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Module IV:
Distribution
Channel
Strategy
 Module IV: Distribution Channel
Strategy

• Distribution Channels: Concept, Functions and Types.

• Distribution channel strategy and features of effective
channel design.
• Channel Conflict: Concept and stages, conflict
management
• Robotic Distribution System

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 Distribution Channels

• A distribution channel is a set of interdependent

organizations
• Or a set of processes undertaken
• to transfer the ownership of products,
• from the point of production to the point of consumption.

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 Functions of distribution channels

Different functions performed by intermediaries are

• charting the process of distribution
• arranging transportation and storage facilities
• site analysis for warehouses
• stocking and reordering procedures
• ordering and payment procedures

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Functions of Facilitate Suppliers Facilitate Customers
Intermediaries
Logistical functions • Breaking Bulk •Sorting products into desired
• Accumulating Bulk quantity
• Creating Assortments • Assorting items into desired variety
• Transportation • Delivery
• Storage • Storage

Communication • Promotion • Buying Based on interpretation of

Function • Gathering customer information customer needs
• Dissemination of information

Facilitating functions •Financing customer purchases • Credit Financing

• Providing management services • Repair and warranty Services
• Taking Risks • Technical Support
 Types of channels
1. Sales Channel-

 motivates buyers,
 shares information between the company and the customer,
 negotiates fair bargains &
finances the transaction

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 Types of channels
2. Delivery Channel-
• consists of CFAs(Carrying and Forwarding Agent),
• CSA s ( Consignment Selling agents)
• also known as facilitators.

3. Service Channel-which performs after sales service

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Marketing Channels in the Consumer
Markets

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Marketing Channels for Services

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Marketing Channels in the Industrial
Markets

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Pharmaceutical Distribution in India

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Example of a Hybrid Marketing Channel
 What is Channel Design

There are variations in usage of the term ‘design’ of

marketing channel:
• a noun to describe channel structure
• The formation of a new channel from scratch/
modifications to existing channels
• ‘Selection’
 What is Channel Design

• It refers to those decisions involving the development

of new marketing channels where none had existed
before, or to modification of existing channels.
 Channel Design Decision
The channel design decision can be broken down into 6
phases or steps:

1. Recognizing the need for a channel design decision

2. Setting and coordinating distribution objectives
3. Specifying the distribution tasks
4. Developing possible alternative channel structures
5. Evaluating the variables affecting channel structures
6. Choosing the best channel structure
 Phase 1: Recognizing the Need
for a Channel Design Decision
Many situations can indicate the need for a channel design decision. Among
them are the following:

1. Developing a new product/product line

2. Aiming an existing product at a new target market
3. Making a major change in some other component of the
marketing mix like price
4. Establishing a new firm
5. Adapting to changing intermediary policies e.g. private labels
 Phase 2: Setting and Coordinating
Distributing Objectives

1. Become familiar with the objectives and strategies in the

other marketing mix areas
2. Set distribution objectives and state them explicitly
3. Check to see if the distribution objectives set are congruent
with marketing and other general objectives and strategies of
the firm
 Phase 3: Specifying the
Distribution Functions
• The kinds of tasks required to meet specific
distribution objectives must be precisely stated.
Example:
A manufacturer of high-quality tennis racquets aimed at
serious amateur tennis players would need to specify
distribution tasks precisely.
 Phase 4: Developing Possible
Alternative Channel Structures
1. Number of
levels in the channel

2. Intensity at the
various levels

Allocation Alternatives

3. Types of
intermediaries
at each level
 Phase 5: Evaluating the
Variables Affecting Channel
Structure
Categories of Variables
1. Market Variables
2. Product Variables
3. Company Variables
4. Intermediary Variables
5. Environmental Variables
6. Behavioral Variables
 Phase 5: Evaluating the Variables
Affecting Channel Structure
1. Market Variables

Market Geography Location, geographical size,

& distance from producer

Market Size Number of customers in a

market

Market Density Number of buying units

(consumers or industrial firms)
per unit of land area

Market Behavior Who buys, & how, when, and

where customers buy
 Phase 5: Evaluating the Variables
Affecting Channel Structure
2. Product Variables

Bulk & Weight -> heavy & bulky product -> high handling & shipping costs -> minimize costs by shipping in
large lots to fewest possible points
Perishability (fresh products) -> channel structure should be designed to provide for rapid delivery from
producers to consumers
Unit Value -> lower unit value product (convenience goods) -> create small margin for distribution costs ->
should use the longer channel
Degree of Standardization -> can lengthen the channel by increase intermediaries unlike the custom-made
products (i.e. industrial machinery) often sold directly from manufacturer to the user
Technical versus Nontechnical –> highly technical product -> needed the technical advice, after sales service
from the expert -> generally be distributed through a direct channel
Newness -> new product -> require extensive & aggressive promotion in the introduction stage -> a shorter
channel will enable such promotional effort
 Phase 5: Evaluating the Variables
Affecting Channel Structure
3. Company Variables

Size The range of options is

relative to a firm’s size

Financial The greater the capital, the

Capacity lower the dependence on
intermediaries

Managerial Intermediaries are necessary

Expertise when managerial experience
is lacking

Objectives Marketing & objectives may

& Strategies limit use of intermediaries
 Phase 5: Evaluating the Variables
Affecting Channel Structure
4. Intermediary Variables
Availability Availability of intermediaries
influences channel structure.

Cost Cost is always a consideration

in channel structure.

Services Services that intermediaries

offer are closely related to the
selection of channel members.
 Phase 6: Choosing the “Best”
Channel Structure

Benefit Limitation

Fairly simple prescriptions Mostly useful as rough

for channel structure guide to decision
making
Phase 6: Choosing the “Best” Channel
Structure
Judgmental-Heuristic Approach
IF
Management’s ability to
make sharp judgments is high

+
Good empirical data on costs
and revenues is available

It’s possible to make highly satisfactory channel-choice decisions

using judgmental-heuristic approaches
 The Well-Designed Distribution
Strategy

Specify
Select Determine
the role of Choose
type of appropriate
distribution specific
distribu- intensity
within the channel
tion of distri-
marketing members
channel bution
mix
Intensity of Distribution

INTENSIVE SELECTIVE EXCLUSIVE

Distribution Distribution Distribution
through every through multiple, through a single
reasonable but not all, wholesaling
outlet in a reasonable middleman
market outlets in a and/or retailer
market in a market

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 Strategic supply/distribution
chain
• Backward integration decisions
• whether the owner wants to contract with others for providing the
inputs (raw materials, components, and supplies) needed for the
business or he wants to own and control the supply network

• Forward integration decisions

• whether the business owner should hire others to handle the
distribution function, or whether s/he wants to directly manage the
distribution network all the way down to the end user
 Channel intermediaries -
Wholesalers
• Break down ‘bulk’
• Buys from producers and sell small quantities to retailers
• Provides storage facilities
• reduces contact cost between producer and consumer
• Wholesaler takes some of the marketing responsibility e.g sales
force, promotions
 Types of Wholesalers
• Merchant Wholesalers
– Largest group of wholesalers
– Account for 50% of wholesaling
– Two broad categories:
• Full-service wholesalers
– Carry stock, maintain a sales force, offer credit, make deliveries. They sell primarily to
retailers
• Limited-service wholesalers
– Cash and Carry wholesalers sell a limited FMCG goods to small retailers for cash.
– E.g. Truck Wholesalers

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 Types of Wholesalers

• Brokers and Agents

– Do not take title to goods
– Perform fewer functions
– Brokers bring buyers and sellers together
– Agents represent buyers on more permanent basis
– Manufacturers’ agents are most common type of agent
wholesaler
– Mainly used in international markets

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 Types of Wholesalers

• Manufacturer’s and retailer’s branches

– Wholesaling operations conducted by seller themselves rather
than through independent wholesalers.

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 Retailing

• All activities involved in selling goods or services directly

to final consumer for personal/ non business use.
• Derived form the French word “Retailler”, meaning a
piece of or to cut up.
• Any organization may it be manufacturer, wholesaler or
retailer who is selling to the final consumer is doing
retailing.

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 Retailing
• Direct interaction with customers.
• Sales generally in small unit sizes.
• Point of purchase display and promotion.
• The critical factor- Location.
• Large in number as compared to other members in value
chain.
• Services as important as core product.
• Impulse Purchase.

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 Classification of Retailers

• Retailers can be classified on the basis of:

– Ownership/ Structure
– Retail location
– Method of customer interaction
– Level of service
– Length and depth of merchandise

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 Types of ownership

• Retail establishments can be classified on the basis of

ownership like:
– Independent, single store establishments
• Kirana Stores
– Corporate retail chains
• Future Group
– Franchising
• KFC, CCD
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 Retail location

• Free standing retailers

– No Competition in proximity.
– Good for one stop shops.
– Facilities can be adapted to individual
specifications.
– Difficult to attract customers.
– Advertising expenses may be high.
– Many unshared costs.
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 Retail location

• Retailers in a business associated location

– Two or more stores situated together in a way that total

arrangement is not a result of prior long term planning.
– Central Business District.
– Neighborhood Business District.

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 Customer interaction
• Store Retailers
• Non Store Retailers
– Electronic retail
– Catalog
– Direct Mail Retail
– Television shopping
– Vending machine retail

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 Amount of Service
• Self-Service Retailers:
– Serve customers who are willing to perform their own
“locate-compare-select” process to save money.
• Limited-Service Retailers:
– Provide more sales assistance because they carry
more shopping goods about which customers need
information.
• Full-Service Retailers:
– Usually carry more specialty goods for which
customers like to be “waited on.”

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 Merchandise
• Department store
– Carry a wide variety of product lines—typically
clothing, home furnishings, and household goods.
– Each line is operated as a separate department
– Managed by specialist buyers or merchandisers.
• Specialty store
– Carry narrow product lines with deep assortments
within those lines.

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• Discount store
– Standard merchandise, Low price, Low
margin, high volume stores.
– E.g. Walmart, Big Bazar
• Convenience Stores:
– Small stores located near residential areas
that are open long hours 7 days a week carry
a limited line of high-turnover convenience
goods.

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• Hypermarkets
– Large retail outlets usually a combination of
superstores and discount stores that offer a
large assortment of routinely purchased food
products, nonfood items, and services
– Owing to the huge volume of sales generated
at hypermarkets, overheads stay low and they
are able to function like discount stores.

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 Channel Management Decisions

Selecting Channel Members

• Selecting channel members involves determining the characteristics that

distinguish the better ones by evaluating channel members
– Years in business
– Lines carried
– Profit record

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 Channel Management Decisions

Selecting Channel Members

• Selecting intermediaries that are sales agents involves evaluating

– Number and character of other lines carried
– Size and quality of sales force
• Selecting intermediates that are retail stores that want exclusive
or selective distribution involves evaluating
– Store’s customers
– Store locations
– Growth potential
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 Channel Management Decisions

Managing and Motivating Channel Members

• Partner relationship management (PRM) and supply chain management

(SCM) software are used to

– Forge long-term partnerships with channel members

– Recruit, train, organize, motivate, and evaluate channel
members

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 Channel Management Decisions
Managing and Motivating Channel Members

• The company must sell not only through the intermediaries but also to and
with them

• Methods to motivate channel partners are:

- Develop a cooperative/collaborative
- Understand the partner’s business –
- Establish clear and agreed upon expectations and goals
- Build internal support systems and dedicate resources to the partner

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Conventional Distribution Systems
• Consist of one or more independent producers, wholesalers, and retailers.
• Each seeks to maximize its own profits and there is little control over the
other members.
• No formal means for assigning roles and resolving conflict.

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 Channel modification

• With time channels need to change along with product as

it get older in the PLC
• Introduction – boutiques,company showrooms
• Growth – chain stores, departmental stores
• Maturity – Mass merchandisers
• Decline – ‘sales stores’, discount stores
 Adding channels

Advantages
• Increased market coverage
• Lower channel costs
• More customised selling
Disadvantages
• Increases selling costs
• Increases channel control
• Breeds channel conflict
Vertical Marketing Systems

• Vertical marketing systems (VMS) provide channel

leadership and consist of producers, wholesalers, and
retailers acting as a unified system and consist of:

– Corporate vertical marketing system integrates

sequential stages of production and distribution under
single ownership.

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Vertical Marketing Systems

– Contractual vertical marketing system consists of

independent firms at different levels of production and
distribution who join together through contracts to
obtain more economies or sales impact than each
could achieve alone.
– Most common form is the franchise organization

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Horizontal Marketing Systems
• Horizontal marketing systems include two or more companies at one level
that join together to follow a new marketing opportunity.
• Companies combine financial, production, or marketing resources to
accomplish more than any one company could alone.
Multichannel Distribution Systems
• Hybrid marketing channels exist when a single firm sets up two or more
marketing channels to reach one or more customer segments.

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A multichannel distribution system

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 Channel Conflict
Nature of channel conflict

 Channel conflict is a state of opposition, or discord among the organization

comprising a marketing channel
 Conflicts are always not negative, some conflicts actually strengthens & improves
the channel.
 Channel conflict arises when the behavior of a channel member is in opposition to its
channel counterpart.
 Degree of Conflict

 Conflict implies incompatibility at some level.

 When conflict occurs at such a low level that channel members do not fully sense it,
the conflict is latent in nature.Latent conflict is the norm in marketing channels.

 When a channel member senses that some sort of opposition exists, opposition of
view points, of perceptions, of sentiments, of interests or of intentions, the conflict is
perceived
 Contd.

• But when emotions enter, the channel experiences felt conflict, or affective conflict.
• At this stage members experience tension, anxiety, anger, frustration, hostility. At
this level, the differences start getting converted to disputes

• If not managed, felt conflict can escalate quickly into manifest conflict. This
conflict is visible!In this ,There is blocking of each others initiatives & withdrawal
of support.
 Reasons for Channel Conflict
• Roles not defined properly.
• Resources scarcity.
• Differences of perceptions on the business environment.
• Channel members have expectations from each other.
• Decision domain disagreements.
• Goal incompatibility.
• Communication Difficulties.

More Reasons of Channel Conflict Contd

 More Challenging Reasons of Channel Conflict
• Unclear role definition.
• New channel partner.
• Target fixing exercise.
• Extension of Credit.
• Multiple distributors.
• Difference in perception.
• Loss of opportunity.
• Clash of interest.
 Producer/Retailer Conflict
• Small suppliers’ complaints about large
department stores:
• Onerous logistical demands.
• Pressure to cut prices.
• Demand to give the stores exclusivity.
• Forcing suppliers to contribute in advertising
and promotional expenses of the store.
• Requiring suppliers to invest in elaborate
computerized inventory systems.
 Styles of Conflict Resolution
High Cooperativeness
Accommodation Collaboration
Or
Problem Solving

Compromise
Low Assertiveness
High Assertiveness

Avoidance Competition
Or
Aggression
Low Cooperativeness
 Stages and Management

Institutional Approaches
Latent Conflict •Joint membership
•Exchange of Executives
•Cooptation
•Dealer Councils
Felt Conflict Third Party
•Mediation
•Arbitration

Manifest Conflict Negotiation