Marketing Channels Note.
Marketing Channels Note.
Week 2: The Channel Participants & The Marketing Environment The Channel Participants • Major participants in marketing channels: Producers & manufacturers à Intermediaries (Wholesale & Retail) à Final users (consumers & industries) • Why shift distribution tasks to intermediaries? Because P&M are lack expertise and lack economies of scale to distribute their product directly, while intermediaries can spread high fixed costs over large quantities of diverse product, and also can achieve economies of scale and economies of scope. • Major types of wholesalers: Independent middlemen (merchant wholesaler, agents, brokers & commission merchants), manufacturer owned (manufacturers’ sales branches & offices). Merchant (=dealer/salesman) wholesalers perform buy, take title, and hold inventory and handle. Large quantities of products resell to retailers, industrial commercial or institutional concerns, and other wholesalers. Agents, brokers & commission merchants involved in buying & selling while acting on behalf of clients. Commissions on sales or purchases. Manufacturers’ sales branches & offices are separated from manufacturing plants, owned & operated by manufacturers, distribute manufacturer’s products at wholesale and some wholesale allied & supplementary products purchased from other manufacturers. The role of wholesale distribution: Wholesalers are experts in the process of taking finished goods and getting them on store shelves. The first key step for a wholesaler is to decide which products to purchase and distribute. Generally, a distributor looks for products that have strong consumer appeal that retailers will want to acquire. In some cases, manufacturers offer trade discounts and promotions to get wholesalers to buy because of a reduced cost. • Major trends in wholesale structure: -‐ Size of wholesaler: majority are small businesses -‐ Sales volume: nearly 45% of all firms have annual sales of less than $1 million -‐ Number of employees per firm: about 50% of firms had fewer than 5 employees
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Economic concentration in terms of % of total sales: 50 largest manufacturers’ sales branches and offices garnered nearly 63% of sales for this type.
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Merchant wholesalers specialize in tasks: Provide market coverage à make sales contacts à hold inventory à process orders à gather market information à offer customer support (operate at high levels of effectiveness and efficiency, average cost curves lower than those for their suppliers). -‐ Merchant wholesalers’ distribution tasks serve customers: Assure product availability à provide customer service à extend credit & financial assistance à offer assortment convenience à break bulk à help customers with advice and technical support. -‐ Agents wholesalers’ distribution tasks: + Manufacturers’ agents: market coverage & sales contacts + Selling agents & brokers: market coverage, sales contacts, order processing, marketing information, product availability & customer services. + Commission merchant: market coverage, sales contacts, order processing, breaking bulk, credit & holding inventory.
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Retail structure: -‐ Definition: Retail is the sale of goods to end users, not for resale, but for use and consumption by the purchaser. The retail transaction is at the end of the supply chain. Manufacturers sell large quantities of products to retailers, and retailers attempt to sell those same quantities of products to consumers. Distribution task performed by retailers: -‐ Offer manpower & physical facilities close to consumers’ residences -‐ Provide personal assistance to help sell products -‐ Interpret and relay consumer demand -‐ Divide large quantities into consumer-‐sized lots -‐ Offer storage -‐ Remove risk by ordering in advance of the season
•
•
Retailers’ growing power in marketing channels: -‐ Increased size & buying power -‐ Application of advanced technologies -‐ Use of modern marketing strategies -‐ Become power retailers & category killers -‐ Information technology & the internet, -‐ Modern techniques; relationship marketing
•
Facilitating agencies in marketing channels: transportation, storage, orders processing, advertising and financial agencies, insurance companies & marketing research firms.
2
The Marketing Environment: • The external environment: consists of all external uncontrollable factors within which marketing channels exist. This factor affects channel members and nonmembers, such as facilitating agencies = all channel participants.
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The economic environment: -‐ Major economic forces: recession, inflation & deflation + Recession: Decreased consumer and/or corporate spending = reduced sales volume, profitability and firms caught with large inventories à Channel strategy: manufacturers provide channel member support by financing high inventory costs + Inflation: continued high spending or drop-‐offs in spending, fueling a recession à Channel strategies: 1. Reduce manufacturer’s product mix from higher-‐price to lower-‐price products 2. Reduce inventory burden on members with: streamlined product line, faster order processing & delivery, higher inventory turnover through stronger promotional support.
3
+ Deflation = decreased prices à pass cost-‐included price increases through channel when built-‐in cost pressures from labour contracts were negotiated several years earlier. + Other economic factors: 1. Increased real interest rates = decreased demand & increased costs 2. Strong AUD dollar à difficult to sell products through channel members = AUD products less competitive. •
Types of competition:
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•
The Sociocultural Environment: pervades all aspects of a society, influences both national & international marketing channels, influences wide variations among channel structures worldwide. -‐ Sociocultural developments: + Population age patterns: US population becoming both younger & older + Ethnic mix: increased number of minority-‐owned businesses + Educational trends: increased levels = people more demanding + Family or household structure: smaller & more varied + Role of women: increased number = changing shopping needs
•
The technological environment: Scanners & EDI (electronic data interchange), computerized inventory management & portable computers help retailers & wholesalers closely monitor success or failure of products they handle. EDI = enhanced distribution efficiency: links together channel information systems, provides real-‐time responses, & enhanced by internet.
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•
The legal environment = the set of laws that impact marketing channels: continually evolving, affected by changing values, norms, politics & precedents, knowledge of basics helps channel manager avoid serious & costly legal problems.
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Week 3: Behavioral Processes in Marketing Channels 1. The marketing channel as a social system • Social system: -‐ Generated by any process of interaction on sociocultural level -‐ Between two or more actors -‐ Actor is individual or collectivity à Individuals & collectivities interacting within marketing channel
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2. Behavioural processes Conflict Roles Power Communication 3. How conflict emerges Cause: When a channel member perceives that another member’s actions impede (=delay) that attainment of his or her goals Behavioral trademarks: direct, personal, and opponent-‐centered behavior
4. Causes of channel conflict Conflicts related to role incongruence • Conflicts in servicing key accounts •
•
Temporary conflicts Issues of delayed new product releases, backorders, new product allocation, product quality and service support. Delayed new product releases and backorders result in distributor’s losing potential revenue and the possibility of looking for another supplier. Backorders are the “cardinal sin” in distribution and again can result in defection to another competitor supplier. Product quality issues and service issues create conflict when the vendor does not support the product but leaves it for his channel partners to
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•
• •
resolve. This is evident in IT software where the distributor has to sort out technical issues with no recognition of compensation for carrying out this function. Unethical behaviour by the vendor Channel design as source of conflict Channel variety conflicts: If a vendor has too many channels or distributors then there is always distrust because there are too many channels to market and you spend more time with conflict. You are always worrying about the vendor giving the edge to the other distributor – whether it’s through pricing, pushing the business to that distributor, or their relationship is stronger and you’re not as strong. You’ve got too much distribution then it is tough to build a strong relationship with the supplier. Then you get a lack of closeness because a lot of suppliers see you as buying the product and that’s it – so they don’t want to spend time with you, they get the order and go away. We have strong relationships with certain vendors – we spend a lot of time on developing these relationships.
• Multi channel strategy conflicts: 5. Conflict and channel efficiency • Effects of channel conflict: Negative effect: Reduced efficiency As the level of conflict increases, channel efficiency declines No effect: efficiency remains constant Exists in channels characterized by high level of dependency among members. Channel efficiency is not affected. Positive effect: efficiency increased Conflict might be impetus for either or both members to reappraise their policies. Channel efficiency increased. 6. Managing channel conflict: • Detecting conflict à appraising (= assess/evaluate) the effect of conflict à Resolving conflict -‐ Detecting channel conflict: regularly survey other members’ perceptions of firms’ performance à Perform marketing channel audit à Form distributors’ advisory councils or channel members’ committees.
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Appraising the effect of conflict: subjective process that relies on manager’s judgment
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Resolving conflict: creative action on the other part of some party to the conflict is needed if the conflict is to be successfully resolved. Conversely, if conflict is simply “left alone”, it is not likely to be successfully resolved and may get worse. Communication discussion with multiple points within the vendor (seller/retailer) all of the time because you can’t rely on one person to carry it through.
à Tips for dealing with conflict: -‐ Evaluate your channel partner’s conflict resolution styles. Understand each other offers you a great start -‐ Give positive responses and feedback as often as possible to avoid a negative tone -‐ Review the value of the channel relationship. Ask yourself whether winning this battle will move you closer to an optimal relationship or further away from one -‐ Keep the consequences of your decisions in mind! -‐ Voice is used in an open relationship with high trust to resolve conflicts -‐ Silence is used as a way of disciplining vendors who perpetrate (=maintain/ keep going) a serve conflict. -‐ New channel managers in particular who don’t understand the existing relationships have to develop trust and not make inappropriate channel changes without open communication dialogue. -‐ Exit is used as a last resort when all activity links, social bonds and resource ties are exhausted. Exit can be mutual consent by both parties. à A limited amount of channel conflict is healthy. However, once the balance between coverage and conflict is lost, destructive channel conflict can quickly undermine your channel strategy, market position, and product line profitability. • Conflict escalation: -‐ Experienced channel account manager critical in conflict resolution -‐ Distributors use escalation and multiple communication points to resolve conflicts with the vendors. • Channel Alienation (xa lanh’): is the manifestation real or imaginary of conflict that occurs between two channel partners that create a sense of separation or retreat in their relationship. 7. Power in marketing channels -‐ The capacity of a particular channel member to control or influence the behavior of another channel member -‐ Keys to understanding power: power bases, use of power bases 10
+ Power bases for channel control: reward power, coercive power, legitimate (legal, recognize) power, referent power and expert power. + Use of power bases in the marketing channel: 1. Identify available power bases: producer or manufacturer, organisation of channel, particular set of circumstances 2. Select and use appropriate power bases to better or worsen channel relationships. 8. Roles in marketing channels -‐ It’s a set of prescriptions defining what the behavior of a position member should be à Roles change over time, straying (đi lạc) far from a role may cause conflict, roles help describe & compare the expected behavior of channel members and provides insight into the constraints under which they operate. 9. Communication processes • Behavioral problems in channel communications 1. Differences in goals between manufacturers and their retailers 2. Differences in the kinds of language they use to convey information 3. Perceptual differences among members 4. Secretive behavior 5. Inadequate (poor) frequency of communication 10. Trust: -‐ Trust is forward-‐looking, defined as “one party’s belief that its needs will be fulfilled in the future by actions undertaken by the other party”. • Characteristics of a deteriorating (=worsen/fail/decline) relationship related to distrust: Lack of communication, over distribution, ineffective account management à Deteriorating relationship à Distrust • Characteristics that make a healthy relationship related to trust: Effective communication, clear channel strategy, effective account management à Healthy relationship à Trust
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Week 2: The Channel Participants & The Marketing Environment The Channel Participants • Major participants in marketing channels: Producers & manufacturers à Intermediaries (Wholesale & Retail) à Final users (consumers & industries) • Why shift distribution tasks to intermediaries? Because P&M are lack expertise and lack economies of scale to distribute their product directly, while intermediaries can spread high fixed costs over large quantities of diverse product, and also can achieve economies of scale and economies of scope. • Major types of wholesalers: Independent middlemen (merchant wholesaler, agents, brokers & commission merchants), manufacturer owned (manufacturers’ sales branches & offices). Merchant (=dealer/salesman) wholesalers perform buy, take title, and hold inventory and handle. Large quantities of products resell to retailers, industrial commercial or institutional concerns, and other wholesalers. Agents, brokers & commission merchants involved in buying & selling while acting on behalf of clients. Commissions on sales or purchases. Manufacturers’ sales branches & offices are separated from manufacturing plants, owned & operated by manufacturers, distribute manufacturer’s products at wholesale and some wholesale allied & supplementary products purchased from other manufacturers. The role of wholesale distribution: Wholesalers are experts in the process of taking finished goods and getting them on store shelves. The first key step for a wholesaler is to decide which products to purchase and distribute. Generally, a distributor looks for products that have strong consumer appeal that retailers will want to acquire. In some cases, manufacturers offer trade discounts and promotions to get wholesalers to buy because of a reduced cost. • Major trends in wholesale structure: -‐ Size of wholesaler: majority are small businesses -‐ Sales volume: nearly 45% of all firms have annual sales of less than $1 million -‐ Number of employees per firm: about 50% of firms had fewer than 5 employees
1
-‐
Economic concentration in terms of % of total sales: 50 largest manufacturers’ sales branches and offices garnered nearly 63% of sales for this type.
•
Merchant wholesalers specialize in tasks: Provide market coverage à make sales contacts à hold inventory à process orders à gather market information à offer customer support (operate at high levels of effectiveness and efficiency, average cost curves lower than those for their suppliers). -‐ Merchant wholesalers’ distribution tasks serve customers: Assure product availability à provide customer service à extend credit & financial assistance à offer assortment convenience à break bulk à help customers with advice and technical support. -‐ Agents wholesalers’ distribution tasks: + Manufacturers’ agents: market coverage & sales contacts + Selling agents & brokers: market coverage, sales contacts, order processing, marketing information, product availability & customer services. + Commission merchant: market coverage, sales contacts, order processing, breaking bulk, credit & holding inventory.
•
Retail structure: -‐ Definition: Retail is the sale of goods to end users, not for resale, but for use and consumption by the purchaser. The retail transaction is at the end of the supply chain. Manufacturers sell large quantities of products to retailers, and retailers attempt to sell those same quantities of products to consumers. Distribution task performed by retailers: -‐ Offer manpower & physical facilities close to consumers’ residences -‐ Provide personal assistance to help sell products -‐ Interpret and relay consumer demand -‐ Divide large quantities into consumer-‐sized lots -‐ Offer storage -‐ Remove risk by ordering in advance of the season
•
•
Retailers’ growing power in marketing channels: -‐ Increased size & buying power -‐ Application of advanced technologies -‐ Use of modern marketing strategies -‐ Become power retailers & category killers -‐ Information technology & the internet, -‐ Modern techniques; relationship marketing
•
Facilitating agencies in marketing channels: transportation, storage, orders processing, advertising and financial agencies, insurance companies & marketing research firms.
2
The Marketing Environment: • The external environment: consists of all external uncontrollable factors within which marketing channels exist. This factor affects channel members and nonmembers, such as facilitating agencies = all channel participants.
•
The economic environment: -‐ Major economic forces: recession, inflation & deflation + Recession: Decreased consumer and/or corporate spending = reduced sales volume, profitability and firms caught with large inventories à Channel strategy: manufacturers provide channel member support by financing high inventory costs + Inflation: continued high spending or drop-‐offs in spending, fueling a recession à Channel strategies: 1. Reduce manufacturer’s product mix from higher-‐price to lower-‐price products 2. Reduce inventory burden on members with: streamlined product line, faster order processing & delivery, higher inventory turnover through stronger promotional support.
3
+ Deflation = decreased prices à pass cost-‐included price increases through channel when built-‐in cost pressures from labour contracts were negotiated several years earlier. + Other economic factors: 1. Increased real interest rates = decreased demand & increased costs 2. Strong AUD dollar à difficult to sell products through channel members = AUD products less competitive. •
Types of competition:
4
•
The Sociocultural Environment: pervades all aspects of a society, influences both national & international marketing channels, influences wide variations among channel structures worldwide. -‐ Sociocultural developments: + Population age patterns: US population becoming both younger & older + Ethnic mix: increased number of minority-‐owned businesses + Educational trends: increased levels = people more demanding + Family or household structure: smaller & more varied + Role of women: increased number = changing shopping needs
•
The technological environment: Scanners & EDI (electronic data interchange), computerized inventory management & portable computers help retailers & wholesalers closely monitor success or failure of products they handle. EDI = enhanced distribution efficiency: links together channel information systems, provides real-‐time responses, & enhanced by internet.
5
•
The legal environment = the set of laws that impact marketing channels: continually evolving, affected by changing values, norms, politics & precedents, knowledge of basics helps channel manager avoid serious & costly legal problems.
6
Week 3: Behavioral Processes in Marketing Channels 1. The marketing channel as a social system • Social system: -‐ Generated by any process of interaction on sociocultural level -‐ Between two or more actors -‐ Actor is individual or collectivity à Individuals & collectivities interacting within marketing channel
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• • • •
2. Behavioural processes Conflict Roles Power Communication 3. How conflict emerges Cause: When a channel member perceives that another member’s actions impede (=delay) that attainment of his or her goals Behavioral trademarks: direct, personal, and opponent-‐centered behavior
4. Causes of channel conflict Conflicts related to role incongruence • Conflicts in servicing key accounts •
•
Temporary conflicts Issues of delayed new product releases, backorders, new product allocation, product quality and service support. Delayed new product releases and backorders result in distributor’s losing potential revenue and the possibility of looking for another supplier. Backorders are the “cardinal sin” in distribution and again can result in defection to another competitor supplier. Product quality issues and service issues create conflict when the vendor does not support the product but leaves it for his channel partners to
8
•
• •
resolve. This is evident in IT software where the distributor has to sort out technical issues with no recognition of compensation for carrying out this function. Unethical behaviour by the vendor Channel design as source of conflict Channel variety conflicts: If a vendor has too many channels or distributors then there is always distrust because there are too many channels to market and you spend more time with conflict. You are always worrying about the vendor giving the edge to the other distributor – whether it’s through pricing, pushing the business to that distributor, or their relationship is stronger and you’re not as strong. You’ve got too much distribution then it is tough to build a strong relationship with the supplier. Then you get a lack of closeness because a lot of suppliers see you as buying the product and that’s it – so they don’t want to spend time with you, they get the order and go away. We have strong relationships with certain vendors – we spend a lot of time on developing these relationships.
• Multi channel strategy conflicts: 5. Conflict and channel efficiency • Effects of channel conflict: Negative effect: Reduced efficiency As the level of conflict increases, channel efficiency declines No effect: efficiency remains constant Exists in channels characterized by high level of dependency among members. Channel efficiency is not affected. Positive effect: efficiency increased Conflict might be impetus for either or both members to reappraise their policies. Channel efficiency increased. 6. Managing channel conflict: • Detecting conflict à appraising (= assess/evaluate) the effect of conflict à Resolving conflict -‐ Detecting channel conflict: regularly survey other members’ perceptions of firms’ performance à Perform marketing channel audit à Form distributors’ advisory councils or channel members’ committees.
9
-‐
Appraising the effect of conflict: subjective process that relies on manager’s judgment
-‐
Resolving conflict: creative action on the other part of some party to the conflict is needed if the conflict is to be successfully resolved. Conversely, if conflict is simply “left alone”, it is not likely to be successfully resolved and may get worse. Communication discussion with multiple points within the vendor (seller/retailer) all of the time because you can’t rely on one person to carry it through.
à Tips for dealing with conflict: -‐ Evaluate your channel partner’s conflict resolution styles. Understand each other offers you a great start -‐ Give positive responses and feedback as often as possible to avoid a negative tone -‐ Review the value of the channel relationship. Ask yourself whether winning this battle will move you closer to an optimal relationship or further away from one -‐ Keep the consequences of your decisions in mind! -‐ Voice is used in an open relationship with high trust to resolve conflicts -‐ Silence is used as a way of disciplining vendors who perpetrate (=maintain/ keep going) a serve conflict. -‐ New channel managers in particular who don’t understand the existing relationships have to develop trust and not make inappropriate channel changes without open communication dialogue. -‐ Exit is used as a last resort when all activity links, social bonds and resource ties are exhausted. Exit can be mutual consent by both parties. à A limited amount of channel conflict is healthy. However, once the balance between coverage and conflict is lost, destructive channel conflict can quickly undermine your channel strategy, market position, and product line profitability. • Conflict escalation: -‐ Experienced channel account manager critical in conflict resolution -‐ Distributors use escalation and multiple communication points to resolve conflicts with the vendors. • Channel Alienation (xa lanh’): is the manifestation real or imaginary of conflict that occurs between two channel partners that create a sense of separation or retreat in their relationship. 7. Power in marketing channels -‐ The capacity of a particular channel member to control or influence the behavior of another channel member -‐ Keys to understanding power: power bases, use of power bases 10
+ Power bases for channel control: reward power, coercive power, legitimate (legal, recognize) power, referent power and expert power. + Use of power bases in the marketing channel: 1. Identify available power bases: producer or manufacturer, organisation of channel, particular set of circumstances 2. Select and use appropriate power bases to better or worsen channel relationships. 8. Roles in marketing channels -‐ It’s a set of prescriptions defining what the behavior of a position member should be à Roles change over time, straying (đi lạc) far from a role may cause conflict, roles help describe & compare the expected behavior of channel members and provides insight into the constraints under which they operate. 9. Communication processes • Behavioral problems in channel communications 1. Differences in goals between manufacturers and their retailers 2. Differences in the kinds of language they use to convey information 3. Perceptual differences among members 4. Secretive behavior 5. Inadequate (poor) frequency of communication 10. Trust: -‐ Trust is forward-‐looking, defined as “one party’s belief that its needs will be fulfilled in the future by actions undertaken by the other party”. • Characteristics of a deteriorating (=worsen/fail/decline) relationship related to distrust: Lack of communication, over distribution, ineffective account management à Deteriorating relationship à Distrust • Characteristics that make a healthy relationship related to trust: Effective communication, clear channel strategy, effective account management à Healthy relationship à Trust
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