CHAPTER 15DESIGNING AND

MANAGING VALUE NETWORKS AND

CHANNELS

BY: M ATA LO G , P R U D E N T E A N D S O N

CHAPTER OBJECTIVES

•Describe a value network and marketing-channel system.

•Describe what work is performed by marketing channels.

•Describe what decisions companies face in designing, managing, evaluating, and modifying their channels.

•Describe the trends taking place in channel dynamics.

•Determine how channel conflict can be managed.

In this chapter, we will also address the following questions:

•What is a marketing channel system and value network?

•What work do marketing channels perform?

•How should channels be designed?

•What decisions do companies face in managing their channels?

•How should companies integrate channels and manage channel conflict?

•What are the key issues with e-commerce and m-commerce?

CHAPTER KEY POINTSCONTENTS

MARKETING CHANNEL AND VALUE NETWORKS

•Marketing Channels are sets of interdependent organizations involved in the process of making a product or service available for use or consumption.

• Intermediaries:

- Merchants

- Agents

- Facilitators

THE IMPORTANCE OF CHANNELS

•Marketing Channel System is the particular set of marketing channels employed by a firm.

• The channel chosen affect all other marketing decisions.

•Push Marketing VS Pull Marketing

- Push Strategy involves the manufacturer using its sales force and trade promotion money

- Pull Strategy involves the manufacturer using advertising and promotion

CHANNEL DEVELOPMEN

T

CHANNEL DEVELOPMENT

• Customers expect channel integration, which allows them to:

- Order a product online and pick it up at a convenient retail location

- Return an online-ordered product to a nearby store of the retailer

- Receive discounts and promotional offers based on total online and offline purchases• Four Categories of Buyers:

- Habitual Shoppers

- High Value Deal Seekers

- Variety-Loving Shoppers

- High-Involvement Shoppers

VALUE NETWORKS

• Demand Chain Planning - A supply chain view of a firm sees markets as destination points and amounts to a linear view of the flow.

• Northwerstern’s Don Schultz says: “A demand chain management approach doesn’t just push things through the system. It emphasizes what solutions consumers are looking for, not what products we are trying to sell them.” Schultz has suggested that the traditional marketing four P’s be replaced by a new acronym, SIVA, which stands for Solutions, Information, Value and Access.

• Value Network - a system of partnerships and alliances that a firm creates to source, augment, and deliver its offerings.

Why would a producer delegate some of the selling

job to intermediaries?

THE ROLE OF MARKETING CHANNELS

• Producers do gain several advantages by using intermediaries:

- Many producers lack the financial resources to carry out direct marketing.

- Producers who do establish their own channels can often earn a greater return by increasing investment in their main business.

- In some cases, direct marketing simply is not feasible.

CHANNEL FUNCT IONS AND FLOW

CHANNEL FUNCTIONS

CHANNEL FLOW

CHANNEL LEVELS

CHANNEL LEVELS

• Channels normally describe a forward movement of products from source to user, but reverse-flow channels are also important:

- to reuse products or containers

- to refurbish products for resale

- to recycle products

- to dispose of products and

packaging.

• Reverse-flow intermediaries include manufacturers’ redemption centers, community groups, trash collection specialists, recycling centers, trash-recycling brokers, and central processing warehousing.

CHANNEL DESIGN

DECISIONS

1) ANALYZING CUSTOMERS’ DESIRED SERVICE OUTPUT LEVELS

• Lots size - the number of units the channel permits a typical customer to purchase on one occasion.

• Waiting and delivery time – the average time customers of that channel wait for receipt of the goods.

• Spatial convenience – the degree to which the marketing channel makes it easy for customers to purchase the product.

• Product variety – the assortment breadth provided by the marketing channel.

• Service backup – the add-on (credit, delivery, installation, repairs) provided by the channel.

2) ESTABLISHING OBJECTIVES AND CONSTRAINTS

•Channel objectives should be started in terms of targeted service output levels.

• Channel objectives vary with product characteristics.

•Channel design must take into account the strengths and weaknesses of different types of intermediaries.

• Channel design must adapt to the larger environment.

3) IDENTIFYING MAJOR CHANNEL ALTERNATIVES

• Sale forces to agents – Can handle complex products and transactions.

•Distributors – Can create sales, but the company loses direct contact with the customers.

•Dealers

•Direct mail

• Telemarketing

• Internet – Is much less expensive, but it cannot handle complex products.

• Types of Intermediaries:

- Expand the company’s direct sales force

- Direct mail

- Hire manufacturers’ agents in different regions or end use

industries to sell the equipment

- Find distributors in the different regions or end-use industries

that will buy and carry the device

•Number of Intermediaries:- Exclusive distribution - Selective distribution - Intensive distribution

• Terms and Responsibilities of Channel Members:

- Price policy calls - are for the producer to establish a price list and schedule of discounts and allowances that intermediaries see as equitable and sufficient.

- Conditions of sale - to payment terms and producer guarantees. Most producers grant cash discounts to distributors for early payment. Producers might also provide distributors a guarantee against defective merchandise or price declines. A guarantee against price declines gives distributors an incentive to buy larger quantities.

- Distributors’ territorial rights - define the distributors’ territories and the terms under which the producer will enfranchise other distributors. Distributors normally expect to receive full credit for all sales in their territory, whether or not they did the selling.

- Mutual services and responsibilities - must be carefully spelled out, especially in franchised and exclusive-agency channels.

4) EVALUATING THE MAJOR ALTERNATIVES

• Economic criteria• Control and adaptive criteria

CHANNEL-MANAGEMENT DECISIONS

• Selecting Channel Members

• Training Channel Members

•Motivating Channel Members

- Coercive power

- Reward power

- Legitimate power

- Expert power

- Referent power

• Evaluating Channel Members

• Modifying Channel Arrangements

CHANNEL INTEGRATIO

N AND SYSTEMS

1) VERTICAL MARKETING SYSTEMS• 3 Types of Vertical Marketing Systems”

– Corporate VMS - combines successive stages of production and distribution under single ownership.

– Administered VMS - coordinates successive stages of production and distribution through the size and power of one of the members.

a) Distribution programming

b) Distributor-relations planning

– Contractual VMS - consists of independent firms at different levels production and distribution integrating their programs on a contractual basis

a) Wholesaler - sponsored voluntary chain

b) Retailer cooperatives

c) Franchise organizations

– The new competition in retailing - a polarization in retailing between large vertical marketing organizations and independent specialty stores, which create a problem for manufacturers.

2) HORIZONTAL MARKETING SYSTEMS

•by adding the channels, companies can gain the following:

- Increased market coverage

- Lower Channel cost

- More customized selling

3) MULTICHANNEL MARKETING SYSTEMS

PLANNING CHANNEL ARCHITECTURE

CONFLICT, COOPERATION AND COMPETITION

• Channel Conflict - generated when one channel member’s actions prevent the channel from achieving its goal.

• Channel Coordination - occurs when channel members are brought together to advance the goal of the channel.

• Types of Conflict and Competition

– Vertical Channel Conflict

– Horizontal Channel Conflict

– Multichannel Conflict

CONFLICT, COOPERATION AND COMPETITION

• Causes of Channel Conflict

- Goal Incompatibility - dealers, in contrast, may prefer to work with high margins and pursue short-run profitability.

- Unclear Roles and Rights - territory boundaries and credit for sales often produce conflict.

- Differences in Perception - the manufacturer may be optimistic but not the dealer.

- Intermediaries’ Dependence on the Manufacturers

CONFLICT, COOPERATION AND COMPETITION

• Managing Channel Conflict

- Adoption of Superordinate Goals - channel members come to an agreement on the fundamental goal they are jointly seeking.

- Exchange Persons between Two or More Channel Levels.

- Co-optation - an effort by one organization to win the support of the leaders of another organization.

• When conflict is chronic, the parties may refer to:

- Diplomacy

- Mediation

- Arbitration

E-COMMERCE MARKETING PRACTICES

• E-business - describes the use of electronic means and platforms to conduct a company’s business.

• E-commerce - means that the company or site offers to transact or facilitate the selling of products and service online.

• E-purchasing - means companies decide to purchase goods, services, and information from various online suppliers.

• E-marketing - describes company efforts to inform buyers, communicate, promote, and sell its products and services over the internet.

a) Pure-Click Companies

b) Brick-and-Click Companies

E-COMMERCE MARKETING PRACTICES

•Three Strategies for Trying to Gain Acceptance from Intermediaries:

- Offer different brands or products on the internet.

- Offer the offline partners higher commissions to cushion the negative impact on sales.

- Take orders on the Web site but have retailers deliver and collect payment.

CHAPTER SUMMARYBULLET-FORM, SHORT SUMMARY

• Most producers do not sell their goods directly to final users. Between producers and final users stands one or more marketing channels, a host of marketing intermediaries performing a variety of functions.

• Marketing-channel decisions are among the most critical decisions facing management. The company’s chosen channel(s) profoundly affect all other marketing decisions.

• Companies use intermediaries when they lack the financial resources to carry out direct marketing, when direct marketing is not feasible, and when they can earn more by doing so. The most important functions performed by intermediaries are information, promotion, negotiation, ordering, financing, risk taking, physical possession, payment and title.

• Manufacturers have many alternatives for reaching a market. They can sell direct or use one-, two-, or three-level channels. Deciding which type(s) of channels to use calls for analyzing customer needs, establishing channel objectives and identifying and evaluating the major alternatives, including the types and numbers of intermediaries involved in the channel.

• Effective channel management calls for selecting intermediaries and training and motivating them. The goal is to build a long-term partnership that will be profitable for all channel members.

• Marketing channels are characterized by continuous and sometimes dramatic change. Three of the most important trends are the growth of vertical marketing systems, horizontal marketing systems and multichannel marketing systems.

• All marketing channels have the potential for conflict and competition resulting from such sources as goal incompatibility, poorly defined roles and rights, perceptual differences and interdependent relationships. Companies can manage conflict by striving for superordinate goals, exchanging people among two or more channel levels, co-opting the support of leaders in different parts of the channel and encouraging joint membership in and between trade associations.

• Channel arrangements are up to the company, but there are certain legal and ethical issues to be considered with regard to practices such as exclusive dealing or territories, tying agreements and dealer’s rights.

• E-commerce has grown in importance as companies have adopted “brick-and-click” channel systems. Channel integration must recognize the distinctive strengths of online and offline selling and maximize their joint contribution.

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