MODULE 3: DEVELOPING THE MARKETING CHANNEL

STRATEGY IN MARKETING CHANNELS

Learning Objectives:
1. Understand the meaning of marketing channel strategy
2. Be able to recognize the relationship of distribution to the other variables in the
marketing mix and the role of channel strategy.
3. Appreciate the role of channel strategy in creating a differential advantage through
channel design.
4. Be able to familiarize the implications of the selection decision for channel strategy.
5. Know the strategic decisions faced by the channel manager in the management of the
marketing channel.
6. Be aware of the main channel strategy issue involved in the evaluation of channel
members.
Channel Strategy Defined
Kotler defines marketing strategy as the “broad principles by which the business unit expects to
achieve its marketing objectives in a target market.”
Marketing channel strategy can be viewed as a special case of the more general marketing strategy.
Hence, we can define marketing channel strategy as:
This definition, though parallel to Ketler’s definition of marketing strategy is narrower because it
focuses on the principles as guidelines for achieving the firm’s distribution objectives rather than
on general marketing objectives (which include product, price and promotional objectives). Thus,
marketing channel strategy is concerned with the place aspect of marketing strategy, while the
other three Ps of the marketing mix address product, price, and promotional strategies. As we shall
see shortly, channel strategy, though relatively narrow in focus, may be of equal or more
importance than the other strategic variables of the marketing mix, as well as of vital importance
in the firm’s overall objectives and strategies.
To achieve their distribution objectives, most firms will have to address six basic distribution
decisions:
1. What role should distribution play in the firm’s overall objectives and strategies?
2. What role should distribution play in the marketing mix?
3. How should the firm’s marketing channels be designed to achieve its distribution
objectives?
4. What kinds of channel members should be selected to meet the firm’s distribution
objectives?
5. How can the marketing channel be managed to implement the firm’s channel strategy and
design effectively and efficiently on a continuing basis?
6. How can channel member performance be evaluated?
These six decisions are the “heart and soul” of distribution when viewed from a marketing channel
management perspective.
The six basic distribution decisions can be dealt with on an ad hoc or ‘cross that bridge when you
come to it” basis. But such an approach is shortsighted and can result in a “firefighting” mentality
whereby distribution decisions are kept in the background until a crisis arises. One the “fire” is put
out, distribution decisions are returned to the background until the next crisis arises. A sounder
approach to dealing with distribution decisions is to formulate marketing channel strategy to
provide the guiding principles for decisions is to formulate marketing channel strategy to provide
guiding principles for dealing with them.

Figure 5.1 Schematic Overview of Marketing Channel Strategy in Relation to Basic Distribution Decisions
MARKETING CHANNEL STRATEGY AND THE MARKETING MIX
Whether or not the firm views distribution as worthy of top management concern when developing
overall objectives and strategies, it must deal with the issue of the role of distribution in the
marketing mix. Developing a marketing mix of product, price, promotion, and distribution (place
strategies) that meets the demands of the firm’s target markets better than the competition is the
essence of modern marketing management.
This relationship between target market satisfaction and a firm’s marketing mix can be represented
as follows:
Ts = f (P1, P2, P3, P4)
Where
Ts = degree of target market satisfaction
P1 = product strategy
P2 = pricing strategy
P3 = promotional strategy
P4 = place (distribution) strategy

The job of the marketing manager is to develop the right combination of the four Ps to provide and
maintain the desired level of target market satisfactions (Ts). To do the marketing manager has to
consider the possible contributions of each variable in meeting the demands of the target market.
Hence, the role of distribution must be considered along with the product, price, and promotion.
This raises the question of how much emphasis should be placed on each strategic variable in the
marketing mix.
Distribution Relevance to Target Market Demand
Target market demand is, of course, the basis for developing an appropriate marketing mix. Hence,
if customers in the firm’s target market have demands that can be satisfied best through distribution
strategy, this should be stressed in the firm’s marketing mix. In short, distribution becomes relevant
because the target market wants it that way.
As firm’s have become more oriented to target markets over the past two decades by listening
more closely to their customers, the relevance of distribution has become apparent to an increasing
number of companies because it plays such a key role in providing customer satisfaction.
Why are marketing channels so closely linked to customer satisfaction? Because it is through
distribution that the firm can provide the kinds and levels of service that make for satisfied
customers.
A case-in-point involved Volvo GM Heavy Truck Corporation. Volvo GM dealers were losing
business to competitors because of problems in providing service. All too often dealers and
regional warehouses supplying them were out of stock of the parts needed for the repairs even
though parts inventories at the dealership and warehouses were increasing. Volvo GM knew the
problem was caused by dealers’ inability to predict the demand for parts and services accurately.
But it was not until Volvo GM performed some careful market research that they understood the
nature of the target market’s demand for service.
Distribution and Synergy for the Channel
As we have pointed out several times in this context, one of the difficulties of managing marketing
channels is that it involves independent channel members – businesses that have their own
objectives, policies, and strategies. Attempting to gain their cooperation so that they help the
manufacturer to achieve its objectives and strategies is what makes interorganizational channel
management such a challenge.Yet, along with this challenge come opportunities, because a well-
developed marketing channel comprised of the right channel members can provide synergy
between the channel members that produces a superior distribution program. So in thinking about
which variable to emphasize in the marketing mix, the potential for synergy in distribution should
be considered. By “hooking up” with the right kind of channel members, the marketing mix can
be susbtantially strengthened to a degree not easily duplicated with the other variables.
Synergy through distribution goes well beyond the enhancement of the manufacturer’s image.
Strong and close relationships between the manufacturer and channel members – which in recent
years have been referred to increasingly as distribution partnerships, partnering, strategic alliances,
or networks – can provide a susbtantial strategic advantage.
In the industrial or business-to-business market, synergestic channel partnerships and alliances
have also become popular. Motorola, for instance, as part of its Total Quality Management (TQM)
program, has developed close, mutually beneficial relationships with suppliers through a program
the company calls Suppliers Perceptions Management, which helps suppliers to meet Motorola’s
stringent quality and performance standards. The program has reduced the number of suppliers
that Motorola deals with, but the relationships are closer and more mutually profitable.

CHANNEL STRATEGY AND DESIGNING MARKETING CHANNELS

The purpose in introducing the topic channel design in this module is limited to showing the
relationship between channel strategy and channel design. This relationship is straightforward
one: Channel strategy should guide channel design so as to help the firm attain a differential
advantage.
Differential Advantage and Channel Design
Differential advantage, also called sustainable competitive advantage in more recent years, refers
to a firm’s attainment of an advantegeous position in the market relative to competitors – a place
that enables it to use its particular strengths to satisfy customer demands better than its competitors
on a long-term (sustainable) basis. The entire range of resources available to the firm and all of its
major functional activities can contribute to the attempt to create a differential advantage. The level
of capital, the quality of management and employees, and its overall production, financial, and
marketing strategies all play a part.
Channel design, though just one component of this attempt to gain a differential advantage, can be
a very important part. Given that distribution is one of the major controllable variables of the
marketing mix, it is no less important for the firm to seek a differential advantage in its channel
design than its product, pricing, and promotional strategies. Indeed, a differential advantage based
on the design of a superior marketing channel can yield a formidable and long-term advantage
because competitors cannot copy it easily.

Positioning the Channel to Gain Differential Advantage

In the channel manager’s attempt to foster differential advantage through channel design, the
concept of channel position can serve as a helpful guide. Narus and Anderson define a channel
position as:
“… the reputation a manufacturer acquires among distributors (channel members) for
furnishing products, services, financial returns, programs, and systems that are in some way
superior to those offered by competing manufacturers.”
Channel Positioning. Is what the firm does with its channel planning and decision making to
attain the channel position. The key ingredient, according to Narus and Anderson, is to view the
relationship with channel members as a partnership or strategic alliance that offers recognizable
benefits to the manufacturer and channel members on a long-term basis. By thinking in terms of
channel positioning, the channel manager takes a longer-term strategic view of channel design and
is more likely to ask the question: How can I design the channel so that the channel members will
view my firm as having done a better job than the competitive manufacturers they represent?

CHANNEL STRATEGY, SELECTION OF CHANNEL MEMBERS and MANAGING

THE MARKETING CHANNEL
The selection of channel members is the final phase of channel design and is discussed
comprehensively. Our purpose in introducing the subject of channel member selection in this topic
is to show that this aspect of chanel design also has a strategic dimension. In particlar, the approach
taken to channel member selection and the particular types of intermediaries chosen to become
channel members should reflect the channel strategies the firmhas developed to achieve its
distribution objectives.
Moreover, the selection of channel members should be consistent with the firm’s broader
marketing objectives and strategies and may also need to reflect the objectives and strategies of
the organization as a whole. This follows because channel members, though independent
businesses, are from the customers’ perspective an extension of the manufacturer’s products
ultimately reflect on the manufacturer. So, for example, a manufacturer that prides itself on
providing prestigious products products of the highest quality would have to be very careful about
the kinds of channel members it chooses to sell its products. Rolex, for example, arguably the
world’s most prestigious watchmaker, takes extreme care in selecting only the most reputable retail
dealers to sell its products. Rolex also advertises directly to customers in publications such as the
Wall Street Journal to remind customers that only authorized Rolex jewelers can provide the
superior selection, service, and warranty protection that customers purchasing such a prestigious
product.
In contrast, if a manufacturer’s products are “middle of the road” in quality and aimed at the mass
market, its distribution strategy should stress broad coverage of the market. In this case, the types
of channel members handling the product will be a much less sensitive issue. BIC Corporation, for
example, manufacturer of the ubiquitos low-cost Bic ballpoint pens, stresses a channel member
selection strategy that could be described as “open admissions” to virtuality any intermediary who
is capable of selling its products.
As for the managing the marketing channel, channel management from the manufacturer’s
perspective involves all of the plans and actions taken by the manufacturer aimed at securing the
cooperation of the channel members in achieving the manufacturer’s distribution objectives.
The channel manager attempting to plan and implement a program to gain the cooperation of
channel members is faced with three strategic questions:
1.) How close a relationship should be developed with the channel members?
2.) How should the channel members be motivated to cooperate in achieving the
manufacturer’s distribution objectives?
3.) How should the marketing mix be used to enhance channel member cooperation?

Closeness of Channel Relationships

In recent years a substantial body of literature has appeared arguing the need for closer
relationships between manufacturers and channel members at the wholesale and or retail levels.
Only by developing close relationships, ‘partnerships’, or strategic alliances can manufacturers
and channel members work together to achieve high levels of effectiveness and efficiency in
distribution, according to the argument. Indeed, the underlying philosophy of most of the literature
on interorganizational channel management presupposes the need for close relationships or even
purposely keeping greater distance. Does so much emphasis on one side and vritually none on the
other mean that the “closeness is best” argument is right and the other is wrong? Actually, neither
side is necessarily right or wrong.

What should not be forgotten in this debate – or, more correctly, this one-sided argument – is that
the question of how close a channel relationship any given manufacturer should develop with its
channel members is really a question of strategy. If the channel manager believes that a close
working relationship will help him or her do a better job of managing the channel and achieve the
distribution objectives, then closeness should be emphasized. If, on the other hand, the channel
manager believes that closeness is not necessary for effective management of the channel, then it
is probably not necessary and indeed might even be wasteful of time, energy, and money. For a
manufacturer of an undifferentiated commodity product sold through thousands of retailers, for
example, it would most likely not be feasible to attempt to develop a close relationship with each
retailer. Yet, if the manufacturer uses a relatively small group of wholesalers to reach those
retailers, it may make a great deal of sense to establish a close relationship with the wholesalers.

Distribution intensity is not, of course, the only factor to consider in deciding how close a
relationship the manufacturer should develop with the channel members. Many other factors, such
as markets being targeted, products, company policies, middlemen, environment, and behavioral
dimensions can all play a role. But distribution intensity is probably as good a point as any to begin
to deal with the strategic question of how close a relationship to develop with channel members.

Motivation of Channel Members

Approaching any of the basic distribution decisions the channel manager should think in terms of
the underlying channel strategy involved. When motivating channel members, the strategic
challenge is to find the means to secure strong member cooperation in achieving distribution
objectives. Channel strategy in this context involves whatever ideas and plans the channel manager
can devise to help achieve that result.
The “brute force” approach of slotting allowances – a relatively recent term for the old-age
practice of paying channel members to provide shelf space – all the way to the much more subtle
approach of establishing distributor councils to provide a voice for channel members in decisions
affecting the channel.
From the diverse array of channel tactics, the channel manager must decide which to use to most
effectively motivate the channel members. What is appropriate at this point, however, is to discuss
briefly a very general strategy that can help the channel manager to approach the question of
motivating channel members in a more fruitful way. The general strategy is based on the concept
of the portfolio – a concept that originated in the field of finance. Basically, the invesotr views the
assorted investments he or she was as comprising a financial portfolio, Overtime, the investor
changes the mix of investments in the portfolio to achieve financial objectives via different
strategies for each investment.
The portfolio concept has also been applied in the context of marketing channels and is referred to
as distribution portfolio analysis (DPA). While DPA povides a comprehensive method for
categorizing channel members, the essence of DPA is that it can help the channel manager to focus
more insightfully on the channel members by viewing all of the channel structures and/or channel
members as the portfolio.
To motivate channel members, the tactics chosen from the menu migt have to be varied for each
category of channel member. Wholesalers, for example, might be higlhy motivated by a training
program, whereas a high slotting allowance may be much closer to what mass merchandisers are
seeking.
Although the channel portfolio concept provides a useful framework for determining which
motivational approaches might be used for various classes of channel members, the channel
manager should not lose sight of the final customer which, after all, is the real reason for
developing an appropriate mix of channels and strategies in the portfolio. As Schoenbacher and
Gordon point out in addressing this issue from the consumer perspective:
“Too often the focus has been on the channel, how to improve the channel, and how to drive
customers to the channel without offending other channel members. The focus should, however,
be on the consumer rather than on the channel. The consumer or customer-centric focus
encourages managers to develop and design channel alternatives that are successful and
effective because they consider customer needs.”
CHANNEL STRATEGY, AND THE EVALUATION OF CHANNEL MEMBER
PERFORMANCE
The adage “the proof is in the pudding” is most apt when it comes to the evaluation of channel
member performance because it is through this process that the channel manager should be able to
obtain concrete evidence of how well the channel has been designed and managed.
We discuss the distinction between day-to-day monitoring of channel member performance versus
a longer-term approach of comprehensive performance evaluation that involves use of a variety of
criteria and in some cases formal methods to gather and analyze the data needed to measure
channel member performance.
At this point,we are concerned only with the underlsying strategic significance of channel member
performance evaluation, which in practice is concerned with one overiding question: Have
provisions made in the design and management of the channel to assure that channel member
performance will be evaluated effectively? This questions will direct the channel manager’s
attention toward viewing performance evaluation as integral part of the development and
management of the marketing channel rather than as an afterthought. This kind of approach to
channel member performance evaluation can apply in virtually any industry, from a maker of
luxury products such as Rolex watches to a producer of heavy earth-moving equipment such as
Caterpillar.

DESIGNING MARKETING CHANNEL

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 or product line. If existing channels for other products are not
suitable for the new product or product line, a new channel may have to be set up or the
existing channels modified in some fashion.
2. Aiming an exisitng product at a new target market. A common example of this situation is
a firm’s introduction of a product in the consumer market after it has sold in the industrial
market.
3. Making a major change in some other component of the marketing mix. For example, a
new pricing policy emphasizing lower prices may require a shift to lower price dealers such
as discount mass merchandisers.
4. Establishing a new firm, either from scratch or as a result of mergers or acquisitions.
5. Adapting to changing intermediary policies that may inhibit the attainment of the firm’s
distribution objectives. For example, if intermediaries begin to emphasize their own private
brands, then the manufacturer may want to add new distributors who will promote the
company’s products more enthusiastically.
6. Dealing with changes in availability of particular kinds of intermediaries. For example,
French manufacturers of luxury goods such as Yves St. Laurent evening wear, Limoges
 china, and Christofle silverware faced channel design decisions in the U.S. market when
the number of prestigious department stores was reduced as a result of the wave of
acquisitions and mergers that occurred in the retail sector.
7. Opening up new geographic marketing areas (territories).
8. When technological advances make new channels possible, such as Internet-based online
channels and smartphone technology that enabled mobile channels to emerge recently from
a marginal to a major channel option.
9. Meeting the challenge of conflict or other behavioral problems. For example, in some
instances conflict may become so intense that it is possible to resolve it without modifying
the channel. A loss of power by a manufacturer to his or her distributors may also foster
the need to design an entirely new channel. Further, changing roles and communication
difficulties may confront the marketer with channel design decisions.
10. Reviewing and evaluating. The regular periodic reviews and evaluations undertaken by a
firm may point to the need for changes in the existing channels and possibly the need for
new channels.

This list, although by no means comprehensive, offers an overview of the more common
conditions that may require the channel manager to make channel design decisions. It is
important to be familiar with the list because the channel design decisions are not
necessarily obvious especially those involving modifications rather than the setting up new
channels.

PHASE 2: Setting and Coordinating Distribution Objectives

Having recognized that a channel design decision is needed, the channel manager should try to
develop a channel structure, whether from scratch or by modifying existing channels, that will help
achieve the firm’s distribution objectives effectively and efficiently. Yet, quite often at this stage
of the channel design decision, the firm’s distribution objectives are not explicitly formulated,
particularly because the changed conditions that created the need for channel design decisions
might also have created the need for new and modified distribution objectives.
It is important for the channel manager to evaluate carefully the firm’s distribution objectives must
also be made to see if they needed. An examination of the distribution objectives must also be
made to see if they are coordinated with objectives and strategies in the other areas of the marketing
mix (product, price and promotion), and with the overall objectives and strategies of the firm.
In order to set distribution objectives that are well coordinated with other marketing and firm
objectives and strategies, the channel manager needs to perform three tasks:
1. Become familiar with the objectives and strategies in the other marketing mix areas

Whomever is responsible for setting distribution objectives should also make an effort to
learn which existing objectives and strategies in the firm may impinge on the distribution
objectives to be set.
 In practice, often the same individuals who sets objectives for other components of the
marketing mix will do so for distribution. But even in this case, it is necessay to “think
through” the interrelationships of the various marketing objectives and policies.

2. Setting explicit distribution objectives

Distribution objectives are essentially statements describing the part that distribution is
expected to play in achieving the firm’s overall marketing and corporate objectives. Dell
computer, for example, which in recent years has sought to reinvigorate its growth by
gaining more penetration in consumer markets on a global scale, states its distribution
objective it its annual report as follows:
‘Our growth strategy involves reaching more customers worldwide through new
distribution channels such as consumer retail, expanding our relationships with value-
added resellers, and augmenting select areas of our business through targeted
acquisitions.’
Other examples of distribution obejctives are as follows:
• General Mill’s decision to merge with Pillsbury was based heavily on General Mill’s
distriubution objective, which sought to gain access to restaurants, school cafeterias,
and vending machines by using Pillsbury’s expertise in selling through those channels.
• At the start of the new millenium, Apple Computer set a distribution objective to reach
more consumers with what it refers to as the “Apple experience. So Apple developed a
chain of its own retail stores to maximize its control over how its products would be
presented to consumers at the retail level.
• The Coca-Cola Co., based on a distribution objective seeking to broaden its penetration
in the school and college markets, has used exclusive distribution contracts where
schools or colleges agree to sell only Coca-Cola Company products. These exclusive
contracts lock out competitors, and thereby help Coke achieve its distribution objective
of gaining a high penetration rate in this market.

3. Checking for congruency

A congruency check in the context of channel design involves verifying that the distribution
objectives do not conflict with objectives in other areas of the marketing mix (product,
price and promotions) or with the overall marketing and general objectives and strategies
of the company. In order to make such a check, it is important to examine the
interrelationships and hierachy of objectives and strategies in the firm.
 Figure 6.2
Interrelationships and Hierarchy of Objectives and Policies in the Firm.

PHASE 3: Specifying the distribution tasks

After distribution objectives have been set and coordinated, a number of distribution tasks
(functions) must be performed if the distribution objectives are to be met. The channel manager
should, therefore, specify explicitly the nature of these tasks.
Over the year, marketing scholars have discussed numerous lists of marketing tasks (functions).
These lists generally included such activities as buying, selling, communication, transportation,
storage, risk taking, financing, breaking bulk, and others. Such classifications of marketing
functions, while useful to those seeking to explain the role of marketing in a macro context, are of
little direct value to the channel manager operating in the individual firm. The job of a channel
manager in outlining distribution functions or tasks is much more specific and situationally
dependent. The kind of tasks required to meet specific distribution objectives must be precisely
stated. For example, a manufacturer of a consumer product such as, say, high-quality tennis
racquets aimed at serious amateur tennis players would need to specify distribution tasks such as
the following to make the racquets readily available to them:
1. Gather information on target market shopping patterns
2. Promote product availability in the target market
3. Maintain inventory storage to assure timely availability
4. Compile information about product features
5. Provide for hands-on tryout of product
6. Sell against competitive products
7. Process and fill specific customer orders
 8. Transport the product
9. Arrange for credit provisions
10. Provide product warranty service
11. Establish product return procedure
The specification of distribution tasks for products sold in industrial markets often has to be even
more specifically stated than for consumer products. For example, a steel or metal producer whose
distribution objectives call for dealing with a target market that contains many small customers
woud have such basic distribution tasks as selling, communication, transportation, storage, risk-
taking, and financing, but in addition, in order to serve the smaller customers, the producer would
probably have to perform many more specialized tasks, such as the following:
1. Maintain readily available inventory
2. Provide rapid delivery
3. Offer credit
4. Provide emergency service
5. Include packaging and special handling

PHASE 4: Developing Alternative Channel Structures

Having specified in detail the particular distribution tasks that need to be peformed to achieve the
distribution objectives, the channel manager should then consider alternative ways of allocating
these tasks. Often, the channel manager will choose more than one channel structure in order to
reach the target markets effectively and efficiciently.
Number of Levels
The number of levels in a channel can range from two levels – which is the most direct
(manufacturer ->user) – up to five levels and occasionally even higher.
The number of alternatives that the channel manager can realistically consider for this structural
dimension is often limited to no more that two or three choices. For example, it might be feasible
to consider going direct (two-level), using one intermediary (three-level) or possible two
intermediaries (four-level).
Intensity at the Various Levels
Intensity refers to the number of intermediaries at each level of the marketing channel. As we
pointed out, traditionally this dimension has been broken into three categories: 1.) intensive 2.)
selective 3.) exclusive. Intensive sometimes termed saturation means that as many outlets as
possible are used at each level of the channel. Selective, as the name suggests, means that not all
possible intermediaries at a particular level are used, but rather that those included in the channel
are carefully chosen. Exlusive is actually a way of referring to a very highy-selective pattern of
distribution.
Types of Intermediaries
The third dimension of channel structure deals with the particular types of intermediaries to be
used (if any) at the a various levels of the channel.
The channel manager should not overlook new types of intermediaries that have emerged,
particularly electronic or online auction firms such as eBay or Amazon.com as possible sales
outlets for consumer products. For industrial products sold in business-to-business markets,
electronic marketplaces such as Chemdex, Converge.com, and hundreds of others.
Number of Possible Channel Structure Alternatives
Given that the channel manager should consider all three structural dimensions. (level,intensity,
and type of intermediaries) in developing alternative channel alternative structures, there are, in
theory, a high number of possibilities.

PHASE 5: Evaluating the Variables Affecting Channel Structure

Having laid out alternative channel structures, the channel manager should then evaluate a number
of variables to determine how they are likely to influence various channel structures. Although
there are myriad of such variables, six basic categories are the most important:
1. Market variables

Marketing management, including channel management, is based on the underlying

philosophy of the classic marketing concept, which stresses customer (market) orientation.
In developing and adapting the marketing mix, then, marketing managers should take their
basic cues from the needs and wants of the target markets at which they are aiming. Hence,
just as the products a firm offers, the prices it charges, and the promotional messages it
employs should closely reflect the needs and wants of the target market, so too should the
structure of its marketing channels. Market variables are therefore the most fundemental to
consider when designing a marketing channel.

Four basic subcategories of market variables are particularly important in influencing

channel structure. They are the following:

• Market Geography. Refers to the geographical size of markets and their physical
location and distance from the producer or manufacturer. From a channel design
standpoint, the basic tasks that emerge when dealing with market geography are the
development of a channel structure that adequately covers the markets in questions and
provides for an efficient flow of products to those markets.
• Market Size. The number of customers making up a market (consumer or industrial)
determines the market size. From a channel design standpoint, the larger the number of
individual customers, the larger the market size.
 • Market Density. The number of buying units (consumer or industrial firms) per unit of
land area determines the density of the market. A market having 1,000 customers in an
area of 100 square miles is more dense than one containing the same number of
customers in an area of 500 square miles.

In general, the less dense the market, the more difficult and expensive is distribution.
This is particularly true for the flow of goods to the market.
• Market Behavior. Market behavior refers to the following four types of buying
behaviors: (1) how customers buy (2) when customers buy (3) where customers buy,
and (4) who does the buying.

Each of these patterns of buyer behavior may have a significant effect on channel
structure.

2. Product Variables. These are another important category to consider in evaluating

alternatie channel structures. Some of the most important product variables are bulk and
weight, perishability, unit value, degree of standardization (custom-made versus
standardized), technical versus nontechnical, newness, and prestige.

• Bulk and Weight. Heavy and bulky products have very high handling and shipping
costs relative to their value. The producers of such products should therefore attempt
to minimize these costs by shipping only in large lots to the fewest possible points.
• Perishability. Products subject to rapid physical deterioration (such as fresh foods) and
those that experience rapid fashion obsolescence are considered to be highly perishable.
When products are highly perishable,channel structures should be designed to provide
for rapid delivery from producers to consumers.
• Unit Value. In general, the lower the unit value of a product, the longer the channels
should be. This is because the low unit value leaves a small margin for distribution
costs.
• Degree of Standardization. In general, the influence of this product variable on channel
structure is characterized by the relationship. Semi-custom products such as accessory
equipment in the industrial market and furniture in the consumer market will often
include one intermediary.
• Technical versus nontechnical. In the industrial market, a highly technical product will
generally be distributed through a direct channel.
• Newness. Many new products in both consumer and industrial markets require
extensive and aggressive promotion in the introductory stage to build demand.
• Product prestige. Prestigous products often associated with famous luxury brands such
as Gucci, Rolex, Louis Vuitton, Mercedes -Benz, and many others need to maintain an
 aura of exlusivity and rareness that would be incompatible with mass market
distribution channels.

3. Company Variables. The most important company variables affecting channel design are
(1) size , (2) financial capacity (3) managerial expertise, and (4) objectives and strategies.

• Size. In general, the range of options for different channel structures is a positive
function of a firm’s size. The power bases available to large firms – particularly those
of reward, coercion, and expertise – enable them to exercise a susbstantial amount of
power in the channel.
• Financial capacity. Generally, the greater the capital available to a company, the lower
is its dependence if intermediaries. In order to sell directly to ultimate consumers or
business users, a firm may need its own sales force and support services or retail stores,
warehousing, and order processing capabilities.
• Managerial expertise. Some firms lack the managerial skills necessary to perform
distribution tasks. When this is the case, channel design must of neccessity include the
services of intermediaries, which may include wholesalers, manufacturer’s
representatives, selling agents, brokers, or others.
• Objectives and strategies. Marketing and general objectives and strategies (such as
desire to exercise a high degree of control over the product and its service) may limit
the use of intermediaries.

4. Intermediary Variables. The key intermediary variables related to channel structure are (1)
availability, (2) cost, and (3) the services offered.

• Availability. In a number of cases, the availability of adequate intermediaries will

influence channel structure. For example, lack of availability of appropriate
intermediaries led Micheal Dell, the founder of Dell Computers.
• Cost. The cost of using intermediaries is always a consideration in choosing a channel
structure. If the channel manager determines that the cost of using intermediaries is too
high for the services performed.
• Services. The third variable, the services offered by intermediaries is closely related to
the selection of channel members. Essentially this involves evaluating the services
offered by particular intermediaries to see which ones can perform them most
effectively at lower cost.
• Environmental variables. As we pointed out, environmental variables may affect all
aspects of channel development and management. Economic, sociocultural,
competitive, technological and legal environment forces can have a significant impact
on channel stunting and structure.
 • Behavioral variables. When choosing a channel structure,the channel manager should
review the behavioral variables discussed before. Giving more attention to the
influence of behavioral provblems that can distort communications.

PHASE 6: Choosing the “Best” Channel Structure

In theory, the channel manager should choose an optimal channel structure that would offer the
desired level of effectiveness in performing the distribution tasks at the lowest possible cost. If the
firm’s goal is to maximize its long-term profits, an optimal channel structure would be consistent
with that goal.
In reality, choosing an optimal channel structure, in the stricktest sense of the term, is not possible,
to do so would require the channel manager to have considered all possible alternative channel
structures and to be able to calculate the exact payoffs associated with each alternative structure in
terms of some criterion (usually profit). The channel manager would then choose the one
alternative offering the highest payoffs.
“Characteristics of Goods and Parallel Systems” Approach
First laid out in the late 1950s by Aspinwall, this appraoach places the main emphasis for choosing
a channel structure on product variables arguing that all products may be described in terms of the
following five characteristics”
1. Replacement rate – the rate at which a good or product is purchased and consumed by users
in order to provide the satisfaction a consumer expects from the product.
2. Gross margin – the difference between the laid-in cost and the final realized sales price.
3. Adjustment – services applied to goods in order to meet the exact needs of the consumer.
4. Time of consumption – the measured time of consumption during which the product gives
up the utility desired.
5. Searching time - a measure of average time and distance from the retail store.
Aspinwall continues by presenting a method for classifying all products based on the degree to
which they possess each of these characteristics. He does so by using an ingenious analogy to the
color spectrum. Any product could be represented by its “shade” on this spectrum, which uses only
three colors instead of the usual seven.
Financial Approach
Lambert offers another approach, developed in the 1960s.by arguing that the most important
variables for choosing channel structure are financial:
“Examination of the process of choosing a trade channel leads to the conclusion that the choice
is determined primarily by financial rather than what are generally thought of as marketing
considerations. This is shown to be the case regardless of whether the has adequate or limited
financial resources to expand marketing operations. It is equally true whether the firm is
contemplating shortening the channel, which requires more capital, or lengthening the channel,
which will make funds formerly used in distribution available for other employment.”
So, according to Lambert, choosing an appropriate channel structure is analogous to an investment
decision of capital budgeting. Basically, this decision involves comparing estimated earnings on
capital resulting from alternative channel structures in light of the cost of capital to determine the
most profitable channel.
Using the Financial Approach
The financial approach serves as a useful reminder of the importance of financial variables in
choosing a channel structure. Moreover, the perspective is appropriate because channel structure
decisions are usually long-term ones compared with the other decision areas of the marketing mix.
By viewing the channel as a long-term investment that must more than cover the cost of the capital
invested in itand provide a better return than other alternative uses for capital (opportunity cost),
the criteria for choosing a channel structure become more rigourous.
Transaction Cost Analysis Approach
Transaction Cost Analysis (TCA), based on the work of Williamson, has become the focus of much
attention in the marketing channels literature. TCA addresses the choice of marketing channel
structure only in the most general case situation of choosing between the manufacturer performing
all of the distribution tasks itself through vertical integration versus using independent
intermediaries to perform some or most of the distribution tasks.
Management Science Approach
It would certainly be desirable if the channel manager could take all possible channel structures.
Along with all the relevant variables, and “plug” these into a set of equations,which would then
yield the optimal channel structure. Such an approach is possible in theory. I fact, some pioneering
attempts have been made to use management science methods, such as operations research,
simulation, and decision theory, in an effort to design optimal marketing channel.
Judgemental-Heuristic Approach
As the name suggests, these approaches to choosing channel structure rely heavily on managerial
judgement and heuristic, or rules of thumb. There are, however, variations in the degree of
precision of judgemental-heuristic approaches. Some attempt to formalize the decision-making
process to some degree, whereas others attempt to incorporate cost and revenue data. The three
approaches below illustrate these variations in judgemental-heuristic approaches to choosing a
channel.

• Straight Qualitative Judgment Approach

The qualitative approach is the crudest but, in practice, the most commonly used
approach for choosing channel structures. Under this approach, the various alternative
channel structurs that have been generated are evaluated by Management in terms of
decision factors that are thought to be important.
 As an example of this approach, consider the following: The Commodity Chemical
Company has generated five channel alternatives for the distribution of its new
swimming pool germicide product. If the straight quantitative judgment approach were
to be used for choosing the “best” alternative, management would subjectively and
qualitatively “weight” each of the alternatives.

• Weighted Factor Score Approach

A more refined version of the straight qualitative approach to choosing among channel
alternatives is the weighted factor approach suggested by Kotler. This approach forces
management to structure and quantify its judgements in choosing a channel alternative.
The approach consists of four basic steps:

1. The decision factors on which the channel choice will be based must be stated
explicitly.
2. Weights are assigned to each of the decision factors in order to reflect their relative
importance precisely in perentage terms.
3. Each channel alternative is rated on each of the decision factors, on a scale of 1 to
10.
4. The overall weighed factor score (the total score) is computed for each channel
alternative by multiplying the factor weight (A) by the factor score (B).

• Distribution Costing Approach

Under this approach, estimates of costs and revenues for different channel alternatives
are made, and the figures are compared to see how each alternative stacks up. Consider
the following example that compares two channel structure alternatives: direct
distribution (two-level structure) versus the use of distribution (three-level structure)
by a manufacturer.
Assume 6,000 potential customers, each one of whom requires a personal call by an
outside salesperson every two weeks. If salespeople are able to make an average of six
calls per day, each salesperson could then handle 60 customers. Given these figures,
100 outside salespeople would be needed by the manufacturer to serve the customer
base.
Estimated figures
100 salespeople at P40,000 = P4,000,000.00
1 Field sales manager per 10 salespeople at 60,000 each x 4 regions = 600,000.00
1 regional sales manager for each region at 80,000 = 320,000.00
Warehouse staff, inventory, other overhead expenses = 5,000,000.00
TOTAL COST FOR DIRECT CHANNEL = P9,920,000.00
 Assuming an average of 30% gross margin on sales, the sales volume needed to cover
these costs would be:
P9,920,000.00 / .30 = P33,066,666.00
Suppose distributors were used with the following altnerative trade margins offered by
the manufacturer at the projected level of sales (rounded out to the nearest dollar):
If 20% then P33,066,666.00 x .20 = P6,613,333.00
If 15% then 33,066,666.00 x .15 = P4,960,000.00
If 10% then 33,066,666.00 x .10 = P3,306,667.00
Direct versus distributor cost comparison:
20% Margin 15% Margin 10% Margin
Assumption Assumption Assumption
Direct P9,920,000.00 9,920,000.00 9,920,000.00
Distributor 6,613,333.00 4,960,000.00 3,306,667.00
SAVINGS P3,306,667.00 P4,960,000.00 P6,613,333.00

This is of course, a simplified example. More elaborate and detailed versions of this kind of
approach are discussed in the literature on distribution analysis.