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 Kapitel_4.indd 234 03.08.2010 13:01:44 Uhr 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 Kapitel_4.indd 235 03.08.2010 13:01:45 Uhr 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 Kapitel_4.indd 236 03.08.2010 13:01:45 Uhr 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 Kapitel_4.indd 237 03.08.2010 13:01:46 Uhr 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 Kapitel_4.indd 238 03.08.2010 13:01:46 Uhr 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- Kapitel_4.indd 239 03.08.2010 13:01:47 Uhr 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. Kapitel_4.indd 240 03.08.2010 13:01:47 Uhr 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, Kapitel_4.indd 241 03.08.2010 13:01:47 Uhr 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 Kapitel_4.indd 242 03.08.2010 13:01:47 Uhr 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- Kapitel_4.indd 243 03.08.2010 13:01:48 Uhr 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). Kapitel_4.indd 244 03.08.2010 13:01:48 Uhr 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 Kapitel_4.indd 245 03.08.2010 13:01:48 Uhr 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 Kapitel_4.indd 246 03.08.2010 13:01:48 Uhr 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 Kapitel_4.indd 247 03.08.2010 13:01:48 Uhr 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) Kapitel_4.indd 248 03.08.2010 13:01:49 Uhr 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 Kapitel_4.indd 249 03.08.2010 13:01:49 Uhr 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 Kapitel_4.indd 250 03.08.2010 13:01:49 Uhr 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 Kapitel_4.indd 251 03.08.2010 13:01:49 Uhr 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). Kapitel_4.indd 252 03.08.2010 13:01:50 Uhr 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. Kapitel_4.indd 253 03.08.2010 13:01:50 Uhr 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 Kapitel_4.indd 254 03.08.2010 13:01:50 Uhr 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 Kapitel_4.indd 255 03.08.2010 13:01:50 Uhr 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 Kapitel_4.indd 256 03.08.2010 13:01:50 Uhr 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? Kapitel_4.indd 257 03.08.2010 13:01:50 Uhr 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. Kapitel_4.indd 258 03.08.2010 13:01:50 Uhr 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. Kapitel_4.indd 259 03.08.2010 13:01:50 Uhr 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 Kapitel_4.indd 260 03.08.2010 13:01:51 Uhr 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 Kapitel_4.indd 261 03.08.2010 13:01:51 Uhr 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 Kapitel_4.indd 262 03.08.2010 13:01:51 Uhr 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 Kapitel_4.indd 263 03.08.2010 13:01:52 Uhr 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 Kapitel_4.indd 264 03.08.2010 13:01:52 Uhr 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 Kapitel_4.indd 265 03.08.2010 13:01:52 Uhr 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- Kapitel_4.indd 266 03.08.2010 13:01:52 Uhr 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, Kapitel_4.indd 267 03.08.2010 13:01:52 Uhr 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. Kapitel_4.indd 268 03.08.2010 13:01:52 Uhr 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 Kapitel_4.indd 269 03.08.2010 13:01:53 Uhr 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. Kapitel_4.indd 270 03.08.2010 13:01:53 Uhr 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? Kapitel_4.indd 271 03.08.2010 13:01:53 Uhr 4. Marketing Mix in the Marketing Planning Process272 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. Kapitel_4.indd 272 03.08.2010 13:01:53 Uhr