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Designing Distribution Channels - Structure and Design of Marketing Channels
MARKETING MANAGEMENT - Structure and Design of Marketing Channels
Designing Distribution Channels - Structure and Design of Marketing Channels
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Channel design refers to those decisions that involve in the development of new marketing channels or modifying the existent ones.
Designing Distribution Channels
Channel design refers to those decisions that involve in the development of new marketing channels or modifying the existent ones. The channel design decision can be broken down into six steps namely:
1. Recognizing the need for channel design decision
2. Setting and coordinating distribution objectives
3. Specify the distribution tasks
4. Develop alternative channel structures
5. Evaluate relevant variables
6. Choose the best channel structure
First and foremost task for the organization is to recognize the need for a channel design. An organization would go in for a new channel design for the following reasons namely
1. When a new product or product line is developed, mainly when the existing channels are not suitable for the new line
2. When the existing product is targeted to a different target market. This is common when an organization is used to catering the B2B, plans to enter the consumer market
3. When there is a change in the marketing mix elements, when an organization reduces its prices on certain offering the channel worked out will be based on the price points, they may look in for discounters
4. When facing major environmental changes namely in economic or technological or in legal spheres.
5. Finally when the organization opens up new geographic marketing areas
The list by no means is comprehensive, but gives a picture about some of the most common conditions when channel design decisions are worked out.
Once a need for a design is recognized the next task for the channel manager is to work out to develop the channel structure, either form the scratch or by modifying the existing one. It is necessary for the channel manager to carefully evaluate the firm’s distribution objectives. In order for the distribution objectives to be effective and well coordinated the channel manager need to perform three tasks namely
1. Become familiar with the objectives and strategies in other marketing mix areas and other relevant objectives and strategies of the firm. In most cases the person or the group that sets the objectives of the other marketing mix elements will also set the objectives for distribution as well.
2. Set the objectives and state them explicitly. A good objective is one, which is clear, and explicit, and has a greater role in achieving the firm’s overall objectives. Some examples of a good distribution objectives are as follows.
3. Apple Computers set a distribution objective to reach more consumers with what it refers to as the ‘Apple experience’. So, Apple reinvigorated and reestablished relationships with large retail chains, which it had neglected in recent years .
4. In the same way Coca-Cola seeks to broaden its penetration in schools and college markets, as a result of which it has entered into contact with many schools and colleges, whereby these institutions would sell only Coca-Cola products on their campuses.
5. Check and see if the distribution objectives set are congruent with marketing and other general objectives and strategies of the firm. This involves verifying if the distribution objectives do not conflict with the objectives in the other areas of marketing mix or even to the overall objectives of the company. In order to cross check, it is essential to examine the interrelationships and hierarchy of the objectives of the firms. Exhibit 4.9 gives a clear picture of the same
The important variables that affect a good channel design are size, financial capacity, managerial expertise and objectives and strategies. Larger the firms in terms of size it enables them to exercise a substantial amount of power in the channel. The size does give flexibility for the firm in picking the channel structures. The same hold true when it comes for the financial capability. Greater capital available with a firm, less dependency is seen on the intermediaries.
When a firm is into industrial marketing, it prefers to have its own sales force, warehousing, order processing capabilities and larger firms with good financial backing are better able to bear the high cost of these facilities. When a firm lacks quality managerial skills, a comprehensive channel structure ranging from wholesalers to brokers are needed to perform the distribution activity, once the firm gains experience it can change or reduce the number of intermediaries.
The objectives and strategies a firm has may limit the use of intermediaries. These strategies may emphasis on aggressive promotion and may even alter the distribution tasks. Overall this is one of the prime variables used for evaluating.
The important intermediary variables are availability, costs and services offered. The availability is one of the key variables as this influences the channel structure.
If we take the case of Dell Computers, due to lack of a proper channel structure he designed a direct mail order channel, which provided a strong technical backup as well. The cost is another variable a channel manager considers. If the cost of using a particular intermediary is too high compared the services it offers the manager may consider in minimizing the use of intermediaries. The services performed by the intermediaries is another integral component, a good intermediary is one, which offers efficient services at the lowest cost.
The uncontrollable or the macro environmental forces may affect the different aspects of channel development and management. Forces like the Socio-cultural, economic, technological, legal forces have a significant impact on the channel structure. The other variables are those the organization can work upon or change to the situation but the environmental forces are those the organization has to cope up with.
In deciding the manager should choose an optimal channel structure that would offer desired level of effectiveness at the lowest possible cost. Even though there is not one set method to pick an optimal channel structure, it all depends on the orientation of the firm. If the goal of the firm were profit maximization, the channel structure would be in line with the goal. Most channel choices are still however made on the basis of managerial judgment and the data that is available.
Channel design refers to those decisions that involve in the development of new marketing channels or modifying the existent ones. The channel design decision can be broken down into six steps namely:
1. Recognizing the need for channel design decision
2. Setting and coordinating distribution objectives
3. Specify the distribution tasks
4. Develop alternative channel structures
5. Evaluate relevant variables
6. Choose the best channel structure
1.Recognizing the need for a channel design decision
First and foremost task for the organization is to recognize the need for a channel design. An organization would go in for a new channel design for the following reasons namely
1. When a new product or product line is developed, mainly when the existing channels are not suitable for the new line
2. When the existing product is targeted to a different target market. This is common when an organization is used to catering the B2B, plans to enter the consumer market
3. When there is a change in the marketing mix elements, when an organization reduces its prices on certain offering the channel worked out will be based on the price points, they may look in for discounters
4. When facing major environmental changes namely in economic or technological or in legal spheres.
5. Finally when the organization opens up new geographic marketing areas
The list by no means is comprehensive, but gives a picture about some of the most common conditions when channel design decisions are worked out.
2.Setting and Coordinating Distribution Objectives
Once a need for a design is recognized the next task for the channel manager is to work out to develop the channel structure, either form the scratch or by modifying the existing one. It is necessary for the channel manager to carefully evaluate the firm’s distribution objectives. In order for the distribution objectives to be effective and well coordinated the channel manager need to perform three tasks namely
1. Become familiar with the objectives and strategies in other marketing mix areas and other relevant objectives and strategies of the firm. In most cases the person or the group that sets the objectives of the other marketing mix elements will also set the objectives for distribution as well.
2. Set the objectives and state them explicitly. A good objective is one, which is clear, and explicit, and has a greater role in achieving the firm’s overall objectives. Some examples of a good distribution objectives are as follows.
3. Apple Computers set a distribution objective to reach more consumers with what it refers to as the ‘Apple experience’. So, Apple reinvigorated and reestablished relationships with large retail chains, which it had neglected in recent years .
4. In the same way Coca-Cola seeks to broaden its penetration in schools and college markets, as a result of which it has entered into contact with many schools and colleges, whereby these institutions would sell only Coca-Cola products on their campuses.
5. Check and see if the distribution objectives set are congruent with marketing and other general objectives and strategies of the firm. This involves verifying if the distribution objectives do not conflict with the objectives in the other areas of marketing mix or even to the overall objectives of the company. In order to cross check, it is essential to examine the interrelationships and hierarchy of the objectives of the firms. Exhibit 4.9 gives a clear picture of the same
3.Specifying the Distribution Tasks
Once the objectives are
formulated, a number of functions need to be performed in order for the
distribution objectives to be met. The manager therefore has to specify the
nature of the tasks that needs to be carried out
Once the tasks have been specified by the channel manager he should find out alternate ways of allocating these tasks. In most cases the channel manager chooses from more than one channel to reach the consumer effectively. Britannia would sell their biscuits thorough wholesale food distributor, departmental stores, convenience stores and even in pharmacies. Whatever may be the channel structure, the allocation alternatives should be in terms of (a) the number of levels in the channel (b) the intensity at various levels, and (c) the types of intermediaries.
The number of levels can be from two level upto five levels. The channel manager can think of going for a direct way of meeting the customers to using two intermediaries as an appropriate way. Intensity refers to the number of intermediaries at each level.
Generally the intensities can be classified into three categories namely intensive, selective and exclusive. Intensive saturation means as many outlets as possible are used at each level of the channel. Selective means that not all possible intermediaries at a particular level are used. Exclusive refers to a very selective pattern of distribution.
A firm like Parle may use intensive distribution channel structure, while Rolex may use high degree of selectivity. The types of intermediaries, third component has to be carefully dealt. The firms should not overlook new types of intermediaries that have emerged in recent years particularly
(A) Activity
Would you use exclusive, selecting or intensive distribution for the following products?
1. Maruti Automobiles
2. MTR Food Products
3. Samsung Electroinics
Once the alternative structures have been outlined, each channel structure has to be evaluated on a number of variables. There are five basic categories namely,
Market variables - marketing management is based on the philosophy of marketing concept, which stresses on the consumers needs and wants, the managers have to take the cues from the market. The subcategories that have a greater influence on the market structure are market geography, market size, market density and market behavior
Product variables - some of the most important product variables are bulk and weight, perishability, unit value, degree of standardization, technical vs. non-technical and newness. Heavy and bulky products have a high handling and shipping costs relative to their value. The manufactures of such products have to keep in mind to ship in large lots to a fewer possible points.
It would always be better if the channel structure remains short. Food products, flowers are considered to be highly perishable. When products are highly perishable, the channel structure should be designed to provide rapid delivery from producers to consumers. One important consideration is lower the unit value of a product, the longer the channels should be as low unit value leaves small margins for distribution costs.
Exhibit 4.10 explains the relationship between the degree of standardization and channel length. If the product flows directly from manufacturer or producer to the user the degree of customization is more, but as the product becomes more standardized it passes through many channels. Mostly the B2B machinery has a great degree of customization as it passes from the manufacturer to the industrial user, while many consumer market is predominantly a standardized one.
When it comes for the technical component, the industrial products are mostly distributed through direct channels because of the technical expertise and service while many technical consumer products do use shorter channel structure. When the product is new and is in the introductory stage in order to capitalize on the aggressive promotion, a shorter channel is preferred to gain awareness.
Exabit 4.10 Relationship between degree of standardization and channel length
4.Developing Possible Alternative Channel Structures
Once the tasks have been specified by the channel manager he should find out alternate ways of allocating these tasks. In most cases the channel manager chooses from more than one channel to reach the consumer effectively. Britannia would sell their biscuits thorough wholesale food distributor, departmental stores, convenience stores and even in pharmacies. Whatever may be the channel structure, the allocation alternatives should be in terms of (a) the number of levels in the channel (b) the intensity at various levels, and (c) the types of intermediaries.
The number of levels can be from two level upto five levels. The channel manager can think of going for a direct way of meeting the customers to using two intermediaries as an appropriate way. Intensity refers to the number of intermediaries at each level.
Generally the intensities can be classified into three categories namely intensive, selective and exclusive. Intensive saturation means as many outlets as possible are used at each level of the channel. Selective means that not all possible intermediaries at a particular level are used. Exclusive refers to a very selective pattern of distribution.
A firm like Parle may use intensive distribution channel structure, while Rolex may use high degree of selectivity. The types of intermediaries, third component has to be carefully dealt. The firms should not overlook new types of intermediaries that have emerged in recent years particularly
(A) Activity
Would you use exclusive, selecting or intensive distribution for the following products?
1. Maruti Automobiles
2. MTR Food Products
3. Samsung Electroinics
5.Evaluating the variables affecting Channel structure
Once the alternative structures have been outlined, each channel structure has to be evaluated on a number of variables. There are five basic categories namely,
Market variables - marketing management is based on the philosophy of marketing concept, which stresses on the consumers needs and wants, the managers have to take the cues from the market. The subcategories that have a greater influence on the market structure are market geography, market size, market density and market behavior
Product variables - some of the most important product variables are bulk and weight, perishability, unit value, degree of standardization, technical vs. non-technical and newness. Heavy and bulky products have a high handling and shipping costs relative to their value. The manufactures of such products have to keep in mind to ship in large lots to a fewer possible points.
It would always be better if the channel structure remains short. Food products, flowers are considered to be highly perishable. When products are highly perishable, the channel structure should be designed to provide rapid delivery from producers to consumers. One important consideration is lower the unit value of a product, the longer the channels should be as low unit value leaves small margins for distribution costs.
Exhibit 4.10 explains the relationship between the degree of standardization and channel length. If the product flows directly from manufacturer or producer to the user the degree of customization is more, but as the product becomes more standardized it passes through many channels. Mostly the B2B machinery has a great degree of customization as it passes from the manufacturer to the industrial user, while many consumer market is predominantly a standardized one.
When it comes for the technical component, the industrial products are mostly distributed through direct channels because of the technical expertise and service while many technical consumer products do use shorter channel structure. When the product is new and is in the introductory stage in order to capitalize on the aggressive promotion, a shorter channel is preferred to gain awareness.
Exabit 4.10 Relationship between degree of standardization and channel length
Company Variables
The important variables that affect a good channel design are size, financial capacity, managerial expertise and objectives and strategies. Larger the firms in terms of size it enables them to exercise a substantial amount of power in the channel. The size does give flexibility for the firm in picking the channel structures. The same hold true when it comes for the financial capability. Greater capital available with a firm, less dependency is seen on the intermediaries.
When a firm is into industrial marketing, it prefers to have its own sales force, warehousing, order processing capabilities and larger firms with good financial backing are better able to bear the high cost of these facilities. When a firm lacks quality managerial skills, a comprehensive channel structure ranging from wholesalers to brokers are needed to perform the distribution activity, once the firm gains experience it can change or reduce the number of intermediaries.
The objectives and strategies a firm has may limit the use of intermediaries. These strategies may emphasis on aggressive promotion and may even alter the distribution tasks. Overall this is one of the prime variables used for evaluating.
Intermediary Variables
The important intermediary variables are availability, costs and services offered. The availability is one of the key variables as this influences the channel structure.
If we take the case of Dell Computers, due to lack of a proper channel structure he designed a direct mail order channel, which provided a strong technical backup as well. The cost is another variable a channel manager considers. If the cost of using a particular intermediary is too high compared the services it offers the manager may consider in minimizing the use of intermediaries. The services performed by the intermediaries is another integral component, a good intermediary is one, which offers efficient services at the lowest cost.
Environmental Variables
The uncontrollable or the macro environmental forces may affect the different aspects of channel development and management. Forces like the Socio-cultural, economic, technological, legal forces have a significant impact on the channel structure. The other variables are those the organization can work upon or change to the situation but the environmental forces are those the organization has to cope up with.
6.Choosing the ‘Best’ Channel structure
In deciding the manager should choose an optimal channel structure that would offer desired level of effectiveness at the lowest possible cost. Even though there is not one set method to pick an optimal channel structure, it all depends on the orientation of the firm. If the goal of the firm were profit maximization, the channel structure would be in line with the goal. Most channel choices are still however made on the basis of managerial judgment and the data that is available.
Tags : MARKETING MANAGEMENT - Structure and Design of Marketing Channels
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