Executives should recognize the unique cultural, economic, institutional, and legal aspects of each market before trying to design marketing channels in foreign coun- tries. Manufacturers introducing products in global markets face a tough decision:
what type of channel structure to use. Specifically, should the product be marketed directly, mostly by company salespeople, or through independent foreign inter- mediaries, such as agents and distributors? Using company salespeople generally provides more control and is less risky than using foreign intermediaries. However, setting up a sales force in a foreign country also entails a greater commitment, both financially and organizationally.
Marketers should be aware that channel structures and types abroad may differ from those in the United States. For instance, the more highly developed a nation is economically, the more specialized its channel types. Therefore, a marketer wishing to sell in Germany or Japan will have several channel types to
choose from. Conversely, developing countries like India, Ethiopia, and Venezuela have limited channel types available; there are typically few mail-order channels, vending machines, or spe- cialized retailers and wholesalers. Some countries also regulate channel choices. Until 2004, Chinese regulations required foreign retailers to have a local partner. So, when IKEA, the Swedish home furnishings retailer, opened its first two stores in China, it used joint ventures. When the regulations were lifted, however, IKEA opened its first wholly owned store in Guangzhou and then a Beijing store that is almost as big as eight football fields, second in size only to the company’s flagship store in Stockholm.18
Developing effective marketing chan- nels in emerging nations is further complicated due to different retail for- mat preferences and differences in the ways locals shop. In many emerging nations, consumers shun large-scale formats popularized in the United States and Western Europe such as super centers and other big-box retailers, in favor of tiny, independently owned street-side retailers that may be no larger than a closet. These small retailers (known at Procter and Gamble as “high frequency shops”) provide small-size packages of goods that are intended to fulfill customer needs only for a day or two. Procter and Gamble estimates that over 620,000 such stores exist in Mexico alone, and that 80 percent of emerging nation citizens shop high-frequency stores multiple times per week. New channel strategies are currently being developed by firms like P&G in order to maximize sales and pen- etration into high frequency shops, including reliance on local sales agents who are paid to ensure popular products are placed as close as possible to the street and/or cash register.19
© AP PHOTO/NG HAN GUAN
Marketing Channels Chapter 13
Marketers must also be aware that many countries have “gray” marketing chan- nels in which products are distributed through unauthorized channel intermediar- ies. It is estimated that sales of counterfeit luxury items like Prada handbags and Big Bertha golf clubs have reached almost $2 billion a year. The new fakes are harder to detect and hit the market almost instantly. For instance, a fake Christian Dior sad- dlebag was available just weeks after the original arrived on retailers’ shelves. Simi- larly, Chinese companies are producing so many knockoffs of Yamaha, Honda, and Suzuki motorcycles that the Japanese companies are seeing a drop in sales. What’s more, many companies are getting so good at design piracy that they are beginning to launch their own new products.
The Internet has also proved to be a way for pirates to circumvent authorized distribution channels, especially in the case of popular prescription drugs. In recent years, the U.S. Customs Service has seized millions of dollars worth of prescription drugs, most of which were purchased from for- eign Internet sites. Some were seized because they had not been approved for use in the United States, others because they did not comply with U.S. labeling laws. Most sites offer just a handful of the most popular drugs, such as Viagra.
Consumers can get the drugs after obtaining the approval of a doctor affiliated with the site who never sees the patient.
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Channels and Distribution Decisions for Services
The fastest-growing part of our economy is the service sector.
Although distribution in the service sector is difficult to visualize, the same skills, techniques, and strategies used to manage inventory can also be used to manage service inventory—for instance, hospital beds, bank accounts, or airline seats. The quality of the planning and execution of distribution can have a major impact on costs and customer satisfaction.
One thing that sets service distribution apart from traditional manufacturing distribution is that, in a service environment, production and consumption are si- multaneous. In manufacturing, a production setback can often be remedied by using safety stock or a faster mode of transportation. Such substitution is not possible with a service. The benefits of a service are also relatively intangible—that is, a consumer normally can’t see the benefits of a service, such as a doctor’s physical exam, but normally can see the benefits provided by a product—for example, cold medicine re- lieving a stuffy nose.
Because service industries are so customer oriented, customer service is a pri- ority. To manage customer relationships, many service providers, such as insurance carriers, physicians, hair salons, and financial services, use technology to schedule appointments, manage accounts, and disburse information. Service distribution focuses on three main areas:
• Minimizing wait times: Minimizing the amount of time customers wait in line to deposit a check, wait for their food at a restaurant, or wait in a doctor’s office for an appointment is a key factor in maintaining the quality of service. People tend to overestimate the amount of time they spend waiting in line, researchers report, and unexplained waiting seems longer than explained waits. To reduce anxiety among waiting customers, some restaurants give patrons pagers that allow them to roam around or go to the bar. Banks sometimes install electronic boards displaying stock quotes or sports scores. Car rental companies reward repeat customers by eliminating their waits altogether. Airports have designed comfortable sitting areas with televisions and children’s play areas for those Distribute directly or through
foreign partners
Different channel structures than in domestic markets
Illegitimate “gray”
marketing channels
Legal and infrastructure differences
Discuss channels and distribution decisions in global markets
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Distribution Decisions
waiting to board planes. Some service companies are using sophisticated tech- nology to further ease their customers’ waiting time. For example, many hotels and airlines are using electronic check-in kiosks. Travelers can insert their
credit cards to check in upon arrival, receive their room key, get directions, print maps to area restaurants and attractions, and print out their hotel bills.
• Managing service capacity: For product manufacturers, inventory acts as a buffer, enabling them to provide the product during periods of peak de-
mand without extraordinary efforts. Service firms don’t have this luxury.
If they don’t have the capacity to meet demand, they must either turn down some prospective customers, let service levels slip, or expand
capacity. For instance, at tax time a tax preparation firm may have so many customers desiring its services that it has to either turn
business away or add temporary offices or preparers. Popular restaurants risk losing business when seating is unavailable or the wait is too long. To manage their capacity, travel Web sites allow users to find last-minute deals to fill up empty airline seats and hotel rooms.
• Improving service delivery: Like manufacturers, service firms are now experimenting with different distribution channels for their services. Choosing the right distribu- tion channel can increase the times that services are available (such as using the Internet to disseminate infor- mation and services 24/7) or add to customer convenience (like pizza delivery, walk-in medical clinics, or a dry cleaner located in a supermarket). The airline industry has found that using the Internet for ticket sales both re- duces distribution costs and raises the level of customer service by making it easier for customers to plan their own travel. Cruise lines, on the other hand, have found that travel agents add value by helping customers sort through the abundance of information and complicated options available when booking a cruise. In the real estate
industry, realtors are placing kiosks in local malls that enable consumers to directly access listings.
The Internet is fast becoming an alternative channel for delivering services. Consumers can now purchase plane tickets, plan a vacation cruise, reserve a hotel room, pay bills, purchase mutual funds, and receive electronic newspapers in cyber- space. Insurance giant Allstate, for instance, now sells auto and home insurance directly to consu- mers in some states through the Internet in addi- tion to its traditional network of agents. The effort reduces costs so that Allstate can stay competitive with rival insurance companies Progressive and Geico that already target customers directly. Simi- larly, several real estate Web sites are making it easier for customers to shop for a new home on the Web. Traditionally, the only way for custom- ers to gain access to realtors’ listings was to work through a real estate agent who would search the listings and then show customers homes that met their requirements. The new companies offer direct access to the listings, enabling customers to review properties for sale on their own and choose which ones they would like to visit.
Minimizing wait times is a key factor in maintaining service quality.
KIOSK KIOSK
Managing service capability is critical to successful service distribution.
Improving service delivery makes it easier and more convenient for consumers to use the service.
REVIEW LEARNING OUTCOME
Identify the special problems and
opportu nit ies associated with distribution in service organizations
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© JEFF GREENBERG/ALAMY
GEICO’s early business model—a first in the insurance industry—involved direct marketing to targeted customers without the use of agents. In its early years, GEICO contacted its customers by mail and telephone, but now it offers online service 24 hours a day, seven days a week.
Review and Applications
Explain what a marketing channel is and why intermediaries are needed. A marketing channel is a business structure of interdependent organizations that reach from the point of product origin to the consumer with the purpose of physically moving products to their final consumption destina- tion, representing “place” or “distribution” in the marketing mix, and encompassing the processes involved in getting the right product to the right place at the right time. Members of a marketing channel create a continuous and seamless system that performs or supports the marketing channel functions. Channel members provide economies to the distribution process in the form of specializa- tion and division of labor; overcoming discrepancies in quantity, assortment, time, and space; and providing contact efficiency.
1.1 Your family runs a specialty ice cream parlor called Scoops. It manufactures its own ice cream in small batches and sells it only in pint-sized containers. After someone not affiliated with the company sent six pints of its ice cream to a popular talk-show host, she proclaimed on her national TV show that it was the best ice cream she had ever eaten. Immediately after the broadcast, orders came flooding in, overwhelming your small-batch production schedule and your limited distribution system. The company’s shipping manager thinks she can handle it, but you disagree. List the reasons why you need to restructure your channel of distribution.
Define the types of channel intermediaries and describe their functions and activities. The most prominent difference separating intermediaries is whether they take title to the product. Retailers and merchant wholesalers take title, but agents and brokers do not. Retailers are firms that sell mainly to consumers. Merchant wholesalers are organizations that facilitate the movement of products and services from the manufacturer to producers, resellers, governments, institutions, and retailers. Agents and brokers do not take title to the goods and services they market, but they do facilitate the exchange of ownership between sellers and buyers. Channel intermediaries perform three basic types of functions. Transactional functions include contacting and promoting, negotiat- ing, and risk taking. Logistical functions performed by channel members include physical distribution, storing, and sorting functions. Finally, channel members may perform facilitating functions, such as researching and financing.
2.1 What kind of marketing channel functions can be performed over the Internet? Why do you think so?
Describe the channel structures for consumer and business products and discuss alternative channel arrangements. Marketing channels for consumer and business products vary in degree of complexity. The simplest consumer-product channel involves direct selling from producers to consum- ers. Businesses may sell directly to business or government buyers. Marketing channels grow more complex as intermediaries become involved. Consumer-product channel intermediaries include agents, brokers, wholesalers, and retailers. Business-product channel intermediaries include agents, brokers, and industrial distributors. Marketers often use alternative channel arrangements to move their prod- ucts to the consumer. With dual distribution or multiple distribution, they choose two or more different channels to distribute the same product. Nontraditional channels help differentiate a firm’s product from the competitor’s or provide a manufacturer with another avenue for sales. Finally, strategic channel alliances are arrangements that use another manufacturer’s already established channel.
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<major retailers in the World wide Retail Exchange percentage of purchasing costs saved by using the exchange >
<Dollar Tree Stores Dollar Tree distribution centers >
copies of Harry Potter and the Deathly
Hallows mistakenly released early >
< photo prints sold by Walgreens each year
yearly profi ts
Kodak lost to channel confl ict with Walgreens >
small “high frequency” stores in Mexico >
<percentages of emerging nation citizens who shop in such stores multiple times each week
17
9
1200 620,000
2 billion
15
Marketing Channels Chapter 13
3,000
$500 billion
80
Distribution Decisions
3.1 Describe the most likely marketing channel structure for each of these consumer products:
candy bars, Tupperware products, nonfiction books, new automobiles, farmers’ market produce, and stereo equipment. Now, construct alternative channels for these same products.
3.2 You have been hired to design an alternative marketing channel for a firm specializing in the manufacturing and marketing of novelties for college student organizations. In a memo to the president of the firm, describe how the channel operates.
3.3 Building on question 1.1 determine a new channel structure for Graeter’s. Write a proposal to present to your key managers.
Discuss the issues that influence channel strategy. When determining marketing channel strategy, the channel manager must determine what market, product, and producer factors will influence the choice of channel. The manager must also determine the appropriate level of distribution intensity.
Intensive distribution is distribution aimed at maximum market coverage. Selective distribution is achieved by screening dealers to eliminate all but a few in any single area. The most restrictive form of market coverage is exclusive distribution, which entails only one or a few dealers within a given area.
4.1 Decide which distribution intensity level—intensive, selective, or exclusive—is used for each of the following products, and explain why: Piaget watches, Land Rover sport-utility vehicles, M&Ms, special edition Barbie dolls, Crest toothpaste.
4.2 Now that you have a basic channel structure for Graeter’s (from question 3.3), form a team of three to four students and list the market, product, and producer factors that will affect your final channel structure.
Describe the different channel relationship types and their unique costs and benefits. Channel relationships can be plotted on a continuum ranging from Arm’s Length to integrated, with coopera- tive relationships somewhere in between. Arm’s Length relationships generally consist of unique transactions that are intended to occur once or very infrequently, and are pursued when closer relationships are undesirable or impractical. Though Arm’s Length relationships are low risk, they also provide few benefits in terms of favorable conditions for the agreement, and disputes are often resolved in court. Integrated relationships, on the opposite end of the spectrum, are very close relationships that are backed by formal agreements and can result in great efficiency and effective- ness. However, given that integrated relationships tend either to involve high levels of expense (in the case of vertical integration) or require enormous amounts of trust in the partner company (as in the case of supply chains), many companies prefer cooperative relationships in some settings.
Cooperative relationships are a hybrid form of relationship that is governed by formal contract, are temporary, and are enforced by the agreement itself.
5.1 Working with another student in the class, decide when it would be most advantageous for large companies like Procter & Gamble, IBM, and/or Ford Motor Company to develop integrated relationships with smaller suppliers. Would the same rules for integrated relationship development also apply to customers? Why or why not?
Explain channel leadership, conflict, power, and partnering. Power, control, leadership, conflict, and partnering are the main social dimensions of marketing channel relationships. Channel power re- fers to the capacity of one channel member to control or influence other channel members. Channel control occurs when one channel member intentionally affects another member’s behavior. Channel leadership is the exercise of authority and power. Channel conflict occurs when there is a clash of goals and methods among the members of a distribution channel. Channel conflict can be either horizontal, between channel members at the same level, or vertical, between channel members at different levels of the channel. Channel partnering is the joint effort of all channel members to create an integrated system that serves customers and creates a competitive advantage. Collaborating channel partners meet the needs of consumers more effectively by ensuring that the right products reach shelves at the right time and at a lower cost, boosting sales and profits.
6.1 Procter & Gamble and Wal-Mart are key partners in a shared channel. P&G is one of Wal-Mart’s biggest suppliers, and Wal-Mart provides extremely detailed scanner data about customer purchases of P&G products. Wal-Mart has begun selling its own brand of Sam’s
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Marketing Channels Chapter 13
Choice laundry detergent in bright orange bottles alongside P&G’s Tide, but for a greatly reduced price. What do you think will be the impact of this new product on what has been a stable channel relationship?
Discuss channels and distribution decisions in global markets. Global marketing channels are becoming more important to U.S. companies seeking growth abroad. Manufacturers introducing products in foreign countries must decide what type of channel structure to use—in particular, whether the product should be marketed through direct channels or through foreign intermediaries.
Marketers should be aware that channel structures in foreign markets may be very different from those they are accustomed to in the United States. Global distribution expertise is also emerging as an important skill for channel managers as many countries are removing trade barriers.
7.1 Go to the World Trade Organization’s Web site at http://www.wto.org. What can you learn at the site about how globalization affects channel management and other aspects of business?
Identify the special problems and opportunities associated with distribution in service organiza- tions. Managers in service industries use the same skills, techniques, and strategies to manage lo- gistics functions as managers in goods-producing industries. The distribution of services focuses on three main areas: minimizing wait times, managing service capacity, and improving service delivery.
8.1 Assume that you are the marketing manager of a hospital. Write a report indicating the distribution functions that concern you. Discuss the similarities and dissimilarities of distribu- tion for services and for goods.
Key Terms LO 7 LO 7
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agents and brokers 379
Arm’s Length relationship 389
channel conflict 391
channel control 391
channel leader (channel captain) 391
channel members 376
channel partnering
(channel cooperation) 393
channel power 391
cooperative relationship 390
direct channel 381
discrepancy of assortment 377 discrepancy of quantity 377 dual distribution
(multiple distribution) 384 exclusive distribution 388
horizontal conflict 391
integrated relationship 389 intensive distribution 387 logistics 380
marketing channel (channel
of distribution) 376
merchant wholesaler 379
retailer 379 selective distribution 387
spatial discrepancy 377
strategic channel alliance 385 temporal discrepancy 377
vertical conflict 392
Exercises
APPLICATION EXERCISE
It may be easy to understand how distribution channels work just from reading, but you may still not appreciate their broad scope. This exercise will help you see for yourself how complex a single distribution channel is. Then, when you think of the number of products and services available on the market at any one time, you will understand how tremendous the national (and international) distribution network actually is.19
Activities
1. Create a list of approximately 20 products that you often purchase for personal use and/or that are present in your home.
2. For each of the products you listed, speculate whether the product was routed through the marketing channel using (a) exclusive, (b) selective, or (c) intensive distribution.
3. Now, for each product/distribution strategy combination, speculate as to the product, market, or producer factors that lead to this distribution strategy.