Distribution

Module 1: Channel structure and functions Module 2: Channel design: demand, supply and efficiency Module 3: Managing channels: power, conflict, alliances, integration Module 4: Channels institutions: retailing, wholesaling, franchising, internet, logistics and supply chain
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Why should we understand channels? They are gatekeepers Asset to the company- can be a source of differentiation Channel experience shapes brand image/ quality perception Low awareness Difficulty in designing and maintaining channels Marketing channels are sets of interdependent organizations involved in the process of making a product or service available for use or consumption. 2

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Q.Why channels exist and change ? Demand ( customer side) factors: search facilitation, adjustment of assortment discrepancy (sorting, accumulation, allocation/bulk breaking, assortingCREATING UTILITY Supply side factors: optimizes standardized transactionsadd value reduces cost market contact,

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Hybrid channels: IBM uses sales force to sell to key accounts, telemarketing to mid sized accounts, direct mail for small accounts, retailers to smaller accounts and Internet for specialty items Dell and Amazon Color plus (56 EBOs, 250 MBO, 32 S-i-S) + website

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Why companies prefer marketing channels:

1. 2. 3. 4.

Producers lack financial resourcesDirect marketing is not feasible- Cadbury Better returns for the manufacturer Economy of effort

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Channel function and flows: 1. Gathering information about potential and current customers, competitors.. 2. Persuade customers to buy 3. Reach agreements on price/ credit (car/ TV) 4. Place orders with manufacturers 5. Funds for managing inventories 6. Take risks connected with channel management 7. Storage and movement of products 8. Transfer of ownership
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Marketing flows in channels
possession

ownership
p r o d u c e r s promotion

negotiation financing risking ordering payment

w h o l e s a l e r s

r e t a i l e r s

c u s t o m e r s

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Notes on channel flows: Every member need not participate in the channel flow Flow should be shared only by members who can ADD VALUE or reduce cost Flows are interrelated- possession involves financing Though channel members can be eliminated, the flows remain Reducing no. of members do not necessarily lead to cheaper cost of operations Which is the missing flow ? Are customers part of the channel ? 8

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Some points on flows: Other flowsrisk different flows with same channel members Challenge is to understand the cost/ performance q. Car and spare partsShould Maruti use a. The existing dealer network as sole service centre ? b. Add some centres in addition to A ? c. Create a exclusive service channel ?
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Each flow has a cost ( producer to customer: expressions 2011 -selling desi peas)
Type of flow
Physical possession Ownership Promotion Negotiation Financing

Costs involved
Storage and delivery costs (reverse logistics)* Inventory carrying costs Selling, advertising, sales promotion, publicity, public relation Time and legal costs Credit terms, terms and condition of sale

Risking
Ordering Payment

Price guarantees, warranties, insurance, repair, after sales service

Order processing costs Collections, bad debt costs
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Reverse logistics: channel flow for returned merchandise Around $80 billion. Web returns $5 billion ( cost of processing web returns is twice as high as the merchandise itself) Some retailers charge 10% as stocking fee from customers HUL has stopped accepting returns from retailers Rise of third party logistics: grade/ sort/ give (to charity)/ repair A very unorganized and under- researched area
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Channel managers should try to club activities under different flows to account for the cost and create common terms for the flows for channel audits Create channel efficiency template ( see next slide)- the case of an online furniture seller and the truck driver

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A template for measuring channel efficiency
Weights for flows cost Benefit s (h/l/m) Physical possession ownership promotion 30 12 10 h m l Final weight 35 15 8 Proportional cost , flow perf. 1 30 30 20 2 30 3 20 4 ( end user) 20 Total 100 100 100

negotiation
financing risking ordering payment Total Profit share

5
25 5 6 7 100 n.a

l
m L L l n/a n.a

4
29 2 3 4 100 n.a

20
30 30 20 20 n.a 28% na 30% n.a 22% n.a 20%

100
100 100 100 100 n.a 100 %
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A template for measuring channel efficiency: note that
Separate templates required for different end user/channel Qualitative ranking can also be used in lieu of quantitative data Matching normative and actual profit share: the EQUITY PRINCIPLEcompensation should mirror normative profit based on cost/value add ( truck driver delivering a kitchen table)

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Service sector channels: Education delivery system (pricing e-MBA) Hospitals (Apollo hospitals- multi specialty vs. super specialty outsourcing at FORTIS Gurgaon) Hotels (Taj group) Other services: movie halls (I-max), book shops. Challenges in movie distribution

Push strategy: low brand loyalty, impulse items Pull strategy: brand chosen before shopping
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Module take-aways: Tools for analyzing channels 1. Compare demand side issues with supply side capabilities

2. Consider channel flow- risk vs. cost.

Elimination or addition of a channel member is irrelevant- who is bearing that flow and cost ?

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Module 1: Channel structure and functions Module 2: Channel design: demand, supply and efficiency Module 3: Managing channels: power, conflict, alliances, integration Module 4: Channels institutions: retailing, wholesaling, franchising, internet, logistics and supply chain 17

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5 steps to design: Step A: segmentation based on service outputs (decisions about efficient channel response) Step B: Channel structure who will be members ? identity of the chosen partners ( efficiency /image)? how many of each type ?

Step C: splitting the workload based on flow and see existing alternatives Step D: Degree of commitment 18 Step E ( for existing channels): GAP analysis

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Step 1Segment markets based on desired service output levels [The elements of how a product/service is bought are called service outputs ] 1. Lot size/bulk breaking 2. Waiting/delivery time, ( between order and receipt) (why GE medical has different channel for selling eqpt and service)3. spatial convenience ( how far u r willing to go for the product) 4. Variety and assortment (www.tuesdaymorning.com) 5. Customer service6. Information provision- MS WINDOWS 7.0 e.g. buying soft drink during a coffee break, Mexican beer market

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Notes on service outputs More service outputs imply more number and type of intermediaries As service outputs increase the cost of operations increase reflecting in higher end user price- price of shoes online and offline Customers can sometimes free ride* a channel- using services of an offline store and then buying shoe online, yatra.com (* only in cases where part of the service is alienable from the product) IBM FRANCE has identified 46 segments in 10 markets and helps resellers with these data
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Notes on service outputs Q. Should all service outputs, as desired by the customer be served? Depends on

a. b. c. d.

Cost pf providing additional value Are existing competitors providing these outputs Can a particular service output block the entry for others (airport lounges) Is it consistent with the other elements of the marketing mix ?
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Post segmentation Segment attractiveness Decide which segments to target

Customize marketing channels

Create brand/ product/channel positioning

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Step 2. Establish objectives and constraintspositioning- establishing monopoly- Microsoft/ National Cash Will depend on the type of product 3. Major channel alternatives: Determined by a) types of available intermediaries b) no. of them needed, c) terms and responsibilities

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SWOT analysis- Internet sales: e-MBA course, Sanjeev Kapoor Tandoor 4. Evaluate the major alternatives: Check value add against cost per transaction Teller clerk- ATM Net-banking (HDFC offers) High touch channels vs. low touch ( CISCO) Challenge is to estimate the sales BOSE sound system

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Companies today must INNOVATIVE channels-

look

for

How about ALTO/ bike in Big bazaar ? Street-light channelspeapod

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The peapod example: Critical issues Ancillary services Own warehouses Charges and value adds Assortments (Std., holiday, Christmas) Alliances- magazines

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Channel structure and intensity

the three challenges of channel structure and intensity: How much should be the coverage? How to design to go-to-market strategy/channel mix? Should the company also go direct ( dual distribution)- CISCO case

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Channel structure and intensity

Q1. Why more coverage is always better for convenience goods Beyond a threshold limit, the coverage includes small retailers who stock limited brands Customers do not generally switch- rather they buy whatever is available Better brand image, more likely the retailer will store it, leading to a spiral

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Channel structure and intensity

Q2. Why downstream channel members dislike intensive distribution a. From a retailers perspective, more distribution is a negative- limiting his ability to create assortment b. To win, retailer gives a price cut from his margin, much to the delight of the mfg. c. Leads to long term channel discontent - leading to some distributors
stop selling the brand Drop the category if possible Give minimal coverage to category captain (bait and switch) 29 { when channel members free ride on another member}

Channel structure and intensity

How to manage intensive distribution and stop bait and switch ? Contractual Pull strategy to build brand equity (Coke, Sony) ( pull strategy and intensive distribution is a bad combination: Barbie, Omega, DKNY)* Resale price maintenance ( RPM)- mfg. setting a price floor Move from intensive to selective distribution * Many companies use artificial scarcity to build brand image ( ZARA, Harley) 30

Channel structure and intensity

There are three conflicts embedded in the coverage strategy a. Mfg wanting full coverage, outlets dont. b. Outlets want many brands, mfg. dont c. Outlets prefer low cost and high margin: mfg want them to take low margins but give best support How much of selectivity ? a. There should be enough intra-brand competition in the channel b. Nature of the product category ( service outputs) c. Brand strategy: price/quality
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Channel structure and intensity

Type and Number of intermediaries The golden rule is to identify how users buy the product. The intermediary should Match users desired shopping patterns Connote the same quality and positioning Piggybacking- P&G, Marico Reciprocal piggybacking: Mattel & Bandai Membership will finally depend on demand side issues, supply-side or efficiency issues and co-ordination issues
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How many channel members at each level ?

Fight between buyer access and channel control Vertical restraints (unusual contractual restraints on channel members)- legal issues The degree of selectivity is an outcome of negotiation: Digital Shoppe and Haiier The paradox of more coverage Selectivity is a strategic trade-off: category selectivity vs. territory selectivity Intensive distribution always increases revenue for leaders BUT not necessarily the profit Dual distribution: company owned channels and 33 independent channels ( APPLE)

Distribution- gap analysis

Gap analysis framework
Sources of Gaps

Environmental Local legal constraints Local , physical, retailing infrastructure

Managerial Constraints due to lack of knowledge Constraints due to optimization at a higher level

Types of gaps Demand side gaps SOS < SOD SOS > SOD Which service outputs (SO) ? Supply side gaps Flow cost is too high Which flow ?

Closing gaps
Demand side gaps Offer tiered service levels Manage service output Change target segment Supply side gaps Change flow responsibilities of current channel Invest in new low cost distribution tech. 34 Bring in new channel members

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Objectives: Eliminating non-value adding/redundant activities from the channel Possibility to automate certain activities ( even at a higher fixed cost) Possibility to modify MIS to reduce the cost of prospecting, order entry or quote generation activities Environmental gap, example: government contracts for computer hardware in US requires around 25% vendors to be from the SME sector- India 16% of sourcing from reserved categories
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Supply side gaps exist when the total cost of performing all channel flows are performed at too high a cost ( sales people training for high end luxury cars and the sales force turnover) Note: total cost minimization may include higher than average costs on some activities ZARA is one of the most profitable retailers and yet has the highest transportation cost for its clothes. GAPs create tension between speculation and postponement ( e.g. a book seller has the option of sending x copies to the store or use online bookstore to help customers download the books 36 they want

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Cost performance level Demand side gap (SOD > SOS) No demand side Gap (SOD = SOS) Demand Side Gap ( SOS > SOD)

No supply side gap ( efficient flow cost)

Price/value combn. Right for a less demanding segment

No gaps

Price/value combo right for a more demanding segment

Supply side gap ( inefficiently high flow cost)

Insufficient SO at high cost: price too high, value too low

High cost, but Sos are right: value is good, but price is high

High cost AND Sos too high: no extra value created, but price and/or cost is high
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Closing demand side gaps take a music retailer who has Short supply of bulk breaking and assortment and variety and over supply of customer service, compared to saregama.com What should the channel manager do ? check competition. increase/decrease SO-s ( remember how high priced CDs drove the market for pirated / downloaded copies) explore the possibility of offering a service menu to reduce cost check whether modifying target segment possible
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Closing supply side gaps

a. Change role of current channel members (SONY home theatre demo room in Pantaloons BBSR) b. Invest in new distribution technologies to reduce cost ( cross docking to reduce inventory flow) c. Bringing in new distribution function specialists to improve the functioning of the channel ( CISCOvoice VARs)

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Common problems faced in gap closing

Organizational buy in Energetic champion: channel steward Task force with clear responsibility Need to have a true customer driven approach Design must include a mechanism that permits the organization to stay in touch with end users

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Sample template for demand side gap analysis template

Cust. Bulk segment brking Spatial conv Delivery Assort Cust. /wtng ment/va service time riety informa tion Channe l used

4
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CHANNEL DYNAMICS: Vertical marketing systems: Whirlpool/ Luxottica/ Reliance/Telco-indica Most integration decisions are adhoc Cost and benefit of vertical integration Personnel cost is often high Is control a benefit? How? Because the core business is loosing appeal

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Vertical marketing systems: In a VMS, producers, retailers and wholesalers act as a unified system. The channel captain (may not be actual manufacturer- Sierra India) Result of channel conflicts VMS achieves economy through size, bargaining power and eliminating self duplicating services

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CHANNEL DYNAMICS: Vertical marketing systems: Corporate VMS: Production and distribution under same ownership Administered VMS: Where one dominant member gets unusual supportMS and HP/IBM Contractual VMS: When independent firms work contract to maximize gains. (Taiwan) Some trends
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Wholesaler sponsored voluntary retail chains Retailer cooperatives Franchise organizations- coke bottlers, hotels Why we should outsource distribution: six reasons: 1.Motivation- insurance sales model/ volkswagon 2. Specialization- Chile/ Brazil 3. Survival of the economically fittest 4.Economies of scale 5. Heavier market coverage due to product assortment 6. Independence from single manufacturer.
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Why we should not outsource: Company specific capabilities idiosyncratic knowledge relationships, brand equity The Jean Delatour example: Hypermarket like store Custom production Kiosk showing Antwerp Watches and clocks46

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Why we should not outsource: Relationship between brand equity and distribution outsourcing- the origin of private labels. Coke and Pepsi: change in brand equity- owning distribution- spinning off separate company Other factors for not outsourcing: Dedicated capacity Site specificity (Hilti DX) Customized physical facilities (medi- shoppee, merchant navy) Switching costs (sacked employees) 47 Thin supply- selling semiconductors

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Why we should not outsource: 1. When result and performance cannot be matchedpharma industry (specialty cos.- himalayaspecialty ranbaxy) Horizontal marketing systems

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Module 1: Channel structure and functions Module 2: Channel design: demand, supply and efficiency Module 3: Managing channels: power, conflict, alliances, integration Module 4: Channels institutions: retailing, wholesaling, franchising, internet, logistics and supply chain .
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Channel power

Channel conflict

Manage/defuse issues

Channel coordination
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Channel Power is the ability of one channel member to get another member to do something it other wise would not have done Power and dependence (HP Printerspostponement) Why marketing channels require power? How can we measure dependence? (utility & scarcity analysis)

Reward Legitimate

Coercive Referent

Expert
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Proxy indicators for measuring dependence (power) What is the % of sales or profits ( in case of franchisees ?) How well is the role performed over competitors ? Inventory of the 5 powers Reward power (in the IT industry)
Channel policies Market development support policies Supplemental contact programme ( internet, newsletter) Incentive programme End user encouragement porgramme
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Channel Power: reward Decathlon, France Coercive Power: expectation of punishment (slotting fee, margin reduction, withdrawal of rewards, slowing shipments) When should you use coercion? Expert power: manufacturer helping retailers, Walmart & P&G, Toyota ( data, forecast, analysis) Durability of expert power is a critical issue- once given is the power transferred ?
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Problems in using expert power: 1. The channel member must be trusted 2. Status of the experts impedes trust building 3. Entrepreneurial channel members think they are experts Legitimate power- when members feel they are obligated morally, legally or socially ( China/ Japan) Law and values MNCs CREATE legal power: BP in Colombia, Halliburton/ Bechtel in Iraq Moral power- japan 54

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Referent Power: Prestige Harley, Ralph Lauren etc. (also Namura, Saks Fifth Avenue, Nordstorm) Results of high power dependence: The rise and decline of Marks & Spencers

Note: Channels in luxury brands: Louis Vitton in Tokyo (membership fees), Daslu in Sau Paulo, guerilla shops in Europe
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The nature and sources of channel power

As level of investment in : Reward Coercion Legitimacy Expertise reference Utility derived by B from A As offering to B Dep. Of B on A

Competitive levels of: Reward Coercion Legitimacy Expertise reference

Reward Coercive Legitimacy Expertise reference

Power of A over B

Scarcity of Bs alternative to A

Bs access to As competitors

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Strategies for parties weaker in the power balance a. Developing alternatives to A b. Organizing a coalition to attack A (GINO) c. Exiting the situation, removing itself from danger by no longer seeking the benefit A provides (CISCO, GINO) d. The most common scenario: tolerating imbalance LOW reward is OKAY when our investment is low, other competitors are not gaining much, there is no better use for the resource, principal is seen to invest heavily.
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Exercising power: 6 influence strategies

Promise strategy: If you do what we wish, we will reward you Threat strategy: punish Legal strategy Request strategy Information exchange strategy: general discussion without direct reference to the conflict in hand Recommendation strategy

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Channel conflicts: Good conflict is not an oxymoron. Latent, perceived, felt, manifest How to measure conflicts? 1. Counting up the issues 2. Importance 3. Frequency of disagreement 4. Intensity of dispute Multiplicative relation- depends on type of trade

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Functional conflict or useful conflict- P&G in France fighting without anger 1. Communicate more frequently and effectively 2. Establish outlets for expressing their issues 3. Critically review their past actions 4. Devise and implement a more equitable split 5. Better balance of power 6. Develop ways to deal with future conflict The PC sellers conflict
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Major sources of conflict: 1. Channel members goals 2. Perception of reality 3. Their idea of areas with autonomy- DOMAIN CONFLICT DC may involve products/ markets Conflict is embedded in relationship (saas- bahu) 1. Supplier: You dont put enough effort behind my brand. Your prices are too high. reseller: You dont support me enough. With your wholesale prices, we cant make money
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2. Supplier: We need more coverage and more effort from our reseller. Reseller: You dont respect our marketing strategy. We need to make money. Perception of reality- a) major reason is lack of focus: b) difference in culture for international marketingcoke in Spain- Diamond Boart in Pakistan- Bosch in China and Bangladesh- coke vending machines in Japan Supplier needs to understand members customs, values, attitudes and beliefs- PSUs
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How to measure conflict?

Counting up the issues Importance Frequency of disagreement Intensity of dispute Multiplicative relationship

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Multiple channel- issues and concerns Insurance selling Q. What suppliers can do? 1. Different pricing 2. Help members to differentiate by offering more support, more service, more product. 3. Different brand names to different channels SANSUI changes its distribution system- product based dealership/ Revlon and Meccano
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Unwanted channels- gray markets vs. black market What causes them? 1. Differential pricing 2. Different geographic markets- mainly taxes 3. Jonan Denki Japan 4. The story of Victorinox- channel power and innovation 5. Sometimes suppliers like gray marketers!!!

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Software piracy: Top 5: Vietnam, China, Indonesia, Russia, Thailand Bottom 5: SA, Germany, Japan, Britain, US MS in Lebanon

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Conflict resolution: Information intensive mechanisms: a) Channel diplomats (like KAMS) b) Joint memberships c) Exchange of persons (job rotations) d) Co-opt Third party mechanisms: a) Mediation b) Arbitration

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Four styles of conflict resolution: 1. Accommodation 2. Avoidance 3. Collaboration 4. Competition (depends on levels of cooperation and assertiveness) Examples from Honda/ Toyota vs. big three

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Module 1: Channel structure and functions Module 2: Channel design: demand, supply and efficiency Module 3: Managing channels: power, conflict, alliances, integration Module 4: Channels institutions: retailing, wholesaling, franchising, internet, logistics and supply chain
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Retailing: Consists of the activities involved in selling goods and services to ultimate consumers for personal consumption Choosing a retail positioning strategy: Financial and cost side positioning: Margin and inventory turnover goals

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Management can pursue: Margin management Asset turnover Some parameters looked at are: Sales/sq. foot Sales/per employee Sales/transaction GMROI= Gross Margin x (sales/inventory) Fixed cost in retailing- anchor stores

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Demand side positioning: Bulk breaking- Sams clubs Spatial convenience: search-shopping behaviorhow women buy- the effect of smell & musicshopping cart Waiting and delivery time: The effect of brand equity; the portable shopper- vending machinesProduct variety: breadth and depth- banking services Customer service: Nordstorm
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Increased power of retailers: Retailers are growing faster than packaged goods companies They are concerned with improving their productivity- SCM Many new products (P&Gs answer reduce brands- blink) IT- Direct Product Profitability (DPP)- in-shopkiosks Reduction in forward buying Slotting allowance Failure Fees 73

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Private brands Initially money saving unexciting alternatives Only 14% of shop sales- for which categories they will do well ? Private brands give the retailer power in many ways: a. They become responsible for fashion/ trend b. More marketing orientation than distribution c. Suppliers are more worried with retailers than consumers They can be risky- St.Michaels.
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How can suppliers respond to retail power? 1. Bring more channels- bring more knowledge planogram 2. Change price- promotion strategy- no promotions 3. Expand the product line 4. Divest non-marketing functions an redirect spending 5. Use different channels

Category Killers- discount retailers specializing in one product area The challenge of retail differentiation
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1. Retail differentiations- luxury brands- prada, LVMH, guerilla channels 2. Prada epicentre NY- RFID, staff device interactive dressing rooms 3. How does kirana differentiate? Foodworld?

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Interactive dressing rooms: Glass changes from transparent- translucenttransparent Lighting- day/night/evening Closet touch screens- RFID closet Magic mirror- see your back/ slow motion Use of human factor specialists

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Distribution- guerilla retailing

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Distribution- pop up stores

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Online/ electronic channels:

They have the same problems- domain conflict, free riding Other issues for a e-commerce site
The immersion experience- Prada epicentre store Titansolitaire.com ( NRIs, gift vouchers, games)

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Issues in integrating online and offline channels

1.Ability to order a product online and pick it up at a convenient retail location (7/11 Japan) 2. Are you able to return an online orders product to a nearby store of the retailer? 3. Discounts based on total online and offline purchase? 4. The long-tail theory
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Power of wholesalers

Concept of cooperatives Metaljunction.com Manufacturer- cum- wholesaler- retail chains The Indian fan industry

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Logistics and supply chain:

The bull whip effect- the result of poor communicationthe butterfly effect Efficient consumer response (ECR) 1. Continuous replacement, 2. efficient pricing and promotion, 3. changes in product introduction, 4. changes in merchandising The problem with promotions category management- the basket The paradox of more brands and lesser purchase
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Logistics and supply chain:

QR- quick response- good for say, fashion The essence is in manufacturing- grey pull-over (postponement). Product design should be modular

ECR is about demand that consumers know they will have QR is about demand that consumers dont sense Both are pull systems. ECR is efficient, QR focuses on being quick 85

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Logistics and supply chain: Key to QR: POS data, EDI, CAD-CAM Which one to adopt ECR/QR? If supply chain is so great, why doesnt it happen: 1. Pressure 2. Lack of standards 3. IT investment 86

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5.Culture of cross integration- house of design 6. Effective channel management Some eternal values: Agility Collaboration Flexibility Trust and respect

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Third party logistics solutionFeige, Germany handles international distribution for 3 MNCs- Ingersoll Rand, Clark and Spicer Manages spare parts inventories Receives, stores and ships different countries Accounting services and cash management Online stock view Dealers order online Toshiba and DHL Just in Time lobsters for Japan !
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Third party REVERSE logistics solutionDiffers in Volume forecasting Transportation Product Quality Product packaging Ultimate destination Accounting cost transparency

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Indian scenario GATI SAFEX Lemuir Balmer Lawrie UPS

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