distribution lesson 2

• Channel design


  Decisions associated with developing new marketing channels where none had existed before, or modifying existing channels
• Channel design is presented as a decision faced by the marketer

  
• Channel design


  Used in a broad sense to include either setting up channels from scratch or modifying existing channels
• Channel Design (verb)


  The marketer is consciously and actively allocating the distribution tasks in an attempt to develop an effective and efficient channel structure
• The term channel design refers to only one phase of channel design - the selection of the channel members

  
• Channel design


  Has a strategic connotation because it should be used as an integral part of the firm's attempt to gain a differential advantage or sustainable competitive advantage in the market
• Who engages in channel design

  • Producers
  • Manufacturers
  • Wholesalers (consumer and industrial)
  • Retailers
• Retailers' perspective on channel design


  They look "up the channel" in an attempt to secure suppliers, rather than "down the channel" toward the market as is the case for producers and manufacturers
• Phases/steps of the channel design decision

  • Recognizing the need for a channel design decision
  • Setting and coordinating distribution objectives
  • Specifying distribution tasks
  • Developing possible alternative channel structures
  • Evaluating the variables affecting channel structure
  • Choosing the "best" channel structure
  • Selecting the channel members

  
• Reasons for recognizing the need for a channel design decision

  • Developing a new product or product line
  • Aiming an existing product at a new target market
  • Making a major change in some other component of the marketing mix
  • Establishing a new firm, either from scratch or as a result of mergers or acquisitions
  • Adapting to changing intermediary policies that may inhibit the attainment of the firm's distribution objectives
  • Dealing with changes in availability of particular kinds of intermediaries
  • Opening up new geographic marketing areas (territories)
  • When technological advances make new channels possible
  • Meeting the challenge of conflict or other behavioral problems
  • Reviewing and evaluating

  
• Setting and coordinating distribution objectives

  1. Become familiar with the objectives and strategies in the other marketing mix areas and any other relevant objectives and strategies of the firm

  2. Set distribution objectives and state them explicitly

  3. Check to see if the distribution objectives set are congruent with marketing and other general objectives and strategies of the firm

  
• Distribution tasks

  • Gather information on target market shopping patterns
  • Promote product availability in the target market
  • Maintain inventory storage to assure timely availability
  • Compile information about product features
  • Provide for hands-on tryout of product
  • Sell against competitive products
  • Process and fill specific customer orders
  • Transport the product
  • Arrange for credit provisions
  • Provide product warranty service
  • Provide repair and restringing service
  • Establish product return procedure
• Number of levels in a channel

  Can range from two levels (most direct) up to five levels and occasionally even higher
• Intensity of distribution


  • Intensive - as many outlets as possible are used at each level
  • Selective - not all possible intermediaries at a particular level are used, but rather those included are carefully chosen
  • Exclusive - only one intermediary in a particular market area is used

  
• Six Basic Categories that affect channel structure

  • Market variables
  • Product variables
  • Company variables
  • Intermediary variables
  • Environmental variables
  • Behavioral variables
• Market variables


  • Market Geography - geographical size of markets and their physical location and distance from the producer or manufacturer
  • Market Size - the number of customers making up a market
  • Market Density - the number of buying units per unit of land area
  • Market Behavior - how, when, where, and who customers buy

  
• Product variables


  • Bulk and Weight - heavy and bulky products have very high handling and shipping costs relative to their value
  • Perishability - products subject to rapid physical deterioration or fashion obsolescence
  • Unit Value - the lower the unit value, the longer the channels should be
  • Degree of Standardization - influence on channel structure
  • Technical versus Nontechnical - highly technical products generally distributed through direct channel
  • Newness - new products require extensive promotion
  • Product Prestige - prestigious products need limited access
• Company variables


  • Size - range of channel options is positively related to firm size
  • Financial Capacity - greater capital means less dependence on intermediaries
  • Managerial Expertise - more experience allows reducing reliance on intermediaries
  • Objectives and Strategies - constrain available channel structures
• Intermediary variables


  • Availability - adequate intermediaries influence channel structure
  • Cost - cost of using intermediaries is a consideration
  • Services - services offered by intermediaries are related to channel member selection

  
• Environmental variables


  • Impact of environmental forces is a common reason for channel design decisions
• Behavioral variables


  • Attention to behavioral problems that can distort communications fosters more effective channel structure
• Characteristics of Goods and Parallel Systems Approach

  Places main emphasis on product variables, arguing all products can be described by 5 characteristics: replacement rate, gross margin, adjustment, time of consumption, and searching time

  
• Financial Approach


  Argues most important variables are financial, involving comparing estimated earnings on capital from alternative structures vs cost of capital
• Transaction Cost Analysis (TCA) Approach


  Addresses choice between manufacturer performing distribution tasks or vertical integration vs using independent intermediaries, based on opportunistic behaviors
• Management Science Approaches


  Attempt to use quantitative models by taking all possible channel structures and plugging into a set of equations to determine optimal channel structure, but still need more development
• Judgmental-Heuristic Approaches


  Rely heavily on managerial judgment and heuristics, including straight qualitative judgment, weighted factor score, and distribution costing
• Judgmental-heuristic approaches incorporate non-financial criteria and enable satisfactory (though not optimal) channel choices, despite relying on estimation and judgment
• number of alternatives channel manager can realistically consider  is often limited to no more than two or three choices
• what to consider in getting number of possible channel structure

  level, intensity, and type of intermediaries = 45
• Straight Qualitative Judgment Approach

  crudest and common; evaluated by management in terms of decision factors that are thought to be important
• Weighted Factor Score Approach

  forces management to structure and quantify its judgments in choosing a channel alternative
• Distribution Costing Approach

  estimates of costs and revenues for different channel alternatives are made, and the figures are compared to see how each alternative compares to another