PART V Delivering Value

C H A P T E R

1 3

Designing and Managing Integrated Marketing Channels

In this chapter, we will address the following questions:
1. What are marketing channel systems and value networks? 2. What functions do marketing channels perform? 3. What decisions do companies face in designing, managing, and integrating their channels? 4. What key issues do companies face in e-commerce?

MARKETING MANAGEMENT AT ROYAL PHILIPS ELECTRONICS

Royal Philips Electronics of the Netherlands is one of the worlds biggest electronics companies and Europes largest, with annual sales of over $36 billion. The company offers a broad range of products, from flat screen TVs and electric razors for consumers to medical imaging equipment and professional lighting systems for hospitals and businesses. Philips uses local distributors in some countries but relies mainly on its company sales force and its own Web sites to handle orders from institutional and industrial buyers. A hospital purchasing agent can log on, compare product specifications, enter a purchase order, check the delivery status of a previous order, or access service and support databases. On the consumer side, Philips products reach buyers worldwide through a diverse distribution model that includes mass merchants, retail chains, independent stores, and small specialty 230
A Framework for Marketing Management, Fourth Edition, by Philip Kotler and Kevin Lane Keller. Published by Prentice Hall. Copyright 2009 by Pearson Education, Inc.

2008933525

Chapter 13 Designing and Managing Integrated Marketing Channels stores. Philips has created an organization designed around these retail customers, with dedicated Global Key Account Managers serving leading retailers such as Best Buy, Carrefour, Costco, Dixons, and Tesco. The company also sells to consumers via its own online store as well as through other online retailers.1

231

uccessful value creation needs successful value delivery. Holistic marketers are increasingly taking a value network view of their businesses, examining the whole supply chain that links raw materials, components, and manufactured goods and shows how they move toward the final consumers. This chapter discusses the strategic and tactical issues of marketing channels and value networks; Chapter 14 will examine marketing channel issues from the perspective of retailers, wholesalers, and physical-distribution agencies.

MARKETING CHANNELS AND VALUE NETWORKS

Most producers dont sell their goods directly to the final users; between them stands a set of intermediaries performing a variety of functions. These intermediaries constitute marketing channels (also called trade channels or distribution channels), sets of interdependent organizations involved in the process of making a product or service available for use or consumption. Theyre the set of pathways a product or service follows after production, culminating in purchase and use by the final end user.2

The Importance of Channels

A marketing channel system is the particular set of marketing channels employed by a firm. Decisions about the marketing channel system are among the most critical facing management. In the United States, channel members collectively earn margins that account for 30% to 50% of the ultimate selling price, whereas advertising typically accounts for less than 7% of the final price.3 Marketing channels also represent a substantial opportunity cost because they dont just serve markets, they must also make markets.4 The channels chosen affect all other marketing decisions. The companys pricing depends on whether it uses mass merchandisers or high-quality boutiques. The firms sales force and advertising decisions depend on how much training and motivation dealers need. In addition, channel decisions involve relatively long-term commitments to other firms. When an automaker signs up independent dealers to sell its automobiles, it cant buy them out the next day and replace them with companyowned outlets. Holistic marketers ensure that marketing decisions in all these different areas are made to collectively maximize value. Todays successful companies are also multiplying the number of go-to-market or hybrid channels in any one area. For example, Hewlett-Packard uses its sales force to sell to large accounts, outbound telemarketing to sell to medium-sized accounts, direct mail with an inbound number for small accounts, retailers for still smaller accounts and consumers, and the Internet to sell specialty items. Consumers may choose their preferred channels based on price, product assortment, and convenience, as well as their economic, social, or experiential shopping goals.5 The firm must decide how much effort to devote to push versus pull marketing. A push strategy uses the manufacturers sales force and trade promotion to induce intermediaries to carry, promote, and sell the product to end users. This is appropriate where
A Framework for Marketing Management, Fourth Edition, by Philip Kotler and Kevin Lane Keller. Published by Prentice Hall. Copyright 2009 by Pearson Education, Inc.

2008933525

232

Part V Delivering Value there is low brand loyalty in a category, brand choice is made in the store, the product is an impulse item, and product benefits are well understood. In a pull strategy, the manufacturer uses advertising and promotion to persuade consumers to ask intermediaries for the product, thus inducing the intermediaries to order it. This is appropriate when there is high brand loyalty and high involvement in the category, people perceive differences between brands, and people choose the brand before they shop. Top marketing firms such as Nike and Intel skillfully employ both push and pull strategies.

Value Networks
The company should first think of the target market and then design the supply chain backward from that point, a view called demand-chain planning. Northwesterns Don Schultz says: A demand chain management approach doesnt just push things through the system. It emphasizes what solutions consumers are looking for, not what products we are trying to sell them. He suggests replacing the marketing four Ps with a new acronym, SIVA, which stands for solutions, information, value, and access.6 The concept of a value networka system of partnerships and alliances that a firm creates to source, augment, and deliver its offeringstakes an even broader view. A value network includes a firms suppliers and its suppliers suppliers, and its immediate customers and their end customers. The value network includes valued relations with others such as university researchers and regulatory agencies. Demand chain planning yields several insights. First, the firm can estimate whether more money is made upstream or downstream, in case it might want to integrate backward or forward. Second, the company is more aware of disturbances anywhere in the supply chain that might cause costs, prices, or supplies to change suddenly. Third, companies can go online with business partners for faster, more accurate, and less costly communications, transactions, and payments.

THE ROLE OF MARKETING CHANNELS

Why would a producer delegate some of the selling job to intermediaries? Delegation means relinquishing some control over how and to whom the products are sold. But producers can often gain effectiveness and efficiency by using intermediaries. Its impractical for the William Wrigley Jr. Company to establish small retail gum shops throughout the world or to sell gum by mail order. It would have to sell gum along with many other small products and would end up in the drugstore and grocery store business. Wrigley finds it easier to work through the extensive network of privately owned distribution organizations. Even General Motors would be hard-pressed to replace all the tasks handled by its 8,000 dealers.

Channel Functions and Flows

A marketing channel performs the work of moving products from producers to consumers, overcoming the time, place, and possession gaps that separate goods and services from those who need or want them. Members of the marketing channel perform a number of key functions (see Table 13.1). Some functions (physical, title, and promotion) constitute a forward flow of activity from the company to the customer; other functions (ordering and payment) constitute a backward flow from customers to the company.
A Framework for Marketing Management, Fourth Edition, by Philip Kotler and Kevin Lane Keller. Published by Prentice Hall. Copyright 2009 by Pearson Education, Inc.

2008933525

Chapter 13 Designing and Managing Integrated Marketing Channels Still others (information, negotiation, finance, and risk taking) occur in both directions. If the flows for forklift trucks shown in Figure 13.1 were superimposed in one diagram, the complexity of even simple marketing channels would be apparent. The question is not whether these channel functions need to be performedthey must bebut rather who is to perform them. All channel functions have three things in common: They use up scarce resources; they can often be performed better through specialization; and they can be shifted among channel members. If a manufacturer shifts some functions to intermediaries, its costs and prices go down, but the intermediaries must add a charge to cover their work. Still, if the intermediaries are more efficient than the manufacturer, prices to consumers should be lower. If consumers TABLE 13.1 Channel Member Functions

233

Gather information about potential and current customers, competitors, and other actors

and forces in the marketing environment.

Develop and disseminate persuasive communications to stimulate purchasing. Reach agreements on price and other terms so that transfer of ownership or possession can

be effected.
Place orders with manufacturers. Acquire the funds to finance inventories at different levels in the marketing channel. Assume risks connected with carrying out channel work. Provide for the successive storage and movement of physical products. Provide for buyers payment of their bills through banks and other financial institutions. Oversee actual transfer of ownership from one organization or person to another.

FIGURE 13.1

Five Marketing Flows in the Marketing Channel for Forklift Trucks

1. Physical Flow Suppliers Transporters, warehouses Manufacturer Transporters, warehouses Dealers Transporters Customers

2. Title Flow Suppliers Manufacturer Dealers Customers

3. Payment Flow Suppliers 4. Information Flow Suppliers Transporters, warehouses, banks Manufacturer Transporters, warehouses, banks Dealers Transporters, banks Banks Manufacturer Banks Dealers Banks Customers

Customers

5. Promotion Flow Suppliers

2008933525

Advertising agency

Manufacturer

Advertising agency

Dealers

Customers

A Framework for Marketing Management, Fourth Edition, by Philip Kotler and Kevin Lane Keller. Published by Prentice Hall. Copyright 2009 by Pearson Education, Inc.

234

Part V Delivering Value perform some functions themselves, they should enjoy still lower prices. Changes in channel institutions thus reflect the discovery of more efficient ways to combine or separate the economic functions that provide assortments of products to target customers.

Channel Levels
The producer and the final customer are part of every channel. Well use the number of intermediary levels to designate the length of a channel. Figure 13.2a illustrates consumer-goods marketing channels of different lengths, while Figure 13.2b illustrates industrial marketing channels. A zero-level channel (also called a direct-marketing channel) consists of a producer selling directly to final customers through door-to-door sales, Internet selling, mail order, telemarketing, home parties, TV selling, manufacturer-owned stores, and other methods. A one-level channel contains one intermediary, such as a retailer. A two-level channel contains two intermediaries; a three-level channel contains three intermediaries. From the producers perspective, obtaining information about end users and exercising control becomes more difficult as the number of channel levels increases. Channels normally describe a forward movement of products, but there are also reverse-flow channels, important for bringing products back for reuse (such as refillable bottles); refurbishing items for resale; recycling products; and disposing of products and packaging. Several intermediaries play a role in these channels, including manufacturers redemption centers, community groups, traditional intermediaries such as trash-collection specialists, recycling centers, trash-recycling brokers, and centralprocessing warehousing.7 FIGURE 13.2 Consumer and Industrial Marketing Channels
(b) Industrial Marketing Channels 3-level Manufacturer 0-level Manufacturer 1-level Manufacturer 2-level Manufacturer 3-level Manufacturer

(a) Consumer Marketing Channels 0-level Manufacturer 1-level Manufacturer 2-level Manufacturer

Wholesaler

Wholesaler

Manufacturer's representative

Manufacturer's sales branch

Jobber

Retailer

Retailer

Retailer

Industrial distributors

Consumer

Consumer

Consumer

Consumer

Industrial customer

Industrial customer

Industrial customer

Industrial customer

2008933525

A Framework for Marketing Management, Fourth Edition, by Philip Kotler and Kevin Lane Keller. Published by Prentice Hall. Copyright 2009 by Pearson Education, Inc.

Chapter 13 Designing and Managing Integrated Marketing Channels

235

Service Sector Channels

Producers of services and ideas also face the problem of making their output available and accessible to target populations. Schools develop educational-dissemination systems and hospitals develop health-delivery systems. These institutions must determine agencies and locations for reaching a population that is spread out over an area. Marketing channels are also changing in person marketing. Besides live and programmed entertainment, entertainers can reach fans online in many waysvia their own Web sites, social community sites such as MySpace, and third-party Web sites. And as Internet technology advances, service industries such as banking, travel, and insurance are operating through new channels. Kodak offers its customers four ways to print their digital photosminilabs in retail outlets, home printers, the Kodak Gallery Web site, and self-service kiosks.8

CHANNEL-DESIGN DECISIONS
Designing a marketing channel system involves analyzing customer needs, establishing channel objectives, identifying major channel alternatives, and evaluating major channel alternatives.

Analyzing Customers Desired Service Output Levels

The marketer must understand the service output levels its target customers want. Channels produce five service outputs:
1. Lot size.The number of units the channel permits a typical customer to purchase on one occasion. In buying for its fleet, Hertz wants a channel from which it can buy a large lot size; a household wants a channel that permits buying a lot size of one. 2. Waiting and delivery time.The average time customers of that channel wait for receipt of the goods. Customers normally prefer fast delivery channels. 3. Spatial convenience.The degree to which the marketing channel makes it easy for customers to purchase the product. 4. Product variety.The assortment breadth provided by the channel. Normally, customers prefer a greater assortment, which increases the chance of finding what they need. 5. Service backup.The add-on services (credit, delivery, installation, repairs) provided by the channel.

Providing greater service outputs means increased channel costs and higher prices for customers. The success of discount resellers (online and offline) indicates that many consumers will accept lower outputs if they can save money.

Establishing Objectives and Constraints

Marketers should state their channel objectives in terms of targeted service output levels. Under competitive conditions, channel institutions should arrange their functional tasks to minimize total channel costs and still provide desired levels of service outputs.9 Usually, planners can identify several market segments that want different service levels. Effective planning requires determining which market segments to serve and the best channels for each.
A Framework for Marketing Management, Fourth Edition, by Philip Kotler and Kevin Lane Keller. Published by Prentice Hall. Copyright 2009 by Pearson Education, Inc.

2008933525

236

Part V Delivering Value Channel objectives vary with product characteristics. Perishable products require more direct marketing. Bulky products, such as building materials, require channels that minimize the shipping distance and the amount of handling. Nonstandard products, such as custom-built machinery, are sold directly by company sales representatives. Products requiring installation or maintenance services, such as heating systems, are usually sold and maintained by the company or franchised dealers. High-unit-value products such as turbines are often sold through a company sales force rather than intermediaries. Channel design is also influenced by such environmental factors as competitors channels, economic conditions, and legal regulations and restrictions. U.S. law looks unfavorably on channel arrangements that substantially lessen competition or create a monopoly.

Identifying Major Channel Alternatives

Companies can choose from a wide variety of channels for reaching customers, each of which has unique strengths as well as weaknesses. Each channel alternative is described by (1) the types of available intermediaries; (2) the number of intermediaries needed; and (3) the terms and responsibilities of each channel member. Types of Intermediaries A firm needs to identify the types of intermediaries available to carry on its channel work. Some intermediariesmerchants such as wholesalers and retailersbuy, take title to, and resell the merchandise. Agents such as brokers, manufacturers representatives, and sales agents search for customers and may negotiate on the producers behalf but dont take title to the goods. Facilitators, including transportation companies, independent warehouses, banks, and advertising agencies, assist in the distribution process but neither take title to goods nor negotiate purchases or sales. Companies should identify innovative marketing channels. For instance, seeing its printed catalog as out of date, commercial lighting company Display Supply & Lighting developed an interactive online catalog that cost less, sped up the sales process, and increased revenue.10 Number of Intermediaries In deciding how many intermediaries to use, companies can use one of three strategies: exclusive, selective, or intensive distribution. Exclusive distribution means severely limiting the number of intermediaries. Firms such as automakers use this approach to maintain control over the service level and service outputs offered by the resellers. Often it involves exclusive dealing arrangements, in which resellers agree not to carry competing brands. Selective distribution relies on more than a few but less than all of the intermediaries willing to carry a particular product. The company doesnt have to worry about too many outlets; it can gain adequate market coverage with more control and less cost than intensive distribution. In intensive distribution, the manufacturer places the goods or services in as many outlets as possible. This strategy is generally used for items such as snack foods, newspapers, and gum, products the consumer seeks to buy frequently or in a variety of locations. Terms and Responsibilities of Channel Members Each channel member must be treated respectfully and given the opportunity to be profitable.11 The main elements in the trade-relations mix are price policy, conditions of sale, territorial rights, and specific services to be performed by each party. Price policy calls for the producer to establish a price list and schedule of discounts and allowances that intermediaries see as equitable and sufficient. Conditions of
A Framework for Marketing Management, Fourth Edition, by Philip Kotler and Kevin Lane Keller. Published by Prentice Hall. Copyright 2009 by Pearson Education, Inc.

2008933525

Chapter 13 Designing and Managing Integrated Marketing Channels sale are payment terms and producer guarantees. Most producers grant cash discounts to distributors for early payment. Producers might also provide distributors a guarantee against defective merchandise or price declines. A guarantee against price declines gives distributors an incentive to buy more. Distributors territorial rights define the distributors territories and the terms under which the producer will enfranchise other distributors. Distributors normally expect to receive full credit for all sales in their territory, whether or not they did the selling. Mutual services and responsibilities must be carefully spelled out, especially in franchised and exclusive-agency channels. McDonalds provides franchisees with a building, promotional support, a recordkeeping system, training, and general administrative and technical assistance. In turn, franchisees must satisfy company standards for the physical facilities, cooperate with promotional programs, furnish requested information, and buy supplies from specified vendors.

237

Evaluating the Major Alternatives

The company must evaluate each alternative against appropriate economic, control, and adaptive criteria. Figure 13.3 shows the value added per sale and cost per transaction of six different sales channels. The firm should determine whether its own sales force or a sales agency will produce more sales; next, it estimates the costs of selling different volumes through each channel.

FIGURE 13.3
High

The Value-Adds versus Costs of Different Channels

Sales force Value-added partners Distributors Retail stores Telemarketing Internet Direct marketing channels Low Low Cost per Transaction
2008933525

Value-add of Sale

Direct sales channels

"Indirect" channels

High

Source: Oxford Associates, adapted from Dr. Rowland T. Moriarity, Cubex Corp.

A Framework for Marketing Management, Fourth Edition, by Philip Kotler and Kevin Lane Keller. Published by Prentice Hall. Copyright 2009 by Pearson Education, Inc.

238

Part V Delivering Value Using a sales agency poses a control problem because the agency is an independent firm seeking to maximize its profits. Agents may concentrate on customers who buy the most, but not necessarily of the producers goods. Furthermore, agents might not master the details of every product they carry or handle all promotion materials effectively. To develop a channel, the members must make some mutual commitments for a specified period; this reduces the producers ability to respond to a changing marketplace. In dynamic, volatile, or uncertain environments, producers need channels and policies that provide high adaptability.

CHANNEL-MANAGEMENT DECISIONS
After a firm has chosen a channel system, it must select, train, motivate, and evaluate individual intermediaries for each channel. It must also modify channel design and arrangements over time.

Selecting Channel Members

Companies need to select their channel members carefully because to customers, the channels are the company. Producers should determine what characteristics distinguish the better intermediaries and examine the number of years in business, other lines carried, growth and profit record, financial strength, cooperativeness, and service reputation of potential channel members. If the intermediaries are sales agents, producers should evaluate the number and character of other lines carried and the size and quality of the sales force. If the intermediaries want exclusive distribution, the producer should evaluate locations, future growth potential, and type of clientele.

Training and Motivating Channel Members

A company needs to view its intermediaries in the same way it views its end users. It needs to determine intermediaries needs and construct a channel positioning such that its channel offering is tailored to provide superior value to these intermediaries. To improve intermediaries performance, the company should provide training, market research, and other capability-building programs. The company must also constantly reinforce that its intermediaries are partners in the joint effort to satisfy customers. Producers vary greatly in channel power, the ability to alter channel members behavior so that the members take actions they wouldnt have taken otherwise.12 Often, gaining intermediaries cooperation can be a huge challenge.13 More sophisticated producers try to forge a long-term partnership with channel members. The manufacturer communicates clearly what it expects from its distributors in the way of market coverage and other channel issues and may establish a compensation plan for adhering to these policies.

Evaluating Channel Members

Producers must periodically evaluate intermediaries performance against such standards as sales-quota attainment, average inventory levels, customer delivery time, treatment of damaged and lost goods, and cooperation in promotional and training programs (see Marketing Skills: Evaluating Intermediaries). A producer will occasionally discover that it is paying particular intermediaries too much for what they are
A Framework for Marketing Management, Fourth Edition, by Philip Kotler and Kevin Lane Keller. Published by Prentice Hall. Copyright 2009 by Pearson Education, Inc.

2008933525

Chapter 13 Designing and Managing Integrated Marketing Channels

239

MARKETING SKILLS: EVALUATING INTERMEDIARIES

How important is it for marketers to evaluate and manage suppliers, wholesalers, retailers, and other intermediaries? One company found that unpredictable supplier deliveries were causing it to hold $200 million in excess inventory. By evaluating suppliers on standards such as on-time delivery, this company slashed its costs. To start, determine how suppliers (and their suppliers) as well as distributors can influence the companys performance. Also, translate companywide strategic goals and measurements into specific targets and measures for channel partners. Finally, continually measure and reward performance to keep channels efficient, reactive, and reliable. A key criterion for toymaker Cranium is how well an intermediary can support the companys drive for growth. To get an edge in its highly competitive industry, the company often works with channel members that typically dont carry toys and games. Early on, it arranged to sell its Cranium game in Starbucks outlets, an innovative deal that built Craniums brand. Today its games are still sold in Starbucks but now theyre also in Whole Foods Market, Barnes & Noble, and thousands of other stores in 30 countries.14

actually doing. One manufacturer compensating a distributor for holding inventories found that the stock was actually held in a public warehouse at its own expense. Producers should set up functional discounts in which they pay specified amounts for the intermediarys performance of each agreed-upon service. Underperformers need to be counseled, retrained, remotivated, or terminated.

Modifying Channel Arrangements

Channel arrangements must be reviewed periodically and modified when distribution isnt working as planned, consumer buying patterns change, the market expands, new competition arises, innovative distribution channels emerge, and the product moves into later stages in the product life cycle. No marketing channel remains effective over the entire product life cycle. Early buyers might be willing to pay for high-cost valueadded channels, but later buyers will switch to lower-cost channels. In competitive markets with low entry barriers, the optimal channel structure will change over time; the firm may add or drop individual channel members, add or drop particular market channels, or develop a new way to sell goods. Adding or dropping an individual channel member requires an incremental analysis to determine what the firms profits would look like with and without this intermediary. Increasingly, marketers are using datamining to analyze customer shopping data as input for channel decisions.15 The most difficult decision is whether to revise the overall channel strategy.16 Channels can become outmoded as a gap arises between the existing distribution system and the ideal system to satisfy customers (and producers) requirements. This is why Avons door-to-door system for selling cosmetics had to be modified as more women entered the workforce, for example.
A Framework for Marketing Management, Fourth Edition, by Philip Kotler and Kevin Lane Keller. Published by Prentice Hall. Copyright 2009 by Pearson Education, Inc.

2008933525

240

Part V Delivering Value

CHANNEL INTEGRATION AND SYSTEMS

Distribution channels dont stand still. New wholesaling and retailing institutions emerge, and new channel systems evolve. We look next at the recent growth of vertical, horizontal, and multichannel marketing systems and see how these systems cooperate, conflict, and compete.

Vertical Marketing Systems

One of the most significant channel developments is the rise of vertical marketing systems. A conventional marketing channel comprises an independent producer, wholesaler(s), and retailer(s). Each is a separate business seeking to maximize its own profits, even if this goal reduces profit for the system as a whole. No channel member has complete or substantial control over other members. A vertical marketing system (VMS), by contrast, comprises the producer, wholesaler(s), and retailer(s) acting as a unified system. One channel member, the channel captain, owns the others, franchises them, or has so much power that they all cooperate. The channel captain can be the producer, the wholesaler, or the retailer. Channel stewardship is the ability of a given participant (steward) in a distribution channel to create a go-to-market strategy that simultaneously addresses customers best interests and drives profits for all channel partners. An effective channel steward considers the channel from the customers point of view and advocates for change among all participants, transforming disparate entities into partners with a common purpose.17 VMSs arose as a result of strong channel members attempts to control channel behavior and eliminate conflict from independent channel members pursuing their own objectives. They achieve economies through size, bargaining power, and elimination of duplicated services. VMSs have become the dominant distribution mode in the U.S. consumer marketplace, serving between 70% and 80% of the total market. There are three types of VMSs: corporate, administered, and contractual. A corporate VMS combines successive stages of production and distribution under single ownership. Companies that desire a high level of control over their channels favor vertical integration. Sherwin-Williams, for example, makes paint but also owns and operates 3,200 retail outlets.18 An administered VMS coordinates successive stages of production and distribution through one members size and power. Manufacturers of a dominant brand are able to secure strong trade cooperation and support from resellers. Thus Campbell Soup can command cooperation from its resellers in connection with displays, shelf space, promotions, and price policies. A contractual VMS consists of independent firms at different levels of production and distribution, integrating their programs on a contractual basis to obtain more economies or sales impact than they could achieve alone. Johnston and Lawrence call them value-adding partnerships (VAPs).19 Contractual VMSs are of three types:
1. Wholesaler-sponsored voluntary chains organize groups of independent retailers to better compete with large chains through standardized selling practices and buying economies. 2. Retailer cooperatives arise when the stores take the initiative and organize a new business entity to carry on wholesaling and possibly some production. Members of retail cooperatives concentrate their purchases through the co-op, jointly plan their advertising, and share in profits in proportion to their purchases.
A Framework for Marketing Management, Fourth Edition, by Philip Kotler and Kevin Lane Keller. Published by Prentice Hall. Copyright 2009 by Pearson Education, Inc.

2008933525

Chapter 13 Designing and Managing Integrated Marketing Channels

3. Franchise organizations are created when a franchisor links several successive stages in the productiondistribution process. Franchises include manufacturer-sponsored retailer franchises (Honda and its dealers); manufacturer-sponsored wholesaler franchises (Coca-Cola and its bottlers); and service-firm-sponsored retailer franchises (Ramada Inn and its motel franchisees). Some franchising uses dual distribution: vertical integration (franchisor owns and operates the units) and market governance (franchisor licenses units to franchisees).20

241

The New Competition in Retailing

The new competition in retailing is no longer between independent business units but between whole systems of centrally programmed networks (corporate, administered, and contractual) competing against one another to achieve the best cost economies and customer response. Other developments include horizontal marketing systems and multichannel marketing systems. Horizontal Marketing Systems In the horizontal marketing system, two or more unrelated companies put together resources or programs to exploit an emerging marketing opportunity. Each company lacks the capital, know-how, production, or marketing resources to venture alone, or it is afraid of the risk. The companies might work with each other on a temporary or permanent basis or create a joint venture company. Many supermarket chains have arrangements with local banks to offer instore banking, the way Citizens Bank has placed 500 branches inside New England supermarkets. Integrating Multichannel Marketing Systems Most companies have adopted multichannel marketing, which occurs when a single firm uses two or more marketing channels to reach one or more customer segments. An integrated marketing channel system is one in which the strategies and tactics of selling through one channel reflect the strategies and tactics of selling through other channels. By adding more channels, companies can gain three important benefits. The first is increased market coverage. Not only are more customers able to shop for the companys products in more places, but customers who buy in more than one channel are often more profitable than single-channel customers.21 The second is lower channel costselling by phone is cheaper than personal visits to small customers. The third is more customized sellingsuch as adding a technical sales force to sell more complex equipment. However, new channels typically introduce conflict and control problems. Different channels may end up competing for the same customers, and, as the new channels become more independent, cooperation becomes more difficult.

Conflict, Cooperation, and Competition

No matter how well channels are designed and managed, there will be some conflict, if for no other reason than that the interests of independent business entities dont always coincide. Channel conflict is generated when one channel members actions prevent another channel from achieving its goal. Channel coordination occurs when channel members are brought together to advance the goals of the channel, as opposed to their own potentially incompatible goals.22 Here we examine three questions: What types of conflict arise in channels? What causes channel conflict? What can be done to resolve conflict situations?
A Framework for Marketing Management, Fourth Edition, by Philip Kotler and Kevin Lane Keller. Published by Prentice Hall. Copyright 2009 by Pearson Education, Inc.

2008933525

242

Part V Delivering Value Types of Conflict and Competition Vertical channel conflict means conflict between different levels within the same channel. General Motors came into conflict with its dealers in trying to enforce policies on service, pricing, and advertising. Horizontal channel conflict is conflict between members at the same level within the channel. Some Pizza Inn franchisees complained that other Pizza Inn franchisees were cheating on ingredients, maintaining poor service, and hurting the brand image. Multichannel conflict exists when the manufacturer has established two or more channels that sell to the same market. Its likely to be especially intense when the members of one channel get a lower price (based on larger volume purchases) or work with a lower margin. Independent dealers were angered when Goodyear began selling its popular tire brands through Sears, Wal-Mart, and Discount Tire. Goodyear eventually placated them by offering exclusive tire models not sold in other retail outlets. Other strategies to reduce multichannel conflict are creating and enforcing rules of engagement beforehand and compensating both parties that participate in a sale regardless of which one books the order.23 Causes of Channel Conflict One major cause of channel conflict is goal incompatibility. For example, the manufacturer may want to achieve rapid market penetration through a low-price policy. Dealers, in contrast, may prefer to work with high margins for short-run profitability. Sometimes conflict arises from unclear roles and rights. HP may sell PCs to large accounts through its own sales force, but its licensed dealers may also be trying to sell to large accounts. Territory boundaries and credit for sales often produce conflict. Conflict can also stem from differences in perception, as when the producer is optimistic about the short-term economic outlook and wants dealers to carry more inventory, while dealers are more pessimistic. At times, conflict can arise because of the intermediaries dependence on the manufacturer. The fortunes of exclusive dealers, such as auto dealers, are greatly affected by the manufacturers product and pricing decisions, creating high potential for conflict. Managing Channel Conflict Some channel conflict can be constructive and lead to more dynamic adaptation in a changing environment.24 Too much conflict can be dysfunctional, however, so the challenge is not to eliminate conflict but to manage it better. There are several mechanisms for effective conflict management (see Table 13.2).25 One is the adoption of superordinate goals, with channel members agreeing on the fundamental goal they jointly seek, whether its survival, market share, high quality, or customer satisfaction. Members usually come to agreement when the channel faces an outside threat such as a more efficient competing channel, an adverse piece of legislation, or a shift in consumer desires. TABLE 13.2 Strategies for Managing Channel Conflict

Adoption of superordinate goals Exchange of employees Joint membership in trade associations Co-optation Diplomacy, mediation, or arbitration Legal recourse
2008933525

Source: Excerpted from Hallie Mummert, Multi-Channel Marketers Earn a C+ on Returns, Target Marketing, October 2003, p. 158.

A Framework for Marketing Management, Fourth Edition, by Philip Kotler and Kevin Lane Keller. Published by Prentice Hall. Copyright 2009 by Pearson Education, Inc.

Chapter 13 Designing and Managing Integrated Marketing Channels A useful step is to exchange persons between two or more channel levels. General Motors executives might work briefly in some dealerships, and some dealership owners might work in GMs dealer policy department, to help participants appreciate the others viewpoint. Marketers can accomplish much by encouraging joint membership in and between trade associations. Co-optation is an effort by one organization to win the support of another organizations leaders by including them in advisory councils, boards of directors, and the like. As long as the initiating organization treats the leaders and their ideas seriously, co-optation can reduce conflict. Diplomacy takes place when each side sends a person or group to meet with its counterpart to resolve the conflict. Mediation means having a skilled, neutral third party reconcile the two parties interests. Arbitration occurs when the two parties agree to present their arguments to an arbitrator and accept the arbitration decision. When none of these methods proves effective, a company or channel partner may choose to file a lawsuit. Dilution and Cannibalization Marketers must also avoid diluting their brands through inappropriate channels. This is especially a concern with luxury brands whose images are built on the basis of exclusivity and personalized service. To reach affluent shoppers who work long hours and have little time to shop, high-end fashion brands such as Dior and Louis Vuitton now sell through e-commerce sites. These luxury makers also see their Web sites as a way for customers to research items before walking into a store and a means to help combat fakes sold over the Internet.26

243

Legal and Ethical Issues in Channel Relations

For the most part, companies are legally free to develop whatever channel arrangements suit them. In fact, the law seeks to prevent companies from using exclusionary tactics that might keep competitors from using a channel. Here we briefly consider the legality of exclusive dealing, exclusive territories, tying agreements, and dealers rights. With exclusive dealing, the seller allows only certain outlets to carry its products and requires that these dealers not handle competitors products. Both parties benefit from exclusive arrangements: The seller obtains more loyal and dependable outlets, and the dealers obtain a steady source of supply of special products and stronger seller support. Exclusive arrangements are legal as long as they dont substantially lessen competition or tend to create a monopoly, and both parties have voluntarily entered into the agreement. Exclusive dealing often includes exclusive territorial agreements. The producer may agree not to sell to other dealers in a given area, or the dealer may agree to sell only in its own territory. The first practice increases dealer enthusiasm and commitment and is perfectly legala seller has no legal obligation to sell through more outlets than it wishes. The second practice, whereby the producer tries to keep a dealer from selling outside its territory, is a major legal issue. The producer of a strong brand sometimes sells it to dealers only if they will take some or all of the rest of the line, a practice called full-line forcing. Such tying agreements arent necessarily illegal, but they do violate U.S. law if they tend to lessen competition substantially. Note that a producers right to terminate dealers is somewhat restricted. In general, sellers can drop dealers for cause, but not if, for instance, the dealers refuse to cooperate in a doubtful legal arrangement, such as exclusive dealing or tying agreements.

2008933525

A Framework for Marketing Management, Fourth Edition, by Philip Kotler and Kevin Lane Keller. Published by Prentice Hall. Copyright 2009 by Pearson Education, Inc.

244

Part V Delivering Value

E-COMMERCE MARKETING PRACTICES

E-business describes the use of electronic means and platforms to conduct a companys business. E-commerce means that the company or site transacts or facilitates the online selling of products and services. E-commerce has given rise to e-purchasing and e-marketing. E-purchasing means companies decide to buy goods, services, and information from various online suppliers. E-marketing describes company efforts to inform buyers, communicate, promote, and sell its offerings online. We can distinguish between pure-click companies, those that have launched a Web site without any previous existence as a firm, and brick-and-click companies, existing companies that have added an online site for information and/or e-commerce. M-commerce (m for mobile) is another emerging trend in e-commerce.

Pure-Click Companies
There are several kinds of pure-click companies: search engines, Internet service providers (ISPs), commerce sites, transaction sites, content sites, and enabler sites. Commerce sites sell all types of products and services, notably books, music, toys, insurance, travel services, clothes, and so on. Breakthrough Marketing: Amazon describes that quintessential commerce site. Although the popular press has given the most attention to business-to-consumer (B2C) Web sites, even more activity is being conducted on business-to-business (B2B) sites, which make markets more efficient. In the past, buyers had to exert a lot of effort to gather information on worldwide suppliers. With the Internet, buyers have easy access to information from (1) supplier Web sites; (2) infomediaries, third parties that add value by aggregating information about alternatives; (3) market makers, third

BREAKTHROUGH MARKETING: AMAZON

Amazon started as the worlds largest bookstore in July 1995 and has blazed a trail of e-commerce innovations ever since. It set out to create personalized storefronts for each customer by providing more useful information and more choices than neighborhood stores. Amazon invites readers to review books, evaluate them on a one- to five-star rating system, and vote on how helpful each review is. Readers can browse and search pages from thousands of books, receive personal recommendations based on their buying patterns, and buy with just one click. And, to overcome the lag between purchase and delivery, Amazon offers fast, inexpensive shipping. Today Amazon generates $10 billion in annual revenue from its Web sites in Canada, the United Kingdom, Germany, Austria, France, China, and Japan, offering everything from clothing and kitchen items to downloadable movies and music. It also profits from serving as an electronic marketplace, enabling all kinds of merchants to sell on Amazon.com. Its Amazon Web project opened its databases to more than 65,000 programmers and businesses that, in turn, have created moneymaking Web sites, online shopping interfaces, and services for Amazons 800,000 sellers. Recently Amazon began renting excess data storage capacity to businesses, the first in a new series of technology offerings. What will Amazon sell next?27
A Framework for Marketing Management, Fourth Edition, by Philip Kotler and Kevin Lane Keller. Published by Prentice Hall. Copyright 2009 by Pearson Education, Inc.

2008933525

Chapter 13 Designing and Managing Integrated Marketing Channels parties that create markets linking buyers and sellers; and (4) customer communities, sites where buyers can swap stories about suppliers offerings. The net impact of these mechanisms is to make prices more transparent.28 In the case of undifferentiated products, price pressure will increase. For highly differentiated products, buyers will gain a better picture of the items true value. Suppliers of superior products will be able to offset price transparency with value transparency; suppliers of undifferentiated products will have to drive down their costs to compete.

245

Brick-and-Click Companies
Many brick-and-mortar companies debated adding an e-commerce channel, fearing that channel conflict would arise from competing with their offline retailers, agents, or company-owned stores.29 Most eventually added the Internet as a distribution channel after seeing how much business their online competitors were generating. The question is how to sell both through intermediaries and online. There are at least three strategies for trying to gain acceptance from intermediaries: (1) offer different brands or products on the Internet; (2) offer offline partners higher commissions to cushion the negative impact on sales; and (3) take orders on the Web site but have retailers deliver and collect payment. Harley-Davidson asks customers who want to order accessories online to select a participating dealer. The dealer, in turn, fulfills the order, adhering to Harleys standards for prompt shipping.30

M-Commerce
Consumers and businesspeople no longer need to be near a computer to go online. All they need is a cellular phone or personal digital assistant to wirelessly connect to the Internet so they can check the weather, sports scores, and more; send and receive e-mail messages; and place online orders. Many see a big future in what is now called m-commerce (m for mobile).31 M-commerce success will be driven, in part, by convenience, ease of use, trust, and widespread availability.32 For example, in Japan, millions of teenagers carry DoCoMo phones from NTT (Nippon Telephone and Telegraph). In addition to voice and text communication, they can use their phones to order goods or make purchases at participating outlets like McDonalds. Subscribers receive a monthly bill from NTT listing the subscriber fee, usage fee, and cost of all other transactionsand they can pay the bill at any 7-Eleven convenience store.33

EXECUTIVE SUMMARY
Most producers dont sell their goods directly to final users. Between producers and final users stands one or more marketing channels, a host of marketing intermediaries performing a variety of functions. Companies use intermediaries when they lack the financial resources to carry out direct marketing, when direct marketing isnt feasible, and when they can earn more by doing so. The most important functions performed by intermediaries are information, promotion, negotiation, ordering, financing, risk taking, physical possession, payment, and title. Manufacturers can reach a market by selling direct or using one-, two-, or three-level channels, depending on customer needs, channel objectives, and their

2008933525

A Framework for Marketing Management, Fourth Edition, by Philip Kotler and Kevin Lane Keller. Published by Prentice Hall. Copyright 2009 by Pearson Education, Inc.

246

Part V Delivering Value identification and evaluation of major channel alternatives. Effective channel management calls for selecting intermediaries, then training and motivating them to build a long-term, mutually profitable partnership. Three key channel trends are the growth of vertical marketing systems, horizontal marketing systems, and multichannel marketing systems. All channels have the potential for conflict and competition. Marketers have to consider legal and ethical issues relating to practices such as exclusive dealing or territories, tying agreements, and dealers rights. As e-commerce has grown in importance, channel integration must recognize the distinctive strengths of online and offline selling to maximize their joint contributions.

NOTES
1. Leila Abboud, New Treatment: Electronics Giant Seeks a Cure in Health Care, Wall Street Journal, July 11, 2007, p. A1; Kerry Capell, Thinking Simple at Philips, BusinessWeek, December 11, 2006, p. 50; PhilipsUnfulfilled, brandchannel.com, June 20, 2005; Royal Philips Electronics Annual Report, 2006; Jennifer L. Schenker, Fine-Tuning a Fuzzy Image, TIMEeurope.com, Spring 2002. 2. Anne T. Coughlan, Erin Anderson, Louis W. Stern, and Adel I. El-Ansary, Marketing Channels, 6th ed. (Upper Saddle River, NJ: Prentice Hall, 2001). 3. Louis W. Stern and Barton A. Weitz, The Revolution in Distribution: Challenges and Opportunities, Long Range Planning 30, no. 6 (1997): 823829. 4. For a summary of academic research, see Erin Anderson and Anne T. Coughlan, Channel Management: Structure, Governance, and Relationship Management, in Bart Weitz and Robin Wensley, eds., Handbook of Marketing (London: Sage Publications, 2001), pp. 223247 and Gary L. Frazier, Organizing and Managing Channels of Distribution, Journal of the Academy of Marketing Sciences 27, no. 2 (1999): 226240. 5. Asim Ansari, Carl F. Mela, and Scott A. Neslin, Customer Channel Migration, Journal of Marketing, 2007, forthcoming; Jacquelyn S. Thomas and Ursula Y. Sullivan, Managing Marketing Communications, Journal of Marketing 69 (October 2005): 239251; Edward J. Fox, Alan L. Montgomery, and Leonard M. Lodish (2004), Consumer Shopping and Spending Across Retail Formats, The Journal of Business 77 (2): S25S60; Sridhar Balasubramanian, Rajagopal Raghunathan, and Vijay Mahajan (2005), Consumers in a Multichannel Environment: Product Utility, Process Utility, and Channel Choice, Journal of Interactive Marketing 19 (2): 1230. 6. Chekitan S. Dev and Don E. Schultz, In the Mix: A Customer-Focused Approach Can Bring the Current Marketing Mix into the 21st Century, Marketing Management 14 (January/February 2005). 7. For additional information on reverse-flow channels, see Marianne Jahre, Household Waste Collection as a Reverse ChannelA Theoretical Perspective, International Journal of Physical Distribution and Logistics 25, no. 2 (1995): 3955; and Terrance L. Pohlen and M. Theodore Farris II, Reverse Logistics in Plastics Recycling, International Journal of Physical Distribution and Logistics 22, no. 7 (1992): 3537. 8. Katherine Boehret, The Mossberg Solution: How the Big Photo-Sharing Sites Stack Up, Wall Street Journal, August 1, 2007, p. D8; William M. Bulkeley, Kodak Revamps Wal-Mart Kiosks, Wall Street Journal, September 6, 2006; Faith Keenan, Big Yellows Digital Dilemma, BusinessWeek, March 24, 2003, pp. 8081. 9. Louis P. Bucklin, A Theory of Distribution Channel Structure (Berkeley: Institute of Business and Economic Research, University of California, 1966). 10. Allison Enright, Shed New Light, Marketing News, May 1, 2006, pp. 910. 11. For more on relationship marketing and the governance of marketing channels, see Jan B. Heide, Interorganizational Governance in Marketing Channels, Journal of Marketing (January 1994): 7185. 12. Anderson and Coughlan, Channel Management: Structure, Governance, and Relationship Management, pp. 223247. 13. Bert Rosenbloom, Marketing Channels: A Management View, 5th ed. (Hinsdale, IL: Dryden, 1995). 14. Bruce Horovitz, Cranium Guys Have Their Inner Child on Speed Dial, USA Today, May 8, 2006, p. 7B; Christopher Palmeri, March of the T oysOut of the Toy Section, BusinessWeek, November 29, 2004,

2008933525

A Framework for Marketing Management, Fourth Edition, by Philip Kotler and Kevin Lane Keller. Published by Prentice Hall. Copyright 2009 by Pearson Education, Inc.

Chapter 13 Designing and Managing Integrated Marketing Channels

p. 37; Miles Cook and Rob Tyndall, Lessons from the Leaders, Supply Chain Management Review, NovemberDecember 2001, pp. 22+. Thomas H. Davenport and Jeanne G. Harris, Competing on Analytics: the New Science of Winning (Boston: Harvard Business School Press, 2007). For an excellent report on this issue, see Howard Sutton, Rethinking the Companys Selling and Distribution Channels, research report no. 885, Conference Board, 1986, p. 26. V. Kasturi Rangan, Transforming Your Go-to-Market Strategy: The Three Disciplines of Channel Management (Boston: Harvard Business School Press, 2006). Parker Howell, Columbia Paint Takeover Set, Spokesman-Review (Spokane), August 29, 2007. Russell Johnston and Paul R. Lawrence, Beyond Vertical IntegrationThe Rise of the Value-Adding Partnership, Harvard Business Review (JulyAugust 1988): 94101. See also Judy A. Siguaw, Penny M. Simpson, and Thomas L. Baker, Effects of Supplier Market Orientation on Distributor Market Orientation and the Channel Relationship: The Distribution Perspective, Journal of Marketing (July 1998): 99111; Narakesari Narayandas and Manohar U. Kalwani, Long-Term ManufacturerSupplier Relationships: Do They Pay Off for Supplier Firms? Journal of Marketing (January 1995): 116. Raji Srinivasan, Dual Distribution and Intangible Firm Value: Franchising in Restaurant Chains, Journal of Marketing 70 ( July 2006): 120135. Rajkumar Venkatesan, V. Kumar, and Nalini Ravishanker, Multichannel Shopping: Causes and Consequences, Journal of Marketing 71 (April 2007): 114132. Anne T. Coughlan and Louis W. Stern, Marketing Channel Design and Management, in Dawn Iacobucci, ed., Kellogg on Marketing (New York: John Wiley, 2001), pp. 247269. Alberto Sa Vinhas and Erin Anderson, How Potential Conflict Drives Channel Structure: Concurrent (Direct and Indirect) Channels, Journal of Marketing Research 42 (November 2005): 507515. For an example of when conflict can be viewed as helpful, see Anil Arya and Brian Mittendorf, Benefits of Channel Discord in the Sale of Durable Goods, Marketing Science 25 (January-February 2006): 9196 and Nirmalya Kumar, Living with Channel Conflict, CMO Magazine, October 2004.

247

15.

16.

17.

18. 19.

20.

21.

22.

23.

24.

25. This section draws on Coughlan, Anderson, Stern, and El-Ansary, Marketing Channels, ch. 6. See also Jonathan D. Hibbard, Nirmalya Kumar, and Louis W. Stern, Examining the Impact of Destructive Acts in Marketing Channel Relationships, Journal of Marketing Research 38 (February 2001): 4561; Kersi D. Antia and Gary L. Frazier, The Severity of Contract Enforcement in Interfirm Channel Relationships, Journal of Marketing 65 (October 2001): 6781; James R. Brown, Chekitan S. Dev, and Dong-Jin Lee, Managing Marketing Channel Opportunism: The Efficiency of Alternative Governance Mechanisms, Journal of Marketing 64 (April 2001): 5165. 26. Christina Passriello, Fashionably Late? Designer Brands Are Starting to Embrace E-Commerce, Wall Street Journal, May 19, 2006, pp. B1, B4. 27. Mylene Mangalindan, Amazons MP3 Store Takes Aim at Apple, Wall Street Journal, September 26, 2007, p. B3; Jim Carlton, Amazon Looks to Keep Sales Momentum, Wall Street Journal, July 25, 2007, p. A3; Riva Richmond, Amazon Offer: Its Gigabytes Now for Sale, Wall Street Journal, June 27, 2007, p. B5D; Click to Download, The Economist, August 19, 2006, pp. 5758; Robert D. Hof, Jeff Bezos Risky Bet, BusinessWeek, November 13, 2006; Erick Schonfield, The Great Giveaway, Business 2.0, April 2005, 8086. 28. For an in-depth academic examination, see John G. Lynch, Jr. and Dan Ariely, Wine Online: Search Costs and Competition on Price, Quality, and Distribution, Marketing Science 19 (Winter 2000): 83103. 29. Described in Inside 1-to-1, Peppers and Rogers Group newsletter, May 14, 2001. 30. Bob Tedeshi, How Harley Revved Online Sales, Business 2.0, December 2002/January 2003, p. 44. 31. Douglas Lamont, Conquering the Wireless World: The Age of M-Commerce (New York: Wiley, 2001); Marc Weingarten, The Medium Is the Instant Message, Business 2.0, February 2002, pp. 9899. 32. Gordon Xu and Jairo A. Gutierrez, An Exploratory Study of Killer Applications and Critical Success Factors in M-commerce, Journal of Electronic Commerce in Organizations 4.3 (July-September 2006): 63+. 33. Kanako Takahara, McDonalds, DoCoMo Team Up on Marketing, Japan Times, February 27, 2007.

2008933525 A Framework for Marketing Management, Fourth Edition, by Philip Kotler and Kevin Lane Keller. Published by Prentice Hall. Copyright 2009 by Pearson Education, Inc.