Module IV

Channel Design &

Management

Distribution Strategy
The Andersen Consulting Distribution Strategy
Pyramid, focuses on answering the following strategic
questions:
Given the value proposition, who are the end
customers and, therefore,
what are the distribution
objectives?
What channel structure will achieve these distribution
objectives at the lowest cost to serve?
How do we manage our physical network to achieve
objectives at lowest costs?
What processes and organisation structure will help
sustain the distribution networks performance?

The Andersen Consulting Distribution Strategy Pyramid

Distribution
Objectives
STRATEGY
Channel
Design

Network
Strategy
STRUCTURE

Intermediate
Management

Warehouses
and Transport

Materials
Management

PROCESS
IT

Policies and
Procedures

Facilities and
Equipment
IMPLEMENTATION

Channel
Management

Distribution objectives:
Influenced by the customer expectations
Defines the extent of time, place and possession utility which the customer can
expect out of the channel network
The relative level of DDI and CDI will determine the extent of the opportunity to
actually extend distribution.

The Distribution Development Index (DDI) is defined as the availability of a

brand/category in the market relative to that of a benchmark brand/category. The
Category Development Index (CDI) is defined as the per capita consumption of the
category in that market relative to the national per capita consumption of the category.

High

Concentrate on
demand generation
activities

Low

Develop integrated
sales and
marketing package

Concentrate on
quality of distribution,
service level,
frequency etc.

Distribution
Development

Low

Extend distribution
immediately

High
Category Development

Channel Design Factors

Product mix and nature of the product
Width and depth of market / outlet coverage planned
Long term commitments to channel partners
Level of customer service planned
Cost affordable on the channel system
Channel control requirements of the company
Channel Design Issues:
Activities required and who will perform
Activities relationship to service levels
Number of channel members required and the relationship
between categories
Roles, responsibilities, remuneration and appraisal of
performance of channel members
5

Channel Design Process:

1) Segmentation: Grouping customers in similar clusters based on their
needs. Ex.: Doctors, Chemists, Hospitals and nursing homes . Enables the
sales manager to plan for the kind of channel members needed.

2) Positioning : The sales manager decides the channel partner who is ideal
to meet the expectations of the segments., the number of each category &
the service objectives and flows for each channel partner.
3) Focus :The sales manager has to firmly decide which of the segments he
will service considering cost, the managerial talent available and other
constraints. The competitive scenario also helps in this decision.
4) Development : At this stage the channel system is being put in place to
achieve the objectives. Select the best of the alternatives based on cost,
adaptability/flexibility to handle different types of markets and changes in
the market conditions, volume and range to be handled, ability to manage
and control & competitor benchmarking.
For modifying an existing channel, the gap between the ideal and the
existing is to be identified for remedial action.

Channel Design:
Patterns of Distribution:
Determines the intensity of the distribution; Intensity decides the service level
provided
Types of distribution intensity:
Intensive
Selective
Exclusive
Channel Levels:
Zero level
One level
Two level
Marketing Channel Systems:
Vertical:
Corporate
Administered
Contractual
Horizontal
Multi-channel

Vertical :
Various parties like producers, wholesalers and retailers act as a unified system to avoid
conflicts. Improves operating efficiency and marketing effectiveness
1) Corporate: Combines successive stages of production and distribution under single
ownership Examples: Bata, Bombay Dyeing, Raymond, Sears, Goodyear, Suppliers of
food items could be also their own supplying firms - like Nilgiris
2) Administered: Co-ordinates distribution activities, Gains market power by dominating
a channel, Command high level of co-operation in shelf space, displays, pricing
policies and promotion strategies. Ex. Usually true of dominant brands like GE, Kodak,
Pepsi, Gillette, Coke and HLL in certain locations.
3) Contractual : Independent producers, wholesalers and retailers operate on a contract
Ex. : Franchise organizations, Retailer co-operatives
Horizontal:
Two or more unrelated companies join together to pool resources and exploit an
emerging market opportunity. Examples: In-store banking in hotels/ big stores, Retail
outlets in petrol bunks, sale of Financial products in post offices
Multi Channel:
Company uses different channels to reach / same or different market segments. Ex.: Most
FMCG companies have separate networks for retail market and institutions, Pharma
companies may use different channels to reach doctors, chemists and hospitals

Channel Management
Selecting Channel Partners:
Some of the methods employed to select channel
partners are:

Sales people identify prospects and talk to them

Press advertising (industrial goods)
Existing channel partners can give good references
Competitors channel members for reference, not poaching

Selection Criteria:
Qualitative: willingness, confidence in company products,
willingness to abide by company rules, building company
image, innovativeness etc
Quantitative: financial status, infrastructure, location,
present businesses, customer relationships, market standing
etc

Selection Criteria Checklist

Local presence
Financial soundness
Knowledge of the market-place
Contacts with target customers
Appropriate reputation in the market
Shared values and aspirations
Sales area coverage
Competitive service skills
Complementary lines
Required skills and competence
Appropriate facilities for inventory, warehousing and transportation
Motivation to succeed
Capable of marketing support to the manufacturer
Capable of discharging the responsibilities
Appropriate ethical practice
Necessary leadership qualities.

Training Channel Members:

Market views channel member as part of the company he has to behave in a
like manner hence training assumes significance
Training could be on the job field training or classroom training
Training is an ongoing process and covers:
Field training on how the markets are to be worked to achieve sales, collect
payments and ensure the right kind of merchandising
Class room training on company products, competition and how to tackle it to
gain market shares
Special meetings for new product launches
Submitting reports and maintaining records
Statutory compliance
Care of company products
Technical specifications and answering FAQs of customers
For technical and industrial products recognition of specs, installation
procedure, repair and maintenance and effective demonstrations
Servicing of automobiles and other engineering products

Motivating Channel members:

Continuous motivation required to achieve ambitious volume and growth
targets
Motivation includes:
Capacity building programs
Training
Promotions support
Marketing research support
Working with company personnel
Incentives
Use of the power bases brings diverse channel partners in line for effective
implementation
Channel members are dependent on each other. The power equations
between them keep them working together.
There are basically 5 types of power bases reward, coercion, expert,
reference and legitimacy. 2 more can be considered as support and
competition.
Extent of dependence defines the power base which is appropriate.

Power of Motivation
Reward incentives for good performance
Coercion threat of punishment for nonperformance
Referent benefit of sheer association with a
strong company
Legitimate arising out of a contract
Expert specialized knowledge
Support additional benefits for better
performers only
Competition created between channel partners

Channel Co-ordination
Channel system is well co-ordinated if each
member understands his role correctly and
performs it to help the system achieve its
customer service objectives.
In a co-ordinated channel:
Interests of all channel members are protected
Actions of all are in line with overall objectives
Flows are streamlined to desired customer service
objectives

Channel co-ordination is an on-going effort

Channel Relationships
Relationship Nature
Adhoc

On going

Strategic

Alliance

Partnering

Transaction

Co-operative

Relationship purpose

Operational

Channel Conflicts
Conflict is generated when actions of any channel member
come in the way of the system achieving its objectives.
Situation of discord or disagreement between partners in the
same channel system has negative connotations and is
driven more by feelings than facts
Conflict is part of any social system getting disparate entities
to work together as in a channel system is also one such
social unit
If any member feels that another is working in a manner as
to affect him, conflict results
Each channel member wanting to pursue his own goals
Each wants to retain his independence
There are limited resources which all of them want to utilise
in achieving their goals

Features of conflicts:
Initially latent and does not affect the working
Is not normally possible to detect till it becomes disruptive
Reasons for Channel Conflict:
Roles not defined properly
Allocation of scarce resources between members seem unfair to some
Differences in perception of the business environment
Future expectations not likely to materialize
Decision domain disagreements who has to decide on what (key account
pricing)
Channel members do not agree on objectives
Misunderstanding or mis-interpretation of routine business communication
Three broad categories of channel conflict are:
Goal conflict understanding of objectives by various channel members
is different (mfrs think Long term but channels think short term gains)
Domain conflict understand responsibilities and authority differently
Perception conflict reading of the market place is different and
proposed actions vary

Channel Relationships
Goals (what?)
Divergent

Convergent

Convergent

Misunderstood

Harmonious

Process (How?)
Acrimonious
Divergent

Mismanaged

Types of Conflicts
Latent Conflict:
Some amount of discord exists but does not affect the working or delivery
of customer service objectives.
Disagreement could be on roles, expectations, perceptions,
communication.
Perceived Conflict:
Discords become noticeable channel partners are aware of the
opposition.
Channel members take the situation in their stride and go about their
normal business
No cause for worry but the opposition has to be recognized
Felt Conflict:
Reaching the stage of worry, concern and alarm. Also known as affective
conflict. Parties are trying to outsmart each other.
Causes could be economical or personal
Needs to be managed effectively and not allowed to escalate.
Manifest Conflict:
Reflects open antagonistic behaviour of channel partners. Confrontation
results.
Initiatives taken are openly opposed affecting the performance
May require outside intervention to resolve

Resolving Conflicts
4 Stage Process

Understanding nature and intensity

Tracing the source of the conflict

Understand the impact of the conflict

Strategy and plan of action for resolution

Conflict Resolution Styles

Avoidance

Styles are a combination

of assertiveness and
co-operation.

Aggression
Accommodation

Compromise
Collaboration
Least effort and
results

Maximum effort and

Best results
Kenneth W Thomas

Avoidance:
Used by weak channel members.
Problem is postponed or discussion avoided.
Relationships are not of much importance.
As there is no serious effort on getting anything done, conflict is avoided.

Aggression:
Also known as a competitive or selfish style.
It means being concerned about ones own goals without any thought for
the others.
The dominating channel partner (may be the principal) dictates terms to the
others. Long term could be detrimental to the system.
Accommodation:
A situation of complete surrender.
One party helps the other achieve its goals without being worried about its
own goals.
Emphasis is on full co-operation and flexibility in approach. May generate
matching feelings in the receiver.
If not handled properly, can result in exploitation

Compromise:
Obviously both sides have to give up something to meet mid way.
Can only work with small and not so serious conflicts.
Used often in the earlier two stages.
Colloboration:
Also known as a problem solving approach
Tries to maximize the benefit to both parties while solving the dispute.
Most ideal style of conflict resolution a win-win approach
Requires a lot of time and effort to succeed.
Sensitive information may have to be shared

Channel Policies:
Defines how the channel is required to operate.
Normally framed by the channel principal to guide the operations of the channel
system
If not framed properly could prove the starting point of channel conflicts.
Some subjects of channel policies could be: Markets to be covered, Customer
coverage, Pricing, Product portfolio to be handled, Selection, termination of
channel members, Ownership of the channel

Channel Members Evaluation:

Effectiveness of the distribution channel determines the success of the company

Company would like its channel partners to perform at the highest standards possible
Need to constantly evaluate performance on sales targets, coverage, productivity,
inventory holdings, attending to servicing requests etc

Evaluation on pre-agreed tasks only. No surprises.

Specific targets on periodical basis are set.
Targets on volume and outlet productivity could be for a week or a month
Targets relating to increasing market shares or total outlet coverage could
be for 6 months
Different weightages could be given for each of the parameters for
evaluation
The performance appraisal is open and transparent
Leading FMCG companies feel that an ROI of 30% for a distributor is healthy and
is a fair indication that he is performing well.
If the ROI is more, additional tasks are given
If the ROI is less, the company may provide additional support
Post evaluation tasks include counseling, retraining and motivating. In extreme
cases it may result in termination

Channel Information Systems

CIS is the orderly flow of pertinent operational
data both internally and between channel
members, for use as a basis of decision making in
specified responsibility areas of channel
management
Information Advantages:
Useful in marketing planning helps improve
quality of marketing decisions
Can help tap market opportunities
Provides an alert against competition
Helps spot trends favourable or otherwise
Helps develop action plans for growth
Gives feedback on consumer needs

Sources of Data
Reports (oral and written) and records of channel members, sales
people
Letters, statements and market research
Any other info collected by the sales people and the channel
members from the market
External sources like business publications, magazines, newspapers,
trade journals.
In a dedicated channel system the collection of info is well
streamlined in the JC meeting
With use of IT enabled systems collection and processing has
become simpler.
In a good channel MIS, it is necessary to define upfront for each
element of the MIS, the following:

Purpose of the info

Source of the info
Action possible
Impact on customer service

Elements of a CIS
Market Information
Competition tracking
Distributor profiles &
database
Retailer profiles &
database
Primary sales
Secondary sales
Distributor payment
records

Distribution costs
freight, storage,
ordering, inventory
control
Pricing trends
Promotions
Statutory information &
reporting (VAT etc)

Distribution of services

The Services Sector:

Twice the size of the manufacturing sector
Services offered are to be in line with customer demand
Services have to be presented in an appealing manner to
sustain customers.
Needs specialized channels which understand the
characteristics of service delivery
5 Characteristics of Services:
1. They are intangible can only be felt. No visual features like
size, style.
2. They are inseparable from their service providers a 3P
cannot deliver
3. They cannot be standardized custom made and delivered
4. Customers are involved to a great degree define the
services
5. They are perishable cannot be stored for delivery later.
Salvage value of an unsold service is zero.

Place: Distribution of Services

There is no actual tangible product which is being distributed.

It involves consumers movement to the service location. As consumer is part of the

service operation, the method of selling and environment within

which
product purchase is made becomes part of the service
experience.

service

The intermediaries/agents play a key role in recommending services to

consumers.

The service organisation has to devise promotional/distribution strategies

which encourage the customer to come directly, through agents or other modes.

Key Issues Regarding Location

Need of the market

Technological innovation

Convenience

Service Location: Situations and their Impact

Situation

Impact

1. Customer goes to service provider.

Service providers have to select an appropriate

location or multi-locations.

2. Service provider goes to customer.

Location becomes less important because the

service provider either provides service at
customers place, e.g., janitorial services, customer
lawncare service, lift repair service or decides to do
it at his premises, e.g., some mechanics repair the
car at owners premises or they bring the car to the
garage for repairs.

3. Service provider and customer transact at

Location becomes insignificant, e.g., in case of

e-mail, no transaction or interaction is required
whereas at ATM, customer is using a service
without interacting with people but he may choose
to go to a bank for another transaction personally.

arms length.

Accessibility

Accessibility to range and choice of service literature and brochures

Accessibility to components such as visas, travellers cheques, insurance and

cards

Accessibility to booking points in every main town and cities

Accessibility to alternative brands

Accessibility to alternative agents.

Major Intermediaries for Service Delivery

Franchisees

Services

Electronic Channels

Agents/Brokers

Broad Options for the Form of Channel

Type of Service

Form of Channel

Direct Sales
Producer

Consumer

Agents or Brokers
Producer
Agent

Consumer

Seller and Buyer Agent or Broker

Franchises and Contracted Services Deliveries

Agent
Consumer

Accounting Services
Management Consulting Services
Design and Technical Services
Dieting Services
Eyecare Services
Hair Fashioning Services
Healthcare Services
Legal Services
Insurance Services
Tour and Travel Services
Hotel Reservation Services
Ticketing Services
Advertising Services
Stocks and Shares Brokers
Commodity Brokers
Real Estate
Holding and Investment
Fast Food Services
Car Rental Services
Dry Cleaning Services

Product/Service Category
FAST FOOD

EDUCATION

COURIER

HOTELS
BEAUTY PARLOURS

Some Franchising Examples

Sample Franchises
McDonalds
Dominos
Wimpys
Aptech
NIIT
CMC
STG
Tulec
Overnite Express
DHL
Fedex
Holiday Inn
Radisson
Shehnaz

Electronic Channels
Increased use of self service operations, e.g., many marketing firms have put
services on the Net.

Providing data bank services, e.g., a service provider

information to make a mailing list to target a specific audience.

Electronic banking.

E-mail and many more.

may

their
require

Advantages

Convenience

Low Cost

Wide Distribution

Customer Choice

Quality Control

Agents and Brokers

Agents : Agents are wholesalers who do not take title of products. They work for
commission or fee as payment for their services and are comprised of
manufacturers/service providers agents, selling agents and commission
merchants.

 Services Providers Agents : They work for two or more related services from
noncompeting service creators in a specific geographic territory.
Selling Agents : Selling agents sell full range of services of a service provider and are
responsible for all aspects of marketing of those services under a contractual
agreement.
Brokers: Brokers do not have any affiliation with any particular service provider. They
specialise in certain areas and bring buyers and sellers together to negotiate the
contract.
Benefits of Using Agents/Brokers
1.

The services become widely represented and accessible.

2.

The selling and distribution costs are reduced.

3.

The marketing strategies can be tailored to suit the

agents/brokers possess expert knowledge of local conditions.

local

markets as

4. Those involved in providing services possess special knowledge and skill and therefore
assemble the package of services from the suppliers for the service buyers.
5. They can provide services of the customers choice and they represent multiple
providers of services.

Channels of Distributions for Airline Services (Typical)

AIRLINES

Consolidation

Tour operator

Affiliated with
companies

Travel agent

Passenger

Direct via-home
leased system

Channels of Distribution for Musical Event Show

MUSICAL EVENT SHOW (BUSINESS MANAGER)

MANAGER

MANAGER
BOOKING
AGENCY

BOOKING
AGENCY

BOOKING
AGENCY
MUSIC
COUNCIL

MUSIC
COUNCIL

MUSIC
COUNCIL
MUSIC
MEDIA

SPONSOR

SPONSOR

SPONSOR

SPONSOR

SPONSOR SPONSOR

MUSICAL SHOW AUDIENCE

Channels of Distribution of Services

Channels of Distribution-Destination/Tourism Supplier (Typical)

Customer
Customer

Travel agency

Customer

Tour operator

Customer

Travel agency

Customer

Travel agency

Tour operator

International Distribution
Management

Distribution important in international markets due to

distance and transportation time.
Importers, manufacturers and retailers are increasingly
asking for Just in Time deliveries.
Distribution strategy varies from market to market
depending on size and local conditions.
Multiple channels may be used in countries
DISTRIBUTION OPTIONS:
Depends on the volume of the business
Positioning of the product
Infrastructure of distribution in the country
Local laws some countries insist on local companies in
the distribution business
Internet as a channel of sales and distribution

PRICING AND PAYMENT TERMS:

Common pricing terms are:
Ex Works at the mfrs factory gate
FOT, FOR free on truck / rail loaded on truck/rail
FAS free along side at port next to ship
FOB free on board loaded on ship
C&F cost and freight inclusive of to destination
CIF cost, insurance and freight inclusive to destination

Payment terms can include:

Cash in advance
Cash on delivery cash against documents
Consignment basis payable after sale
Usance payment days after acceptance of documents
Letter of credit
Long term credit financing for machinery / projects
Each method has risks for the buyer or seller. The LC offers safety
and comfort for both

CURRENCY OF PRICING:
The US Dollar is the most widely used currency for pricing
international sales
Importers in some countries may prefer invoicing in local
currencies like Japanese Yen or Euro or Pound Sterling, Singapore
Dollars or UAE Dirhams Saudi riyals etc.
This reduces the risk of exchange rate fluctuations for the buyer
Exchange fluctuation is a major risk for sellers and can be managed
by hedging the currency.
ROLE OF LOGISTICS:
Very important aspect of international selling
Logistics can make up over 15% of the cost of the product
Involves multiple modes of transport land, sea and air
Considerable paperwork and formalities to be completed in
international trade
Logistics providers now offer complete one stop solution including
distribution, invoicing and collection of payment