MARKETING CHANNELS:

SUPPLY CHAINS AND THE VALUE DELIVERY NETWORK

PRODUCING A PRODUCT OR SERVICE AND MAKING IT AVAILABLE TO BUYERS REQUIRES BUILDING RELATIONSHIPS NOT ONLY WITH
CUSTOMERS BUT ALSO WITH KEY SUPPLIERS AND RESELLERS IN THE COMPANY’S SUPPLY CHAIN.
THIS SUPPLY CHAIN CONSISTS OF UPSTREAM AND DOWNSTREAM PARTNERS. UPSTREAM FROM THE COMPANY IS THE SET OF FIRMS
THAT SUPPLY THE RAW MATERIALS, COMPONENTS, PARTS, INFORMATION, FINANCES, AND EXPERTISE NEEDED TO CREATE A
PRODUCT OR SERVICE.

MARKETERS, HOWEVER, HAVE TRADITIONALLY FOCUSED ON THE DOWNSTREAM SIDE OF THE SUPPLY CHAIN—THE MARKETING
CHANNELS (OR DISTRIBUTION CHANNELS) THAT LOOK TOWARD THE CUSTOMER. DOWNSTREAM MARKETING CHANNEL
PARTNERS, SUCH AS WHOLESALERS AND RETAILERS, FORM A VITAL LINK BETWEEN THE FIRM AND ITS CUSTOMERS.

THE NATURE AND IMPORTANCE OF MARKETING CHANNELS

FEW PRODUCERS SELL THEIR GOODS DIRECTLY TO FINAL USERS. INSTEAD, MOST USE INTERMEDIARIES TO BRING THEIR
PRODUCTS TO MARKET. THEY TRY TO FORGE A MARKETING CHANNEL (OR DISTRIBUTION CHANNEL)— A SET OF
INTERDEPENDENT ORGANIZATIONS THAT HELP MAKE A PRODUCT OR SERVICE AVAILABLE FOR USE OR CONSUMPTION BY
THE CONSUMER OR BUSINESS USER.

HOW CHANNEL MEMBERS ADD VALUE

PRODUCERS USE INTERMEDIARIES BECAUSE THEY CREATE GREATER EFFICIENCY IN MAKING GOODS AVAILABLE TO TARGET
MARKETS. THROUGH THEIR CONTACTS, EXPERIENCE, SPECIALIZATION, AND SCALE OF OPERATION, INTERMEDIARIES
USUALLY OFFER THE FIRM MORE THAN IT CAN ACHIEVE ON ITS OWN.

THE ROLE OF MARKETING INTERMEDIARIES IS TO TRANSFORM THE ASSORTMENTS OF PRODUCTS MADE BY PRODUCERS INTO
THE ASSORTMENTS WANTED BY CONSUMERS.

PRODUCERS MAKE NARROW ASSORTMENTS OF PRODUCTS IN LARGE QUANTITIES, BUT CONSUMERS WANT BROAD ASSORTMENTS OF
PRODUCTS IN SMALL QUANTITIES. MARKETING CHANNEL MEMBERS BUY LARGE QUANTITIES FROM MANY PRODUCERS AND BREAK
THEM DOWN INTO THE SMALLER QUANTITIES AND BROADER ASSORTMENTS DESIRED BY CONSUMERS.

CHANNEL LEVEL: A LAYER OF INTERMEDIARIES THAT PERFORMS

SOME WORK IN BRINGING THE PRODUCT AND ITS OWNERSHIP
CLOSER TO THE FINAL BUYER.

CHANNEL 1, A DIRECT MARKETING CHANNEL, HAS NO

INTERMEDIARY LEVELS—THE COMPANY SELLS DIRECTLY TO
CONSUMERS.

THE REMAINING CHANNELS ARE INDIRECT MARKETING

CHANNELS, CONTAINING ONE OR MORE
INTERMEDIARIES.

DIRECT MARKETING CHANNEL: A MARKETING CHANNEL THAT

HAS NO INTERMEDIARY LEVELS.
INDIRECT MARKETING CHANNEL: A MARKETING CHANNEL
CONTAINING ONE OR MORE INTERMEDIARY LEVELS.
CHANNEL CONFLICT: DISAGREEMENTS AMONG MARKETING CHANNEL MEMBERS ON GOALS,
ROLES, AND REWARDS—WHO SHOULD DO WHAT AND FOR WHAT REWARDS.

HORIZONTAL CONFLICT: OCCURS AMONG FIRMS AT THE SAME LEVEL OF THE CHANNEL. OTHER
FRANCHISEES GIVE THE BRAND A BAD NAME.
EG: SOME FORD DEALERS IN CHICAGO MIGHT COMPLAIN THAT OTHER DEALERS IN THE CITY STEAL SALES
FROM THEM BY PRICING TOO LOW OR ADVERTISING OUTSIDE THEIR ASSIGNED TERRITO- RIES. OR HOLIDAY
INN FRANCHISEES MIGHT COMPLAIN ABOUT OTHER HOLIDAY INN OPERATORS OVERCHARGING GUESTS OR
GIVING POOR SERVICE, HURTING THE OVERALL HOLIDAY INN IMAGE.
VERTICAL CONFLICT: CONFLICT BETWEEN DIFFERENT LEVELS OF THE SAME CHANNEL, IS EVEN MORE
COMMON. BETWEEN FRANCHISOR AND FRANCHISEE OR BETWEEN SUPPLIER AND MANUFACTURER.
EG: RETAIL FOOD GROUP (RFG) LIMITED, AN AUSTRALIAN FRANCHISER, HAS RECENTLY BEEN EMBROILED
IN AN ESCALATING DISPUTE WITH ITS FRANCHISEES

THREE TYPES OF VMS (VERTICAL MARKETING SYSTEMS)

CORPORATE: A CORPORATE VMS INTEGRATES SUCCESSIVE STAGES OF PRODUCTION AND DISTRIBUTION

UNDER SINGLE OWNERSHIP. PRODUCTION AND DISTRIBUTION BY ONE OWNER.
EXAMPLE: LUXOTTICA PRODUCES MANY FAMOUS EYE- WEAR BRANDS—INCLUDING ITS OWN RAY-BAN,
OAKLEY, PERSOL, AND VOGUE EYEWEAR BRANDS + LICENSED BRANDS SUCH AS BURBERRY, CHANEL,
POLO RALPH LAUREN ETC. LUXOTTICA THEN CONTROLS THE DISTRIBUTION OF THESE BRANDS THROUGH
SOME OF THE WORLD’S LARGEST OPTICAL CHAINS—LENSCRAFTERS, PEARLE VISION, SUNGLASS HUT,
TARGET OPTICAL ETC. WHICH IT ALSO OWNS. IN ALL, THROUGH VERTICAL INTEGRATION, LUXOTTICA
CONTROLS AN ESTIMATED 60–80 PERCENT OF THE U.S. EYEWEAR MARKET. AND LUXOTTICA RECENTLY
MERGED WITH ESSILOR, THE WORLD’S BIGGEST MANUFACTURER OF LENSES, GIVING IT EVEN MORE
VERTICAL CONTROL OVER ITS SUPPLY CHAIN

CONTRACTUAL: IN WHICH INDEPENDENT FIRMS AT DIFFERENT LEVELS OF PRODUCTION AND

DISTRIBUTION JOIN TOGETHER THROUGH CONTRACTS. FRANCHISOR AND FRANCHISEE. THE FRANCHISE
ORGANIZATION IS THE MOST COMMON TYPE OF CONTRACTUAL RELATIONSHIP = A CONTRACTUAL
VERTICAL MARKETING SYSTEM IN WHICH A CHANNEL MEMBER, CALLED A FRANCHISOR, LINKS SEVERAL
STAGES IN THE PRODUCTION-DISTRIBUTION PROCESS.

ADMINISTERED: COORDINATES
SUCCESSIVE STAGES OF PRODUCTION AND
DISTRIBUTION THROUGH THE SIZE AND POWER
OF ONE OF THE PARTIES.
= V IMP CHANNEL CAPTAIN
EG: LARGE RETAILERS SUCH AS
WALMART, HOME DEPOT, KROGER, AND
WALGREENS CAN EXERT A STRONG INFLUENCE
ON THE MANY MANUFACTURERS THAT
SUPPLY THE PRODUCTS THEY SELL.
WALMART MAKES UP 27% OF CLOROX SALES
CLOROX MAKES UP 0.3% OF WALMART’S SALES
WHO HOLDS THE POWER? WALMART
THREE TYPES OF HMS (HORIZONTAL MARKETING SYSTEMS)
HORIZONTAL MARKETING SYSTEM:
A CHANNEL ARRANGEMENT IN WHICH TWO OR MORE COMPANIES AT ONE LEVEL JOIN TOGETHER TO FOLLOW A NEW
MARKETING OPPORTUNITY.

FORECOURT STORES: BP WITH WILD BEAN CAFÉ OR ENGEN AND WOOLWORTHS

STORES WITHIN STORES: STARBUCKS IN CHECKERS
AIRLINE ALLIANCES: FLYSAFAIR AND DISCOVERY

A DISTRIBUTION SYSTEM IN WHICH A SINGLE FIRM SETS UP TWO OR MORE

MULTICHANNEL DISTRIBUTION SYSTEMS MARKETING CHANNELS TO REACH ONE OR MORE CUSTOMER SEGMENTS.

IN THE FIGURE, THE PRODUCER

SELLS DIRECTLY TO CONSUMER
SEGMENT 1 USING CATALOGS
AND ONLINE AND MOBILE
CHANNELS AND REACHES
CONSUMER SEGMENT 2
THROUGH RETAILERS.
IT SELLS INDIRECTLY TO
BUSINESS SEGMENT 1 THROUGH
DISTRIBUTORS AND DEALERS
AND TO BUSINESS SEGMENT 2
THROUGH ITS OWN
SALESFORCE.

CHANGING CHANNEL ORGANIZATION

CHANGES IN TECHNOLOGY AND THE EXPLOSIVE GROWTH OF DIRECT AND ONLINE MARKETING ARE HAVING A PROFOUND IMPACT
ON THE NATURE AND DESIGN OF MARKETING CHANNELS. ONE MAJOR TREND IS TOWARD
DISINTERMEDIATION:
THE CUTTING OUT OF MARKETING CHANNEL INTERMEDIARIES BY PRODUCT OR SERVICE PRODUCERS OR THE DISPLACEMENT OF
TRADITIONAL RESELLERS BY RADICAL NEW TYPES OF INTERMEDIARIES.
FOR EXAMPLE, APP-BASED RIDE-HAILING SERVICES LYFT AND UBER HAVE RECENTLY STORMED ONTO THE SCENE,
RAPIDLY DISINTERMEDIATING TRADITIONAL TAXI AND CAR-FOR-HIRE SERVICES BY OFFERING BETTER CUSTOMER
EXPERIENCES AT LOWER FARES.
INSURANCE = CONFLICT

DESIGNING EFFECTIVE MARKETING CHANNELS BY ANALYZING CUSTOMER NEEDS, SETTING

CHANNEL DESIGN DECISIONS CHANNEL OBJECTIVES, IDENTIFYING MAJOR CHANNEL ALTERNATIVES, AND EVALUATING THOSE
ALTERNATIVES.
WHAT DOES THE CUSTOMER WANT?
WHAT DOES THE CHANNEL NEED TO DO?
WHAT TYPE OF INTERMEDIARY IS BEST?
HOW MANY WOULD WE NEED?
COMPANIES MUST ALSO DETERMINE THE NUMBER OF CHANNEL MEMBERS TO USE AT EACH LEVEL.
INTENSIVE DISTRIBUTION: STOCKING THE PRODUCT IN AS MANY OUTLETS AS POSSIBLE [LUNCH BAR / CHOCOLATE]
EXCLUSIVE DISTRIBUTION: GIVING A LIMITED NUMBER OF DEALERS THE EXCLUSIVE RIGHT TO DISTRIBUTE THE COMPANY’S PRODUCTS
IN THEIR TERRITORIES [CITIZENSHIP]
SELECTIVE DISTRIBUTION: THE USE OF MORE THAN ONE BUT FEWER THAN ALL OF THE INTERMEDIARIES THAT ARE WILLING TO CARRY
THE COMPANY’S PRODUCTS.CHANEL NO5.
 MARKETING LOGISTICS AND SUPPLY CHAIN MANAGEMENT
MARKETING LOGISTICS—ALSO CALLED
PHYSICAL DISTRIBUTION— INVOLVES
PLANNING, IMPLEMENTING, AND
CONTROLLING THE PHYSICAL FLOW OF
GOODS, SERVICES, AND RELATED
INFORMATION FROM POINTS OF ORIGIN
TO POINTS OF CONSUMPTION TO MEET
CUSTOMER REQUIREMENTS AT A
PROFIT.
IN SHORT, IT INVOLVES GETTING THE
RIGHT PRODUCT TO THE RIGHT
CUSTOMER IN THE RIGHT PLACE AT
THE RIGHT TIME PROFITABLY.

IT INVOLVES THE ENTIRETY OF SUPPLY CHAIN MANAGEMENT

MANAGING UPSTREAM AND DOWNSTREAM VALUE-ADDED FLOWS OF MATERIALS, FINAL GOODS, AND RELATED INFORMATION
AMONG SUPPLIERS, THE COMPANY, RESELLERS, AND FINAL CONSUMERS.
IS A COMPREHENSIVE CONCEPT, AND REQUIRES COORDINATION BETWEEN ALL THE PARTNERS IN THIS NETWORK, WITH
FUNCTIONS THAT INCLUDE: SOURCING, MANUFACTURING, TRANSPORTING, STORING AND SELLING.

THE LOGISTICS SYSTEM

THE GOAL OF MARKETING LOGISTICS SHOULD BE TO PROVIDE A TARGETED LEVEL OF CUSTOMER SERVICE AT THE
LEAST COST.
THE MAJOR LOGISTICS FUNCTIONS ARE WAREHOUSING, INVENTORY MANAGEMENT, TRANSPORTATION, AND LOGISTICS
INFORMATION MANAGEMENT.

WAREHOUSING:
PRODUCTION AND CONSUMPTION CYCLES RARELY MATCH, SO MOST COMPANIES MUST STORE THEIR GOODS WHILE THEY
WAIT TO BE SOLD.
DISTRIBUTION CENTRES: A LARGE, HIGHLY AUTOMATED WAREHOUSE DESIGNED TO RECEIVE GOODS FROM VARIOUS
PLANTS AND SUPPLIERS, TAKE ORDERS, FILL THEM EFFICIENTLY, AND DELIVER GOODS TO CUSTOMERS AS QUICKLY AS
POSSIBLE.

INVENTORY MANAGEMENT:
MANAGERS MUST MAINTAIN A DELICATE BALANCE BETWEEN CARRYING TOO LITTLE INVENTORY AND CARRYING TOO
MUCH.
JIT = JUST-IN-TIME LOGISTICS SYSTEMS
O/S =

TRANSPORTATION:
THE CHOICE OF TRANSPORTATION CARRIERS AFFECTS THE PRICING OF PRODUCTS, DELIVERY PERFORMANCE, AND THE
CONDITION OF GOODS WHEN THEY ARRIVE—ALL OF WHICH WILL AFFECT CUSTOMER SATISFACTION
TRUCKS
DRONES
SHIPPERS ALSO USE MULTIMODAL TRANSPORTATION—COMBINING TWO OR MORE MODES OF TRANS- PORTATION.
INFORMATION MANAGEMENT:
CHANNEL PARTNERS OFTEN LINK UP TO SHARE INFORMATION AND MAKE BETTER JOINT LOGISTICS DECISIONS.
EDI = ELECTRONIC DATA INTERCHANGE = THE DIGITAL EXCHANGE OF DATA BETWEEN ORGANIZA- TIONS, WHICH
PRIMARILY IS TRANSMITTED VIA THE INTERNET.