Channel Management

Channel Management—Discussion Guide Performance Indicator: Explain the nature and scope of channel management

Slide #3 Opening Discussion (Entry) THINK ABOUT IT

• Businesses have many different options for moving their products to consumers and businesses who want to buy them.

• These routes are known as channels of distribution.

• These channels include intermediaries (or channel members), often represented by wholesalers and retailers, who handle the products as they make their way from producer to final consumer.

• Every channel member should add value to the product as it moves through the channel.

KEY CONCEPTS

Slide #4 Channel Tasks

• As products move through these channels of distribution, many channel tasks must be completed no matter how many intermediaries are involved. Since it is often impractical for a producer to perform all of the channel tasks needed to get a product into the hands of final consumers, any channel member that can perform one or more of these tasks expertly adds value to the product and benefits every member in the channel. Here are some of the most common channel tasks:

• Providing marketing information

  • Companies rely on market research to determine their target markets’ needs and wants.

  • Since intermediaries tend to interact more closely with consumers than producers, they are often good sources of marketing information based on what they are hearing from the consumers themselves.

• Promoting products

  • When a producer sells its products through intermediaries, the cost and responsibilities associated with product promotion can be shared.

    • Retailers, for example, often assume a large portion of promotion responsibilities.

  • Shared promotion activities within the channel can lower channel members’ individual costs while producing the same results.

• Negotiating with customers

  • Producers often don’t have the time or the capacity to negotiate with final customers on issues such as price, delivery, installation, etc.

  • When the channel works smoothly, all the channel members are profitable, and the final customer receives the product in an efficient, effective manner.

• Reducing discrepancies

  • There are several barriers that keep producers and final consumers from dealing with each other effectively.

    • These “discrepancies” of quantity and assortment are issues that intermediaries can solve.

    • Wholesalers and retailers can break large quantities down into smaller quantities for individual sale.

• Financing and risk-taking

  • Moving products through a channel costs money.

    • It takes money to manufacture products, to transport and store them, to promote them, to gather information about target market needs, to extend credit to customers, etc.

  • When channel members work together to finance these activities and to assume the inherent financial risks, channels will be more effective.

Slide #5 Discussion: How adding channel member helps lessen the financial risks assumed by other channel members.

Slide #6 Effective Channel Management

• Proper management is crucial for channels to be effective.

• Those designing and overseeing channel strategies must make informed decisions regarding distribution patterns as well as the selection of channel members and assignment of their responsibilities.

• Channels are only effective if channel members share common goals.

• There must be a commitment to the quality of the product and to satisfying the target market’s needs and wants.

• Channel tasks must be shared appropriately; each channel member should be assigned tasks that they can perform the best.

Slide #7 Discussion: When would you prefer direct distribution? Is it possible to have too many member channels? What would be the drawbacks?

Slide #8 Channel Management Decisions:

• Setting channel objectives

  • A manufacturer may decide it wants to use as many channel members as possible so it can spread out its distribution risks and expenses.

  • Or, a manufacturer may decide to forgo indirect distribution (the use of intermediaries) in favor of direct distribution (eliminating intermediaries in the channel and dealing directly with final consumers).

• Determining distribution patterns

  • There is a delicate balance in achieving ideal market exposure (making sure a product is available to each consumer who might buy it, but not over-distributing the product and wasting money).

  • To achieve it, marketers must determine distribution intensity, which is the level of market exposure a certain distribution pattern achieves.

  • These distribution patterns may be:

    • Intensive distribution

      • Selling a product through every available wholesaler and retailer in a geographic area where customers might look for it

      • The goal here is reaching the greatest number of customers possible.

    • Selective distribution

      • Selling a product through a limited number of wholesalers and retailers in a geographic area

      • Here, marketers select the intermediaries they feel will do the best job of promoting and selling their products.

    • Exclusive distribution

      • Selling a product through just one intermediary in a geographic area

      • In this pattern, marketers are able to maintain tight control over a product.

• Selecting channel members

  • Before selecting specific channel members, marketers must determine the types of members that belong in the channel (wholesalers, retailers, etc.) and also determine the channel length (the total number of channel members).

  • The type of product usually determines the types of channel members, whereas the channel length may be long or short based on what makes the most economic sense.

• Determining channel responsibilities

  • Certain activities must take place within a channel, no matter which channel member performs them.

  • Determining which channel members are responsible for which tasks is an important part of channel management.

Slide #9 Discussion: Why might a producer or channel manager want to create conflict in their channels of distribution? What benefits could result from these conflicts? In what ways might this backfire?

Slide #10 Managing Channel Members

• Once all of the decisions about setting up the channels of distribution have been made, the ongoing process of managing, motivating, and monitoring channel members begins. Traditionally, producers controlled channels, but in modern channels, power is more evenly distributed among channel members.

• Managing channel members

  • Marketers should constantly evaluate the channel to see what’s working, what isn’t, and what can be improved.

• Motivating channel members

  • Motivation of channel members can come in the negative form (sanctions and chargebacks) or in the positive (incentives, product training, cooperative advertising, etc.).

  • In general, positive measures are more effective than negative ones.

• Monitoring channel members

  • Marketers must keep a close eye on the channel and keep their goals in mind.

  • A major component in channel management is handling conflict, which can arise when independent businesses try to work together to form one channel.

  • The two basic types are:

    • Horizontal conflict

      • Occurs between channel members at the same level and is typically considered simple business competition (two retailers compete to sell the same manufacturer’s product to the same market)

    • Vertical conflict

      • Occurs between channel members at different levels within the same channel

        • Channel managers must pay very close attention to this kind of conflict.

        • A producer may not feel that channel members are marketing or selling their products aggressively enough, for example.

      • Can also arise when producers bypass traditional intermediaries in favor of e-commerce options or opening their own factory-direct retail stores

• • • • Multiple or dual distribution can cause conflict as well.

        • This occurs when producers use more than one channel to distribute a product, creating horizontal and vertical conflict at the same time.

Channels of Distribution—Discussion Guide

Performance Indicator: Explain the nature of channels of distribution

Slide #12 Opening Discussion (Entry) THINK ABOUT IT

What if, in order to purchase anything, you had to travel to the producer of the good or service? You would soon find that the goods and services you consume would be limited to those produced in your own geographic area. Fortunately, there are channels of distribution, carrying products from many different production locations right to where you live.

KEY CONCEPTS

Slide #13 Channels of Distribution

• Channels of distribution are the paths or routes that goods and services take to get from the producer to the ultimate consumer or industrial user.

• A producer makes or provides goods or services.

• An ultimate consumer (or final consumer) is anyone who personally uses a good or service to satisfy her/his own needs or wants.

• An industrial user is a business that buys materials, services, or goods that will be used either to make other goods or in the operation of a company.

• Direct channels of distribution are short routes that involve just the producer and the consumer or industrial user.

• Indirect channels of distribution are longer and involve the use of intermediaries.

Slide #14 Discussion: Can you think of a product that is handled through a direct channel of distribution. Is this the best way to handle this product? Why or why not?

Slide #15 Intermediaries

• Channels of distribution are composed of businesses and/or people who perform a variety of functions to enable products to be in the right places at the right times.

• These businesses and/or people are referred to as channel members, intermediaries, or middlemen.

  • They operate between the producer and ultimate consumer to help in the movement of goods and services.

  • These are the different types of intermediaries:

    • Retailers are businesses that buy consumer goods and sell them to ultimate consumers. They perform functions such as buying, selling, promoting, storing, and pricing goods. They may also provide such customer services such as credit, installation, and repair.

• • • Wholesalers are businesses that buy goods from producers or agents and sell them to retailers. They buy a variety of goods from many producers and sell groups of related products to retailers. Important functions of wholesalers include packaging, transporting and storing, extending credit to retailers, and providing promotional and consulting services.

    • Agents are businesses or individuals that assist in the sale and/or promotion of goods and services but do not buy them from the producers. They promote a producer’s goods and services, but never actually own them. Agents usually handle a limited number of noncompeting products.

Slide #16 Discussion: What role a company like Amazon serves in channels of distribution. Is Amazon a producer, wholesaler, agent, retailer, or industrial user? Does this role change depending on the type of product in question?

Slide #17 Importance of Intermediaries

• Intermediaries aid in getting products to consumers or industrial users in the most efficient way. The main functions that allow them to aid producers in matching production to customer needs are:

• Buy big and sell small.

  • By placing large orders with producers, intermediaries are able to reduce their per-unit cost for goods.

• Develop an assortment of goods.

  • Intermediaries collect goods from a variety of producers and divide them into quantities and assortments that consumers will want.

• Transport and store goods.

  • Transporting and storing goods allows for goods to be available when consumers or industrial users are ready to buy them.

Slide #18 Channels for Consumer Goods

• There are five basic channels of distribution for consumer goods. They are:

• Producer to consumer

• Producer to retailer to consumer

• Producer to wholesaler to retailer to consumer

• Producer to agent to retailer to consumer

• Producer to agent to wholesaler to retailer to consumer

Slide #19 Channels for Industrial Goods

• Goods that will be used to make other goods or services or that will be used in the operation of a business are known as industrial goods. The four most common channels for industrial goods are:

• Producer to industrial user

• Producer to industrial distributor to user

• Producer to agent to user

• Producer to agent to industrial distributor to user

Slide #20 Channels for Services

• Services are intangible activities. Therefore, producers aren’t concerned with having to ship and store them.

• Most services follow a direct channel of distribution.

• Agents do occasionally assist with the distribution of services.

  • In the case of a travel agent or musical act, a channel would begin with a service provider, move to the agent, and then to the consumer or user.

Slide #21 Discussion: Identify another industry or channel of distribution that involves agents as channel members. Is this a service or a good? What benefit does this channel gain from having agents play a role?

Legal Issues in Channel Management—Discussion Guide Performance Indicator: Explain legal considerations in channel management

Slide #23 Opening Discussion (Entry) THINK ABOUT IT

Illegal business arrangements:

• What if Microsoft’s Windows operating system was the only operating system available?

  • Microsoft could charge whatever price it wanted.

• What if Playstation, Xbox, and Nintendo divided their market, and retailers could only sell the Xbox in the market you live in?

  • You and your local retailer would probably be very unhappy.

• Monopolies and business arrangements that severely limit competition are illegal.

• They are illegal because they harm consumers.

KEY CONCEPTS

Slide #24 Distributors Must Compete Fairly

• Distributors must compete fairly in the marketplace.

• Manufacturers and distributors sometimes use selective and exclusive distribution methods to control or increase distribution of products, gain market share, and increase sales.

  • While these channel management strategies are usually lawful, they raise significant issues when they break antitrust laws governing trade regulation.

  • Any distribution method that severely limits trade is considered anticompetitive, and is therefore illegal.

  • Suppliers are legally responsible to make sure they are competing fairly in the marketplace and following antitrust laws and regulations.

Slide #25 Antitrust Laws

• Antitrust law is the broad category of federal and state laws that are designed to ensure that businesses operate honestly and fairly.

• The main objective of any antitrust law is to prevent businesses from taking any actions to restrain free trade and competition.

• Marketplace competition is beneficial to consumers because it gives businesses incentive to provide quality products at affordable prices.

• The Sherman Act outlaws contracts and business arrangements that restrain trade, fix prices, or create monopolies.

• The Clayton Antitrust Act prevents exclusive business arrangements that significantly reduce competition, create a monopoly, or coerce an unwilling party into an agreement.

• Any business negatively impacted by the action of a supplier can petition the court to determine whether the situation is illegal based on the facts of the case.

  • When a business is found guilty of breaking antitrust laws, the penalties can be severe—as much as $100 million for a corporation, twice the amount the business gained from illegal acts, and/or twice the amount that victims lost.

  • When the court determines that individuals or businesses acted with a clear intention to violate the law, criminal charges can also be brought against them with penalties of imprisonment.

Slide #26 Problematic Distribution Practices

• Some distribution practices can be problematic.

• Exclusive distribution is used by suppliers to create protected or closed territories in a geographic area.

  • This gives a product distributor the exclusive rights to sell a supplier’s products within the specified geographic area.

  • Use of an exclusive distribution channel can help a distributor better focus its promotional efforts and improve customer service in its assigned territory.

  • It can also increase the volume of sales and profit margins for both the manufacturer and its distributors.

  • Franchised operations and companies selling luxury or complex products are examples of suppliers that commonly use exclusive distribution.

  • However, when exclusive distribution severely limits competition, it is considered anti-competitive and illegal.

Slide #27 Discussion: Give examples of companies that use exclusive distribution.

• Monopolies form when a market is controlled by one supplier with no substitute goods or services readily available.

Slide #27 Discussion: Ask Students to share other examples of companies that have near monopolies.

• • An example of a near monopoly could be cable television providers that hold a significant share of the market in a certain geographic area.

  • Monopolies sometimes result from innovation, such as when a drug manufacturer creates and sells the only known cure for an illness or disease.

  • Market division or customer allocation is an arrangement in which each competitor gains the exclusive right to deal with specific customers.

    • These types of arrangements can potentially create a “designated monopoly” for each supplier.

    • Since customers can only obtain the product from their designated supplier, the company can charge higher prices.

    • When market division or customer allocation agreements severely hinder competition, they are illegal.

  • Full-line forcing is used to obligate a distributor to carry the suppliers’ entire product line.

    • A paint manufacturer, for example, may require a retailer selling its paint to also stock and sell its solvents, brushes, and painting accessories.

    • Full-line forcing can help a supplier increase sales, but it can place a burden on distributors to carry large inventories.

    • Full-line forcing is legal as long as it does not have a significant impact on competition.

    • Competition is typically impacted the most in situations involving very exclusive products or suppliers with great market share and power.

  • Tying agreements occur when a company agrees to sell a product on the condition that the customer purchases another “tied” product.

    • By withholding a highly desired product unless tied products are purchased, the supplier can increase the sale of those products.

    • Tying also occurs when a supplier makes the purchase of a product conditional on an agreement from the customer to purchase “tied” items solely from that supplier.

    • For example, a box supplier might agree to supply boxes at a certain price if the customer agrees to purchase all of their packaging materials from the box supplier as well.

    • These types of tying arrangements are illegal because they restrict trade and decrease competition.

    • Sometimes tying arrangements occur without spoken or written agreements.

      1. Some companies such as Microsoft and Apple, for example, have been accused of creating tying arrangements by selling devices with closed platforms.

      2. When a manufacturer provides a product that requires consumers to buy essential services such as Internet access or media content solely from it, competitors providing those same services are negatively impacted.

Slide #27 Discussion: Share examples of tying that you have experienced or witnessed.

Ethics of Channel Management—Discussion Guide

Performance Indicator: Describe ethical considerations in channel management

Slide #29 Opening Discussion (Entry) THINK ABOUT IT

You want to buy the latest model of an athletic shoe.

• The retailer says the shoes are in high demand and the price has doubled.

• Some suppliers/retailers artificially create a low supply to increase demand and raise prices.

• The practice might be legal, but it’s not ethical.

• Ethical suppliers and retailers operate with honesty and transparency.

KEY CONCEPTS

Slide #30 Ethical Channel Members Collaborate

• Ethical channel members work together for the benefit of each other.

• There are many vital relationships involved in channels of distribution that make channel members such as suppliers and retailers dependent on each other to achieve their business goals.

• Therefore, it’s important for all channel members to act ethically by considering the impact of their actions on all channel members.

  • Selfish acts can be detrimental not only to other channel members, but to customers as well.

  • When channel members communicate honestly and act in the best interest of each other, strong relationships are formed to help transport, store, and deliver products to ultimate consumers.

  • By working together to create an effective distribution system, all channel members benefit and profit from the resulting business. And, consumers benefit from an available supply of quality goods.

Slide #31 Ethical Issue: Coercive Power

• There are ethical issues involved in channel management.

• Coercive power

• If a supplier uses its power to harm or threaten a distributor, it is using coercive power.

  • A manufacturer, for example, may threaten to terminate its relationship with a distributor or to withdraw essential resources it has provided to keep the distributor under its control.

  • The use of coercive power is unethical because it puts a distributor at the mercy of the supplier’s demands, creating an extreme imbalance of power and damaging relationships in the supply channel.

Slide #32 Discussion: Give examples of companies that have enough power to wield it in coercive ways.

Slide #33 Ethical Issue: Exploitation

• Exploitation

• Sometimes, suppliers will manipulate the availability of a product to exploit distributors or consumers.

  • A supplier may withhold a supply of product under the pretense that it is only available in limited quantities.

  • This situation allows the supplier to create artificial scarcity, which can be used to increase demand for the product and raise its price.

  • Intentionally making a product appear to be scarce to increase its price is a manipulative and unfair business practice that is harmful to distributors and consumers.

Slide #34 Discussion: Share examples of artificial scarcity you may have seen in the marketplace

Slide #35 Ethical Issue: Gray Markets

• Gray markets

• A gray market occurs when products are sold through an unauthorized sales channel.

  • For example, when individuals or retailers sell flawed or discontinued items not meant to be on the market, they create a gray market.

    • These types of second-hand goods have a negative impact on a brand and harm consumers when the products are flawed and/or lack the protection of warranties.

  • Gray markets are also created when products are sold that haven’t been imported through legal channels.

    • For example, cars specifically produced for distribution in Canada and sold in the U.S. may not comply with governmental safety and environmental standards, thereby putting consumers’ safety at risk.

  • It is unethical for retailers to sell products in unauthorized ways that harm manufacturers, suppliers, and consumers.

Slide #36 Discussion: Share examples of gray markets you have encountered.

Slide #37 Ethical Issue: Slotting Allowances

• Slotting allowances

• A slotting allowance is a fee charged to suppliers by retailers in order to place the supplier’s products on its shelves.

  • Some slotting fees are as high as $50,000 per product per year.

  • Many retailers defend slotting allowances because they help allocate scarce retail space and help offset other related costs of carrying a product such as warehouse space, data entry tasks, and computer coding needed to track the products.

  • However, slotting allowances are considered unethical since they severely limit competition by preventing new and smaller manufacturers access to markets for their products.

Slide #38 Ethical Issue: Serving Low-Profit Markets

• Serving markets with low profit potential

• An example of a market with low profit potential is a rural area that has very few retailers providing goods and services to the people living there.

  • Suppliers and distributors serving such a market provide a valuable source of goods to these consumers.

  • Since suppliers and retailers operating in these types of markets have little to no competition, they benefit from the opportunity to sell multiple products to the same people.

  • Ethical suppliers and retailers work to serve the needs of these consumers by providing quality products that are priced fairly.

  • However, if suppliers serving these markets reduce the quality of their goods or raise prices to increase profits, they are acting unethically by taking advantage of consumers who live in noncompetitive markets.