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Channel Behavior and OrganizationComments by Dr. Laukamm
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Distribution
channels are more than simple collections of firms tied together by
various flows. They are complex behavioral systems in which people and
companies interact to accomplish individual, company, and channel
goals. Some channel systems consist only of 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 at how members
organize to do the work of the channel.
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Channel BehaviorComments by Dr. Laukamm
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A
marketing channel consists of firms that have banded together for their
common good. Each channel member depends on the others. For example, a
Ford dealer depends on Ford to design cars that meet consumer needs. In
turn, Ford depends on the dealer to attract consumers, persuade them to
buy Ford cars, and service cars after the sale. The Ford dealer also
depends on other dealers to provide good sales and service that will
uphold the brand's reputation. In fact, the success of individual Ford
dealers depends on how well the entire Ford marketing channel competes
with the channels of other auto manufacturers.
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Each
channel member plays a specialized role in the channel. For example,
Sony's role is to produce personal consumer electronics products that
consumers will like and to create demand through national advertising.
Best Buy's role is to display these Sony products in convenient
locations, to answer buyers' questions, and to close sales. The channel
will be most effective when each member is assigned the tasks it can do
best.
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Ideally,
because the success of individual channel members depends on overall
channel success, all channel firms should work together smoothly. They
should understand and accept their roles, coordinate their activities,
and cooperate to attain overall channel goals. However, individual
channel members rarely take such a broad view. Cooperating to achieve
overall channel goals sometimes means giving up individual company
goals. 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.
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Horizontal conflict
occurs among firms at the same level of the channel. For instance, some
Ford dealers in Chicago might complain the other dealers in the city
steal sales from them by pricing too low or by selling outside their
assigned territories. Or Holiday Inn franchisees might complain about
other Holiday Inn operators overcharging guests or giving poor service,
hurting the overall Holiday Inn image.
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Vertical conflict,
conflicts between different levels of the same channel, is even more
common. For example, H&R Block franchisees complained when the
parent company began using the Internet to deal directly with
customers. Similarly, McDonald's created conflict with some of its
California dealers when it placed new stores in areas that took
business from existing locations. And office furniture maker Herman
Miller created conflict with its dealers when it opened an online
store—www.hmstore.com—and began selling its products directly to
customers. Although Herman Miller believed that the Web site was
reaching only smaller customers who weren't being served by current
channels, dealers complained loudly. As a result, the company closed
down its online sales operations.3
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Some
conflict in the channel takes the form of healthy competition. Such
competition can be good for the channel—without it, the channel could
become passive and noninnovative. But severe or prolonged conflict can
disrupt channel effectiveness and cause lasting harm to channel
relationships. Companies should manage channel conflict to keep it from
getting out of hand. Here's an example:
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P&G recently moved to manage channel conflict stemming from its change to multichannel distribution for Iams pet products. Traditionally, Iams had been distributed through specialized pet stores and veterinary offices. After studies showed that 70 percent of pet-food buyers never visit pet stores, P&G decided to add 25,000 grocery stores and mass retailers to its channel. To head off conflict with traditional channels, P&G's president wrote to the specialty stores and veterinarians, explaining that the new arrangements would increase brand awareness and not hurt brand equity. Although some pet stores stopped carrying Iams, most continued on, helping Iams boost sales and market share for all of its dealer.4 Comments by Dr. Laukamm
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Vertical Marketing SystemsComments by Dr. Laukamm
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For
the channel as a whole to perform well, each channel member's role must
be specified and channel conflict must be managed. The channel will
perform better if it includes a firm, agency, or mechanism that
provides leadership and has the power to assign roles and manage
conflict.
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Historically, conventional distribution channels
have lacked such leadership and power, often resulting in damaging
conflict and poor performance. One of the biggest channel developments
over the years has been the emergence of vertical marketing systems that provide channel leadership. Figure 13.3 contrasts the two types of channel arrangements.
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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, even at the expense of the system as a whole. No channel
member has much control over the other members, and no formal means
exists for assigning roles and resolving channel conflict. In contrast,
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. The VMS can be
dominated by the producer, wholesaler, or retailer.
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We look now at three major types of VMSs: corporate, contractual, and administered. Each uses a different means for setting up leadership and power in the channel.
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Corporate VMSComments by Dr. Laukamm
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A corporate VMS
integrates successive stages of production and distribution under
single ownership. Coordination and conflict management are attained
through regular organizational channels. For example, Sears obtains
more than 50 percent of its goods from companies that it partly or
wholly owns. Giant Food Stores operates an ice-making facility, a soft
drink bottling operation, an ice cream plant, and a bakery that
supplies Giant stores with everything from bagels to birthday cakes.
And little-known Italian eyewear maker Luxottica sells its many famous
eyewear brands—including Giorgio, Armani, Yves Saint Laurent, and
Ray-Ban—through the world's largest optical chain, LensCrafters, which
it also owns.5
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Controlling
the entire distribution chain has turned Spanish clothing chain Zara
into the world's fastest-growing fashion retailer.
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The secret to Zara's success is its control over almost every aspect of the supply chain, from design and production to its own worldwide distribution network. Zara makes 40 percent of its own fabrics and produces more than half of its own clothes, rather than relying on a hodgepodge of slow-moving suppliers. New styles take shape in Zara's own design centers, supported by real-time sales data. New designs feed into Zara manufacturing centers, which ship finished products directly to 450 Zara stores in 30 countries, saving time, eliminating the need for warehouses, and keeping inventories low. Effective vertical integration makes Zara faster, more flexible, and more efficient than international competitors such as Gap, Benetton, and Sweden's H&M. Zara can make a new line from start to finish in just three weeks, so a look seen on MTV can be in Zara stores within a month, versus an industry average of nine months. And Zara's low costs let it offer midmarket chic at downmarket prices. The company's stylish but affordable offerings have attracted a cult following, and the company's sales have more than doubled to $2.3 billion in the past five years.6 Comments by Dr. Laukamm
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Contractual VMSComments by Dr. Laukamm
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A contractual VMS
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. Coordination
and conflict management are attained through contractual agreements
among channel members. The franchise organization is the most common type of contractual relationship—a channel member called a franchiser
links several stages in the production-distribution process. An
estimated 2,000 franchised U.S. companies with over 320,000 outlets
account for some $1 trillion in annual sales. Industry analysts
estimate that a new franchise outlet opens somewhere in the United
States every eight minutes and that about one out of every 12 retail
business establishments outlets is a franchised business.7
Almost every kind of business has been franchised—from motels and
fast-food restaurants to dental centers and dating services, from
wedding consultants and maid services to funeral homes and fitness
centers.
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There are three type of franchises. The first type is the manufacturer-sponsored retailer franchise system—for example, Ford and its network of independent franchised dealers. The second type is the manufacturer-sponsored wholesaler franchise system—Coca-Cola
licenses bottlers (wholesalers) in various markets who buy Coca-Cola
syrup concentrate and then bottle and sell the finished product to
retailers in local markets. The third type is the service-firm-sponsored retailer franchise system—examples
are found in the auto-rental business (Hertz, Avis), the fast-food
service business (McDonald's, Burger King), and the motel business
(Holiday Inn, Ramada Inn).
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The
fact that most consumers cannot tell the difference between contractual
and corporate VMSs shows how successfully the contractual organizations
compete with corporate chains. Chapter 14 presents a fuller discussion
of the various contractual VMSs.
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Administered VMSComments by Dr. Laukamm
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In an administered VMS,
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. For example, General Electric,
Procter & Gamble, and Kraft can command unusual cooperation from
resellers regarding displays, shelf space, promotions, and price
policies. Large retailers such as Wal-Mart, Home Depot, and Barnes
& Noble can exert strong influence on the manufacturers that supply
the products they sell.
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Horizontal Marketing SystemsComments by Dr. Laukamm
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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.
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Companies
might join forces with competitors or noncompetitors. They might work
with each other on a temporary or permanent basis, or they may create a
separate company. For example, the Lamar Savings Bank of Texas arranged
to locate its savings offices and automated teller machines in Safeway
stores. Lamar gained quicker market entry at a low cost, and Safeway
was able to offer in-store banking convenience to its customers.
Similarly, McDonald's now places "express" versions of its restaurants
in Wal-Mart stores. McDonald's benefits from Wal-Mart's considerable
store traffic, while Wal-Mart keeps hungry shoppers from having to go
elsewhere to eat.
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Such
channel arrangements also work well globally. For example, because of
its excellent coverage of international markets, Nestlé jointly sells
General Mills's cereal brands in markets outside North America.
Coca-Cola and Nestlé formed a joint venture to market ready-to-drink
coffee and tea worldwide. Coke provides worldwide experience in
marketing and distributing beverages, and Nestlé contributes two
established brand names—Nescafé and Nestea. Seiko Watch's distribution
partner in Japan, K. Hattori, markets Schick's razors there, giving
Schick the leading market share in Japan, despite Gillette's overall
strength in many other markets.
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Multichannel Distribution SystemsComments by Dr. Laukamm
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In
the past, many companies used a single channel to sell to a single
market or market segment. Today, with the proliferation of customer
segments and channel possibilities, more and more companies have
adopted multichannel distribution systems—often called hybrid marketing channels.
Such multichannel marketing occurs when a single firm sets up two or
more marketing channels to reach one or more customer segments. The use
of multichannel systems has increased greatly in recent years.
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Figure
13.4 shows a hybrid channel. In the figure, the producer sells directly
to consumer segment 1 using direct-mail catalogs, telemarketing, and
the Internet and reaches consumer segment 2 through retailers. It sells
indirectly to business segment 1 through distributors and dealers and
to business segment 2 through its own sales force.
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These
days, almost every large company and many small ones distribute through
multiple channels. Charles Schwab reaches customers through its branch
offices, by telephone, and over the Internet. Staples markets through
its traditional retail outlets, a direct-response Internet site,
virtual malls, and 30,000 links on affiliated sites. And IBM uses
multiple channels to serve dozens of segments and niches, ranging from
large corporate buyers to small businesses to home office buyers. In
addition to selling through its vaunted sales force, IBM also sells
through a full network of distributors and value-added resellers, which
sell IBM computers, systems, and services to a variety of special
business segments. Final consumers can buy IBM personal computers from
specialty computer stores or any of several large retailers. IBM uses
telemarketing to service the needs of small and medium-size business.
And both business and final consumers can buy online from the company's
Web site (www.ibm.com).
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Multichannel
distribution systems offer many advantages to companies facing large
and complex markets. With each new channel, the company expands its
sales and market coverage and gains opportunities to tailor its
products and services to the specific needs of diverse customer
segments. But such multichannel channel systems are harder to control,
and they generate conflict as more channels compete for customers and
sales. For example, when IBM began selling directly to customers
through catalogs, telemarketing, and its own Web site, many of its
retail dealers cried "unfair competition" and threatened to drop the
IBM line or to give it less emphasis. Many outside salespeople felt
that they were being undercut by the new "inside channels."
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Changing Channel OrganizationComments by Dr. Laukamm
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Changes
in technology and the explosive growth of direct and online marketing
are having a profound impact on the nature and design of marketing
channels. One major trend is toward disintermediation—a
big term with a clear message and important consequences.
Disintermediation means that more and more, product and service
producers are bypassing intermediaries and going directly to final
buyers, or that radically new types of channel intermediaries are
emerging to displace traditional ones.
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Thus,
in many industries, traditional intermediaries are dropping by the
wayside. For example, companies such as Dell Computer and American
Airlines are selling directly to final buyers, eliminating retailers
from their marketing channels. E-commerce is growing rapidly, taking
business from traditional brick-and-mortar retailers. Consumers can buy
Flowers from 1-800-Flowers.com; books, videos, CDs, toys, consumer electronics, and other goods from Amazon.com; and clothes from landsend.com or gap.com, all without ever visiting a store.
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Disintermediation
presents problems and opportunities for both producers and
intermediaries. To avoid being swept aside, traditional intermediaries
must find new ways to add value in the supply chain. To remain
competitive, product and service producers must develop new channel
opportunities, such as the Internet and other direct channels. However,
developing these new channels often brings them into direct competition
with their established channels, resulting in conflict.
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To
ease this problem, companies often look for ways to make going direct a
plus for both the company and its channel partners. For example, to
trim costs and add business, Hewlett-Packard opened three direct-sales
Web sites—Shopping Village (for consumers), H-P Commerce Center (for
businesses buying from authorized resellers), and Electronic Solutions
Now (for existing contract customers). However, to avoid conflicts with
its established reseller channels, HP forwards all its Web orders to
resellers, who complete the orders, ship the products, and get the
commissions. In this way, H-P gains the advantages of direct selling
but also boosts business for resellers.
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