : returned product held in the system for 30-70 days before returning to the market for resale adds to all of these costs. Promotion : when returned product is sent to a liquidator, it is likely to end up in a channel competitive to the new-goods market, creating brand confusion and promotional inefficiency. Risking : uncertainty on both the supply (demand forecasting) and demand (what product is right for me?) sides Payment : returns trigger multiple new payment flows, to end-user (who returns product), to retailer (who gets money back from original invoice paid to manufacturer), and to third-party disposal or logistics firms.  Closing Gaps: Demand-Side Gaps: Supply-Side Gaps: Efforts to minimize returns improve on quick delivery. Effective third-party logistics specialists not only handle returned product faster, but also repackage and re-kit it to sell through non-competing new channels.
  • 35. FIGURE 5-5: PATH FOLLOWED BY A COPY OF “THE PERRICONE PROMISE” 1,4 2,7 3,6 5 KEY: 1,4: Lebanon, Indiana 2,7: Marina del Rey, California 3,6: Jamesburg, New Jersey 5: Bridgewater, Massachusetts TOTAL DISTANCE: 9,600 MILES
  • 36. TABLE 5-1: U.S. RETAIL MUSIC SALES, 1999-2003 Year Sales in $billion 1999 $14.6 2000 $14.3 2001 $13.7 2002 $12.8 2003 $11.8
  • 37. TABLE 5-2: AVERAGE RETAIL CD PRICES IN THE U.S. TABLE 5-3: SHARE OF ALBUMS SOLD BY CHANNEL, 2002 Notes: 680.9 million albums were sold in total in 2002. Mass merchant channel includes Best Buy, Kmart, Wal-Mart, Costco, and Target. Time Period Average Price 2002 (Q1) $13.90 2002 (Q2) $13.90 2002 (Q3) $13.60 2002 (Q4) $13.90 2003 (Q1) $13.80 2003 (Q2) $13.70 2003 (Q3) $13.50 2003 (Q4) $13.55 2004 (Q1) $13.25 Channel Share of Albums Sold Music chain stores 51.0% Mass merchants 33.8% Independents 11.9% Other 3.3%
  • 38. FIGURE 5-6: TYPES OF GAPS
  • 39. FIGURE 5-7: CHANNEL COSTS AND THE PRINCIPLE OF POSTPONEMENT-SPECULATION Source: Adapted from Louis P. Bucklin, A Theory of Distribution Channel Structure (Berkeley, CA: IBER Publications, University of California, 1966), pp. 22-25.
  • 40. FIGURE 5-8: DEMAND-SIDE GAP ANALYSIS TEMPLATE
    • Notes and directions for using this template:
    • Enter names and/or descriptions for each segment.
    • Enter whether SOS>SOD, SOS<SOD, or SOS=SOD for each service output and each segment. Add footnotes to explain entries if necessary. If known and relevant, footnote can record any supply-side gaps that lead to each demand-side gap.
    • Record major channel used by each segment, i.e., how does this segment of buyers choose to buy?
    SERVICE OUTPUT LEVEL DEMANDED (SOD) VERSUS SERVICE OUTPUT LEVEL SUPPLIED (SOS) SEGMENT NAME/ DESCRIPTOR BULK BREAKING SPATIAL CONVENIENCE DELIVERY/ WAITING TIME ASSORTMENT/ VARIETY CUSTOMER SERVICE INFORMATION PROVISION MAJOR CHANNEL FOR THIS SEGMENT 1. 2. 3. 4. 5.
  • 41. FIGURE 5-9: SUPPLY-SIDE GAP ANALYSIS TEMPLATE (to be used in conjunction with Demand-Side Gap Analysis Template, Figure 5-8)
    • Notes:
    • Record routes to market in the channel system. List should include all channels recorded in Figure 5-4 above. Note the segment or segments targeted through each channel.
    • Summarize channel members and key flows they perform (ideally, link this to the Efficiency Template analysis in Chapter 3).
    • Note any environmental or managerial bounds facing this channel.
    • Note all supply-side gaps in this channel, by flow or flows affected.
    • If known, record techniques currently in use or planned for use to close gaps (or note that no action is planned, and why).
    • Analyze whether proposed/actual actions have created or will create other gaps.
    CHANNEL [targeting which segment(s)?] CHANNEL MEMBERS AND FLOWS THEY PERFORM ENVIRONMENTAL/ MANAGERIAL BOUNDS SUPPLY-SIDE GAPS [affecting which flow(s)?] PLANNED TECHNIQUES FOR CLOSING GAPS DO/DID ACTIONS CREATE OTHER GAPS? 1. 2. 3. 4. 5.
  • 42. Chapter 6 Channel Power: Getting It, Using It, Keeping It Learning Objectives
  • 43. FIGURE 6-1 THE NATURE AND SOURCES OF CHANNEL POWER
  • 44. FIGURE 6-2 USING POWER TO EXERT INFLUENCE
  • 45. Chapter 7 Managing Conflict to Increase Channel Coordination
  • 46. FIGURE 7- 1: HOW HIGH LEVELS OF CONFLICT ERODE CHANNEL RELATIONSHIP CONFLICT Level of tension, frustration, disagreement in relationship experienced by focal firm ECONOMIC SATISFACTION of focal firm: positive affective response to financial rewards derived from relationship or economic gratification NON-ECONOMIC SATISFACTION of focal firm: positive affective response to psycho-social aspects of relationship, or gratification from non-financial sector TRUST Focal Firm's belief in counterpart's honesty and benevolence COMMITMENT Focal Firm's desire to continue relationship and to sacrifice to build and maintain it
  • 47. FIGURE 7-2: NATURAL SOURCES OF CONFLICT: INHERENT DIFFRENCES IN VIEWPOINTS OF SUPPLIERS AND RESELLERS
  • 48. FIGURE 7- 3: CONFLICT RESOLUTION STYLES
  • 49. Chapter 8 Strategic Alliances in Distribution
  • 50. FIGURE 8-1: SYMPTOMS OF COMMITMENT IN MARKETING CHANNELS
    • A committed party to a relationship (a manufacturer, a distributor, or another channel member) views its arrangement as a long-term alliance. Some manifestations of this outlook show up in statements such as these, made by the committed party about its channel partner.
    • We expect to be doing business with them for a long time.
    • We defend them when others criticize them.
    • We spend enough time with their people to work out problems and misunderstandings.
    • We have a strong sense of loyalty to them.
    • We are willing to grow the relationship.
    • We are patient with their mistakes, even those that cause us trouble.
    • We are willing to make long-term investments in them, and to wait for the payoff to come.
    • We will dedicate whatever people and resources it takes to grow the business we do with them.
    • We are not continually looking for another organization as a business partner to replace or add to this one.
    • If another organization offered us something better, we would not drop this organization, and we would hesitate to take on the new organization.
    • Clearly, this is not normal operating procedure for two organizations. Commitment is more than having an ongoing cordial relationship. It involves confidence in the future, and a willingness to invest in the partner, at the expense of other opportunities, in order to maintain and grow the business relationship.
  • 51. FIGURE 8-2: MOTIVES TO CREATE AND MAINTAIN STRATEGIC ALLIANCES IN CHANNELS Motives to Ally Strategically The Upstream Channel Member The Downstream Channel Member Fundamentals
    • Motivate downstream channel members to represent them better
    • In current markets
    • With current products
    • In new markets
    • With new products
    • Avoid stockouts while keeping costs under control
    • Lower costs of all flows performed, such as lower inventory holding costs
    Generate customer preference
    • Coordinating marketing efforts more tightly with downstream channel members
    • Get closer to customers and prospects
    • Enhance understanding of the market
    • Coordinating marketing efforts more tightly with upstream channel members
    • Serve the customer better
    • Convert prospects into customers
    • Net effect: higher volume and margins
    Preserving choice and flexibility of channel partners
    • Guaranteeing market access in the face of consolidation in wholesaling
    • Keep routes to market open
    • Rebalance power between the producer and surviving channels
    • Assure a stable supply of desirable products, even as manufacturers consolidate
    • In current markets
    • Selling current products
    • Opening to new markets
    • With new products
    Strategic pre-emption
    • Erecting barriers to entry to other brands
    • Induce channels to refuse access
    • Induce channels to offer low levels of support to entrants
    • Differentiate themselves from other downstream channel members
    • Supplier’s preferred outlet
    • Value-added services, difficult to copy and of high value to their customers
    Superordinate Goal
    • Enduring competitive advantage leading to profit
    • Reduce accounting and opportunity costs
    • Enduring competitive advantage leading to profit
    • Reduce accounting and opportunity costs
  • 52. FIGURE 8-3: THE CIRCLE OF COMMITMENT
  • 53. FIGURE 8- 4 : PHASES OF RELATIONSHIPS IN MARKETING CHANNELS
  • 54. Chapter 9 Vertical Integration in Distribution
  • 55. FIGURE 9-1: THE CONTINUUM OF DEGREES OF VERTICAL INTEGRATION
  • 56. FIGURE 9-2: EXAMPLES OF INSTITUTIONS PERFORMING SOME CHANNEL FUNCTIONS
  • 57. FIGURE 9-3: HOW ENVIRONMENTAL UNCERTAINTY IMPACTS VERTICAL INTEGRATION
  • 58. FIGURE 9-4: THE EFFECTS OF OUTSOURCING
  • 59. FIGURE 9-5: ROAD MAP TO THE VERTICAL INTEGRATION DECISION
  • 60. Chapter 10 Legal Constraints on Marketing Channel Policies
  • 61. FIGURE 10-1: PRINCIPAL U.S. FEDERAL LAWS AFFECTING MARKETING CHANNEL MANAGEMENT Act Key Provisions Sherman Antitrust Act, 1890
    • Prohibits contracts, combinations, or conspiracies in restraint of interstate or foreign commerce.
    Clayton Antitrust Act, 1914
    • Where competition is, or may be, substantially lessened, it prohibits:
    • Price discrimination in sales or leasing of goods
    • Exclusive dealing
    • Tying contracts
    • Interlocking directorates among competitors
    • Mergers and acquisitions.
    Federal Trade Commission (FTC) Act, 1914
    • Prohibits unfair or deceptive trade practices injurious to competition or a competitor.
    • Sets up FTC to determine unfairness.
    Robinson-Patman Act, 1936
    • Discriminatory prices for goods are prohibited if they reduce competition at any point in the channel.
    • Discriminatory prices can be given in good faith to meet competition.
    • Brokerage allowances are allowed only if earned by an independent broker.
    • Sellers must give all services and promotional allowances to all buyers on a proportionately equal basis if the buyers are in competition. The offering of alternatives may be necessary.
    • Buyers are prohibited from knowingly inducing price or promotional discrimination.
    • Price discrimination can be legal if it results from real cost differences in serving different customers.
    FTC Trade Practice Rules
    • Enforced by FTC. Defines unfair competition for individual industries. These practices are prohibited by the FTC.
    • Defines rules of sound practice. These rules are not enforced by the FTC, but are recommended.
  • 62. FIGURE 10-2: LEGAL RULES USED IN ANTITRUST ENFORCEMENT Per se illegality: The marketing policy is automatically unlawful regardless of the reasons for the practice and without extended inquiry into its effects. It is only necessary for the complainant to prove the occurrence of the conduct and antitrust injury. Modified rule of reason: (also called &quot;Quick Look&quot;) The marketing policy is presumed to be anticompetitive if evidence of the existence and use of significant market power is found, subject to rebuttal by the defendant. Rule of reason: Before a decision is made about the legality of a marketing policy, it is necessary to undertake a broad inquiry into the nature, purpose, and effect of the policy. This requires an examination of the facts peculiar to the contested policy, its history, the reasons why it was implemented, and its competitive significance. Per se legality: The marketing policy is presumed legal.
  • 63. Chapter 11 Retailing
  • 64. TABLE 11-1: THE WORLD‘S TOP 100 RETAILERS (2003)
  • 65.  
  • 66.  
  • 67.  
  • 68.  
  • 69.  
  • 70.  
  • 71. Notes : Source : “2005 Global Powers of Retailing,” Stores , January 2005, available on http://www.stores.org . (i) Continents are abbreviated as follows: Af. = Africa; N. Am. = North America; C. Am. = Central America; S. Am. = South America; Asia = Asia; Eur. = Europe; Pac. = Pacific (Australia, New Zealand). (ii) Target was part of Dayton-Hudson Corporation in 1998. Dayton-Hudson itself was ranked 14th in 1998 sales, and if Target’s 1998 sales are taken alone, it would have ranked 25th in sales in 1998 among global retailers. “ n.l.” = not listed in top 100 retailers in 1998.
  • 72. TABLE 11-2: PROFIT PERCENTAGES AT SAKS FIFTH AVENUE‘S FLAGSHIP STORE (1996) Source : adapted from Jennifer Steinhauer (1997), &quot;The Money Department,&quot; The New York Times , Magazine Section 6, April 6, pp. 62-64.
  • 73. TABLE 11-3: EXAMPLE OF ASSORTMENT AVAILABLE AT BOOK BARON (www.bookbaron.com) Author: Sue Grafton, a popular mystery writer; book titles each start with a letter of the alphabet, beginning with “A is for Alibi,” published in 1982. “R is for Ricochet” was published in 2004. Some of the Sue Grafton books available at www.bookbaron.com on July 5, 2005:
  • 74. TABLE 11-4: SALES, GENERAL & ADMINISTRATIVE (SG&A) COSTS AS A PERCENTAGE OF NET SALES FOR SELECTED RETAILERS Source: annual reports for 2004/2005 for each company. Depending on the company’s fiscal year end, 2004 or 2005 figures are used. The actual fiscal years overlap in all cases.
  • 75. TABLE 11-5: A TAXONOMY OF RETAILER TYPES
  • 76. FIGURE 11-1: U.S. E-COMMERCE SALES, IN $ MILLION AND AS A PERCENTAGE OF TOTAL U.S. RETAIL SALES Source: U.S. Census Bureau, Released May 20, 2005, available at http://www.census.gov/mrts/www.ecomm.html .
  • 77. FIGURE 11-2: PERCENTAGE CHANGE FROM ONE YEAR AGO, IN TOTAL U.S. RETAIL SALES AND U.S. E-COMMERCE SALES Source: U.S. Census Bureau, Released May 20, 2005, available at http://www.census.gov/mrts/www.ecomm.html
  • 78. FIGURE 11-3: PERCENTAGE DISTRIBUTION OF E-COMMERCE SALES BY MERCHANDISE LINE, 2003 (for U.S. Electronic Shopping and Mail-Order Houses)
  • 79. FIGURE 11-4: E-COMMERCE AS A PERCENT OF SALES, 2003 (for U.S. Electronic Shopping and Mail-Order Houses)
  • 80. TABLE 11-6: DIRECT SALES BY COUNTRY Country Year Retail Sales (in U.S. $) Number of Salespeople Average Sales Per Salesperson Per Capital Income (1998) 1. United States 2003 $29.5 billion 13,300,000 $2,218 $441,400 2. Japan 2003 $27.0 billion 2,000,000 $13,500 $37,180 3. Brazil 2004 $3.92 billion 1,538,945 $2,547 $3,090 4. United Kingdom 2004 $3.03 billion 520,000 $5,827 $33,940 5. Italy 2004 $2.98 billion 272,000 $10,956 $26,120 6. Mexico 2003 $2.89 billion 1,850,000 $1,562 $6,770 7. Germany 2004 $2.88 billion 206,346 $13,957 $30,120 8. Korea 2003 $2.73 billion 3,208,000 $851 $13,980 9. France 2004 $1.72 billion 170,000 $10,117 $30,090 10. Taiwan 2003 $1.56 billion 3,818,000 $409 $25,300* 11. Malaysia 2003 $1.26 billion 4,000,000 $315 $4,650 12. Australia 2004 $1.07 billion 690,000 $1,550 $26,900 13. Canada 2004 $1 billion 898,120 $1,113 $28,390 13. Russia 2004 $1 billion 2,305,318 $434 $3,410 15. Thailand 2004 $880 million 4,100,000 $215 $2,540 16. Venezuela 2000 $681 million 502,000 $1,357 $4,020 17. Argentina 2004 $662 million 683,214 $969 $3,720 18. Poland 2004 $644 million 585,200 $1,100 $6,090 19. Colombia 2004 $583 million 650,000 $897 $2,000 20. Turkey 2004 $539 million 571,799 $943 $3,750 21. India 2004 $533 million 1,300,000 $410 $620 22. Indonesia 2002 $522 million 4,765,353 $110 $1,140 23. Spain 2002 $497 million 132,000 $3,765 $21,210 24. Switzerland 2003 $355 million 6,885 $51,561 $48,230 25. Chile 2004 $338 million 223,000 $1,516 $4,910
  • 81. TABLE 11-6: DIRECT SALES BY COUNTRY (CONTINUED)
  • 82. FIGURE 11-5: A SAMPLE MULTI-LEVEL DIRECT SELLING ORGANIZATION: STRUCTURE AND COMPENSATION Source : Anne T. Coughlan and Kent Grayson (1998), &quot;Network marketing organizations: Compensation plans, retail network growth, and profitability,&quot; International Journal of Research in Marketing , Vol. 15, p. 403. COMMISSION SCHEDULE: Volume Commission Rate $0-$99 3% $100-$275 5% > $275 7% Janet (personal volume=$200) Susan (personal volume=$100) Catherine (personal volume=$100) Kent (personal volume=$100) Anne (personal volume=$50) Lysa (personal volume=$50) Paulette (personal volume=$50)
  • 83. FIGURE 11-6: DESCRIPTION OF TRADE DEALS FOR CONSUMER NONDURABLE GOODS
    • Off invoice . The purpose of an off-invoice promotion is to discount the product to the dealer for a fixed period of time. It consists of a temporary price cut, and when the time period elapses, the price goes back to its normal level. The specific terms of the discount usually require performance, and the discount lasts for a specified period (e.g., 1 month). Sometimes the trade can buy multiple times and sometimes only once.
    • Bill-back . Bill-backs are similar to off-invoice except that the retailer computes the discount per unit for all units bought during the promotional period and then bills the manufacturer for the units sold and any other promotional allowances that are owed after the promotional period is complete. The advantage from the manufacturer's position is the control it gives and guarantees that the retailer performs as the contract indicates before payment is issued. Generally, retailers do not like bill-backs because of the time and effort required.
    • Free goods . Usually free goods take the form of extra cases at the same price. For example, buy 3 get 1 free is a free-goods offer.
    • Cooperative advertising allowances . Paying for part of the dealers' advertising is called cooperative advertising, which is often abbreviated as co-op advertising. The manufacturer either offers the dealer a fixed dollar amount per unit sold or offers to pay a percentage of the advertising costs. The percentage varies depending on the type of advertising run. If the dealer is prominent in the advertisement, then the manufacturer often pays less, but if the manufacturer is prominent, then he pays more.
    • Display allowances . A display allowance is similar to cooperative advertising allowances. The manufacturer wants the retailer to display a given item when a price promotion is being run. To induce the retailer to do this and to help defray the costs, a display allowance is offered. Display allowances are usually a fixed amount per case, such as 50 cents per case.
  • 84.
    • Sales drives . For manufacturers selling through brokers or wholesalers, it is necessary to offer incentives. Sales drives are intended to offer the brokers and wholesalers incentives to push the trade deal to the retailer. For every unit sold during the promotional period, the broker and wholesaler receive a percentage or fixed payment per case sold to the retailer. It works as an additional commission for an independent sales organization or additional margin for a wholesaler.
    • Terms or inventory financing . The manufacturer may not require payment for 90 days, thus increasing the profitability to the retailer who does not need to borrow to finance inventories.
    • Count-recount . Rather than paying retailers on the number of units ordered, the manufacturer does it on the number of units sold. This is accomplished by determining the number of units on hand at the beginning of the promotional period (count) and then determining the number of units on hand at the end of the period (recount). Then, by tracking orders, the manufacturers know the quantity sold during the promotional period. (This differs from a bill-back because the manufacturer verifies the actual sales in count-recount.)
    • Slotting allowances . Manufacturers have been paying retailers funds known as slotting allowances to receive space for new products. When a new product is introduced the manufacturer pays the retailer X dollars for a &quot;slot&quot; for the new product. Slotting allowances offer a fixed payment to the retailer for accepting and testing a new product.
    • Street money . Manufacturers have begun to pay retailers lump sums to run promotions. The lump sum, not per case sold, is based on the amount of support (feature advertising, price reduction, and display space) offered by the retailer. The name comes from the manufacturer's need to offer independent retailers a fixed fund to promote the product because the trade deal goes to the wholesaler.
    • Source : Robert C. Blattberg and Scott A. Neslin (1990), Sales Promotion: Concepts, Methods, and
    • Strategies (Englewood Cliffs, NJ: Prentice-Hall), pp. 318-319.
    FIGURE 11-6: DESCRIPTION OF TRADE DEALS FOR CONSUMER NONDURABLE GOODS (CONTINUED)
  • 85. TABLE 11-7: OBJECTIVES OF TRADE DEALS FOR NONDURABLE GOODS *Objectives: Retailer merchandising activities Loading the retailer. Gaining or maintaining distribution. Obtain price reduction. Competitive tool. Retailer &quot;goodwill.&quot; Source : Robert C. Blattberg and Scott A. Neslin (1990), Sales Promotion: Concepts, Methods, and Strategies (Englewood Cliffs, NJ: Prentice-Hall), p. 321. OBJECTIVES:* TACTICS 1 2 3 4 5 6 Off invoice x x x x x Bill-back x x x x x Free goods x x Cooperative advertising x x x Display allowances x x Sales drives x x Slotting allowances x x Street money x x
  • 86. Chapter 12 Wholesaling
  • 87. TABLE 12-1: SOME SOURCES OF INFORMATION ABOUT THE WHOLESALING SECTOR Internet Resources There are many sources of information about wholesale distribution on the Internet. General Industry Information
    • The National Association of Wholesaler-Distributors operates two web sites:
    • - www.NAW pubs.org – On-line bookstore of NAW reports
    • - www.NAW meetings.org – Upcoming NAW-sponsored events
    • http://www.PembrokeConsulting.com / (A source of forecasts, data, and analyses exclusively on wholesale distribution)
  • 88. TABLE 12-2: PRINCIPAL SERVICES PROVIDED BY MAJOR HARDWARE WHOLESALER-SPONSORED VOLUNTARY GROUPS AND WHOLESALER BUYING GROUPS IN THE U.S.
  • 89. FIGURE 12-1: A REPRESENTATIVE MASTER DISTRIBUTOR CHANNEL Based on Narayandas, Das and V. Kasturi Rangan (2004), &quot;Building and Sustaining Buyer-Seller Relationships in Mature Industrial Markets,&quot; Journal of Marketing, 68 (3), 63-77.
  • 90. Chapter 13 Franchising
  • 91. TABLE 13-1: SECTORS WITH SUBSTANTIAL FRANCHISE PRESENCE, U.S. AND FRANCE Amusement [i] Automobiles: Rental Service Equipment Business Services Building Products and Services Children’s Products, Including Clothing Cleaning Services and Equipment Educational Services Employment Agencies Health and Beauty (Includes Hair Styling and Cosmetology) Home Furnishings/Equipment Lodging/Hotels Maintenance Miscellaneous Retail Miscellaneous Services, including Training Personal Services and Equipment Pet Services Photography and Video Printing Quick Services Real Estate Restaurants Fast Food Traditional Retail Food Shipping and Packing Travel [i] Categorization adapted from Shane and Foo (1999), already cited, and the French Federation of Franchising website: www.franchise-fff.com
  • 92. TABLE 13-2: THE FRANCHISE CONTRACT
    • The International Franchise Guide of the International Herald Tribune suggests that any franchise contract should address these subjects.
    • Definition of terms
    • Organizational structure
    • Term of initial agreement
    • Term of renewal
    • Causes for termination or non-renewal
    • Territorial exclusivity
    • Intellectual property protection
    • Assignment of responsibilities
    • Ability to sub-franchise
    • Mutual agreement of pro forma cash flows
    • Development schedule and associated penalties
    • Fees: front end, ongoing
    • Currency and remittance restrictions
    • Remedies in case of disagreement [i]
    [i] Moulton, Susan L.(ed.) (1996), International Franchise Guide, Oakland, California: Source Books Publications.
  • 93. TABLE 13-3: WHEN DO FRANCHISORS ENFORCE THE FRANCHISE CONTRACT?
    • Consider the scenario of a well-established franchisor that has built a network of franchisees. In theory, such a franchisor should be quick to punish transgressions, such as
    • sourcing from a supplier of one’s one choice, rather than suppliers approved by the franchisor
    • failing to maintain the look and ambiance of the premises
    • violating the franchisor’s standards and procedures
    • failing to pay advertising fees--or even the franchisor’s royalty!
    • Such violations happen surprisingly often. When do franchisors exercise their legitimate right to enforce their contracts by punishing the franchisee?
    • Research indicates [i] franchisors weigh the costs and benefits, taking into account the system-investments they need to protect, their own power, and the countervailing power of the franchisee and the franchise network. In particular, in their actions, franchisors appear to consider what signals they are sending to franchisees, both current and potential, by what they tolerate and what they enforce. With this in mind, franchisors pick their battles, rather than enforcing their contracts every time they are violated.
    • When it is particularly costly to enforce, franchisors are more likely to overlook a violation. This is more likely in the following circumstances.
      • The franchisees have a very dense, tightly knit network among themselves. Hence, the franchisor fears a reaction of solidarity, with other franchisees siding with the violator.
    [i] Antia, Kersi D. and Gary L. Frazier (2001), &quot;The Severity of Contract Enforcement in Interfirm Channel Relationships,&quot; Journal of Marketing, 65 (4), 67-81.
  • 94.
      • The violator is a central player in the franchisee’s network—with one exception, to be presented below.
      • The franchisor suffers from performance ambiguity, meaning its information systems are not sensitive enough to be sure what is the situation. Such a franchisor cannot monitor well, and therefore cannot be sure its case against the “violator” is strong.
      • The franchisor has built strong relational governance, in which the system operates on norms of solidarity, flexibility, and exchange of information. Such a franchisor doesn’t want to risk ruining these norms—and has other ways to deal with the violation in any case.
      • These are the costs of enforcing the contract. But there are circumstances under which the benefits of enforcement outweigh these costs. The franchisor is more likely to take punitive action to enforce its contract when:
      • The violation is a critical one, such as missing a large royalty payment or operating a very shabby facility in a highly visible location.
      • - This is particularly the case when the franchisee is a central player in the network. Ordinarily, central players are protected (as noted above), as the franchisor fears a system backlash. But when a central player violates the contract in a critical way, franchisors choose to enforce because it sends a strong signal that the rules are the rules. Put another way, tolerating a major violation by a central player would signal other franchisees that the contract is just a piece of paper with no real weight.
    TABLE 13-3: WHEN DO FRANCHISORS ENFORCE THE FRANCHISE CONTRACT? (CONTINUED)
  • 95.
    • When the violator is a master franchisee, that is, with multiple units. Here, the risk is that the violation propagates across this franchisee’s units and become a large-scale problem if the franchisor does not enforce.
    • The franchisor has invested a great deal in the franchise system (as opposed to this particular franchisee). The franchisor needs to protect its investment and the capabilities it has created while building the system. This is true even when the franchisor does enjoy strong relational governance. The franchisor will risk upsetting a given relationship to protect its system investments.
    • When the franchisor is large
    • When there is high mutual dependence in the franchisee-franchisor relationship (so that it can withstand the conflict that enforcement will create)
    • Or when the franchisor is much more powerful than the franchisee (so that the franchisor can coerce the franchisee to tolerate enforcement).
    • Taken together, it is clear that the franchisor weighs the power of both sides and the impact of each act of enforcement on its entire franchise system. Franchisees thus have more power than would appear to be the case if one examines each dyad (franchisor/franchisee) in isolation.
    TABLE 13-3: WHEN DO FRANCHISORS ENFORCE THE FRANCHISE CONTRACT? (CONTINUED)
  • 96. FIGURE 13-1: TYPICAL SALES-TO-PROFIT RELATIONSHIPS FOR FRANCHISORS AND FRANCHISEES Adapted from Carmen and Klein (1986)
  • 97. Chapter 14 Logistics and Supply Chain Management
  • 98. FIGURE 14- 1: TYPES OF GOODS FOR SUPPLY CHAIN MANAGEMENT Adapted from Fisher (1997)
  • 99. FIGURE 14-2: TWO KINDS OF SUPPLY CHAINS Adapted from Fisher (1997)

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