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STUDY GUIDE FOR MODULE NO. 01

CHAPTER 1: MARKETING CHANNEL

MODULE OVERVIEW

The chapter does a good job illustrating how “place” as a key component of Strategic
Marketing, will offer to the firm an advantage that cannot be easily copied by competition. In
addition, the author stresses that channel management must first be “managed” by marketing
department personnel with and to the same degree that marketing managers have in the past
managed the promotion or price elements of the marketing mix. Key terms and definitions
surrounding these concepts should be emphasized to the students, as many of them will be new,
especially to those students whose exposure to marketing is limited.
This chapter introduces marketing channels as a competitive advantage to firms as other
forms of traditional competitive differentiations such as price or promotion can be easily copied
whereby channel management may not be so easily duplicated. This growing awareness of the
importance of marketing channels, in the content of a firm’s overall marketing objectives is
deserving of emphasis and study. In addition, the introduction of key terms and definitions
surrounding the topic of channel management and introduces channel management as a
separate marketing function. The chapter closes with an examination of the flow in and the
through marketing channels and how these channels are structured and how to recognize them
and explains the ancillary function.

MODULE LEARNING OUTCOMES

At the end of this Module, you should be able to:

1. Realize that new Internet-based technologies have created a metamorphosis in marketing

channels.
2. Recognize that today’s customers expect more choices as to how, when, and where
products and services are made available to them.
3. Be aware of the need for multi-channel strategies and structures to satisfy heightened
customer expectations for channel choice.
4. Understand the definition of the marketing channel from a managerial perspective.
5. See how marketing channels relate to the other strategic variables in the marketing mix.
6. Know the flows in marketing channels and how they relate to channel management.
7. Understand the principles of specialization and division of labor as well as contractual
efficiency in marketing channels.
8. Be familiar with the concepts of channel structure and ancillary structure and recognize the
difference between them.

CHAPTER TOPICS
 1. The Multi-Channel Challenge
2. The Marketing Channel Defined
3. Specialization and Division of Labor
4. Contactual Efficiency

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LEARNING CONTENT - THE MULTI-CHANNEL CHALLENGE

To meet business-to-consumer (B2C) and business-to-business (B2B) expectations, a variety
of different channels, often both land based and Internet-based, is needed. The pursuit of an
effective multi-channel strategy raises four key challenges that include:
1. Finding the optimal multi-channel mix
2. Creating multi-channel synergies
3. Avoiding multi-channel conflicts
4. Gaining a sustainable competitive advantage via multi-channel strategy

1. An Optimal Multi-Channel Mix

Internet-based online channels have become mainstream channels in the channel mixes of of
both B2C and B2B organizations. A variety of examples are given that include Apple
Computer, Hensen Natural Corporation and Walmart.

2. Multi-Channel Synergies
Using online channels to obtain information about a product before purchasing it in
conventional “brick and mortar” channels is a common example of multi-channel synergy.
Multi-channel synergies can also emerge when different channels in the mix “help each other
out,” and in doing so, create synergies that result in better customer service. For example,
Johnston and Murphy, a well-known manufacturer of men’s shoes and apparel, sells its
products through its own retail stores, independent retailers, a catalog mail order channel, and
via its online channel. Creating such multi-channel synergies that satisfy or even delight
customers is a worthy aspiration to focus on when developing multi-channel strategies.

3. Avoiding Multi-Channel Conflict

This passage introduces the concept of conflict between different channels used to reach the
same customers. It is then explained how the ability to mitigate such conflict requires
knowledge of the economic and behavioral factors that underlie marketing channels as well as
astute channel strategy.

4. Sustainable Competitive Advantage and Multi-Channel Strategy

Companies struggle to find a sustainable competitive advantage that cannot be easily or
quickly copied by competitors. In recent years, the finding of such an advantage is far more
difficult using pricing, product, or promotion strategies. As a result, channel strategy and
particularly multi-channel strategy have attracted increased attention as a means for gaining a
sustainable competitive advantage. One example the author provides pertains to Caterpillar
which is highly regarded, world-wide, for its channel system, of well-capitalized megadealers, a
supply chain that utilizes the most advanced information technology, and highly trained and
motivated employees in the independent Caterpillar.

LEARNING CONTENT - THE MARKETING CHANNEL DEFINED

The definition of “marketing channel” is based upon one’s perspective – that of a consumer
versus that of a manufacturer. From the perspective of a marketing manager, the marketing
channel is viewed and defined as: “the external contactual organization that management

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operates to achieve its distribution objectives”.

➢ Channel Manager
Few firms actually use this term in their job title descriptions. In large consumer products
companies, the people involved can include the V.P. of Marketing, general marketing
manager, product or brand managers, sales managers, or regional sales manager. For
industrial products, it might be the V.P. of Sales and V.P. of Marketing. For small business or
franchisees, it might be the V.P. of Franchising or small business owner.

➢ Marketing Channels and Marketing Management Strategy

The marketing mix model portrays the marketing management process as a “strategic
blending” of the four controllable marketing variables (product, price, promotion, and place) to
meet the demands of customers. External uncontrollable elements include the economy,
sociocultural patterns of buyer behavior, competition, government and technology. Channel
strategy fits under “place” in the marketing management strategy and managers must operate
their marketing channels in such a way as to support and enhance the other strategic
variables in the marketing mix. The example of STIHL is used at this point in the chapter to
illustrate the importance some manufacturers place upon distribution within their marketing
strategies. STIHL enjoys a reputation for making products of the highest quality. Thus, it is
interesting that STIHL has chosen not to sell it products through giant home improvement
retailers. Rather it depends upon a network of over 8,000 independent specialty retailers who
have extensive product knowledge, and the capability to service STIHL products. This channel
strategy has enabled STIHL to preserve and protect the core elements of what the company
stands for: high quality and innovative products, priced to provide value to the customer, solid
profitability for STIHL, and a real connection with its customers, not only before the sale but for
many years after as well.

➢ Channel Strategy versus Logistics Management

Channel strategy and logistics management comprise the distribution variable of the marketing
mix. Channel strategy is concerned with the entire process of setting up and operating the
contactual organizations that are responsible for meeting the firm’s distribution objectives.
Logistics management more narrowly focuses on providing product availability at the
appropriate place and time in the marketing channel. Channel strategy must first be
established before logistics management should be considered. Logistic management is a
subsidiary of channel management.
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➢ Flows in Marketing Channels

1. Product flow is the actual physical movement of the product from the manufacturer through
all of the parties to the consumer.

2. Negotiation flow is the actual physical movement of the product from the manufacturer
through all of the parties to the consumer.

3. Ownership flow is the movement of the title of the product from one stage in the process to
another.

4. Information flow involves two directions – from the manufacturer to the consumer and from
the consumer to the manufacturer. This flow includes transportation as information deemed
necessary for the actual delivery of the product is communicated to the transportation agents.

5. Promotion flow refers to the flow of persuasive communication in the form of advertising,
personal selling, sales promotion and publicity. This flow adds the advertising agency as an
element of promotion.

➢ Distribution through Intermediaries

Economic considerations are very important in determining what form intermediaries will have
in their appearance in marketing channels. Two important concepts are introduced:
specialization and division of labor and contactual efficiency.

LEARNING CONTENT - SPECIALIZATION AND DIVISION OF LABOR

When applied to distribution, the concept is that of breaking down complex tasks into smaller,
less complex ones and allocating them to parties who are specialists at performing them at
 greater efficiencies.

LEARNING CONTENT - CONTACTUAL EFFICIENCY

From a channel manager’s viewpoint, contactual efficiency is the level of negotiation effort between
sellers and buyers relative to achieving a distribution objective.

➢ Channel Structure
The concept of channel structure as shown in other marketing books (Figure 1.10) fails to
suggest the relationship between channel structure and channel management. The channel
manager is faced with allocation decisions, how to allocate or structure the task of distribution.
Multi-channel strategy is when the firm has chosen to reach its target consumer through more
than one channel. With the advent of E-commerce, many firms have opted to use multi-
channel strategies to reach their target market.

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➢ Ancillary Structure
While so far we have included in the channel management only those participants who
perform the negotiatory functions of channel management (buying, selling, transferring title,
distribution, etc.). There are others that are not members of the channel structure that assist in
the process. These other members will be defined as ancillary structure. These ancillary
members provide services to the channel members after the basic channel decisions have
already been made. Examples of ancillary members include: banks, insurance agents, storage
agents, contractors, repair shops, etc. Channel management must also deal with these
ancillary members who do not have as great a stake in the channel as channel members but
 who are nevertheless key components in ensuring that the product is available to the
consumer.

LEARNING ACTIVITY

Read the Channel Issues for Discussion stated below and choose one of to answer:

1. James Johnson, vice president of marketing for a major manufacturer of fiberglass home
insulation aimed at the DIY market, was elated after reading an article in The Wall Street
Journal about the recent steep rise in energy prices. “This will be great for us. Our sales could
double next season,” he exclaimed to his general sales manager, Bill Allan, who had just
walked into the office. “Tell your district sales managers to instruct their field salespeople to
push home center retailers to double their inventory and floor space for home insulation,”
continued Johnson. Bill Allan dutifully responded, “I’ll do it right away, but the last thing home
centers are going to want is to stock up heavily on inventory when this energy price spiral
might cause a recession.” Comment on this situation in terms of the different perspectives of
the manufacturer and the retailers about this environmental development.

2. Almost 80 percent of chief financial officers at the 100 largest retailers say that too much
inventory is the greatest risk factor to the viability of their businesses during recessionary
periods. High inventories lead to heavy discounting when consumer demand is lacking. This,
in turn, undermines gross margins. When demand is very weak, gross margins can disappear
completely as retailers may be forced to liquidate slow moving merchandise at prices below
their wholesale cost. Paradoxically, retailers also worry about having too little inventory to
meet consumer demand and thus losing sales when consumers cannot find the products they
are

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looking for on retailers’ shelves. Hence, retailers attempting to manage their inventories during
a recession often feel that when it comes to stocking their shelves, they are damned if they do
and damned if they don’t. How might retailers deal with this inventory dilemma more effectively
during recessionary periods? What might suppliers do to help retailers address this problem?

3. Home Depot, Toys “R” Us, Staples, Best Buy and many other giant retailers (often referred
to as “category killers” or “big box” retailers because of their dominance in particular
merchandise categories and the sheer physical size of the stores) are fierce competitors and
are frequently accused of driving small retailers out of business. Observers who have
witnessed this competitive struggle take place over the past decade say the reason that small
retailers go out of business is that they “can’t compete” with these giants. The verdict in most
cases has been “no contest” between the retail giants and the little guys because the little guy
so seldom wins or even gets to stay in business. From a competitive standpoint, is such an
outcome inevitable? Discuss. Is it really the “big guys” driving the “little guys” out of business
or is there something more fundamental at work here?

4. When Circuit City, the world’s second largest consumer electronics retailer went out of
business in January of 2009, pundits thought most of Circuit City’s business would be picked
up by the largest consumer electronics retailer, Best Buy, as well as Walmart, which also sells
a great deal of consumer electronics products. But the competitive landscape created by
Circuit City’s demise did not conform neatly to predictions. An Indianapolis-based regional
chain of consumer electronics stores by the name of Hhgregg decided to take a stab at
competing with the giants on a national level. Hhgregg planned to open fifty stores in the very
same markets Circuit City had operated in and, in some cases, even in former Circuit City
stores. Hhgregg believes it can compete even with the huge Best Buy and Walmart by
emphasizing high-end products and superior customer service provided by a highly trained
sales force which is paid primarily on commission. Hhgregg believes that its more
knowledgeable sales force, which receives almost 300 hours of training in its first year,
covering Chapter 3: The Environment of Marketing Channels 105 Copyright 2011 Cengage
Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
Due to electronic rights, some third party content may be suppressed from the eBook and/or
eChapter(s). Editorial review has deemed that any suppressed content does not materially
affect the overall learning experience. Cengage Learning reserves the right to remove
additional content at any time if subsequent rights restrictions require it. over 500 different
products sold in stores, will give it an edge in building a loyal customer base that its
competitors will not be able to match. Do you think hhgregg can compete with Best Buy and
Walmart successfully as a relatively small consumer electronics retailer by offering a customer
experience that is not available from the giants? Why or why not? 5. By 2009, social media
services, such as Facebook and Twitter, had become a popular marketing tool for small
businesses. In fact, almost 25 percent of firms with fewer than 100 employees were using
social media for marketing purposes. This was more than double the percentage of the prior
year. Many of these firms cite the ease of use and low cost of these social media as the main
reason for using them for reaching out to and communicating with potential and existing
customers. How can the ability to communicate with customers via social media enhance
channel management? Discuss. 6. Channels of distribution for books have gone through a
metamorphosis in recent years with the emergence of e-books, such as Amazon’s Kindle,
Barnes & Noble’s Nook, or Apple’s iPad. Indeed, by mid-2010, Amazon.com reported that
sales of books through its Kindle outnumbered its sales of hardcover books by a ratio of

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180 e-books for every 100 hardcover books sold. Only paperback books still sold more units
than e-books. But the e-book channel continued to grow rapidly to account for close to 10
percent of total book sales by the end of 2010. Do you think e-book channels will eventually
totally replace conventional, physical book channels? Why or why not? 7. In mid-2009, a class
action lawsuit was launched against Babies “R” Us, a division of Toys “R” Us, as well as five
manufacturers from whom Babies “R” Us purchased baby products for resale in its stores. The
suit alleges that Babies “R” Us and the supplying manufacturers conspired to fix prices on
several products including strollers, high chairs, and car seats. The suit claims that between
2001 and 2006, over $500 million in merchandise produced by the five manufacturers and sold
by Babies “R” Us was controlled by minimum pricing agreements. These sales amounted to
between 10 to 50 percent of the five manufacturers’ sales in the U.S. The lawsuit claims that
the minimum pricing agreement was anticompetitive and resulted in consumers paying millions
of dollars more for these baby products than they would have in the absence of such an
agreement. Discuss the possible strategic channel management advantages for both Babies
“R” Us and the supplying manufacturers as a result of this price maintenance agreement
versus the possible negative effects of the agreement on consumer welfare from a macro
perspective

SUMMARY
 Marketing channels develop and operate in a complex environment that is continually
changing. Channel managers must therefore be sensitive to the environmental changes in
order to plan effective marketing channel strategies for adapting to these changes
successfully. To do so, they must have an understanding of the environment and how it can
influence channel management.
While there are many ways to categorize the myriad of environmental variables, the
following five-category taxonomy was used in this chapter: (1) economic environment; (2)
competitive environment; (3) sociocultural environment; (4) technological environment and (5)
legal environment.
When dealing with any or all of these environmental categories, channel managers need
to consider the effects of environmental variables not only on their own firms and on their
firms’ target markets, but also on all the channel members and participants.
The economic environment is probably the most obvious and pervasive category of
environmental variables affecting all members and participants in the channel. Especially
important are the effects of recession, inflation and possible deflation; but even so-called
normal economic conditions can create problems. The fundamental challenge confronting
channel managers in the face of these economic developments is to help channel members
weather difficult economic conditions. Advance planning to develop channel strategies for
dealing with economic changes is the basis for successfully meeting this challenge.
The competitive environment must include global as well as domestic competition.
Moreover, four major types of competition need to be addressed: (1) horizontal competition,
where similar firms at the same level of the channel compete with each other; (2) intertype
competition, where different types of firms at the Chapter 3: The Environment of Marketing
Channels 103 same level of the channel compete; (3) vertical competition, where firms at
different levels in the same channel compete with one another and (4) channel system
competition, where entire channels compete with each other. Channel managers must watch
all of these types of competition in order to determine how the competitive structure in which
their channels operate is changing and what implications these changes may have for channel
management strategy.

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 The sociocultural environment has an impact on marketing channels because the
structure of marketing channels reflects the sociocultural environment in which they exist. So,
channel managers must carefully observe changing sociocultural patterns in order to discern
what implications these pattern changes will have for marketing channel strategy. Because of
their profound influence in recent years, certain developments should be especially noted.
These include: globalization, consumer mobility and connectedness, social networking and the
Green movement.
The technological environment must be monitored carefully to evaluate the effects of
technological changes on marketing channels. Developments such as the Internet,
computerized inventory management with handheld computers, EDI, the digital revolution,
smartphones, RFID and cloud computing should be followed closely.

Finally, channel managers cannot ignore the legal environment, with its complex laws and
continually changing precedents. While channel managers cannot be expected to be experts
in the technicalities and nuances involved in the complex and changing legal environment
affecting channel management, general knowledge and awareness of some of the basic laws
and legal issues are needed. In particular, channel managers should be familiar with the basic
provisions of the Sherman Act, Clayton Act, Federal Trade Commission Act, Robinson-
Patman Act and the Celler-Kefauver Act. They should also understand how they affect such
legal issues as: (1) dual distribution; (2) exclusive dealing; (3) full-line forcing; (4) price
discrimination; (5) price maintenance; (6) refusal to deal; (7) resale restrictions; (8) tying
agreements and (9) vertical integration through acquisitions and mergers.

REFERENCE

LEARNING ACTIVITY 1

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)
.

SUMMARY
l

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