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DESIGNING AND

MANAGING CHANNELS
AND DISTRIBUTION
BY:
ABANG ANDY ZULFILDA BIN ABANG SAHREL

THE IMPORTANT ISSUES


1. VALUE CHAINS
2. DISTRIBUTION CHANNELS

Supply Chains & the Value Delivery Network


Supply Chain
Supply

chain is the connected chain of all of the


business entities, both internal and external to the
company, that perform or support the logistics function.

Supply Chains & the Value Delivery Network


Supply Chain
Upstream activities: the whole process of the supply of resources
for the production of products.
Downstream activities: the process from the distribution of finished goods
to the manufacturers reseller to the delivery of products to the end.

Supply Chains & the Value Delivery Network


Value Delivery Network

Value delivery network is


a network made up of the
company suppliers,
distributor, and ultimately,
customers who partner
with each other to improve
the performance of the
entire system.
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Supply Chains & the Value Delivery Network


Value Delivery Network

Value-Chain Issues
1.
2.
3.
4.
5.

Physical distribution efficiency


Supply chain efficiency management
Logistics efficiency management
Cost efficiency
Impacts of technological changes

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DISTRIBUTION
CHANNEL

INTRODUCTION
Basic Distribution Channel

Manufacturers/products

Agents/brokers
Wholesalers/distributors
Retailers

Retailers

Consumers and organizational end users


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DEFINITION OF DISTRIBUTION
CHANNEL
System of marketing institutions that
promotes the physical flow of goods
and services, along with ownership
title, from producers to consumer or
business user.
Also called as Channel of Distribution
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CHANNEL INTERMEDIARY
A list of channel members
Wholesaler or retailer that operates
between producers and consumers or
business users
Also called a middleman
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IMPORTANCE OF

DISTRIBUTION CHANNELS
1.
2.
3.
4.
5.
6.
7.

Growing Power of Distributors


Reduction of Distribution Cost
Stress on Growth
Increasing Role of Technology
Increase the efficiency of distribution
Increase the customers satisfaction
Reduction of time consume in handling the
goods
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CHANNEL INTERMEDIARY
DISTRIBUTION CHANNEL MEMBERS

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THE BASIC ROLES OF CHANNELS


INTERMEDIARY IN MARKETING
STRATEGY
1. Channels provide the means by which the firm moves the
goods and services it produces to ultimate users
2. Facilitate the exchange process by cutting the number of
contacts necessary
3. Adjust for discrepancies in the markets assortment of
goods and services via sorting
4. Standardize exchange transactions
5. Facilitate searches by both buyers and sellers

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Other Roles Performed by Channel


Members
1.

To KFC retailer to sell their products through the process of buying


and selling.

2.

To provide the storage services such as warehouses and


containers

3.

To help the retailer in the transferring the Title process

4.

To facilitate and perform the processing orders from customers

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BASIC DISTRIBUTION CHANNEL


LEVELS

Refers to the layer of intermediaries that


perform some work in bringing the
product and its ownership closer to the
final buyer
1. Consumer market channel levels
2. Business markets channel levels
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BASIC DISTRIBUTION CHANNEL


LEVELS

3 Consumer market channel levels:


1. Manufacturer sells directly to consumer
2. Manufacturer sells to wholesaler and the
wholesaler sells to the consumer
3. Manufacturer sells to the wholesaler and the
wholesaler sells to the retailer and the retailer
sells to the consumer
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BASIC DISTRIBUTION CHANNEL


LEVELS (Consumer Market & Goods)

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BASIC DISTRIBUTION CHANNEL LEVELS

Business markets channel levels:


1. Manufacturer sells to the industrial buyers
2. Manufacturer sells to the business distributor who
then sells to the industrial buyers
3. Manufacturer sells to the manufacturers
representative who then sells to the industrial buyers
4. Manufacturer sells to the manufacturers
representative who then sells to the business
distributor who then sells to the industrial buyers
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Basic Types of Channel Distribution

1. Conventional Distribution Systems


2. Vertical Marketing Systems
3. Multi-Channel Distribution Systems
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Basic Types of Channel Distribution


1. Conventional Distribution Systems

Are a grouping of vertically-linked independent organizations

Each trying to look out for itself, with limited concern for the
total performance of the channel

These channel relationships are generally informal

The focus of the channel organizations is on the buyer-seller


transactions rather than on fostering close cooperation
throughout the distribution channel.
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Basic Types of Channel Distribution


2. Vertical Marketing Systems

(VMS) can be defined as the channel systems consisting of


horizontally coordinated and vertically aligned establishments
that are professionally managed and centrally coordinated to
achieve optimum operating economies and maximum market
impact.

A primary characteristic of the VMS is the management (or


coordination) of the distribution channel by one organization.

This said organization is in effect, the channel manager as it


programs and coordinates all channel activities.
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Basic Types of Channel Distribution


2. Vertical Marketing System
Many marketer see the vertical distribution channel as the answer to
overcoming the disagreements which are found in the traditional distribution
channel
3 Types of VMS:
1. Corporate / Ownership VMS

one channel member owns another channel member in the distribution channel. For
example, a manufacturer may own a wholesaler company

2. Contractual VMS

three independent channel members sign an agreement to work together for a common
purpose

3. Administered VMS

one channel member is so rich or powerful that the other channel members have no
choice but to do whatever he asks of them
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Vertical Marketing System


i. Forward integration
In the case where a manufacturer owns
an intermediary at the next level down in
the channel.

Corporate / Ownership VMS

PadiniHoldings for instance,


manufactures apparel under various
brand names such as Padini, Seed, P &
Co, and PDI, and also owns retail stores.
ii. Backward integration
Retailer may own a manufacturing
operation.
Kroger supermarkets from the US
operate manufacturing facilities that
produce everything from aspirin to
cottage cheese, for sale under the
Kroger label.

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Basic Types of Channel Distribution


3.

Multi-channel Distribution Systems


One company may use a variety of distribution
channels in order to reach a single or several
market segments
For example
Coca Cola sells its drinks through vending machines,
convenience stores, provision stores, supermarkets and
even hypermarkets
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FACTORS INFLUENCE THE DIRECT


DISTRIBUTION STRATEGIES
1. Buyer Considerations
2. Product characteristics
3. Competitive considerations
4. Financial and control considerations
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OTHER FACTORS INFLUENCE THE


DIRECT DISTRIBUTION STRATEGIES

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DEFINITION OF DISTRIBUTION
STRATEGIES
The techniques that facilitating the process of making a
product or service available for use or consumption by a
consumer or business user.
The ways of moving a product or service from producer
to consumer in certain sectors.
The styles and methods of passing the product down the
chain to the next organization, before it finally reaches
the consumer or end-user
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3 DISTRIBUTION STRATEGIES
There
are
three
strategies
available
for
manufacturers in distributing their products or
services. They are:

Intensive distribution (I)


Selective distribution (S)
Exclusive distribution (E)
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SELECTIVE DISTRIBUTION

Under this distribution strategy, the company is actually


covers broad area of market exposure between intensive
and exclusive distribution.

It uses more than one intermediaries who are willing to


carry a particular product and contribute to sales volume
and profit goals.

The producers may use this strategy to eliminate those


retailers who are inefficient in moving the products and
have poor credit risk.

The distributors expect better than average selling efforts,


and a greater market control.
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INTENSIVE DISTRIBUTION

This strategy aims for maximum market coverage


Here, the producers can stock their products in as many outlets
as possible
By doing this, the producer making it easy and convenient for
customers in making their purchases.
the producers stock up their products in supermarkets, grocery
stores and a variety of shops.
This strategy is most suitable for convenience goods that are
inexpensive, have a place utility and frequently purchased in a
highly competitive markets.
Example:
Soap, cigarettes, toothpaste and
Many other convenience goods
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INTENSIVE DISTRIBUTION
Advantages:
Broad market coverage than selective and exclusive
distribution.
Fast growth on market share

Disadvantages
Poor control and high cost than selective and intensive
distribution
Risk of image destruction
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SELECTIVE DISTRIBUTION
The distribution of products only to those wholesalers or retailers
who (a) agree to sell the product for no less than a certain price,
(b) patronize the distributor on a regular basis or for at least a
certain dollar amount annually, or (c) meet specific requirements
established by the distributor as outlined by the manufacturer.
Selective distribution is used primarily for hard goods, such as
appliances, stereo equipment, or furniture.
It allows manufacturers to maintain more control over the way
their products are sold and minimizes price competition among
sellers of the products.

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SELECTIVE DISTRIBUTION

This strategy is ideal especially for shopping


goods and many other.

Selective distribution means placing shopping


goods (clothing, shoes, etc) in selected
department stores that fit the image of the product
and fit the characteristics of the targeted market.

Examples:
Famous cosmetics like Tia Amelia, Nona
Roguy, Jus Mate, Estee Lauder, Mac factor,
Kose, Shisedo can be found at selective beauty
Boutiques ONLY
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SELECTIVE DISTRIBUTION
Advantages:

Better market coverage than exclusive distribution


More control and less cost than intensive distribution
Concentrate effort on few productive outlets
Selected firms capable of carrying full product line and
provide the required service

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SELECTIVE DISTRIBUTION
Disadvantages:
May not cover the market adequately
Difficult to select dealers (retailers) that can
match your requirement and goals

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EXCLUSIVE DISTRIBUTION

In this strategy, the distributors may limit the number of


dealers by granting the exclusive right to one or two
dealers to distribute their products in a certain area or a
respective territory.

This strategies involves the stronger selling support from


the producers to the distributors and the distributors have
more control over dealer prices, promotion, credit, and
services.

Instead, this strategy also enhances the product image


and allows higher markups.

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EXCLUSIVE DISTRIBUTION
The retail selling strategy typically used by
manufacturers of high-priced, generally upscale
merchandise, such as cars or jewelry, whereby
manufacturers grant certain dealers exclusive territorial
rights to sell the product.
The retailer benefits from the lack of competition, and the
manufacturer benefits from a greater sales commitment
on the part of the retailer.
Additionally, exclusive distribution gives the manufacturer
greater control over the way the product is merchandised
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EXCLUSIVE DISTRIBUTION

Exclusive distribution also means placing specialty products


(expensive jewelry, perfumes, etc.) in few stores that
maintain a prestige image that match the store with the
product.

It uses routine decision making (habitual purchases) so


require intensive distribution. Intensive, widespread
distribution refers to placing the product is as many
convenient outlets as possible (vending machines,
convenience stores, grocery stores, etc.)

The distribution of goods under this strategy is rather


confined to consumer specialty goods, a few shopping
goods and major industrial equipments and many other .
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EXCLUSIVE DISTRIBUTION

Examples:

Roll Royce automobiles, Ferrari automobiles, BMW


and Mercedes. Those products are distributed under
exclusive territories given to NAZA Corporation.

Even some special toys like Playschool and Mattel are


marketed exclusively through a selected retail store
only.

AVON cosmetics only can be bought at any AVON


Outlets or Exclusive dealer ONLY.
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EXCLUSIVE DISTRIBUTION:
Advantages
Maximize control over service level/output
Enhance products image & allow higher
markups
Promotes dealers loyalty, better forecasting,
better inventory and merchandising control
Restricts resellers from carrying competing
brands
Less competition

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EXCLUSIVE DISTRIBUTION:
Disadvantages
Betting on one dealer in each market
Only suitable for high price, high margin, and
low volume products

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CHANNEL CONFIGURATION

The final step in selecting the


appropriate distribution strategy is
making decisions with regard to:
1. How many levels of organizations to include
in the vertical channel
2. The specific kinds of intermediaries to be
selected at each level
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CHANNEL CONFIGURATION
1. End-user considerations
2. Product characteristics
3. Manufacturers Capabilities and Resources
4. Required Functions
5. Availability and Skills of Intermediaries
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CHANNEL CONFIGURATION
1.

End-user considerations

2.

Product characteristics

3.

The determination of the type of intermediary depends on


where the targeted end user can be found and/or expected to
purchase the product of interest.

The type of product, in terms of its complexity, its application


requirements and after-sales needs are useful in guiding the
choice of the type of intermediary.

Manufacturers Capabilities and Resources

Large organizations with expansive resources have a great


deal of flexibility in choosing their intermediaries since they
possess bargaining power.
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CHANNEL CONFIGURATION
4. Required Functions
The nature of the distribution functions to move
products and services from manufacturer to enduser.
Example:
Warehousing, transportation, servicing will guide
companies to ascertain the appropriate intermediary.
A direct-selling company is likely to depend on independent
agents.

5. Availability and Skills of Intermediaries


The capabilities and resources of intermediaries that
are under consideration to become channel
members need to be properly evaluated.
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CHANNEL MANAGEMENT

It must be noted that these management issues


are just as important as the earlier activities
since once established, the channel design may
be difficult to modify, or worse, very expensive to
rectify.

The activities involve:


1.
2.
3.
4.
5.

Choosing how to assist and support intermediaries


Developing SOPs
Providing incentives
Selecting promotional programs
Assessing channel results.
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9 ISSUES IN CHANNEL MANAGEMENT


1.
2.
3.
4.
5.
6.
7.
8.
9.

Channel Leadership
Management Structure and Systems
Physical Distribution Management
Channel Relationships
Channel Globalization
Multi-channeling
Conflict Resolution
Channel Performance
Legal & Ethical Considerations
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9 ISSUES IN CHANNEL MANAGEMENT


1. Channel Leadership
The bigger or stronger organization will usually
exercise its authority and power to assume
leadership over other channel members.
This leadership role is taken up because of this
organization's size, financial strength, experience,
environmental factors and its ability to capitalize on
these said factors.
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9 ISSUES IN CHANNEL MANAGEMENT


2. Management Structure and Systems
Channel coordination and management are often the
responsibility of the sales function of an organization.
E.g. A manufacturers sales force is responsible for developing
buyer-seller relationships with wholesalers and/or retailers.

3. Physical Distribution Management


This activity, also referred to as logistics, is to enhance and
improve the distribution of supplies, goods in process and
finished products.
Physical distribution is a primary channel function, and as such
it is an important part of channel strategy and management.

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9 ISSUES IN CHANNEL MANAGEMENT


4. Channel Relationships
Relationships between channel members are
influenced by these issues:
1. Degree of collaboration
2. Commitment and trust among channel
members
3. Power and dependence

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9 ISSUES IN CHANNEL MANAGEMENT


4. Channel Relationships
(i) Degree of collaboration
Channel relationships are usually transactional in
conventional channels, but are collaborative in
VMSs.
The extent of this collaboration depends on the
potential benefits of collaboration, the willingness
of channel members to work together for mutual
benefit and the type and complexity of the product
or service.
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9 ISSUES IN CHANNEL MANAGEMENT


4. Channel Relationships
(ii) Commitment and trust among channel members
This is likely to be higher in VMS as compared to
conventional channels.
Effective collaborations necessitate high levels of
commitment and trust between the channel partners since
this type of arrangement will see exchange of information
and processes that may be confidential.
Example: market data and confidential product plans).

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9 ISSUES IN CHANNEL MANAGEMENT


4. Channel Relationships
(iii) Power and dependence
Power in conventional channels is not so obvious
unless any one of the organizations in this
distribution relationship superior than all other
channel members.
In VMS, power is concentrated in the hands of
one organization and other channel members are
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dependent on this channel member.

9 ISSUES IN CHANNEL MANAGEMENT


5. Channel Globalization
We are also witnessing the growing power of consumer goods suppliers
and retail chains as they expand their operations globally.
For example, Wal-Mart and Carrefour.
Given this new-found ability to source and merchandise globally, plus the
development of efficient supply chains, and the power of information
technology, major retailers have more bargaining power than many of their
suppliers.

Increasingly, industry-wide forms include online exchanges on the Internet.


In retail there are Sears Roebuck (US), Sainsbury (UK), Metro (Germany)
and Carrefour (France) have come together to form GlobalNet
Exchange/GNX (Cravens & Piercy, 2006, p 307). The concept is to link key
retailers with their suppliers throughout the world to compete with each
other through a single Web portal with complete price transparency.
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9 ISSUES IN CHANNEL MANAGEMENT


6. Multi-channeling
An important trend in distribution is using
multiple channels to access end-users.
Example:
The Hong Kong-based Dairy Farm operates
multiple formats
Coke also operates multiple formats

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9 ISSUES IN CHANNEL MANAGEMENT


7. Conflict Resolution
Conflicts do occur between channel members and in
multi-channeling because of differences in
objectives, corporate cultures, and priorities.
One of channel managements focus should be to
foster effective communications before and after
establishing channel relationships in order to reduce,
if not eliminate channel conflict.
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9 ISSUES IN CHANNEL MANAGEMENT


8. Channel Performance
The performance of the channel is important because
1. Each member is interested in how well the channel is meeting the
members objectives
2. The organization that is managing or coordinating the channel is
concerned with its performance and the overall performance of
channel members.

Aiming to reduce distribution costs and the time in moving


products to end users are high-priority action areas for many
companies.
Companies gain a strategic advantage by improving distribution
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productivity.

9 ISSUES IN CHANNEL MANAGEMENT


9. Legal and Ethical Considerations
Legal issues whether in the areas of restrictive contracts that
govern products and/or geographical coverage, pricing practices,
arrangements between channel members that inhibit competition,
laws, etc all can affect channel management.
Besides legal matters, channel decisions that impact other channel
members may create ethical situations.
As such many companies have established internal standards on
how business should be conducted
Example:
Target Corporations Standards of Vendor Engagement).
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Channel Conflict

Refers to any type of disagreement and


argument among marketing channel
members on the following:
1. Goals of distributing the products
2. Roles (who should do what)
3. Rewards

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Types of Channel Conflict


Horizontal conflict
disagreement between channel members located at
the same level of a distribution channel for a similar
product and different products
Example:
Conflict between wholesaler of Maggi Instant Noodles and
Maggi Sauces
Conflict between Wholesaler of Maggi Instant Noodles in
Kepong and Wholesaler of Maggi Instant Noodles in Cheras

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Types of Channel Conflict


Vertical conflict
disagreement between channel members
located at different levels of a distribution
channel for a similar products ONLY.
Example:
conflict between wholesaler of Maggi Instant
Noodles and retailers of Maggi Instant noodles.
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CONCLUSIONS
Distribution is very important in marketing because
the availability of the product needed is depend on
the effectiveness of distribution processes
implemented by the company of the product.
If the distribution activities related to the product
are effective and well succeed, we will definitely
get the product available at anywhere we go for
our consumption.
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CONCLUSIONS

The value chain consists of the organization, systems and processes that
add to customer value in moving goods and services to end-users.

The core of the value-chain is the distribution channel.

A strong distribution channel can give the organization a competitive


advantage over its competitors.

The choice between company distribution to end-users and the use of


intermediaries is guided by end-user needs and characteristics, product
characteristics and financial and control characteristics.

Manufacturers select the type of channel to be used, determine distribution


intensity, design the channel configuration, and manage various aspects of
channel operations.

The choice of a channel strategy begins when the organization decides


whether to manage the channel or to assume a participant role.

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CONCLUSIONS
Strategic analyses examines and assess
channel alternatives, by considering access to
the target market, channel functions to be
undertaken, financial considerations, and legal
and control considerations.
A strategic value-chain perspective aims to align
and modify/rectify the companys value-chain
depending on customer and competitive
requirements amidst a changing marketplace.
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List of References

Victor Ong (2010) Marketing Strategy: Module, Center for Graduate Studies,
Open University Malaysia.
Subash C. Jain (2004) Marketing: Planning & Strategy, 7th Edition, Thomson.
Boone, L., & Kurtz, D. (2009). Contemporary Business. Denvers: John Wiley &
Sons, Inc.
Cravens, D.W. (2000), Strategic Marketing, 6th Edition, McGraw Hill.
Kotler P& Armstrong.G., (2004) Principles of Marketing, 10th edition, Pearson.
Kotabe, Masaki & Kristian Helsen (2001). Global Marketing Management 2nd
Edition John Wiley & Son. Inc New York.
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Topics

List of References

Ebert, R., & Griffin, R. (2003). Business Essential, 4th Edition. New Jersey:
Prentice Hall.
Ferrel, O., Hirt, G., & Ferrel, L. (2009). Business: A Changing World. New York:
McGraw Hill.
khalid, K. e. (2008). Business Management: A Malaysian Perspective. Kuala
Lumpur: Oxford University Press.
McDaniel, C., & Gitman, L. (2008). The Future of Business. Ohio: ThomsonSouth Western.(2008). The Future of Business. Ohio: Thomson- South
Western.

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Topics

List of References

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http://www.buckinvestor.com/basics/economic_systems.shtml
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Boone, L., & Kurtz, D. (2009). Contemporary Business. Denvers: John Wiley &
Sons, Inc.

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Topics