4. Marketing Mix in the Marketing Planning Process234
4.3 Distribution Decisions
A product must be made accessible to the target market at an affordable price. Distribution decisions deal with the problems of moving products from points of origin to points
of consumption. Often referred to as the place element in the marketing mix, distribution decisions are directed at ensuring that the right product is in the right place at the
right time and in the right quantities. The creation of place, time, and possession utility
for a select group of customers located in a specific geographic location provides the
focus of the logistics manager’s efforts. The distribution network is referred to as a marketing channel – a set of interdependent marketing institutions involved in the process
of making a product or service available for use or consumption by the customer.
Producers need to consider not only the needs of their ultimate customer but also the
requirement of channel intermediaries, those organisations that facilitate the distribution of products to customers.
Getting the product to the target market can be a costly process if inadequacies within
the distribution structure cannot be overcome. Forging a reliable channel of distribution
is one of the most critical and challenging tasks facing the marketer.
4.3.1 The Role of the Intermediary
The most essential question a company has to ask when deciding channel strategy is
whether to sell its products and services directly to the ultimate customer or use channel
intermediaries such as retailers and/or wholesalers. Channel intermediaries basically
solve the problem of the discrepancy between the various assortments of goods and
services required by industrial and household consumers and the assortments available directly from individual producers. The use of intermediaries results from their
greater efficiency in making products available to target markets and enables consumers
to avoid dealing directly with individual manufacturers in order to satisfy their needs.
Figure 4.23 shows how using intermediaries can provide economies.
M
M
M
C
C
C
I
M C I= Manufacturer = Customer = Intermediary
Direct distribution
Number of contact lines = M x C = 9
Indirect distribution
(using an intermediary)
Number of contact lines = M + C = 6
Source: Adapted from Hollensen, 2003, modified
M
M
M
C
C
C
Figure 4.23: How an intermediary increases distribution efficiency
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4.3 Distribution Decisions 235
The left side of the figure shows three manufacturers, each of them using direct marketing to reach three customers. Consequently, this system requires nine different contacts.
The right hand side of the figure shows the three producers working through one distributor, which contacts the three consumers. This system requires only six contacts. In
this way, intermediaries significantly reduce the amount of work that must be done by
both manufacturers and customers.
The role of the intermediaries is to transform the assortments of products made by manufacturers into the assortments wanted by consumers. Producer make narrow assortments in large quantities, but customers want broad assortments of products in small
quantities In the marketing channels, intermediaries buy large quantities from many
different manufacturers and break them down into smaller quantities and broader assortments wanted by customers. Therefore, intermediaries play an important role in
matching supply and demand (Kotler and Armstrong, 2009).
The middlemen may participate in the performance of any or all of the marketing flows
(i.e. ownership, physical possession, information, financing, risk taking, negotiating, ordering and payment). They add value by bridging the major time, place, and possession
gaps that separate goods and services from those who would use them. Figure 4.24 summarizes the intermediaries’ ‘value adding’ functions for the suppliers and customers
served.
It is of paramount importance to emphasize that the question is not whether these functions need to be performed but rather who will perform them. To the extent that the
manufacturer performs these functions, its cost and investment go up and therefore
prices have to be higher essentially tarnishing competitive advantage. When some of
these functions are directed to intermediaries, the manufacturer’s cost and prices may
be lower, but the intermediaries must charge more to cover the costs of their increased
ß Market penetration
ß Inventory holding
ß Order processing
ß Gather market information
ß Customer support
“Value add”
through the
distribution chain
ß Product availability
ß Assortment convenience
ß Credit and finance
ß After sales service
ß Technical support
Intermediary
performs
these functions
Marketing functions
performed
for manufacturer
Marketing functions
performed
for customers
Source: Adapted from Hollensen, 2006, modified
Figure 4.24: Value added by intermediary through performance of marketing
functions for manufacturer and customers
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4. Marketing Mix in the Marketing Planning Process236
workload. Consequently, in dividing the work of the channel, the different functions
should be assigned to the channel members who can add the highest value for the cost.
4.3.2 Types of Distribution Channel
Companies can design their distribution channels to make their products available to
consumers in different ways. Each layer of marketing intermediaries that performs work
in bringing the product closer to the final buyer is a channel level. The number of intermediary levels indicates the length of a channel. Figure 4.25 shows several consumer distribution channels of various lengths. The first channel at the top of the figure is called a
direct marketing channel as it has no intermediary levels. In this case, the company sells
directly to the customer. For example, Avon and Amway sell their products directly to
their consumers. Cutting out distributor profit margin make this option attractive. The
elimination of a layer of intermediaries from a distribution channel is called disintermediation (Mills and Camek, 2004). For example, iTunes is displacing record shops in
the distribution of music. The remaining channels in Figure 4.25 are indirect marketing
channels, containing one or more intermediaries.
4.3.3 International Market Entry Modes
Once the firm has chosen target markets (discussed in Chapter 3.2) the question arises
as to the best way to enter those markets. An international market entry mode is an institutional arrangement necessary for the entry of a company’s products, technology and
human capital into a foreign market.
Figure 4.26 shows the classical distribution systems in a national consumer market. The
company may choose among entry modes within three entry mode categories, and in
one example from each of the three categories is shown:
export modes• – here the distributor is shown as example
intermediate modes• – here the joint venture is shown as example
hierarchical modes• – here a sales subsidiary is shown as example
Wholesaler RetailerAgent
Wholesaler Retailer
Retailer
Producer
Consumer
Consumer
Consumer
ConsumerProducer
Producer
Producer
Figure 4.25: Distribution channels
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4.3 Distribution Decisions 237
The chosen market entry mode can be regarded as the first decision level in the vertical
chain that will provide marketing and distribution to the next actor in the vertical chain –
in Figure 4.26 this actor is the retail chain. In this chapter we will also take a closer look
at the further distribution systems at the single national level.
Some firms have discovered that an inappropriate market entry selection in the initial
stages of a firm’s internationalization can threaten the firm’s future market entry and
expansion activities. Since it is common for companies to have their initial mode choice
institutionalized over time, as new products are sold through the same established channels and new markets are entered using the same entry method, a problematic initial
entry mode choice can endure through the institutionalization of this mode. The inertia
in the shift process of entry modes delays the conversion to a new entry mode. The reluctance of firms to change entry modes once they are in place, and the difficulty involved
in so doing, makes the mode of entry decision a key strategic issue for firms operating in
today’s rapidly global marketplace.
For most SMEs the market entry represents a decisive first step, but for established companies the problem is not how to enter new emerging markets, but how to exploit opportunities more effectively within the context of their active network of international
operations.
Head Quarters (HQ)
(production company)
Border
Entry Mode
Decisions
(first level in the vertical
chain)
National distribution
decisions
Export modes
Distributors /
agents / importers
Intermediary modes
Joint venture
Hierarchical modes
Foreign sales
subsidiary
Retail chains Retail chains Retail chains
End customer End customer End customer
Increasing control
Increasing financial risks
Source: Adapted from Hollensen, 2006, modified
Figure 4.26: Examples of optional market entry modes in international consumer markets
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4. Marketing Mix in the Marketing Planning Process238
There is, however, no ideal market entry strategy, and different market entry methods
might be adopted by different companies entering the same market and/or by the same
firm in different markets. The same enterprise may also use a combination of entry
modes for a specific market (multiple channel approach).
As shown in figure 4.26 three broad groupings of entry modes can be distinguished.
There are different degrees of control, risk and flexibility associated with each of these
different market entry modes. For example, the use of hierarchical modes (investment
modes) gives the company ownership and consequently high control, but committing
heavy resource to foreign markets also represents a higher potential risk. At the same
time, heavy resource commitment creates exit barriers, which diminish the firm’s ability
to change the chosen entry mode in a quick and easy way. So the entry mode decision
involves trade-offs, as the firm cannot have both high control and high flexibility (Hollensen, 2006).
We shall now discuss each of the three categories of entry modes in more detail.
Export Modes
The simplest way to enter a foreign market is through exporting which involves entering
a foreign market by selling products produced in the company’s home country. Export
modes are the most common mode for initial entry into international markets. The firm
has to decide which functions will be the responsibility of the international distributor
and which will be handled by the company itself. Exporting involves the least change in
the firm’s product lines, organisation, investments, or mission.
Arnold (2000) suggests seven guidelines for managing the relationship to the international distributor:
Select distributors – Don’t let them select you•
Look for distributors capable of developing markets, rather than those with a few •
obvious customer contacts.
Treat the local distributors as long-term partners, not temporary market-entry ve-•
hicles.
Support market entry by committing money, managers and proven marketing ideas.•
From the start – maintain control over marketing strategy.•
Make sure distributors provide you with detailed market and financial performance •
data.
Build links among national at the earliest opportunity.•
Manufacturers get the most out of their international distributors if they let them do •
what they are doing best: Implementing the local marketing strategy.
Intermediate Modes/Joint Venturing
Intermediate entry modes are distinguished from export modes because they are
primary vehicles for a closer transfer of knowledge and skills between the partners.
They are distinguished from the hierarchical entry modes in the way that there is no
full ownership (by the parent firm) involved, but ownership and control can be shared
between the parent firm and a local partner.
Joint venturing involves joining with foreign companies to produce or market products
or services. A joint venture is an approach to going global that is a specific type of strategic alliance in which the partners agree to form a separate, independent organisation
for some business purpose (Robbins and Coulter, 2005). There are four types of joint
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4.3 Distribution Decisions 239
ventures: licensing, contract manufacturing, management contracting, and joint ownership (Bamford et al., 2004):
Licensing •
Licensing is an easy way for a manufacturer to pursue an international marketing
strategy. The firm enters into an agreement with a licensee in a foreign market. For a
fee or royalty, the licensee buys the right to use the company’s manufacturing pro cess,
trademark, patent, or other item of value. This strategy involves low risk as the license
gains production expertise or a well-known product or brand without having to start
from scratch. For example, Coca-cola markets internationally by licensing bott lers
around the world and supplying them with the ingredients needed to produce the
product.
The disadvantage of licensing is that the company has less control over the licensee
than it would over its own production facilities. In addition, if the licensee is very successful, the company has given up these profits, and if the contract ends, it may find
it has eventually created another competitor.
Contract manufacturing •
Another option is contract manufacturing – the company contracts with manufacturers in the foreign market to produce its product. Benefits involve the chance to start
faster, with less risk, and the later opportunity either to form a partnership with or to
buy out the local manufacturer. The drawbacks of this approach are decreased control
over the manufacturing process and loss of potential margins on manufacturing.
Management contracting •
Under management contracting, the domestic company supplies management knowhow to a foreign company that supplies the capital. For example, Hilton uses this arrangement in managing hotels around the world. This approach is a low-risk method,
and it yields income from the beginning. The arrangement is not feasible, however,
if the company can put its scarce management talent to better uses or if it can make
greater profits by undertaking the whole venture.
Joint ownership •
Joint ownership ventures consist of one company joining forces with foreign investors
to create a local business in which they share ownership and control. A company may
buy an interest in a local company, or the two parties may from a new business venture. Joint ownership may be needed for economic or political reasons. The company
may lack the financial, physical, or managerial resources to undertake the venture on
its own. Alternatively, a foreign government may require joint ownership as a condition for entry. Joint ownership has different drawbacks. The partners may disagree
over investment, marketing, or other strategic issues.
Hierarchical Modes/Direct Investment
The highest involvement in a foreign market comes through hierarchical modes (also
called direct investment) – the development of foreign-based subsidiary. This is an approach to going global that involves a direct investment in a foreign country by setting up a separate and independent production facility or office (Robbins and Coulter,
2005). If a firm has gained experience in exporting and if the foreign market is large
enough, foreign production facilities may offer many advantages. The company might
have lower costs in the form of cheaper labour or raw materials, foreign government investment incentives, and freight savings. In addition, the company may improve its im-
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4. Marketing Mix in the Marketing Planning Process240
age in the host country because it creates jobs. In general, a company develops a deeper
relationship with stakeholders such as government, consumers, suppliers, and distributors, allowing it to adapt its products to a local market more sophisticatedly. Finally, the
company keeps full control over the investment and therefore can develop manufacturing and marketing policies that serve its long-term international objectives (Kotler and
Armstrong, 2009).
4.3.4 Designing and Managing the Channel Structure
Once having considered and chosen the overall market entry strategy for a given foreign
market, management needs to turn its attention to the task of designing the firm’s channels of distribution within a given country. Channel design is the process of developing
new channels where none had existed before, or making significant modifications to
existing channels. The process of channel design and management of it can be broken
down into seven basic stages or phases (Hollensen, 2006):
1. setting distribution objectives
2. specifying the functions that need to be performed by the channel
3. considering alternative channel structures
4. choosing an ‘optimal’ channel structure
5. selecting the intermediaries
6. motivating the channel members
7. evaluating channel member performance
Setting Distribution Objectives
Distribution objectives refer to what the company would like its channel strategy to accomplish in terms of how, when and where its products and services are provided to its
target markets.
At the stage of channel design, distribution objectives need to be stated explicitly so that
they can be made operational. Companies should state their marketing channel objectives in terms of targeted levels of customer service. The firm needs to decide which
segments to serve and the best channels to use in each case. Within this framework, an
organisation should express its distribution objectives in quantifiable terms such as the
following: within 12 months we would like to have XYZ cereal distributed in 80 per cent
of the supermarkets in which consumers of this product are likely to shop.
Distribution objectives must also reflect the firm’s broader marketing and corporate objectives so that there are no inconsistencies. A manufacturer of a luxury product, for
example, would have to pay close attention to whether distribution objectives which
seek to broaden the availability of its products would detract from the exclusive image
of the goods.
Designing and managing distribution channels does not, of course, take place in a vacuum. It is important to effectively blend all other variables of the marketing mix and
coordinate channel strategy accordingly with the remaining elements of the marketing
strategy. Such coordination should help reduce strategies and actions in the four areas
of marketing mix to be internally and externally coherent. Ideally, superior coordination
should enhance the effectiveness of the firm’s overall marketing mix strategy by creating
synergies among the marketing mix variables rather than the debilitating incongruity
that can result from neglecting this significant issue.
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4.3 Distribution Decisions 241
To achieve such coordination, management needs to be aware of the potential interfaces
and relationships of channel strategy with product, price and promotional strategies.
Specifying the Functions that need to be Performed by the Channel
The following factors should be considered as detailed distribution functions, which
should be performed by the distribution channel:
Product and services flow (from manufacturer to final customer).• Inventory management, product transportation, product modification and after-sales service, customizing a product for the specific needs of clients/distributors, providing technical service, product maintenance and repair, procedure and handling of returned products,
promote product availability, packaging, specific packaging requirements, evaluating
new products and others.
Communication flow (from manufacturer to final customers).• Sales promotion to final
consumers, information about product features, advertising, providing sales force,
packaging information, loyalty programs, Web site participation, traceability information and others.
Information flow (from customers to manufacturer).• Sharing knowledge of local market, scanning data (access to computer data), complaints via Web site/service line,
order frequency, arrange information about consumption and others.
Payments and financial flows.• Conducting credit checks on final consumers, billing
customers, caring for specific customer orders, arrange for credit provisions, price
guarantees, financing and others.
This step provides a detailed overview of the chain and the distribution channels for a
specific firm. Therefore, management must try to be as comprehensive and precise as
possible in spelling out just what functions need to be performed to attain the distribution objectives.
Considering Alternative Channel Structure
The form or shape that the channel of distribution takes to perform the distribution
functions is the channel structure. Unless a direct channel structure from manufacturer
to final customer is used, the structure will include some combination of independent
intermediaries such as wholesalers, retailers, agents and brokers.
Management needs to be concerned with three dimensions of channel structure:
1. the length and width of the channels (market coverage)
2. the intensity at the various levels
3. the types of intermediaries involved
The amount of market coverage that a channel member provides is important. Coverage is a bendable term. It can refer to geographical areas of a country (such as cities and
major towns) or the number of retail outlets (as a percentage of all retail outlets). Regardless of the market coverage measure(s) used, the company has to create a distribution
network (dealers, distributors and retailers) to meet its coverage goals.
As shown in Figure 4.27, three different approaches are available:
Intensive distribution.• This calls for distributing the product through the largest
number of different types of intermediary and the largest number of individual intermediaries of each type. For example, many mass-market products, such as cigarettes,
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4. Marketing Mix in the Marketing Planning Process242
foods, toiletries, beer and newspapers, and other similar items are sold in millions of
outlets to provide maximum brand exposure and consumer convenience.
Selective distribution.• This entails using more than one, but fewer than all, of the
intermediaries who are willing to sell a company’s products. Thus, a producer uses a
limited number of outlets in a geographical area to sell its products. The advantages
to the manufacturer are the opportunity to select only the best outlets to focus its
effort to build close relationships and to train distributor staff on fewer outlets than
with intensive distribution, and, if selling and distribution is direct, to reduce costs.
Upmarket brands are often sold in carefully selected outlets. Retail outlets and industrial distributors like this arrangement since it reduces competition. Products such
as audio and video equipment, cameras, personal computers and cosmetics are distributed in this manner. Selective distribution gives producers good market coverage
with more control and less cost than does intensive distribution.
Exclusive distribution.• This is an extreme form of selective distribution in which only
one wholesaler, retailer or industrial distributor is used in a geographic area. Exclusive distribution is often found in the distribution of luxury automobiles. For example, Bentley dealers are few and far between – even large cities may only have one
dealer. This reduces a purchaser’s power to negotiate prices for the same product
between dealers. It also allows very close cooperation between producer and retailer
over servicing, pricing and promotion. Initially, Apple’s iPhone was also subject to
exclusive distribution in the UK through the mobile phone operator O2 and retailer
the Carphone Warehouse (Ritson, 2008). The right to exclusive distribution may be
requested by distributors as a condition for stocking a manufacturer’s product line.
Channel coverage (width) can be identified along a continuum ranging from wide channels (intensive distribution) to narrow channels (exclusive distribution).
Source: Adapted from Levinson, 1996
M M M
W W W W W W
R
Target market
consumers
Target market
consumers
INTENSIVE
DISTRIBUTION
SELECTIVE
DISTRIBUTION
EXCLUSIVE
DISTRIBUTION
RRR RR R R RR R R RR R R R
Selective coverageIntensive coverage Exclusive coverage
M = Manufacturer
W = Wholesaler
R = Retailer
R
R
R
R
R
R R
R
R
R
R
R
R
R
R
R
R
R
Target market consumers
C
ha
nn
el
w
id
th
M
ar
ke
t c
ov
er
ag
e
Figure 4.27: Three strategies for market coverage
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4.3 Distribution Decisions 243
With regard to the types of intermediaries to be used at each level in the channel structure, this can vary quite extensively depending upon the industry in question.
Decisions involving any of the dimensions of channel structure, particularly those of
intensity and type of intermediary, should be guided by channel strategy and the distribution objective being pursued to avoid channel structures that are inappropriate to the
strategy and objective. For instance, if a firm’s objectives and strategy stress high levels
of attention and service for final customers, this would generally be far more difficult to
attain with an intensive distribution structure than with a more selective one because
the very large numbers of channel members involved in intensive distribution would be
harder to monitor and control than a small group of carefully chosen ones.
Choosing an ‘Optimal’ Channel Structure
In practice it is not feasible to choose an optimal channel structure in the strictest sense
of the term. However, it is possible to select an effective and efficient channel structure
that can meet the firm’s distribution objectives.
Many different approaches have been suggested over the years for choosing such a channel structure. Most popular are judgmental and heuristic approaches that rely on managerial judgement augmented by some data on distribution costs and profit potentials.
Certainly, in the process of applying its best judgement, management needs to take into
consideration a number of key variables that are usually relevant when choosing channel structure. The most basic of these are:
Market variables• : location of final customers, the numbers of customer, customer density, customer buying behaviour
Product variables• : weight, unit value, newness
Firm variables• : The financial capacity of the firm, its size, expertise, desire for managerial control
Intermediary variables• : cost, availability and services provided
Behavioural variables• : potential of particular channel structures to reduce conflict,
while maximizing power and communications effectiveness
External environmental variables• : economic conditions, socio-cultural changes, competitive structure, technology, government regulations
Selecting the Intermediaries
The selection of intermediaries who will become channel members can be viewed as
the last stage of channel design (choosing the channel structure), or as an independent
channel management area if selection is not undertaken as part of an overall channel
design decision. Essentially, the selection of channel members consists of the following
four stages:
Developing selection criteria •
Each firm should develop a set of criteria for selecting channel members that is consistent with its own distribution objectives and strategies. Obviously, there is no universal list of selection criteria which would be applicable for all firms under all conditions.
However, there is a basic guiding principle or heuristic that most companies can use
which can be stated as follows: the more selective the firm’s distribution policy, the
more numerous and stringent the criteria used for selection should be and vice versa.
Thus the list of criteria for a firm practicing highly selective distribution might include such factors as the prospective channel member’s reputation, competing prod-
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4. Marketing Mix in the Marketing Planning Process244
uct lines carried and management succession. A company using intensive distribution might use little more than one criterion consisting of the ability of the prospective
channel members to pay the manufacturer for the products it ships to them.
Finding prospective channel members •
The search for potential channel members can utilize a number of sources. If the
manufacturer has its own outside field sales force, this is usually regarded as the
best source because of the sales force’s knowledge of prospective channel members
in their territories.
Other useful sources include final customers, trade sources, advertising and trade
shows. Usually, a combination of several of these sources is used to find prospective
channel members whether they are at the wholesale or at retail levels.
Assessment of the prospective channel members against the criteria •
Once the group of eventual channel members has been identified, they need to be
assessed against the criteria to determine those who will actually be selected. This
can be done by an individual manager (such as the sales manager) or by a committee.
Depending upon the importance of the selection decision, such a decision might well
include top management even up to and including the chairman of the board if the
selection decision is of great strategic importance.
The example in Table 4.3 uses thirteen criteria for screening potential channel members. The criteria to be used depend on the nature of a company’s business and its
distribution objectives in given markets. The list of criteria should correspond closely
to the marketer’s own determinants of success.
Converting prospective channel members to become actual channel members •
The key issue of concern here is to recognize that the selection process is an interaction and relationship marketing process. Not only do producers and manufacturers
select intermediaries or various agents, but these intermediaries also select producers
and manufacturers. Indeed, quite often it is the intermediaries, especially large and
powerful distributors and wholesalers who are in the controlling position when it
comes to selection. Consequently, the manufacturer seeking to secure the services of
quality channel members has to make a convincing case that carrying its products
will be profitable for the channel members. Given the sophistication of today’s retailers and wholesalers, owing to the excellent computerized information systems they
use, manufacturers must make their case very carefully and thoroughly to win the
acceptance of such channel members.
Motivating Channel Members
Once selected, channel members must be continuously managed and motivated. Motivation in the context of channel management refers to the actions taken by the manufacturer to secure channel member cooperation in implementing the manufacturer’s
channel strategies and achieving its distribution objectives. Because the manufacturer’s
efforts to motivate channel members take place in the inter-organisational setting of
the marketing channel, the process is often more difficult and certainly less direct than
would be the case for motivation in the intra-organisational setting of one organisation.
Possible motivators include financial, territorial exclusivity, providing resource support
(e.g. sales training, marketing research information and management training) and developing strong work relationships (e.g. joint planning assurance of long-term commitment, appreciation of effort and success and arranging distributor conferences).
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4.3 Distribution Decisions 245
Criteria (no ranking) Weight Distributor 1 Distributor 2 Distributor 3
Rating Score Rating Score Rating Score
Financial soundness
and depth of channel
member
4 5 20 4 16 3 12
Marketing management
expertise and sophistication
5 4 20 3 15 2 10
Satisfactory trade,
customer relations and
contacts
3 4 12 3 9 3 9
Capability of providing
adequate sales coverage
4 3 12 3 12 3 12
Overall positive reputation and image as a
company
3 5 15 4 12 4 12
Product compatibility
(synergy or conflict?)
3 3 9 4 12 4 12
Pertinent technical
know-how at staff level
– – – – – – –
Adequate technical
facilities and service
support
– – – – – – –
Adequate infrastructure
in staff and facilities
1 5 5 3 3 3 3
Proven performance
record with client companies
2 4 8 3 6 3 6
Positive attitude towards
the company’s products
1 3 3 3 3 3 3
Mature outlook regarding the company’s
inevitable progression in
market management
1 3 3 3 3 3 3
Excellent government
relations
1 4 4 3 3 3 3
Score 111 94 85
Scales:
Rating: 5 – Outstanding, 4 – Above average, 3 – Average, 2 – Below average, 1 – Unsatisfactory.
Weighting: 5 – Critical success factor, 4 – Prerequisite success factor, 3 – Important success
factor, 2 – Of some importance, 1 – Standard.
Source: Adapted from Toyne and Walters, 1993
Table 4.3: Examples of distributor (dealer) selection criteria
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4. Marketing Mix in the Marketing Planning Process246
Exhibit 4.1
Kofola – the regional ‘cola’ drink is challenging the big multinationals
International brands like Coca-Cola (The Coca-Cola Company) aggressively entered
the Czech market in the early 1990s and the U.S. soft drink giant quickly managed
to become market leader. Kofola eventually made its comeback and became the third
strongest soft drink maker in the Czech Republic in terms of market share.
Kofola is a Czech brand name for dark-coloured sweet-and-sour soft drink with na tural ingredients and aromas. Kofola originated in a former Czechoslovak pharmaceutical company during research targeted at finding a use for surplus caffeine produced
in the process of coffee roasting. The new drink Kofola was introduced in 1960’s.
Kofola became extremely popular in the Czech Republic because it substituted for
Western cola-based drinks.
The Czech company Kofola currently
operates seven plants in the Czech
Republic, Slovakia, Poland and Russia, and distributes products to other
countries in the region. In 2007, the
company merged with Polish soft
drink maker Hoop and formed Kofola-
Hoop S.A., which was renamed a year
ago to the parent company Kofola S.A.
The Polish company Hoop is controlled by the Samaras family, a local family of Greek origin, while another 42.5 percent of
the company is in the hands of Poland-based private equity firm Enterprise Investors.
By the end of 2009 Kofola S.A. had 2,715 employees – 899 in Poland, 839 in the Czech
Republic, 550 in Russia and 427 in Slovakia.
After the fall of totalitarian regime in 1989, Kofola had to face a competition of many
foreign brands and experienced a period of decline and trademark lawsuits. The most
significant turn came in 2002. The Santa Drinks, a.S. company purchased the registered trademark and the original recipe of the beverage Kofola from the pharmaceutical company for 215 million CZK (which is approximately 7 million EUR). Together
with the trade mark the company gained the market of previous Kofola-based drinks.
The name of the company was changed to the Kofola, a.S. and the company actively
started to work with the brand.
Through the established distribution channels Kofola has been distributed to Czech
wholesalers and retailers in various-size bottles and to restaurants in 50-litre kegs
where Kofola is traditionally sold draught. The chosen distribution channels have
contributed to the success of the brand. The same as competition Kofola is distributed
in glass bottles and PET bottles. Intensive way of distribution supports the feeling
that Kofola is ‘in’. Except that Kofola keeps the local tradition and distributes 50-litre
kegs to restaurants and pubs. This specific way of distribution helps Kofola keep its
position on the market. Draught Kofola is nearly the same popular as draught beer.
Since 2002 the producer has launched a thriving media campaign aimed to a young
audience based on the slogan: ‘Když ji miluješ, není co rešit.’ (‘When you love her
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247Exhibit 4.1
nothing matters.’ In Czech the
word ‘her’ is represented both
by Kofola and a woman.) In the
past several years the campaign
has received recognition, most
notably by being awarded the
Gold Effie 2006 – a prize for the
most effective advertising.
Along with this campaign, Kofola launches advertisements with
a significant local touch every
Christmas. The centre of the advertisements is the local tradition of a golden Christmas pig.
According to the OMD Snapshot
survey, the Kofola Christmas TV spot was the
most popular Czech TV spot of the year 2008.
This TV spot adds the local touch twice. First,
it is the tradition that says you will see a golden pig if you do not eat the whole Christmas
day. Second, the spot makes fun of former
Czech habit to cut the Christmas trees in the
woods instead of buying them. Kofola also
launches extremely successful internet viral
campaigns. In 2008, the Czechs sent 1.5 million of viral Christmas interactive postcards.
Without any significant change in distribution,
sales of Kofola have grown since 2002. Nowadays, Kofola is the main competitor of Coca-
Cola in the Czech market and it is the favourite drink of today’s generation no matter who
remembers the past. Talking about off-trade
(retail) cola sales, Coca-Cola had a 47 percent
market share in 2008, Kofola had 27 percent
and Pepsi-Cola 15 percent, accord ing to a top
market research firm. In on-trade sales, Coca-
Cola is number one and Kofola number two.
I some cities (e.g. in Budapest, Hungary in 2006)
Kofola has used an untraditional PR campaign
about giving out samples in the streets (see picture to the right).
Mission of the company is to enthusiastically
create attractive brand-name beverages that will
offer the consumer such functional and emotional value that they become an important part of the
consumer’s lifestyle. The Kofola group’s vision is
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4. Marketing Mix in the Marketing Planning Process248
Motivation management in the marketing channel can be viewed as a sequence of three
steps (Hollensen, 2006):
1. learning about the needs and problems of channels members
2. offering support for channel members to help meet their needs and solve their problems
3. providing ongoing leadership
Although the stages in the motivation process are sequential, the process is also iterative
because of the continuous feedback from stages two and three. The different steps can
be described as follows:
Learning about the needs and problems of channel members •
As mentioned above, channel members as independent businesses have their own
goals, strategies and operating procedures. In this context, they also have their own
needs and problems, which might be substantially different from those of the manufacturer. Hence, if the manufacturer seeks close cooperation from the channel members, it is incumbent on that manufacturer to discover the key needs and problems
of channel members in order to be able to help meet those needs and solve those
problems. This is not a simple or straightforward task for the manufacturer because
the range of needs and problems of channel members can be legion. Small channel
members may be overburdened with inventory, lack modern information systems,
need better managerial skills and newer ideas for competing against giant retailers.
On the other hand, large retailers may face problems of how to reduce costs to operate
profitably on small gross margins while being forced to carry increasingly larger inventories as wholesalers disappear from the channel and new products proliferate. At
the same time, wholesale channel members may be in need of finding ways of competing successfully against power-buying retailers and customers who seek direct
sales from the manufacturers.
In order to foster enhanced communication between manufacturer and channel
member advisory committee consists of representatives from wholesale and/or retail
level channel members and key executives from the manufacturer meeting on a regular basis (such as twice a year) in some neutral location. This type of close interaction
between the manufacturer and channel members can generate the kind of constructive dialogue needed to uncover channel member needs and problems which may not
emerge in the normal course of business.
to become one of the three biggest players on the non-alcoholic-beverages market in
the Czech Republic, Slovakia, Poland and Hungary and have at least two brands in
every country in the 1st or 2nd place in their segments.
Notes:
S. A. = Inc.
Source:
The exhibit has been developed by Klára Ondrášková and Ondrej Dufek
Mendel University in Brno, Czech Republic in cooperation with Svend Hollensen
We thank Kofola a.s. (www.kofola.cz)
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4.3 Distribution Decisions 249
Offering support for channel members •
Offering support to channel members to help meet their needs and solve their problems can be done in a variety of ways, from an informal ad hoc approach through to
formal and carefully planned partnerships and strategic alliances.
The ad hoc approaches, also called cooperative support, are the most common in loosely aligned traditional channels. Basically, advertising dollars, promotional support,
incentives, contests and a host of other ad hoc activities are offered by the manufacturer to initiate channel member’s efforts to push the manufacturer’s products.
Partnerships and strategic alliances, in contrast, represent a more substantial and
continuous commitment between the manufacturer and channel members. Support
provided by the manufacturer is based on extensive knowledge of the needs and
problems of the channel members and tends to be carried out on a longer term basis,
with specific performance expectations that have been carefully worked out by the
manufacturer in conjunction with channel members.
Providing ongoing leadership •
Even a well-conceived motivation effort, based on a thorough attempt to understand
channel member needs and problems, together with a carefully articulated support
programme still requires leadership on a systematic basis to achieve effective motivation of channel members. In other words, someone has to be in charge to deal with the
inevitable changes and unforeseen problems that arise such as new forms of competition, technological developments and government regulations. While the manufacturer cannot always assume the leadership role and immediately deal with any problems,
it is important that support should be available to provide direction and input over the
long term instead of only while a new motivation programme is being developed and
then rapidly left to the channel members to deal with on a day-in-day-out basis.
Evaluating Channel Member Performance
The evaluation of channel member performance is necessary to assess how successful
the channel members have been in implementing the manufacturers’ channel strategies
and achieving distribution objectives. In addition, evaluation has an important bearing
on distributor retention, training and motivation decisions.
Evaluations require the manufacturer to gather information on the channel members.
The manufacturer’s ability to do this will be affected by the following aspects:
Degree of control of channel members• : Usually, the higher the degree of control, the
more information the manufacturer can gather and vice versa
Importance of the channel members• : With regard to the importance of channel members, if the manufacturer relies heavily on them for the distribution of its products,
it will tend to put more effort into evaluation than those who do not rely heavily on
independent channel members
Number of channel members• : Finally, when large numbers of channel members are
used such as in intensive distribution, evaluation tends to be much more cursory than
when smaller, more carefully selected channel members are used
The actual performance evaluation essentially consists of the following three steps:
Developing performance criteria•
Although a wide variety of performance criteria can be used to evaluate channel
members, by far the most commonly used ones are sales performance, inventory
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4. Marketing Mix in the Marketing Planning Process250
maintenance, selling capabilities, attitudes, competitive products handled and growth
prospects.
Naturally, this list can be supplemented to fit the particular circumstances of the
manufacturer. The relative importance of each criterion may also vary considerably
based on the policies of a particular manufacturer.
Evaluating channel members against criteria •
The use of a list of criteria to evaluate channel members can be made in an informal,
judgmental fashion or by using a more formal quantitative approach. In former approach, criteria are used as a general benchmark of what the manufacturer is seeking.
Channel members are then assessed against this list based on qualitative managerial judgements. In the latter approach, formal weighting schemes can be developed
to specify precisely the importance of criteria relative to each other. Formal scoring
systems such as a scale of one to ten can then be used to rate each channel member
against each criterion. It is then possible to arrive at an overall quantitative performance index for each channel member by multiplying the criteria weights by the scores
and adding up the results.
Taking corrective actions •
The management purpose behind evaluation is not only to monitor performance but
also to take the necessary actions to improve the performance of those channel members who are below the standards. Thus, an integral part of the evaluation process
is to have a set of pre-planned steps to be taken to help channel members to meet or
exceed performance expectations. Termination of the relationship with the channel
member should be the very last step in this pre-planned corrective process.
4.3.5 Distributor Portfolio Analysis
A distributor analysis can be undertaken by reviewing the information on a distributor’s
growth rate and the firm’s percentage of the distributor’s total sales.
Using Table 4.4 as an input, Figure 4.28 is an example of a manufacturer firm X, which
within a SBU has four distributors each serving a different segment (area).
Before making final recommendations Firm X should also include its dependence on
each distributor, e.g. by calculating how total sales are distributed among its four distributors.
Segment Served by Percentage of firm
X in distributor total
sales
Distributor annual
growth rate within
the SBU
Segment A Distributor A 60% 50% p.a.
Segment B Distributor B 30% 30% p.a.
Segment C Distributor C 75% -25% p.a.
Segment D Distributor D 10% -40% p.a.
Table 4.4: A Manufacturer’s distributor portfolio analysis
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4.3 Distribution Decisions 251
4.3.6 Developing and Managing Relationships between Manufacturer
and Distributor
A relationship occurs when there is a fit between the marketing strategies and implementation skills of the manufacturer and distributor in the customer value added process. Customer value is created by what each party bring to the relationship and how
they work together to add additional customer services and marketing campaigns.
In addition to trading relationships and processes that raise the perceived quality of
the product and supporting services, a unique trading relationship advantage can come
from both the manufacturer and distributor working together will to reduce the costs of
doing business. If the cost-reduction drives and efforts of both parties are synchronized
and if this synchronization between the manufacturer and distributor is better than any
other trading relationship that manufacturers or distributors are in, then the trading
relationship will have a unique competitive cost advantage towards customers.
Source: Adapted from Dickson, 1982
70
60
50
40
30
20
10
0
- 10
- 20
- 30
- 40
- 50
- 60
- 70
100 90 80 70 60 50 40 30 20 10 0
Defensive entrenchment
Strategic retreatSelective strategy
Offensive investment
Distributor A
Other
manufacturers:
40%
Firm X:
60%
Distributor B
Other
manufacturers:
70%
Firm X:
30%
Distributor D
Other
manufacturers:
80%
Firm X:
20%
Distributor COther
manufacturers:
25%
Firm X:
75%
Penetration %: Firm X’s share of distributors product-line sales –the area of each circle is proportional
to the value of the distributor’s total purchase, from Firm X and others
D
is
tri
bu
to
r’s
in
fla
tio
n
ad
ju
st
ed
a
nn
ua
l g
ro
w
th
ra
te
(%
)
Figure 4.28: A manufacturer’s distributor portfolio analysis
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4. Marketing Mix in the Marketing Planning Process252
It is always important to remember that the competitive advantage of a manufacturerdistributor relationship is managed by people at the manufacturer and distributor.
Historically, the way companies viewed personal relationships depended on their size.
Among small firms, relationships mainly existed among owners. Larger firms operated
under the sales representative/purchasing agent mental model. This model assumes a
firms’ trading relationship is funnelled through primarily single agents: the personal
relationship between the selling firm’s salesperson (agent) and the buying firm’s purchasing manger (agent). Other agency relationships were expected to develop among engineers working on supply-chain engineering specifications. But the salesperson acted
somewhat as a gatekeeper to the buying organisation.
The modern relationship marketing approach to the supply chain argues that this funnelling is unnecessarily restrictive. It proposes that trading relationships in the supply
chain should be among cross-functional teams.
The new relationship marketing approach emphasizes that at the heart of the trading
relationship is the set of relationship processes, such as decision making and learning,
that integrate the operational and implementation processes between the two firms.
The reality of an important trading relationship is that it is held together by relationship
processes and personal relationships among agents at several levels. At the strategic
level, quality relationship processes have to enable senior management to initiate, agree
on, and invest in creating a unique competitive positioning for the relationship. In addition, if senior managers get on well together, it makes a big difference in obtaining
subordinates’ cooperation in managing operations. The development of such inter-firm
personal relationship s is particular valuable in hypercompetitive markets when trading
relationships are stressed and have to creatively adapt to new competitive realities. Such
personal relationships nurture the personal ‘trust’ and ‘commitment’ that enables the
relationship to survive market crises through creative, cooperative improvisation.
What is ‘personal trust and commitment’? Personal trust is when the words of the individual representatives are their bond, and they are prepared to help each other to
solve problems. ‘Commitment’ is commitment to the goal of developing and nurturing
the competitiveness of the relationship, compared to other competitive trading relationships. Mutual trust and commitment are determined by a history of shared values, open
communication, both parties giving more to the relationship than to alternative relationships, and, particularly, not taking advantage of (exploiting) the trust. The long-term
return from the relationship is perceived to be higher than the return from nurturing
other relationships. The driver of this long-term return is relationship process innovation: innovations in reducing process costs, increasing process speed, and increasing
process output. Personal relationship goodwill and trust are needed when conflict arises
and when attempts are initiated to improve systems and processes.
New information technology helps strengthening long-term relationships between
manufacturer and distributors.
Integrated channel information systems (channel intranets) enable a manufacturer to
assess the performance of distributors, the profitability of doing business with them,
and the success of promotional programs and new, more efficient operating processes.
Not being a part of such an information system may become a real barrier to entering
some markets. On the other hand, being part of the system may also limit the managerial options of the participant by limiting the company’s ability to switch to alternative
distribution options (Hollensen, 2003).
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4.3 Distribution Decisions 253
4.3.7 Vertical Integration in the Distribution Channel
The control of one member in the vertical distribution channel is its ability to influence
the decisions and actions of other channel members. Channel control is of critical concern to marketers wanting to establish – international – brands and a consistent image
of quality and service.
The company must decide how much control it wants to have over how each of its products is marketed. The answer is partly determined by the strategic role assigned to each
market. It is also a function of the types of channel member available, the regulations
and rules governing distribution activity in each foreign market, and to some extent the
roles traditionally assigned to channel members.
As already discussed above, there is a trade-off between a producer’s ability to control
important channel functions and the financial resources required to exercise that control.
The more intermediaries involved in getting a supplier’s product to user customers, the
less control the supplier can generally exercise over the flow of its product through the
channel and the way it is presented to customers. On the other hand, reducing the length
and breadth of the distribution channel usually requires that the supplier perform more
functions itself. In turn, this requires the supplier to allocate more financial resources to
activities such as warehousing, shipping, credit, field selling or field service.
Degree of Integration
Control can also be exercised through integration. Channel integration is the process of
incorporating all channel members into one channel system and uniting them under
one leadership and one set of goals. Channel integration is relevant for the manufacturer
to consider when high transaction costs occur between manufacturer and distributor, as
a result channel conflicts and/or bad cooperation climate. There are two different types
of integration:
Vertical integration• : seeking control of channel members at different levels of the
channel.
Horizontal integration• : seeking control of channel members at the same level of the
channel (i.e. competitors).
Integration is achieved either through acquisitions (ownership) or through tight cooperative relationships. Getting channel members to work together for their own mutual benefit can be a difficult task. However, today cooperative relationships are essential
for efficient and effective channel operation.
Historically, conventional distribution channels have lacked such relationships and
leadership, often resulting in damaging conflict and poor performance. One of the biggest channel developments over the years has been the emergence of vertical marketing
systems (VMS) that provide channel leadership. Figure 4.29 contrasts conventional distribution channels and a vertical marketing system.
A conventional distribution channel consists of one or more independent producers,
wholesaler, and retailers. Each is a separate stakeholder seeking to maximize its own
profits, even at the expense of the system as a whole. No channel member has much
control over the other members, and no formal means exists for assigning roles and
resolving channel conflict.
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4. Marketing Mix in the Marketing Planning Process254
In contrast, a vertical marketing system (VMS) consists of producers, wholesalers, and
retailers acting as a unified system. One channel member owns the others, has contracts
with them, or wields so much power that they must all cooperate. Vertical integration
offers the promise of potential efficiencies gained from a reduction in management overhead, integration information systems, reduction or elimination of selling costs within
the integrated channel, and better management and control of marketing campaigns
and physical distribution logistics. It is sometimes the only way to introduce new technological advances into a channel. Integration enables unilateral decisions on who is
going to do what and the more direct rewarding of key personnel down the channel for
responding to the changes. It also gives the integrating firm more control over training
and management succession. However, competitive market forces often make the use of
independent channel agents more efficient, and vertical integration should be employed
only when the market fails – when gross inefficiencies result from working with independent channel participants.
Figure 4.29 shows an example of vertical integration. The starting point is the conventional marketing channels (CMCs), where the channel composition consists of isolated
and autonomous participating channel members. Channel coordination is here achieved
through arm’s-length bargaining. At this point, the vertical integration can take two
forms: forward and backward.
The manufacturer can make • forward integration, when it seeks control of businesses
of the wholesale and retail levels of the channel.
The retailer can make • backward integration, seeking control of businesses at wholesale and manufacturer levels of the channel.
The wholesaler has two possibilities: both forward and backward integration.•
The result of these manoeuvres is the vertical marketing system. Here the channel composition consists of integrated participating members, where channel stability is high
due to assured member loyalty and long-term commitments.
Manufacturer
Wholesaler
Retailer
Consumer Consumer
Manufacturer
Wholesaler
Retailer
Backward
integration
Forward
integration
Conventional marketing
channels (CMCs)
Vertical marketing
systems (VMSs)
Figure 4.29: Vertical integration
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4.3 Distribution Decisions 255
We shall now look at the major types of VMs: corporate, contractual, and administered:
Corporate VMS •
A vertical marketing system that combines successive stages of production and distribution under single ownership is called corporate vertical marketing system. Controlling the entire distribution chain has turned Spanish clothing chain Zara into
the world’s fastest-growing fashion retailer: the origin of Zara’s success is its control
over almost every aspect of the supply chain, from design and production to its own
world-wide distribution network. New styles take shape in Zara’s own design centres,
supported by real-time sales data. New designs feed into Zara’s manufacturing centres, which ship finished products directly to 652 Zara stores in 48 countries. Effective
vertical integration makes Zara faster, more flexible, and more efficient than international competitors such as Gap, Benetton, and H&M. Zara can make a new line from
start to finish in less than 15 days and a look seen on MTV can be in Zara stores within
a month, versus and industry average of 9 months (Reda, 2004).
Contractual VMS •
A contractual vertical marketing system consists of independent firms at different levels of production and distribution who join together through contracts to obtain more
economies of sales impact than each could achieve alone. Coordination and conflict
management are attained through contractual agreements among channel members
(Kotler and Armstrong, 2009).
The franchise organisation is the most common type of contractual relationship. A
franchise is a legal contract in which a producer and channel intermediaries agree
each member’s rights and obligations. Typically, the intermediary receives marketing,
managerial, technical and financial services in return for a fee. Franchise organisations such as McDonald’s, Benetton, the Body Shop and Avis combine the strengths
of a large marketing-orientated organisation with the motivation and sophistication
of a locally owned outlet. Although a franchise operation gives a degree of producer
control there are areas of potential conflict. For example, the manufacturer may be
dissatisfied with the standards of service provided by the outlet, or the franchisee
may believe the franchisor provides inadequate promotional support. In addition,
compared with ownership, the franchise organisation lacks total control over franchisees (Jobber, 2010).
Franchising may be a means of overcoming resource constraints, as an efficient system to overcome producer-distributor management issues and as a way of gaining
knowledge of new markets (Hopkins and Scott, 1999). Franchising allows the producer to overcome internal resource constraints by providing access to the franchisee’s
resources. The second explanation relates to the problems of managing geographically dispersed operations. In such circumstances, manufacturers may value the notion of the owner-manager who has a vested interest in the success of the business.
Finally, franchising may be a way for a producer to access the local knowledge of the
franchisee. Franchising may therefore be attractive when a producer is expanding
into new markets and where potential franchisees have access to information that is
important in penetrating such target markets.
Administered VMS •
In an administered VMS is assumed not through common ownership or contracts but
through the size and power of one or a few dominant channel members. Manufacturers of a top brand can obtain strong trade cooperation and support from resellers.
For example, General Electric, Procter & Gamble, and Kraft can command unusual
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4. Marketing Mix in the Marketing Planning Process256
co operation from resellers regarding displays, shelf space, promotions and price policies (Kotler and Armstrong, 2009)
As shortly mentioned above, another channel development is the horizontal marketing
system, in which two or more companies at one level join together to follow a new marketing prospect. By joining forces, companies can combine their financial, production,
or marketing resources to accomplish more than any one company could alone. Firms
might work together with competitors and non-competitors on a temporary or permanent basis, or they may create a separate company. For example, McDonald’s places ‘express’ versions of its restaurants in Wal-Mart stores and thus benefits from Wal-Mart’s
heavy store traffic, while Wal-Mart keeps hungry shoppers from leaving the stores to eat
somewhere else.
4.3.8 International Distribution Channel Design
International marketers face many additional complexities in designing their channels.
Each country has its own unique distribution system that has evolved over time and
changes rather slowly. Thus, global marketers must typically adapt their channel strategies to the specific structures in each target market. In every market all consumer and
industrial products eventually go through a distribution process. The distribution process includes the physical handling and distribution of goods, the passage of ownership
(title), and – most important from the standpoint of marketing strategy – the buying and
selling relationships between producers and middlemen and between middlemen and
customers.
A host of policy and strategic channel-selection issues confronts the international marketing manager. These issues are not in themselves very different from those encountered in domestic distribution, but the resolution of the issues differs because of different
channel alternatives and market patterns.
Each country market has a distribution structure through which goods pass from manufacturer to client. Within this structure are a variety of intermediaries whose customary
functions, activities, and services reflect existing competition, market characteristics,
tradition, and economic development.
Briefly, the behaviour of channel members is the result of the interactions between the
cultural environment and the marketing process. Channel structures range from those
with modest developed marketing infrastructure such as those found in many emerging
markets to the highly complex, multilayered system found in Japan.
Traditional channels in developing countries evolved from economies with a strong dependence on imported goods. In an import-oriented or traditional distribution structure,
an importer controls a fixed supply of goods and the marketing system develops around
the viewpoint of selling a limited supply of goods at high prices to a small number of affluent customers. In the resulting seller’s market, market penetration and mass distribution are not necessary because demand exceeds supply and, on the whole, the customer
seeks the supply from a limited number of middlemen. Perceptibly, few countries fit the
import-oriented model today.
Today, hardly any country is remote enough to be unaffected by global economic and
political changes. These currents of change are changing all levels of the economic fabric, including the distribution structure. Traditional channel structures are giving way
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4.3 Distribution Decisions 257
to new forms, new alliances, and new processes – some more slowly than others, but all
are changing. Pressures for change in a country originate from internal and external factors. Multinational marketers are seeking ways to profitably tap market segments that
are served by costly, traditional distribution systems. Direct marketing, door-to-door
selling, hypermarkets, discount houses, shopping malls, catalogue selling, the Internet,
and other distribution methods are being introduced in an attempt to provide efficient
distribution channels.
Some important trends in distribution will eventually lead to greater cohesion than disparity among middlemen in different countries. Wal-Mart, for example, is expanding
all over the world – from Mexico to Brazil and from Europe to Asia. Avon is expanding into Eastern Europe; Mary Kay Cosmetics and Amway into China; and Lands’ End
made successful entry into the Japanese market. The effect of all these intrusions into the
traditional distribution systems is change that will make discounting, self-service, supermarkets, mass merchandising and e-commerce concepts common all over the world,
and that elevates the competitive climate to a level not known before (Hollensen, 2006).
The Global Channel Design Process
The actual process of building channels for international distribution is rarely easy, and
many companies are blocked in their efforts to develop international markets by their
inability to construct a satisfactory system of channels.
Despite the special characteristic of each individual country’s channel structure, it can
still be possible to identify what middlemen should be used in a country to ensure that
the strategic objectives of the marketing mix – the target segmentation and the desired
product positioning – are accomplished. In order to achieve this goal a company needs
to analyze what the important functions in the channel network are (identification of
what the key success factors are as they relate to channel choice) and then ensure that the
chosen intermediaries in each country measure up on those criteria.
To identify the channel requirements, the first step is to decide whether any of the firmspecific advantages (FSAs) and competences is uniquely lodged in the distribution channels to be used. In the case of fast-food franchising, the answer is clearly yes: Without
control over the outlets afforded by the franchising contracts, there would be little point
in expanding globally. The product sold is a standardized (and therefore reliable) meal
located at a convenient place.
Key success factors and FSAs may vary across countries. As already stated above, many
of the convenience products in Western markets (packaged foods, cigarettes and soft
drinks) require intensive distribution coverage, precisely because customers want them
to be conveniently available.
Availability of Distribution Channels/Partners
Once the significant features of the channel network have been identified, the question
is whether the country market analyzed possesses channels that will provide the necessary service. Are there financially strong franchisees available if they are necessary?
Can dealers provide after-sales service? Are there boutiques where designer apparel is
sold to an upscale market niche?
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4. Marketing Mix in the Marketing Planning Process258
Possible Establishment of own Distribution Network
If the company cannot find relevant distribution partners it might invest in a dedicated
network in order to supply the market. This is usually a large investment matter, and
clearly success is not guaranteed. When the market is sufficiently sized it might pay for
the company to develop its own distribution network, as Honda has done for its motorcycles. But where the market is smaller and the gains consequently of a lesser amount,
the investment might not be worth the risks incurred.
Selection of the right International Distributors
Construction of the middleman network includes looking for potential middlemen, selecting those who fit the company’s requirements, and establishing working relationships with them. In international marketing, the channel-building process is barely routine. The closer the company wants to get to the consumer in its channel contact, the
larger the sales force required.
The search for prospective middlemen should begin with study of the market and determination of criteria for evaluating middlemen servicing that market. The checklist of
criteria differs according to the type of middlemen being used and the nature of their
relationship with the company. Basically, such lists are built around four subject areas:
productivity or volume, financial strength, managerial stability and capability, and the
nature and reputation of the business. Emphasis is usually placed on either the actual or
potential productivity of the middleman.
Finding probable middlemen is less a difficulty than determining which of them can
perform satisfactorily. Low volume or low potential volume hampers most prospects,
many are underfinanced, and others are simply not reliable. In many cases, when a
manufacturer is not well-known abroad, the reputation of the middleman becomes the
reputation of the manufacturer, so a deprived choice at this point can be devastating.
The screening and selection process itself should include the following actions: an
exploratory letter including product information and distributor requirements in the
native language sent to each prospective middleman; a follow-up to the preeminent respondents for more specific information concerning lines handled, territory covered,
size of company, number of salespeople, and other background information; check of
credit and references from other clients and customers of the prospective middleman;
and if possible, a personal check of the most promising firms.
Contracting with the chosen Distributor
Once a potential middleman is found and evaluated, there remains the task of detailing
the arrangements with that partner. So far the company is in a buying position; now it
must shift into a selling and negotiating position to convince the middleman to handle
the products and accept a distribution agreement that is feasible for the company. Agreements must spell out specific responsibilities of the manufacturer and the middleman,
including an annual sales minimum. The sales minimum serves as a basis for evaluation of the distributor; failure to meet sales minimums may give the exporter the right
of termination.
It might be sensible to evaluate whether to sign initial contracts for one year only. If the
first year’s performance is satisfactory, they should be reviewed for renewal for a longer
period. This permits easier termination, and more important, after a year of working
together in the market, a more workable arrangement generally can be reached.
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4.3 Distribution Decisions 259
Motivating Middlemen (channel tie-up)
The level of distribution and the importance of the individual middleman to the company determine the activities undertaken to keep the middleman stimulated. On all levels there is a comprehensible correlation between the middleman’s motivation and sales
volume. Motivational techniques that can be employed to maintain middleman interest
and support for the product may be grouped into five categories: financial rewards, psychological rewards, communication, company support, and corporate rapport.
Where channel members are available to provide the functions necessary, they still
might be unwilling to sign on with the new product unless special trade allowances better than those offered by the competition are made. There are reasons for making sure at
this stage that the best units available are tied into, and it is customary for new entrants
to pay a premium to established dealers to get them to accept the innovative product.
For example, when the Japanese car manufacturers entered the US-market they offered
higher dealer margins than customary for that size of automobile.
The thrust behind signing up good distributors and dealers is not only because that
sales will be high but that they are the ones most likely to sustain the FSAs identified as
necessary for the competitive success of the producer.
Middlemen and their salespeople also respond to psychological rewards and recognition of their efforts. For example, publicity in company media and local newspapers
might build esteem and involvement among foreign middlemen.
In all instances, the company should maintain a continuing flow of communication in
the form of letters, newsletters, and periodicals to all its intermediaries. The more intense the relationship between the manufacturer and the distributor, the better the performance of the stakeholders involved. Increased and superior contact naturally leads to
less conflict and a smoother working relationship.
Finally, considerable attention must be paid to the establishment of close rapport between the company and its middlemen. In addition to methods described above, a company should be assured that the conflicts that arise are handled skilfully and diplomatically as business is always a personal and vital thing to the people involved.
Coordination and Control
The increased length of channels typically used in international distribution makes control of middlemen particularly important. Marketing objectives must be spelled out both
internally and to middlemen as unambiguously as possible. Standards of performance
should include sales volume objective, market share in each market, inventory turnover
ratio, number of accounts per area, growth objective, price stability objective, and quality of publicity. Cultural differences enter into all these areas of management.
The more involved a company is with the distribution, the more control it exerts. A
company’s own sales force affords the most control, but often at a cost that is not practical. Each type of channel arrangement provides a different level of control; as channels
grow longer, the ability to control price, volume, promotion, and type of outlets shrinks.
If a company cannot sell directly to the end user or final retailer, an important selection
criterion for middlemen should be the amount of control the marketer can maintain.
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4. Marketing Mix in the Marketing Planning Process260
Terminating Contracts with Distributors
When middlemen do not perform up to principles or when market situations change,
requiring a company to reorganize its distribution, it may be necessary to cease relationships. In some parts of the world the distributor (e.g. in EU) often has legal protection
which makes termination difficult. In other parts of the world (e.g. USA) it is generally a
simple action regardless of the type of middlemen, they are simply dismissed.
Competent legal advice is vital when entering distribution contracts with middlemen.
Overall, the best rule is to avoid the need to terminate distributors by screening all prospective middlemen carefully. A poorly chosen distributor may not only fail to live up to
expectations but may also adversely affect future business and prospects in the country
(Hollensen, 2006).
Thus, international marketers face a wide range of channel alternatives. Designing
efficient and effective channel systems between and within various country markets
poses a difficult challenge. We will discuss international distribution decisions further
in Chapter 5.
4.3.9 Multichannel Distribution Systems
Distribution channels can be seen as sets of interdependent organisations involved in
the process of making a product or service available for consumption or use. When making channel choices, companies can choose from a wide variety of alternatives. In the
past, many companies used a single channel to sell to a single market or market segment. Today, more and more companies have adopted multichannel distribution systems
– often called hybrid marketing channels. A multichannel distribution system (or hybrid
marketing channel) occurs when a single company sets up two or more marketing channels to reach one or more customer segments.
The increasing popularity of this strategy results from the potential advantages provided: extended market coverage and increased sales volume; lower absolute or relative
costs; better accommodation of customers’ evolving needs; and more and better information. This strategy, however, can also produce potentially disruptive problems: consumer confusion; conflicts with intermediaries and/or internal distribution units; increased
costs; loss of distinctiveness; and, eventually, an increased organisational complexity.
Figure 4.30 shows a hybrid channel. In the figure, the producer sells directly to customer
segment 1 using direct-mail catalogues, telemarketing, and the Internet and reaches consumer segment 2 through retailers. The company sells indirectly to business segment
1 through distributors and dealers and to business segment 2 through its own sales
force.
A special case of ‘multiple channel marketing’ is often referred to as dual marketing
where the same product is sold to both consumer and business customers at the same
time (Biemans, 2001).
For instance, in selling mobile phones, taxes and audio equipment, Philips Electronics
is confronted with a lot of similarities and overlap between both markets. For instance,
small business owners also shop in customer outlets and focus on price differences,
while ignoring differences in product functionality offered on both markets. Therefore,
Philips uses different product versions, sales channels, prices and communication efforts in an effort to tailor its offering to both groups of customers. In addition, it is faced
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4.3 Distribution Decisions 261
with a continuous struggle of adapting the internal organisation of the marketing function to the dynamics of the marketplace.
The use of dual marketing is also stimulated by a convergence of consumer marketing
and business marketing.
At the same time, consumers have become increasingly well-informed about products
and product functions, such as personal computers and the health implications of food
ingredients, making them more susceptible to rational selling arguments. Finally, new
interactive technologies allow firms to build one-to-one relationships with customers,
whether they are large firms or individual consumers.
Although it is often impossible to completely separate the channels used for both markets, a supplier can enhance the differences between both channels by offering different
versions of the same product and charge different versions of the same product and
charge different prices. The success of this strategy depends on the extent to which both
distribution channels can actually be separated.
Managing Multiple Channels
In managing multiple channels, companies differentiate products and models by channels, thus minimizing direct comparison. The demarcations, of course, work only when
there are meaningful differences among products.
However, consumers do not come carefully segmented into such airtight compartments.
There is considerable movement between segments and across purchases. Moreover,
with accelerating product life cycles, proliferation of products, and fragmentation of cus-
Producer
Consumer
segment 1
Retailers
Consumer
segment 2
Distributors
Dealers
Business
segment 1
Business
segment 2
Source: Adapted from Kotler and Armstrong, 2009
Catalogues,
telephone,
Internet
Sales force
Figure 4.30: Multichannel distribution system
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4. Marketing Mix in the Marketing Planning Process262
tomer segments, multiple channel approaches are often the only way to provide market
coverage. Different customers with different buying behaviours will seek channels that
best serve their needs.
Options are not, however, a perfect solution. Customers can infiltrate from other segments by patronizing both the full-service channel and the low-price channel (see Figure
4.31). As long as higher price reasonably reflects higher service, customers will be loyal
to a particular channel, but if the service is unnecessary or can be obtained at a lower
cost, customers will cross to the low-price channel. In some businesses, pre-sales service
is a public good that customers can avail themselves of without making a purchase. For
example, a customer can get a full-function demonstration at a computer specialty store
and then buy the product from a low-cost mail-order retailer of on the Internet. Thus, the
customer profits from the full-service channel without paying for it.
Multiple channels are most prevalent in fast changing market environments. When the
product market matures slowly, the channel has time to adapt to changes in customerbuying patterns. Even if multiple channels are necessary to reflect market plurality, each
channel is clearly specialized to serve a specific buying pattern. Moreover, in dynamic
environments, customers’ shopping and buying behaviours, buying criteria, and segments change frequently. In coping with turbulence, channel diversity pays, but only if
the arrangements are treated as options.
Supplier
High-cost
channel
Low-cost
channel
Service sensitive
customers
Customers move into this gray
zone dependent on the
purchase circumstances
Price responsive
customers
High Price sensitivity Low
Low Service sensitivity High
Source: Adapted from Hollensen, 2006, modified
Figure 4.31: High- and low cost channels
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4.3 Distribution Decisions 263
The Trend towards Hybrid Multiple Channels
In a hybrid multiple distribution channel, the marketing functions are shared by the
producer and the channel intermediary. The former usually handles promotion and
customer-generation activities, whereas the intermediary is in charge of sales and distribution (Gabrielsson et al., 2002).
Another model is suggested by Anderson et al. (1997). Both the supplier and its channel
partners divide up the execution of the channel functions. The supplier performs several functions such as sales negotiation and order generation, while its channel partners
deliver physical distribution and order fulfilment. Other channel members might specialize in functions such as after-sales service. The members work together with certain
members specializing in certain functions (see Figure 4.32). The difference between the
hybrid and conventional channels is the horizontal task allocation. A team of channel
partners (including the supplier), each specializing in a few tasks, satisfies the customer’s total needs. In the conventional channel, the hand-offs are vertical; each member
performs the full channel functions that its immediate customers require.
The trend toward functional specialization (and therefore horizontal channels) is driven
by customers’ augmented desires to receive products and services in the most cost- and
time-efficient manner. If channel functions have to be unbundled and sourced separately, customers, especially large ones, will be willing to do so.
In the PC industry, multiple channels are often used. In addition to the sales channel
strategy, the PC producer also must consider a great variety of channel intermediaries at
each channel level. Channel intermediaries are classified into distributors, resellers, and
retailers. By definition, distributors usually do not sell directly to end customers but use
either resellers or retailers as intermediaries. Resellers can be further divided into dealer
chains (or corporate resellers); local dealers; indirect fax, telephone, or Internet resellers;
Supplier
Customer
Own
sales force
Outside
distributor
Inside or outside
service specialists
Demand
generation
Physical
distribution
After-Sales
service
Source: Adapted from Hollensen, 2006
Figure 4.32: Hybrid multiple channels
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4. Marketing Mix in the Marketing Planning Process264
and value-added resellers, which add software and services to the industrial organisations, whereas retailers sell to consumers through retail outlets. However, because the
definitions of intermediary types vary greatly from industry to industry and even from
company to company, it is more important for a producer to consider the functions a
particular intermediary can perform than to pay attention to names per se. The sales
channels target a variety of customers. In this example, they are divided into two broad
groups: consumers, which include people who buy the PCs from a personal budget, and
business organisations from different worlds of industry and services (Gabrielsson et
al., 2002).
4.3.10 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. In summary, it involves getting the right product to the right customer in the right place at the right time.
It is important to state that logistics is also a critical component of the firm’s marketing
capability. The right product, price and promotional mix are ineffective without dependable and timely product availability (place). Timely availability creates value by allowing
customers to purchase products or services where desired and if appropriate arrange
delivery when and where desired. For a customer, availability or timely availability is
equally as important as price and assortment. Consequently, physical distribution and
logistics effectiveness has a major impact on both customer satisfaction and company
cost structures (Kotler and Armstrong, 2009).
While the role of logistics has not always been visible and well defined in commercial
enterprises, transportation, inventory storage and customer service have always been
performed. However, top management did not always fully appreciate the strategic importance and competitive impact of integrated logistics. Wide acceptance of enterprise
operating philosophies such as just-in-time, total quality management, customer satisfaction and customer responsiveness served to enhance the role of logistics in achieving
competitive advantage. A well-planned and executed logistics effort can achieve timely
shipment arrival, undamaged product and satisfied customers at the lowest attainable
total cost.
Logistics plays a major role in achieving customer expectations. The participants involved in logistical process management include wholesalers, distributors, retailers and
third party service providers necessary to provide warehousing, transportation and a
wide range of other value added services. The transportation service decision includes
selection of transport modes and providers. The managerial aspect of logistics includes
scheduling and execution of activities to respond to customers and facilitate shipments.
Management or execution activities include order processing, selection and shipment.
Measurement includes monitoring activities to ensure performance both satisfies customers and deploys firm resources effectively. Typical measures include customer service level, cost, productivity, asset utilization and quality (Hollensen, 2006).
Logistics Value Chain
Marketing logistics involves not solely outbound distribution (moving products from the
factory to resellers and ultimately to customers) but also inbound distribution (moving
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4.3 Distribution Decisions 265
products and materials from
suppliers to the factory of the
manufacturer) and reverse
distribution (moving broken,
unwanted, or excess products
returned by consumers or resellers). Consequently, marketing logistics entails entire
supply chain management
– managing upstream and
downstream flows of materials, final goods, and relating information among the
stakeholders involved (Kotler
and Armstrong, 2009).
The logistics value chain
links all activities required
to support profitable transactions as a single process linking business with customers. In some situations the value
chain is owned by a vertically integrated firm which controls all activities from raw
material procurement to retail sales. Such vertical integration is found, for example, in
the petroleum industry where firms control product value added from the drill to retail
sales.
The more common value chain involves a number of independent firms such as material suppliers, manufacturers, wholesalers, retailers and logistics service firms. Due to
the potential efficiency and effectiveness benefits, most firms linked together in a value
chain seek to integrate some behaviours. Such relationship is what distinguishes a traditional channel of distribution from a value chain.
A traditional channel of distribution comprises of multiple chain members each attempting to optimise their individual performance. For example, each channel member
may seek to diminish inventory investment rather than coordinating activities to reduce
overall value chain inventory. The integrated value chain perspective attempts to coordinate value chain activities in an effort to reduce redundancy and duplication. It is the
degree of collaboration in joint planning and synchronized operations that differentiates a traditional channel of distribution and an integrated value chain.
Value chains facilitate a combination of value added flows. The primary three are inventory, information and financial flows. Information flow consists of sales activity,
forecasts, plans and orders that must be refined into deployment, manufacturing and
procurement plans.
Besides, normal inventory flow toward end-customers must at times be reversed. Product recall capability is a critical competency to accommodate increasingly rigid safety
standards, product expiration, and responsibility for hazardous material. Reverse logistics is also necessary due to the increasing number of laws prohibiting disposal and
encouraging recycling of containers and packaging materials. Reverse logistics does
not usually enjoy the scale economies characteristic of outbound movement. However,
reverse movement capability is a social responsibility that must be accommodated in
logistical system design.
Example 28:
In its ads DHL Express promises to export whatever the
customers wants
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4. Marketing Mix in the Marketing Planning Process266
Retailers and wholesalers typically link physical distribution and procurement activities
even though no change in product form typically occurs. Nevertheless, wholesalers and
retailers are key contributors to the value added process. Wholesalers develop assortments of products from multiple manufacturers allowing retailers to purchase desired
end-combinations in smaller quantities. Retailers make a broad range of products conveniently available to customers. Such sorting and positioning is an essential element of
the value added process (Hollensen, 2006).
Goals of the Logistics System and Major Logistic Functions
The overall goal of a comprehensive marketing logistics strategy usually involves providing a targeted level of customer service at the least cost. As the objective is essentially
to maximize profits, not sale, the company must weigh the benefits of providing increased level of service against the higher costs associated with this option.
After having stated logistic objectives, a company must design a logistic system that
will minimize the cost of attaining these goals. The major logistics functions include
customer service, transportation, inventory management, and distribution operations.
We shall discuss each function in more detail now:
Customer service •
Customer service manages the primary interface between a company and its customers from an order fulfilment perspective. Customer service includes order taking
and modification, order status inquiry and customer problem resolution. Customers expect the firm’s customer service activity to be capable of providing accurate
information regarding product availability, order processing, delivery time, product
substitution, pricing and product customisation options.
Customer service standards should be given paramount attention because they may
be the key differentiating factor between suppliers and may be used as a vital customer choice criterion.
Transportation •
In the end, customer service ultimately depends on the ability of the physical distribution system to transport products on time and without damage. Consequently, the
choice of transportation mode is vital to the successful implementation of marketing
strategy. The key tasks include selecting the type of carrier, scheduling, routing and
freight payment. In addition to managing the firm’s shipping activities, transportation is responsible for monitoring carrier performance. Logistics is responsible for
improving transportation service levels while simultaneously decreasing overall cost.
The transportation management objective is to minimize total costs associated with
all movements from suppliers to the final customer.
Railways are efficient at transporting large, rather bulky freight on land over comparable large distances. Rail is often used to transport coal and chemicals. Motorized
transport by road has the advantage of flexibility because of direct access to companies and warehouses. With the removal of cross-border restrictions, the speed of road
transport in Europe has increased significantly. However, road transport is not as
environmentally friendly as rail and did receive considerable criticism because of increased traffic congestion. The central advantages of air freight are its speed and longdistance capabilities. Thus, this transportation option is often used to transport perishable goods over long distances and emergency deliveries. Its major disadvantages
are high costs and the need to transport the products by road to and from air termi-
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4.3 Distribution Decisions 267
nals. Water transportation is slow but rather inexpensive. While inland transportation
is usually associated with bulky, non-perishable good such as coal and petroleum,
ocean-going ships carry a wider range of products. The Internet carries digital products from producer to customer via satellite, cable mode, or telephone wire. Software
companies, the media, music companies, and many other organisations make use of
the Internet to ‘transport’ digital products.
Inventory management •
Inventory management consists of monitoring inventory levels and requirements at
manufacturing plants and distribution facilities. The objective is to maintain enough
inventories to satisfy customer demands while minimizing total asset deployment.
Leading edge companies gather knowledge regarding sales, customer demand, delivery times and replenishment cycles so that inventory can be synchronized with
demand. Many organisations have greatly reduced their inventories and related costs
through just-in-time logistics systems. With such systems, producers and retailers
carry only small inventories, often only enough for a few days of operation. For example, Dell carries just 3-5 days of inventory, whereas competitors might carry 40 days
or even 60 (Uttal, 1987). New stock arrives exactly when required, rather than being
stored in. This system calls for accurate forecasting along with fast, frequent, and flexible delivery and reliable suppliers so that new supplies will be available exactly when
needed. However, these systems result in substantial savings in costs.
Distribution operations •
Distribution operations have responsibility for the physical facilities and activities
that take place at the distribution facilities used by a firm. The facilities include the
buildings, offices, communications equipment, storage racks and material handling
equipment. The activities include product receipt, storage, order selection and shipment. The distribution operations objective is to minimize expenses for receiving,
storing and shipping product from a distribution facility. The historical operations
focus has been to minimize the variable cost associated with handling or moving a
product. A more comprehensive focus is to reduce assets required to support logistics
while simultaneously increasing operating flexibility. Reduced assets remove distribution facilities and handling equipment from a company’s books.
4.3.11 Retailing and Wholesaling
In the continuing integration of the world economy, internationalization not only concerns advertising, banking and manufacturing industries, it also affects the retailing
business. The trend in all industrialized countries is towards larger units and more selfservice. The number of retail outlets is dwindling, but the average size is increasing.
Most retailing is conducted in stores such as supermarkets and department stores, but
non-store retailing, such as online and mail order also accounts for an increasing proportion of sales.
However, retailing still shows great differences between countries, reflecting their different histories, geography, culture and economic development.
Trade Marketing
For too long, manufacturers have viewed vertical marketing channels as closed systems,
operating as separate, static entities. The most important factors creating long-term,
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4. Marketing Mix in the Marketing Planning Process268
integrated strategic plans and fostering productive channel relationships were largely
ignored. Providentially, a new philosophy about channel management has emerged, but
to understand its potential it is crucial to comprehend how power has developed at the
retailer level.
Power in channel relationships can be defined as the ability of a channel member to control marketing decision variables of any other member in a channel at a different level
of distribution. A classic example of this is the amount of power wielded by retailers
against the food and grocery manufacturers. As the balance of power has shifted, more
merchandise is controlled by fewer and fewer retailers.
There is a world-wide tendency towards concentration in retailing.
A consequence of this development is that there has been a world-wide shift from manufacturer to retailer dominance. Power has become concentrated in the hands of fewer
and fewer retailers, and the manufacturers have been left with little choice but to accede
to their demands. This often results in manufacturing of the retailers’ own brands (private labels).
Therefore, traditional channel management, with its characteristics of power struggles,
conflict and loose relationships, is no longer beneficial. New ideas are emerging to help
channel relationships become more cooperative. This is what is known as trade marketing. Trade marketing involves the manufacturer (supplier) marketing directly to the
trade (retailers) to create a better fit between product and outlet. The objective is to create
joint marketing and strategic plans for mutual profitability.
For the manufacturer (supplier), it means creating twin marketing strategies: one to the
consumer and another to the trade (retailers). However, as Figure 4.33 shows, potential
channel conflicts exist because of differences in the objectives of the channel members.
Despite potential channel conflicts, what both parties share, but habitually overlook, is
their common goal of consumer satisfaction. If the desired end result is to create joint
marketing plans, a prerequisite must be an improved understanding of the other’s perspective and objectives.
Retailers are looking for potential sales, profitability, exclusivity in promotions and volume. They are currently in the enviable position of being able to choose brands which
fulfil those aims.
A private label manufacturer has to create different packages for different retailers.
By carefully designing individual packages, the manufacturer gains a better chance of
striking up a relationship with the best-matched retailer.
Manufacturers can offer retailers a total ‘support package’ by stressing their own
strengths. These include marketing knowledge and experience, market position, proven
new product success, media support and exposure, and a high return on investment in
shelf space.
If a joint strategy is going to be successful, manufacturers and retailers must work together at every level, perhaps by matching counterparts in each organisation. As a consequence of the increasing importance of the individual customer, the concept of the key
account (key customer) was introduced. Key accounts are often large retail chains with
a large turnover (in total as well as of the supplier’s products), which are able to decide
quantity and price on behalf of different outlets.
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4.3 Distribution Decisions 269
Segmentation of customers is therefore no longer based merely on size and geographic
position, but also on customers’ (retailers’) structure of decision making. This results in
a gradual restructuring of sales from a geographic division to a customer division. This
reorganisation is made visible by creating key account managers (managers responsible
for customers).
Efficient Consumer Response (ECR) in Retailing
In the past, consumer goods manufacturers managed the distribution channel with advertising campaigns that pulled new products through the channel and with trade promotions used by a sales force that pushed the product down the channel. Such a push/
pull strategy is not likely to be feasible today given faster and more accurate ordering
processes and cycles and more reliable quick-response delivery processes that now use
tracking information to move bar-coded products down the distribution channel. The
combination of these new computer-driven order and delivery processes is called ‘efficient consumer response’.
Efficient consumer response (ECR) programs are designed to improve the efficiency of
replenishing, delivering, and stocking inventory while promoting customer value. Enhanced cooperation among channel members in order to eliminate activities that do not
add value is a primary goal.
Retailers‘ objectives/requirements
ß Adequate stock-turn
ß Gross margin
ß ROI
ß Promotional allowances
ß Distribution exclusivity
ß Continuity of supply
ß Market development
Manufacturers‘ channel objectives
ß Market share (by segment)
ß Profit / contribution goal
ß ROI
ß Channel member loyalty
ß Consumer brand loyalty
ß Distribution penetration
ß Inventory carrying support
ß Communications support
ß Market development
Consumers‘ objectives
ß Choice
ß Availability
ß Value for money
ß Convenience
Cooperation/
conflict
Consumer
satisfaction
Figure 4.33: Channel relationships and the concept of trade marketing
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4. Marketing Mix in the Marketing Planning Process270
Formerly, the presence of many slow-moving finished goods held in inventory by wholesalers and retailers helped manufacturers ‘own’ distribution channels because channel members had to move these mountains of manufacturers’ goods to make a living.
Nowadays, distribution channels carry small inventories of particular manufacturers’
products, making the wholesalers and retailers less dependent on manufacturers. Conversely, with so little stock in distribution channels, what income manufacturers make
next week almost literally depends on what they sell today. As a result, a problem with
a major distribution channel has immediate effects on manufacturing and cash flow. A
manufacturer has a short time no negotiate, to react, and at worst to switch some of its
business to another distribution channel.
Wholesaling
Wholesaling includes all activities involved in selling goods and services to those buying for resale or business use. Wholesalers buy mostly from producers and sell predominantly to retailers, industrial customers, and other wholesalers. They add value by performing one or more of the following channel functions (Kotler and Armstrong, 2009):
Selling and promoting• : Wholesalers’ sales forces aid manufacturers reach many small
consumers at a low cost. The wholesaler has more contacts and is often more trusted
by the buyer than the distant producer.
Buying and assortment building• : Wholesalers can select items and build assortments
needed by their consumers, thereby saving the customers much work.
Bulk-breaking• : Wholesalers save their clients capital by buying in carload lots and
breaking large lots into small quantities.
Warehousing• : Wholesalers hold inventories, thereby reducing the inventory costs and
risks of suppliers and customers.
Transportation• : Wholesalers can provide faster delivery to buyers because they are
closer than the producers.
Financing• : Wholesalers finance their customers by giving credit, and they finance
their suppliers by ordering early and paying bills on time.
Risk bearing• : Wholesalers take up risk by taking title and bearing the cost of theft,
damage, spoilage, and obsolescence.
Market information• : Wholesalers give information to suppliers and customers about
competitors, new products, and price trends.
Management services and advice• : Finally, wholesalers often aid retailers train their
sales staff.
The wholesaling industry as a whole faces considerable challenges, especially the fierce
resistance to price increases and the winnowing out of suppliers who are not adding
value based on cost and quality. Pro-active wholesalers constantly look for better ways
to meet the changing needs of their suppliers and target customers. To achieve the goal
of adding value by increasing the efficiency and effectiveness of the entire marketing
channel, wholesalers must continuously enhance their services and reduce their costs.
Rising costs on the one hand and, and the demand for increased services on the other,
will persist to put the squeeze on wholesaler profits. However, the use of computerized
and web-based systems will aid wholesalers to contain the costs of ordering, shipping,
and inventory holding, improving their productivity.
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4.3 Distribution Decisions 271
Summary
Marketers must get their goods into the hands of consumers and must choose between
handling all distribution or turning part or all of it over to various middlemen. Distribution
channels vary depending on target market size, competition, and available distribution intermediaries. It is evident that the international marketer has a broad range of alternatives
for developing an economical, efficient, high-volume international distribution system.
The creation of globally coordinated channels has to start with a clear understanding of
how the firm-specific advantages (the FSAs) depend on distribution channel design.
Key elements in distribution decisions include the functions performed by middlemen. The
process of channel design and management of it can be broken into seven basic stages:
1. Setting distribution objectives.
2. Specifying the functions that need to be performed by the channel.
3. Considering alternative channel structures.
4. Choosing an ‘optimal’ channel structure.
5. Selecting the intermediaries.
6. Motivating the channel members.
7. Evaluating channel member performance.
Global logistics are important determinants of financial performance, and their efficiency
has been improving dramatically.
The wholesale and retail structure of a local market reflects the country’s culture and economic progress and the way business is done in that country, but new channel modes may
be successful if timing and conditions are right.
Although international middlemen are more numerous, more reliable, and more sophisticated within the past decade, traditional channels are being challenged by the Internet,
which is rapidly becoming an important alternative to many market segments. Such growth
and development offer an ever-wider range of possibilities for entering foreign markets.
Questions for discussion
1. Why is global distribution more difficult than domestic distribution?
2. What are the factors that affect the length, width and number of marketing channels?
3. Why might a firm choose not to use an intermediary in its efforts to reach its customers?
4. What are the advantages and disadvantages for a clothing manufacturer in making products available via their own website, or alternatively, via a mail order
catalogue sent out to known customers.
5. Why is channel selection and important decision? What factors influence choice?
6. What are the advantages and disadvantages of the firm establishing its own distribution in the international market and what forms might it take?
7. What is the difference between channel decisions and physical distribution management? In what ways are they linked?
8. How do the characteristics of the final consumers influence the structure of the
international distribution channels?
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4.4 Communication Decisions
Communication is the remaining decision about the marketing programme. The role of
communication is to communicate with customers and to provide information which
buyers need to make purchasing decisions. Although the communication mix carries
information of interest to the customer, in the end it is designed to persuade the customer to purchase a product. Communication involves sharing points of view and is at
the heart of forming relationships. A company simply cannot connect with customers
unless it – directly or indirectly – communicates with them.
Promotion is the process whereby marketers inform, educate, persuade, remind, and reinforce consumers through communication. It is designed to influence buyers and other
stakeholders. Although most marketing communications are aimed at consumers, a significant number also address shareholders, employees, channel members, suppliers, and
society. In addition, effective communication is a two-way road: Receiving messages is
often as important as sending them.
Integrated marketing communication (IMC) is the coordination of advertising, sales promotion, personal selling, public relations, and sponsorships to reach consumers with a
powerful unified effect. These five elements should not be considered separate entities.
In fact, each element of the communication plan often has a multiplier effect on the other.
For example, it implies that website visuals are consistent with the images portrayed in
advertising and that the messages conveyed in a direct marketing campaign are in line
with those developed by the public relations department.
4.4.1 The Communication Process
To communicate effectively, marketers need to comprehend how communication works.
A simple model of the communication process is shown in Figure 4.34.
The sender (also called source or communicator) encodes a message by translating the
idea about a product or service to be communicated into a symbol consisting of words
and/or pictures, such as an advertisement. The message is transmitted through media,
such as television or the internet. An important point to consider in this respect is the
degree of ‘fit’ between medium and message. For example, a complex and wordy message would be better for the press than for a visual medium such as television or cinema.
‘Noise’ – distractions and distortions during the communication process – may prevent
or disturb the intended transmission to some of the target audience. The vast amount
of messages a customer receives daily makes it a tough challenge for marketers to cut
though this noise. When a receiver sees and/or hears the message it is decoded. This is
the process by which the receiver interprets the symbols transmitted by the sender. The
aim is for the receiver’s decoding to coincide with the sender’s encoding process. The
receiver thus interprets the message in the way intended by the source. To communicate
in an effective way, the sender needs to have a clear understanding of the purpose of the
message, the audience to be reached and how this audience will interpret and respond
to the message. In a personal selling situation, feedback from buyer to salesperson may
be immediate.
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Zusammenfassung
Marketing – A Relationship Perspective
Moderne Grundlange zum Marketing
Das Lehrbuch behandelt eines der wichtigsten und aktuellsten Themenfelder des modernen Marketings. Der Ansatz verbindet dabei den klassischen Ansatz der strategischen Marketingplanung und seiner Instrumente mit dem neuen Ansatz des Relationship Marketing. Der ganzheitliche Ansatz des Buches umfasst dabei die aktuellen Marketing-Grundlagen, Praxisbeispiele sowie anwendungsorientierte Fallstudien und eignet sich somit ideal sowohl für Manager und Entscheidungsträger im Marketing-Bereich, Studenten in Bachelor- und Materstudiengängen sowie Dozenten und Trainer.