1.

Channel management and relationships

Channel management is all about managing relationships with all these
intermediates(channel members)in such a way that it improves the overall efficiency of
the entire channel.

 Channel management: “The administration of existing channels to secure the

cooperation of channel members in achieving the firm’s distribution objectives.”
All channel members should aim at developing and maintain long term relationships with
each other in order to strengthen the channel. Effective flow of information and proper
communication between members is vital to achieve it.

First, channel management deals with existing channels. Channel design decisions are
therefore viewed as separate from channel management decisions.

Secondly, the phase secure the cooperation of channel members implies that channel
members do not automatically cooperate merely because they are members of the
channel. Administrative actions are necessary to secure their cooperation.

Third, the term distribution objectives is equally relevant for channel management.
Carefully delineated distribution objectives are needed to guide the management of the
channel.

Channel management calls for selecting and motivating individual channel members and
evaluating their performance overtime

1.1. Selecting Channel Members

 Producers vary in their ability to attract qualified marketing intermediaries. Some
producers have not trouble signing up channel members
 At the other extreme there are producers who have to work hard to line up
enough qualified intermediaries.
 Whether producers find it easy or difficult to recruit middleman, they should at
least determine what characteristics distinguish the better middleman
(intermediaries)
 When Selecting intermediaries, the company will want to evaluate each channel
members each channel member’s years in business, other lines carried, growth
and profit record, cooperativeness and reputation.
 If the intermediaries are sales agents, the company will want to evaluate the number
and character of other lines carried and the size and quality of the sales force.
 If the intermediary is a retail store that wants exclusive or selective distribution,
the company will want evaluate the store’s customers, location and future growth
potential.

1.2. Motivating Channel Members

 Once selected, channel members must be continuously motivated to do their best.
 The company must sell not only through the intermediaries, but to them.
  Most producers see the problem as finding ways to gain intermediaries
cooperation.
 They use the carrot-and-stick approach: at times they offer positive motivators
such as higher margins, special deals, premiums, cooperative advertising
allowances, display allowances, and sales contests.
 At other times they use negative motivators, such as threating to reduce margins,
to slow down delivery, or to end the relationship altogether.
 A producer using this approach usually has not done a good job of studying the
needs, problems, strengths, and weakness of its distributors.
 More advanced companies try to forge long term partnerships with their
distributors.
 This involves building a planned, professionally managed, vertical marketing
system that meets the needs of both the manufacturer and the distributors.
 In managing its channels a company must convince distributors that they can
make their money by being part of an advanced vertical marketing system.

1.3. Evaluating Channel Members

 The producer must regularly check the channel member’s 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 customers.
 These company should recognize and reward intermediaries who are performing
well.
 These who ate performing poorly should be assisted or, as a last resort, replaced.
 Finally, manufacturers need to be sensitive to their dealers. Those who treat their
dealers lightly risk not any losing their support but also causing some legal
problems.

2.DESIGNING THE MARKETING CHANNEL

 Channel design: Those decisions involving the development of new marketing channels
where none had existed before, or the modification of existing channels.

Channel design is presented as a decision faced by the marketer, and it includes either
setting up channels from scratch or modifying existing channels. This is sometimes
referred to as reengineering the channel and in practice is more common than setting up
channels from scratch.

The term design implies that the marketer is consciously and actively allocating the
distribution tasks to develop an efficient channel, and the term selection means the actual
selection of channel members.
Finally, channel design has a strategic connotation, as it will be used as a strategic tool
for gaining a differential advantage.

2.1. Who Engages in Channel Design?

Producers and manufacturers, wholesalers, and retailers all face channel design decisions.
Producers and manufacturers “look down” the channel. Retailers “look up” the channel
while wholesaler intermediaries face channel design from both perspectives. In this
chapter, we will be concerned only from the perspective of producers and manufacturers.

2.2. A Step of the Channel Design Decision

The channel design decision can be broken down into seven phases or steps. These are:

1. Recognizing the need for a channel design decision

2. Setting and coordinating distribution objectives
3. Specifying the distribution tasks
4. Developing possible alternative channel structures
5. Evaluating the variable affecting channel structure
6. Choosing the “best” channel structure
7. Selecting the channel members

Phase 1: Recognizing the Need for a Channel Design Decision

Many situations can indicate the need for a channel design decision. Among them are:

1. Developing a new product or product line

2. Aiming an existing product to a new target market
3. Making a major change in some other component of the marketing mix
4. Establishing a new firm
5. Adapting to changing intermediary policies
6. Dealing with changes in availability of particular kinds of intermediaries
7. Opening up new geographic marketing areas
8. Facing the occurrence of major environmental changes
9. Meeting the challenge of conflict or other behavioral problems
10. Reviewing and evaluating

-
Phase 2: Setting and Coordinating Distribution Objectives

In order to set distribution objectives that are well coordinated with other marketing and
firm objectives and strategies, the channel manager needs to perform three tasks:

1. Become familiar with the objectives and strategies in the other marketing mix
areas and any other relevant objectives and strategies of the firm.
2. Set distribution objectives and state them explicitly.
3. Check to see if the distribution objectives set are congruent with marketing and
the other general objectives and strategies of the firm.

Phase 3: Specifying the Distribution Tasks

The job of the channel manager in outlining distribution functions or tasks is a much
more specific and situationally dependent one. The kinds of tasks required to meet
specific distribution objectives must be precisely stated.

In specifying distribution tasks, it is especially important not to underestimate what is

involved in making products and services conveniently available to final consumers.

Phase 4: Developing Possible Alternative Channel Structures

The channel manager should consider alternative ways of allocating distribution

objectives to achieve their distribution tasks. Often, the channel manager will choose
more than one channel structure in order to reach the target markets effectively and
efficiently.

4) Number of Possible Channel Structure Alternatives

Given that the channel manager should consider all three structural dimensions (level,
intensity, and type of intermediaries) in developing channel structures, there are, in
theory, a high number of possibilities.

Fortunately, in practice, the number of feasible alternatives for each dimension is often
limited due to industry or the number of current channel members.

Phase 5: Evaluating the Variables Affecting Channel Structure

Having laid out alternative channel structures, the channel manager should then evaluate
a number of variables to determine how they are likely to influence various channel
structures.
Phase 6: Choosing the “Best” Channel Structure

In theory, the channel manager should choose an optimal structure that would offer the
desired level of effectiveness in performing the distribution tasks at the lowest possible
cost. In reality, choosing an optimal structure is not possible.

Why? First, as we pointed out in the section on Phase 4, management is not capable of
knowing all of the possible alternatives available to them.

Second, even it were possible to specify all possible channel structures, precise methods
do not exist for calculating the exact payoffs associated with each alternative.

Some pioneering attempts at developing methods that are more exacting do appear in
literature and we will discuss these in brief.

3. Conflict in the Marketing Channel

Conflict exists when a member of the marketing channel perceives that another
member’s actions impeded the attainment of his or her goals.

A) Conflict versus Competition

Conflict in the marketing channel should not be confused with competition.
Competition is behavior that is object-centered, indirect, and impersonal.

Conflict, on the other-hand, is direct, personal, and opponent-centered behavior.

B) Causes of Channel Conflict

Analysis and research have pointed to many possible causes of channel conflict. These
are:

a. Misunderstood communications
b. Divergent functional specializations and goals of channel members
c. Failings in joint decision-making
d. Differing economic objectives
e. Ideological differences of channel members
f. Inappropriate channel structure
-
Although there are many causes of channel conflict most can be placed into one or more
of the following seven categories:

1. Role incongruities
2. Resource scarcities
3. Perceptual differences
4. Expectational differences
5. Decision domain disagreements
6. Goal incompatibilities
7. Communication difficulties

1. Role incongruities: Members of the marketing channel have a series of roles they
are expected to fulfill. If a member deviates from the given role, a conflict situation
may result.

2. Resource scarcities: Sometimes conflict stems from a disagreement between channel

members over the allocation of some valuable resources needed to achieve their
respective goals. A common example is between manufacturers and retailers over
“house accounts”. Another example involves site selection in franchised channels.

3. Perceptual differences: Perception refers to the way an individual selects and

interprets environmental stimuli. The way such stimuli are perceived are often quite
different from objective reality.

4. Expectational differences: Various channel members have expectations about the

behavior of other channel members. These expectations are predictions or forecasts
concerning the future behavior of other channel members. Sometimes these
forecasts turn out inaccurate, but the channel member who makes the forecast will
take action based upon the predicted outcomes – thus channel conflict.

5. Decision domain disagreements: Channel members explicitly or implicitly carve out

for themselves an area of decision-making that they feel is exclusively theirs. Hence,
conflicts arise over which member has the right to make what decisions.

The area of pricing decision has traditionally been a pervasive example of such
conflict.

6. Goal incompatibilities: Each member of the marketing channel has his or her own
goals. The opening vignette of the chapter concerning Amazon.com is an example
of such incompatible goals.

Amazon is trying to sell as much merchandise as possible from whatever sources

provide the most revenue and profits to them. The CD, book or electronics firm who
advertises through Amazon.com wants Amazon.com to sell their new products.
7. Communication difficulties: Communication is the vehicle for all interactions
among channel members, whether such interactions are cooperative or conflicting.
Any foulup or breakdown in communications can quickly turn cooperation into
conflict.

3.1. Managing Channel Conflict

There are four generalizations regarding channel conflict:

1. Conflict is an inherent behavioral dimension in the marketing channel.

2. Given the numerous causes from which conflict may stem, it is a pervasive
phenomenon in marketing channels.
3. Conflict can affect channel efficiency.
4. Various levels of conflict may have both negative and positive effects on channel
efficiency, or possibly no effect.

Channel managers must:

1. Detect conflicts or potential conflicts

2. Appraise the possible effects of conflicts
3. Resolve channel conflict

1. Detect channel conflict: Channel managers can detect potential conflict areas by
surveying other channel members’ perceptions of his or her performance. Such
surveys can be conducted by outside research firms, or trade associations.

The marketing channel audit is another possible approach of uncovering potential

conflict between channel members. The term channel audit suggests a periodic and
regular evaluation of key areas of the relationship of a given channel member with
other members.

Distributors’ advisory councils or channel members’ committees offer another

approach to early conflict detection. These groups consist of top management
representatives from each level of the channel distribution system.

The common theme of early detection of channel conflict is this: channel managers
need to make a conscious effort to detect conflict or its potential if they expect to
deal with it before it develops.

-
2. Appraising the effect of conflict: A growing body of literature has been emerging to
assist the channel manager in developing methods for measuring conflict and its
effect on channel efficiency.

For the present, most attempts to measure conflict and appraise its effects on channel
efficiency will still be made at a conceptual level that relies on the manager’s
subjective judgment.

3. Resolving conflict: When conflict exists in the channel, the channel manager should
take action to resolve the conflict if it appears to be adversely affecting channel
efficiency.

Three techniques are suggested:

 A channelwide committee, a sort of “crisis management team”

 Joint goal setting by committee
 A distribution executive position created for each major firm in the channel. The
individual(s) filling this position would be responsible for exploring the firm’s
distribution-related problems.

Another approach to resolving channel conflict is by arbitration.

What is more important than the specifics of any of these particular approaches is the
underlying principle common in all of them: creative action on the part of some
party to the conflict is needed if the conflict is to be successfully resolved.
Conversely, if conflict is simply “left alone” it is not likely to be successfully
resolved and may get worse.

4. THE CHANNEL PARTICIPANTS

The three basic divisions of the marketing channel are: producers and manufacturers,
intermediaries and final users.

 Channel participants are defined as participants that engage in negotiatory functions

linked together by the flows of negotiation or ownership.
 Producers and manufacturers and intermediaries are further broken down into
wholesale and retail intermediaries and consumer and industrial users.
 Final users are defined as target markets and are excluded from further discussions
of channel members.

4.1. Producers and Manufacturers

Producers and manufacturers consist of firms that are involved in the extracting, growing,
or making of products. For the needs of the customers to be satisfied products must be
made available to customers when, where and how they want them.

This theme is expanded to illustrate that producers and manufacturers often do not have
the expertise in distribution as they do in manufacturing or producing.
The section then goes into a detailed explanation regarding the firm Binney & Smith, the
makers of Crayola® crayons. Figure 2.2 deals with hypothetical average cost curves for
Binney & Smith.

The message to be derived from Figure 2.2 is that Binney & Smith would never be able
to sell enough crayons to individual consumers to absorb the enormous fixed costs
associated with the performance of the distribution task.

Intermediaries then because they distribute the products of many producers are able to
spread their fixed costs and achieve the desired economies of scale. Producing and
manufacturing firms often face high average costs for distribution tasks when they
attempt to perform them by themselves.

4.2. Intermediaries

 Intermediaries: Are independent businesses that assist producers and manufacturers in

the performance of negotiatory functions and other distribution tasks.

4.2.1. Wholesal Intermediaries

 Wholesalers: Consist of businesses that are engaged in selling goods for resale or
business use to retail, industrial, commercial, institutional, professional, or
agricultural firms, as well as to other wholesalers.

Types and Kinds of Wholesalers

Three major types of wholesalers as defined by the Census of Wholesale Trade. These
are:
1. Merchant wholesalers
2. Agents, brokers, and commission merchants
3. Manufacturer’s sales branches and offices
-
1. Merchant Wholesalers are firms engaged primarily in buying, taking title to, usually
storing, and physically handling products in relatively large quantities and then
reselling the products in smaller quantities to others. They go under many different
names such as: wholesaler, jobber, distributor, industrial distributor, supply house,
assembler, importer, exporter, and others.

2. Agents, brokers, and commission merchants are independent middlemen who do not
take title to the goods in which they deal, but who are actively engaged in the buying
and selling functions on behalf of others. They are usually compensated in the form
of commissions on sales or purchases. They also go under other names such as
selling agents and import and export agents.

3. Manufacturer’s sales branches and offices are owned and operated by manufacturers
but are physically separated from the manufacturing plants.

4.2.2. Retail Intermediaries

 Retailers: Consist of business firms engaged primarily in selling merchandise for

personal or household consumption and rendering services incidental to the sale
of goods.

Kinds of Retailers

Retailers in the United States comprise an extremely complex and diverse

conglomeration ranging from mom-and-pop neighborhood stores to giant mass
merchandising chains such as Wal-Mart®.

Distribution Tasks Performed by Retailers

Retailers are especially suited to the following distribution tasks:

1. Offering manpower and physical facilities that enable producers/manufacturers

and wholesalers to have many points of contact with consumers close to their
places of residence
2. Providing personal selling, advertising, and display to aid in selling supplier’s
products
3. Interpreting consumer demand and relaying this information back through the
channel
4. Dividing large quantities into consumer-sized lots, thereby providing economies
for suppliers and convenience for consumers
5. Offering storage, so that suppliers can have widely dispersed inventories of their
products at low cost and enabling consumers to have close access to the products
of producers/manufacturers and wholesalers
6. Removing substantial risk from the producer/manufacturer by ordering and
accepting delivery in advance of the season
4.3.Facilitating Agencies

 Facilitating agencies: Are business firms that assist in the performance of distribution
tasks other than buying, selling, and transferring title.

By properly allocating distribution tasks to facilitating agencies, the channel manager will
have an ancillary structure that is an efficient mechanism for carrying out the firm’s
distribution objectives.

Some of the more common types of facilitating agencies:

 Transportation agencies such as United Parcel Service (UPS®) and common carriers
 Storage agencies which consist mainly of public warehouses that specialize in the
storage of goods on a fee basis
 Order processing agencies which are firms that specialize in order fulfillment tasks
 Advertising agencies which offer the channel member expertise in the development
of promotion strategy
 Financial agencies such as banks, finance companies and factors that specialize in
discounting accounts receivable
 Insurance companies providing the channel member with means for shifting the risks
associated with the industry
 Marketing research firms to help the channel member gain relevant marketing
information

5.MOTIVATING THE CHANNEL MEMBERS

 Motivation: Refers to the actions taken by the manufacturer to foster channel member
cooperation in implementing the manufacturer’s distribution objectives.

There are three basic facets involved in motivation management:

1. Finding out the needs and problems of channel members

2. Offering support to the channel members that is consistent with their needs and
problems
3. Providing leadership through the effective use of power

-
Finding Out the Needs and Problems of Channel Members

Before the channel manager can successfully motivate channel members, an attempt must
be made to learn what the members want for the channel relationship.

Manufacturers are often unaware of or insensitive to the needs and problems of their
channel members.

1) Approaches for Learning about Channel Member Needs and Problems

All marketing channels have a flow of information running through them as part of the
formal and informal communications systems that exist in the channel.

Ideally, such systems would provide the manufacturer with all of the information needed
on channel member needs and problems. However, most marketing channel
communication systems have not been formally planned and carefully constructed to
provide a comprehensive flow of timely information.

Consequently, the channel manager should not rely solely on the regular flow of
information coming from the existing channel communication system for accurate and
timely information on channel member needs and problems.

There is a need to go beyond the regular system and make use of one or all of the
following four additional approaches.

A) Research Studies of Channel Members

Most manufacturers never conduct research of channel member needs and problems.
Estimates indicate that less than one percent of manufacturers’ research budgets are spent
on channel member research.

B) Research Studies by Outside Parties

Research designed and executed by a third party is sometimes necessary if complete and
unbiased data on channel member needs and problems are to be obtained.

The use of outside parties to conduct research on channel member needs and problems
provides higher assurance of objectivity.
C) Marketing Channel Audits
The basic thrust of this approach should be to gather data on how channel members
perceive the manufacturer’s marketing program and its component parts, where the
relationships are strong and weak, and what is expected of the manufacturer to make the
channel relationship viable and optimal.

For example, a manufacturer may want to gather data from channel members on what
their needs and problems are in areas such as:
 Pricing policies, margins, and allowances
 Extent and nature of the product line
 New products and their marketing development through promotion
 Servicing policies and procedures such as invoicing, order dating, shipping,
warehousing and others
 Sales force performance in servicing the accounts
Further, the marketing channel audit should identify and define in detail the issues
relevant to the manufacturer–wholesaler and/or manufacturer–retailer relationship.

Whatever areas and issues are chosen, they should be cross-tabulated or correlated as to
kind of channel members, geographical location of channel members, sales volume levels
achieved, and any other variables that might be relevant.

Finally, for the marketing channel audit to work effectively, it must be done on a periodic
and regular basis so as to capture trends and patterns. Emerging issues are more likely to
be spotted if the audit is performed on a regular basis.

D) Distributor Advisory Councils

Three significant benefits emerge from the use of a distributor advisory council. First, it
provides recognition for the channel members. Second, it provides a vehicle for
identifying and discussing mutual needs and problems that are not transmitted through
regular channel information flows. And third, it results in an overall improvement of
channel communications, which in turn helps the manufacturer to learn more about the
needs and problems of channel members, and vice versa.

Offering Support to Channel Members

Support for channel members refers to the manufacturer’s efforts in helping channel
members to meet their needs and solve their problems. Such support for channel
members is all too often offered on a disorganized and ad hoc basis.

The attainment of a highly motivated cooperating “team” of channel members in an

interorganizational setting requires carefully planned programs.

-
Such programs can generally be grouped into one of the following three categories: (1)
cooperative, (2) partnership or strategic alliance, and (3) distribution programming.

1) Cooperative Arrangements

Cooperative arrangements between the manufacturer and channel members at the

wholesale and retail levels have traditionally been used as the most common means of
motivating channel members in conventional, loosely aligned channels.

The underlying rationale of all such cooperative programs, from the manufacturer’s point
of view, is to provide incentives for getting extra effort from channel members in the
promotion of the products.

2) Partnerships and Strategic Alliances

Partnerships or strategic alliances stress a continuing and mutually supportive

relationship between the manufacturer and its channel members in an effort to provide a
more highly motivated team, network, or alliance of channel partners.

Webster points to three basic phases in the development of a “partnership” arrangement

between channel members.

 An explicit statement of policies should be made by the manufacturer in such areas as

product availability, technical support, pricing and any other relevant areas.
 An assessment should be done of all existing distributors as to their capabilities for
fulfilling their roles.
 The manufacturer should continually appraise the appropriateness of the policies that
guide his or her relationship with channel members.

Webster’s basic guidelines can be used for establishing partnerships or strategic alliances
in marketing channels.

3) Distribution Programming

 Distribution programming: “A comprehensive set of policies for the promotion of a

product through the channel.”

The essence of this approach is the development of a planned, professionally managed

channel.

The first step in developing a comprehensive distribution program is an analysis by the

manufacturer of marketing objectives and the kinds and levels of support needed from
channel members to achieve these objectives.
Further, the manufacturer must ascertain the needs and problem areas of channel
members.

Nevertheless, virtually all of the policy options available can be categorized into three
major groups:

a. Those offering price concessions to channel members

b. Those offering financial assistance
c. Those offering some kind of protection for channel members

Providing Leadership to Motivate Channel Members

Control must still be exercised through effective leadership on a continuing basis to attain
a well-motivated team of channel members.

Seldom is it possible for the channel manager to achieve total control, no matter how
much power underlies his or her leadership attempts. For the most part, a theoretical
state, where the channel manager were able to predict all events related to the channel
with perfect accuracy, and achieve the desired outcomes at all times, does not exist or is
not achievable in the reality of an interorganizational system such as the marketing
channel.

Little explained succinctly the problems of achieving very high levels of control and
leadership in this interorganizational setting when he said:
“Because firms are loosely arranged, the advantages of central direction are in large
measure missing. The absence of single ownership, or close contractual agreements,
means that the benefits of a formal power (superior, subordinate) base are not
realized. The reward and penalty system is not as precise and is less easily affected.
Similarly, overall planning for the entire system is uncoordinated and the perspective
necessary to maximize total system effort is diffused. Less recognition of common
goals by various member firms in the channel, as compared to a formally structured
organization, is also probable.”