Principles of Marketing: Understanding Marketing Channels and Value Delivery Networks

1. Marketing Channels Marketing Channels Delivering Customer Value Chapter 12 Chapter 12 Priciples of Marketing by Philip Kotler and Gary Armstrong PEARSON

2. 1 Supply Chains and the Value Delivery Network The Nature and Importance of Marketing Channels Explain why companies use marketing channels and discuss the functions these channels perform. 2 Channel Behavior and Organization Discuss how channel members interact and how they organize to perform the work of the channel. Objective Outline Objective Outline

3. 3 Channel Design Decisions Identify the major channel alternatives open to a company. 4 Channel Management Decisions Public Policy and Distribution Decisions Explain how companies select, motivate, and evaluate channel members. Objective Outline Objective Outline

4. 5 Marketing Logistics and Supply Chain Management Discuss the nature and importance of marketing logistics and integrated supply chain management. Objective Outline Objective Outline

5. Supply Chains and the Value Delivery Network Supply Chains and the Value Delivery Network This supply chain consists of upstream and downstream partners. Upstream from the company is the set of firms that supply the raw materials, components, parts, information, finances, and expertise needed to create a product or service. Downstream marketing channel partners, such as wholesalers and retailers, form a vital link between the firm and its customers.

6. Supply Chains and the Value Delivery Network Supply Chains and the Value Delivery Network The value delivery network is made up of the company, suppliers, distributors, and, ultimately, customers who partner with each other to improve the performance of the entire system. We examine four major questions concerning marketing channels: What is the nature of marketing channels and why are they important? How do channel firms interact and organize to do the work of the channel? What problems do companies face in designing and managing their channels? What role do physical distribution and supply chain management play in attracting and satisfying customers?

7. The Nature and Importance of Marketing Channels The Nature and Importance of Marketing Channels Producers try to forge a marketing channel (or distribution channel ) a set of interdependent organizations that help make a product or service available for use or consumption by the consumer or business user. Distribution channel decisions often involve long-term commitments to other firms. They can scrap old products and introduce new ones as market tastes demand. But when they set up distribution channels through contracts with franchisees, independent dealers, or large retailers, they cannot readily replace these channels with company-owned stores or Internet sites if the conditions change.

8. How Channel Members Add Value How Channel Members Add Value Why do producers give some of the selling job to channel partners? From economic systems point of view, the role of marketing intermediaries is to transform the assortments of products made by producers into the assortments wanted by consumers. Marketing channel members buy large quantities from many producers and break them down into the smaller quantities and broader assortments desired by consumers. Physic al distrib ution Risk taking Match ing Promo tion Financ ing Negoti ation Contac t Inform ation

9. Number of Channel Levels Number of Channel Levels Each layer of marketing intermediaries that performs some work in bringing the product and its owner ship closer to the final buyer is a channel level. Channel 1, called a direct marketing channel, has no intermediary levels the company sells directly to consumers. The remaining channels are indirect marketing channels, containing one or more intermediaries. This shows some common business distribution channels. The business marketer can use its own sales force to sell directly to business customers. Or it can sell to various types of intermediaries, who in turn sell to these customers.

10. Channel Behavior and Organization Channel Behavior and Organization They are complex behavioral systems in which people and companies interact to accomplish individual, company, and channel goals. Some channel systems consist of only informal interactions among loosely organized firms. Others consist of formal interactions guided by strong organizational structures. Moreover, channel systems do not stand still new types of intermediaries emerge and whole new channel systems evolve. Here we look at channel behavior and how members organize to do the work of the channel.

11. Channel Behavior Channel Behavior A marketing channel consists of firms that have partnered for their common good. Each channel member depends on the others. Although channel members depend on one another, they often act alone in their own short- run best interests. They often disagree on who should do what and for what rewards. Such disagreements over goals, roles, and rewards generate channel conflict. Horizontal conflict, occurs among firms at the same level of the channel. Vertical conflict, conflict between different levels of the same channel, is even more common.

12. Vertical Marketing Systems Vertical Marketing Systems A conventional distribution channel consists of one or more independent producers, wholesalers, and retailers. Each is a separate business seeking to maximize its own profits, perhaps even at the expense of the system as a whole. A vertical marketing system (VMS) consists of producers, wholesalers, and retailers acting as a unified system. One channel member owns the others, has contracts with them, or wields so much power that they must all cooperate. It integrates successive stages of production and distribution under single owner ship. It integrates successive stages of production and distribution under single owner ship. Corporate VMS It consists of independent firms at different levels of production and distribution who join together through contracts to obtain more economies or sales impact than each could achieve alone. It consists of independent firms at different levels of production and distribution who join together through contracts to obtain more economies or sales impact than each could achieve alone. Contractual VMS The franchise organization is a contractual vertical marketing system in which a channel member, called a franchisor, links several stages in the production-distribution process. There are three types of franchises. Manufacturer-sponsored retailer franchise system Manufacturer-sponsored wholesaler franchise system Service-firm-sponsored retailer franchise system Leadership is assumed not through common ownership or contractual ties but through the size and power of one or a few dominant channel members. Manufacturers of a top brand can obtain strong trade cooperation and support from resellers. Leadership is assumed not through common ownership or contractual ties but through the size and power of one or a few dominant channel members. Manufacturers of a top brand can obtain strong trade cooperation and support from resellers. Administered VMS

13. Horizontal Marketing Systems Horizontal Marketing Systems Another channel development is the horizontal marketing system, in which two or more companies at one level join together to follow a new marketing opportunity. By working together, companies can combine their financial, production, or marketing resources to accomplish more than any one company could alone.

14. Multichannel Distribution Systems Multichannel Distribution Systems Multichannel distribution system is a distribution system in which a single firm sets up two or more marketing channels to reach one or more customer segments. Multichannel distribution systems offer many advantages to companies facing large and complex markets.

15. Changing Channel Organization Changing Channel Organization Disintermediation is the cutting out of marketing channel intermediaries by product or service producers or the displacement of traditional resellers by radical new types of intermediaries. Disintermediation presents both opportunities and problems for producers and resellers. Channel innovators who find new ways to add value in the channel can displace traditional resellers and reap the rewards. In turn, traditional intermediaries must continue to innovate to avoid being swept aside.

16. Channel Design Decisions Channel Design Decisions Marketing channel design calls for analyzing consumer needs, setting channel objectives, identifying major channel alternatives, and evaluating those alternatives. Analyzing consumer needs Setting channel objectives Identifyin g major alternativ es

17. Analyzing Consumer Needs Analyzing Consumer Needs Each channel member and level adds value for the consumer. Thus, designing the marketing channel starts with finding out what target consumers want from the channel. The company and its channel members may not have the resources or skills needed to provide all the desired services. Also, providing higher levels of service results in higher costs for the channel and higher prices for consumers . The success of discount retailing shows that consumers will often accept lower service levels in exchange for lower prices.

18. Setting Channel Objectives Setting Channel Objectives The companys channel objectives are also influenced by the following things: The nature of the company Competitors Products Environment Marketing intermediaries In some cases, a company may want to compete in or near the same outlets that carry competitors products. In other cases, companies may avoid the channels used by competitors. Finally, environmental factors such as economic conditions and legal constraints may affect channel objectives and design.

19. Identifying Major Alternatives Identifying Major Alternatives Three major channel alternatives: Number of intermedia ries Responsibi lities of each channel member Types of intermedia ries

20. Types of Intermediaries Types of Intermediaries Until recently, Dell sold directly to final consumers and business buyers only through its sophisticated phone and Internet marketing channel. It also sold directly to large corporate, institutional, and government buyers using its direct sales force. However, to reach more consumers and match competitors such as HP and Apple, Dell now sells indirectly through retailers such Best Buy, Staples, and Walmart. It also sells indirectly through value-added resellers, independent distributors and dealers who develop computer systems and applications tailored to the special needs of small- and medium- sized business customers. For example, by selling through retailers and value-added resellers in addition to its own direct channels, Dell can reach more and different kinds of buyers.

21. Number of Marketing Intermediaries Number of Marketing Intermediaries A strategy in which they stock their products in as many outlets as possible. These products must be available where and when consumers want them. Intensive Distribution The producer gives only a limited number of dealers the exclusive right to distribute its products in their territories. Its often found in the distribution of luxury brands. Exclusive Distribution The use of more than one but fewer than all of the intermediaries who are willing to carry a companys products. Most television, furniture, and home appliance brands are distributed in this manner. Selective Distribution

22. Responsibilities of Channel Members Responsibilities of Channel Members The producer and the intermediaries need to agree on the terms and responsibilities of each channel member. They should agree on price policies, conditions of sale, territory rights, and the specific services to be performed by each party.

23. Evaluating the Major Alternatives Evaluating the Major Alternatives Suppose a company has identified several channel alternatives and wants to select the one that will best satisfy its long-run objectives. Each alternative should be evaluated against economic, control, and adaptability criteria. Suppose a company has identified several channel alternatives and wants to select the one that will best satisfy its long-run objectives. Each alternative should be evaluated against economic, control, and adaptability criteria. Finally, the company must apply adaptability criteria. Channels often involve long-term commitments, yet the company wants to keep the channel flexible so that it can adapt to environmental changes. Thus, to be considered, a channel involving long-term commitments should be greatly superior on economic and control grounds. Finally, the company must apply adaptability criteria. Channels often involve long-term commitments, yet the company wants to keep the channel flexible so that it can adapt to environmental changes. Thus, to be considered, a channel involving long-term commitments should be greatly superior on economic and control grounds.

24. Designing International Distribution Channels Designing International Distribution Channels Each country has its own unique distribution system that has evolved over time and changes very slowly. Thus, global marketers must usually adapt their channel strategies to the existing structures within each country. Sometimes local conditions can greatly influence how a company distributes products in global markets. Thus, international marketers face a wide range of channel alternatives. Designing efficient and effective channel systems between and within various country markets poses a difficult challenge.

25. Channel Management Decisions Channel Management Decisions Marketing channel management calls for selecting, managing, and motivating individual channel members and evaluating their performance over time. Selecting members Selecting members Managing and motivating members Managing and motivating members Evaluating their performance Evaluating their performance M arketing channel management M arketing channel management

26. Selecting Channel Members Selecting Channel Members Producers vary in their ability to attract qualified marketing intermediaries. Some producers have no trouble signing up channel members. At the other extreme are producers who have to work hard to line up enough qualified intermediaries. When selecting intermediaries, the company should determine what characteristics distinguish the better ones. It will want to evaluate each channel members years in business, other lines carried, location, growth and profit record, cooperativeness, and reputation.

27. Managing and Motivating Channel Members Managing and Motivating Channel Members Producers vary in their ability to attract qualified marketing intermediaries. Some producers have no trouble signing up channel members. At the other extreme are producers who have to work hard to line up enough qualified intermediaries. When selecting intermediaries, the company should determine what characteristics distinguish the better ones. It will want to evaluate each channel members years in business, other lines carried, location, growth and profit record, cooperativeness, and reputation.

28. Evaluating Channel Members Evaluating Channel Members The company must regularly check channel member performance against standards such as sales quotas, average inventory levels, customer delivery time, treatment of damaged and lost goods, cooperation in company promotion and training programs, and services to the customer. The company should recognize and reward intermediaries who are performing well and adding good value for consumers. Those who are performing poorly should be assisted or, as a last resort, replaced.

29. Public Policy and Distribution Decisions Public Policy and Distribution Decisions The seller allows only certain outlets to carry its products. Exclusive distribution The seller requires that these dealers not handle competitors products. Exclusive dealing Both parties can benefit from exclusive arrangements. Exclusive dealing often includes exclusive territorial agreements. The producer may agree not to sell to other dealers in a given area, or the buyer may agree to sell only in its own territory. Producers of a strong brand sometimes sell it to dealers only if the dealers will take some or all of the rest of its line. It is called full-line forcing. Finally, producers are free to select their dealers, but their right to terminate dealers is somewhat restricted.

30. Marketing Logistics and Supply Chain Management Marketing Logistics and Supply Chain Management In todays global marketplace, selling a product is sometimes easier than getting it to customers. Companies must decide on the best way to store, handle, and move their products and services so that they are available to customers in the right assortments, at the right time, and in the right place. Logistics effectiveness has a major impact on both customer satisfaction and company costs.

31. Nature and Importance of Marketing Logistics Nature and Importance of Marketing Logistics Marketing logistics also called physical distribution involves planning, implementing, and controlling the physical flow of goods, services, and related information from points of origin to points of consumption to meet customer requirements at a profit. Marketing logistics involves not only outbound logistics (moving products from the factory to resellers and ultimately to customers) but also inbound logistics (moving products and materials from suppliers to the factory) and reverse logistics (reusing, recycling, refurbishing, or disposing of broken, unwanted, or excess products returned by consumers or resellers). That is, it involves entire supply chain management managing upstream and down stream value- added flows of materials, final goods, and related information among suppliers, the company, resellers, and final consumers.

32. Nature and Importance of Marketing Logistics Nature and Importance of Marketing Logistics Companies today are placing greater emphasis on logistics for several reasons. First, companies can gain a powerful competitive advantage by using improved logistics to give customers better service or lower prices. Second, improved logistics can yield tremendous cost savings to both a company and its customers. Third, the explosion in product variety has created a need for improved logistics management. Finally, more than almost any other marketing function, logistics affects the environment and a firms environmental sustainability efforts.

33. Goals of the Logistics System Goals of the Logistics System Some companies state their logistics objective as providing maximum customer service at the least cost. Unfortunately, no logistics system can both maximize customer service and minimize distribution costs. The goal of marketing logistics should be to provide a targeted level of customer service at the least cost. A company must first research the importance of various distribution services to customers and then set desired service levels for each segment.

34. Major Logistics Functions Major Logistics Functions Warehousing Inventory Management Transportation Logistics Information Management

35. Warehousing Warehousing A company must decide on how many and what types of warehouses it needs and where they will be located. Storage warehouses store goods for moderate to long periods. In contrast, distribution center are designed to move goods rather than just store them. They are large and highly automated warehouses designed to receive goods from various plants and suppliers, take orders, fill them efficiently, and deliver goods to customers as quickly as possible.

36. Inventory Management Inventory Management Inventory management also affects customer satisfaction. Here, managers must maintain the delicate balance between carrying too little inventory and carrying too much. Thus, in managing inventory, firms must balance the costs of carrying larger inventories against resulting sales and profits. Many companies have greatly reduced their inventories and related costs through just-in-time logistics systems. Companies using RFID know, at any time, exactly where a product is located physically within the supply chain. Smart shelves would not only tell them when its time to reorder but also place the order automatically with their suppliers. Such exciting new information technology are revolutionizing distribution as we know it. Many large and resourceful marketing companies, such as Walmart, P&G, Kraft, IBM, and HP are investing heavily to make the full use of RFID technology a reality.

37. Transportation Transportation The choice of transportation carriers affects the pricing of products, delivery performance, and the condition of goods when they arriveall of which will affect customer satisfaction. The company can choose five main transportation modes: Truck Rail Water Pipeline Air Internet

38. Logistics Information Management Logistics Information Management Information can be shared and managed in many ways, but most sharing takes place through electronic data interchange (EDI), the digital exchange of data between organizations, which primarily is transmitted via the Internet. Many large retailers work closely with major suppliers to set up vendor-managed inventory (VMI) systems or continuous inventory replenishment systems.

39. Integrated Logistics Management Integrated Logistics Management Integrated logistics management is the logistics concept that emphasizes teamwork both inside the company and among all the marketing channel organizations to maximize the performance of the entire distribution system.

40. Cross-Functional Teamwork Inside the Company Cross-Functional Teamwork Inside the Company The goal of integrated supply chain management is to harmonize all of the companys logistics decisions. Close working relationships among departments can be achieved in several ways. Some companies have created permanent logistics committees composed of managers responsible for different physical distribution activities. Companies can also create supply chain manager positions that link the logistics activities of functional areas.

41. Building Logistics Partnerships Building Logistics Partnerships The members of a marketing channel are linked closely in creating customer value and building customer relationships. One companys distribution system is another companys supply system. The success of each channel member depends on the performance of the entire supply chain. Many companies have created cross-functional , cross- company teams . Other companies partner through shared projects .

42. Third-Party Logistics Third-Party Logistics Third-party logistics (3PL) provider is an independent logistics provider that performs any or all of the functions required to get a clients product to market. Companies use third-party logistics providers for several reasons. First, since getting the product to market is their main focus, using these providers makes the most sense, as they can often do it more efficiently and at lower cost. Second, outsourcing logistics frees a company to focus more intensely on its core business. Finally, integrated logistics companies understand increasingly complex logistics environments.

43. The End The End