Chapter 15

Channels of Distribution:
Conflict, Cooperation, and
Management
Sommers  Barnes
Ninth Canadian Edition

Presentation by
Karen A. Blotnicky
Mount Saint Vincent University, Halifax, NS

Copyright © 2001 by McGraw-Hill Ryerson Limited

Chapter Goals
To gain an understanding of:
• The nature and importance of intermediaries
• What a distribution channel is and does
• The decisions involved in designing a channel of
distribution
• Major channels used to distribute consumer goods,
business goods, and services
• Vertical marketing systems
• Intensity of distribution
• Choice of intermediaries and conflict management
• Legal considerations and channel arrangements
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The Distribution Function
• distribution is about getting the product or
service to the customer as conveniently as
possible; it deals with access and availability
• intermediaries perform many of the
distribution functions on behalf of suppliers
• merchant intermediaries actually take title to
physical products that they distribute
• agents do not ever own the products, but they
arrange the transfer of title

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Distribution Channels
• The role of distribution entails:
• Arranging for its sale and transfer of
title
• Promoting the product
• Storing the product
• Assuming some risk during
distribution.
• Intermediaries often perform these
activities for producer or consumer.
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 The Distribution Functions
SALES SPECIALIST PURCHASING AGENT
FOR PRODUCERS FOR BUYERS
I
N
• Provides market T • Anticipates wants
information E • Subdivides large
• Interprets consumers’ R quantities of a product
wants M • Stores products
• Promotes producers’ E • Transports products
products • Creates assortments
D
• Creates assortments • Provides financing
• Stores products
I • Makes products
• Negotiates with A readily available
customers R • Guarantees products
• Provides financing Y • Shares risks
• Owns products
• Shares risks

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Designing the Channel
Channel design is a strategic marketing tool.
Four decisions can be help a firm design a
distribution channel:
• what role distribution is to play in achieving
objectives
• what type of channel is needed? with or
without intermediaries?
• what level of intensity of distribution?
• which specific intermediaries to use? which
will be best suited to achieve objectives?
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 The Well-Designed
Distribution Strategy

Specify
Select Determine
the role of Choose
type of appropriate
distribution specific
distribu- intensity
within the channel
tion of distri-
marketing members
channel bution
mix

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Selecting the Type of Channel
• some firms will distribute directly; others
will use a number of intermediaries:
• producerconsumer (direct)
• producerretailerconsumer
• producerwholesalerretailer consumer
• produceragentretailerconsumer
• produceragentwholesaleretailercons
umer
• when would each of these be considered?
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Major Distribution
Channels
• For distribution of consumer goods, five
different types of channels are widely used.
• Business goods are normally distributed
through four major types of channels.
• There are only two common channels of
distribution for services.
• Some producers are not content to use only a
single distribution channel and use multiple
channels (a.k.a dual distribution)
distribution
• Multiple channels can aggravate middlemen
and cause conflicts in the channels.
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Consumer Channels
PRODUCERS OF CONSUMER GOODS

Agents Agents

Merchant Merchant
wholesalers wholesalers

Retailers Retailers Retailers Retailers

ULTIMATE CONSUMERS
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Business Channels
PRODUCERS OF BUSINESS GOODS

Agents Agents

Merchant wholesalers Merchant wholesalers

(industrial distributors) (industrial distributors)

BUSINESS USERS
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Service Channels
PRODUCERS OF SERVICES

Agents

ULTIMATE CONSUMERS OR BUSINESS USERS

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Multiple Distribution Channels
• some firms will use several distribution
channels to reach specific markets or segments
• dual distribution is used, for example, to reach
business and consumer markets, or to carry
different groups of products
• or may be used to reach different segments of
the seller’s market; different sizes of buyers or
different regions of the country
• some companies operate their own stores

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Vertical Marketing
Systems (VMS)
• a tightly coordinated distribution channel
designed to improve operating efficiency and
marketing effectiveness.
• Corporate VMS: One firm owns other firms in
channel or the entire channel-- Goodyear, Roots.
• Contractual VMS: Independents work together for
much greater effectiveness: IGA, IDA.
• Administered VMS: Relies on economic power of
one channel member-- Rolex, Kraft General Foods..

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Intensity of Distribution

INTENSIVE SELECTIVE EXCLUSIVE

Distribution Distribution Distribution
through every through multiple, through a single
reasonable but not all, wholesaling
outlet in a reasonable middleman
market outlets in a and/or retailer
market in a market

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Considerations in
Channel Choice
• Market Considerations: Type of market,
concentration, potential customers, order
size.
• Product Considerations: Consider unit
value, perishability, technical nature of
product.
• Intermediaries Considerations: Services
offered, availability, attitude, dominance.
• Company Considerations: Desire for
channel control, management, money and
services seller can provide to support sales.
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Conflict and Control
in Channels
• Channel conflict exists when channel members
interfere with each others’ objectives.
• Horizontal conflict involves firms on same level--
grocery store vs. drug store.
• Vertical conflict involves firms at different levels
• producer versus wholesaler
• producer versus retailer
• Channel Power is the ability to influence or determine
behaviour of others in channel.
• Based on expertise, rewards and sanctions.

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Producer/Retailer Conflict
Small suppliers’ complaints about large
department stores:
• Onerous logistical demands.
• Pressure to cut prices.
• Demands to give the stores exclusivity.
• Forcing suppliers to contribute advertising
and promotional dollars to the stores.
• Requiring suppliers to invest in elaborate
computerized inventory systems.

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More Complaints
Small suppliers’ complaints about discounters:
• Being asked to supply their goods on consignment.
• Being asked to deal directly with the retailers’
headquarters and to give to the retailer an amount
equal to the commission that would have gone to
manufacturers’ agents.
Responses from smaller suppliers:
• Quit doing business with big retailers whose
demands are too strict and outlandish.
• Become a retailer.
• Merge with another manufacturer.

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Legal Considerations
• Dealer Selection: Refusing to sell to some
firms. Can be done carefully.
• Exclusive Dealing involves shutting out
competitors, giving most business to one
firm.
• Tying Contracts involves providing one
item on condition other lines be carried as
well.
• Exclusive Territories can create
monopolies.

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 Channels for Entering
Foreign Markets
• Exporting, through:
• An export merchant in the manufacturer's country that
buys goods and exports them.
• An export agent located in either the manufacturer's or
the destination country.
• A company’s sales branches.
• Contracting, via:
• Licensing: Right to use production process, patents,
trademarks, or other assets.
• Franchising.
• Contract manufacturing: having a foreign-based
manufacturer produce the product
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More Foreign Market Entry
Channel Options
• Direct investment, including:
• Joint venture or partnership with a
foreign company.
• Strategic alliance.
alliance
• Wholly-owned subsidiaries.

• Multinational corporation, in which the

foreign and domestic operations are
integrated and are not separately
identified.
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The Changing Face
of Distribution
• Internet (“click and mortar” vs. “brick
and mortar”) a major factor-- where is it
heading?
• Direct Response TV sales are growing
in popularity, especially for time-
starved shoppers
• “The world’s largest bookstore” is on
the Internet! (Amazon.com)

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