Marketing Channel Strategy and Management Marketing channels play an integral role in an organization's marketing strat- egy: A marketing channet consists of individuals and organizations involved in the process of making a product or service available for constimption oF use by consumers and industrial users. Channels not only ink a producer of | goods to the goods’ buyers but also provide the means through which an onganization implements its marketing strategy. Marketing channels determine whether the target markets sought by an organization are reached. The effectiveness of a commu nications strategy is determined, in part, by the ability and willingness of cl ‘mediaries to perform sales, avertising, and promotion activities. An organization's price strategy is influenced by the markup and discount policies of intermediaries, Finally, product strategy is aected by intermediaries’ branding policies, willingness to stock and ‘customize offerings, and ability to augment offerings through installation of maintenance services, the extension of credit, and so forth, Marketing channel strategy and management has assumed greater significance with the onset of electronic commerce. Growth in the sophistication and usage of Internet technology has revolutionized the way products and services are made a able for consumption or use by consumers and industrial users. The Internet has chal- lenged marketers to innovatively employ this technology in channel strategy and ‘management in a manner that creates customer value at a profit. This topic is, addressed in this chapter from the perspective of multi-channel marketing, Making the channelsclection decision is not so much a single act as itis a process of making various component decisions. ‘The process of channel selection involves speci= fying the type, location, density, and functions of intermediaies, iF any, in a marketing channel. However, before addressing these decisions, the marketing manager must con- duct a thorough market analysis in order to identify the target markets that will be served by a prospective marketing channel. The target markets sought and their buying, requirements form the basis for all channel decisions, In other words, che marketing, ‘manager needs answers to fundamental questions such as these; Who are potential cus: tomers? Where do they buy? When do they buy? How do they buy? What dlo they buy? 353354 CCUAPTER > MARKETING CHANNEL STRATEGY AND MANAGEMENT By working backward from the ultimate buyer or user of develop framework for specific channel decisions and ca designs." Consider Avon Products Inc, the work's leading direct seller of beauty and related {tems to women in 139 countries.” For more than 115 years, the company successflly marketed its products through an extensive network of independent representatives, ‘which number 3.4 million worldwide. However, Avon's marketing research indicated that 59 percent of women who don't buy Avon products would if they were more acces sible. The message to Avon's senior management was clear: Give busy women a choice in how, where, and when they do their buying—through an Avon representative, int retail setting, oF online. Acconling to Avon's chief executive offices, "While dseet selling will allways be our principal sales channel, expanding access to new customers will help accelerate topline [sales} yrowth"Today, Avon products are sold by independent repre- sentatives, at kiosks in shopping malls, and on its Web site [Link]). offering, the manager ean identify alternative channel ‘The Design of Marketing Channels Exhibit 7.1 illustrates traditional channel designs for consumer and industrial offerings. Also indicated is the number of levels in a marketing channel, which is determined by the number of intermediaries between the producer and the ultimate buyers or users. [As the number of intermediaries between the producer and the ultimate buyer increases, the channel increases in length, Direct Versus Indirect Distribution ‘The first decision facing a manager is whether the organization should (1) use intermediaries to reach target markets or (2) contact ultimate buyers directly using its own sales force or distribution outlets, or the Internet through a marketing Web site or electronic storefront. If the manager clects to use intermediaries, then the type, location, density, and number of channel levels must be determined, EXHIBIT 7.1 ss a ss SCARCE ‘Traditional Marketing Channel Designs Brokers or Agents Distributors of Wholesalers Retailers of Dealers Ubimate BuyersTIME CHANNELSELBCHON DECISION 355 Organizations usually elect to contact ultimate buyers disectly rather than through intermediaries when the following conditions exist. Direct distribution is usually employed when target markets are composed of buyers who are easily identifiable, when personal selling is a major component of the organization's communication pro ‘geim, when the organization has a wide variety of offerings for the target macket, and ‘when sufficient resources are available to satisfy target market requirements that would. normally be handled by intermediaries (such as credit, technical assistance, delivery, and. ostsale service). Direct distribution must be considered when intermediaries are not available for reaching target markets, or when intermediaries do not possess the capac ity to service the requircments of target markets, For example, Procter & Gamble sells its ‘soap and laundry detergents door to door (ditect) in the Philippines because there are no other alternatives in many parts of the country. Also, when Ingersoll-Rand first intro- duced pneumatic tools, a direct channel was used because considerable buyer educa: tion and service were necessary. As buyers became more familiar with these products, the company switched to using industrial distributors. Certain characteristics of offer ings also favor direct distribution. ‘Typically, sophisticated technical of mainframe computers, unstandardized offerings such as custom-built machinery, and offerings of high unit value are distributed directly to buyers. Finally, the overall market ing strategy might favor direct distribution. An organization might seek a certain aura of exclusivity not generated by using intermediaries, or an orginization might want to emphasize the appeal of *buying direct” presumably important to certain market segments. Direct distribution may also be appropriate ifthe organization seeks to differ centiate its offering from others distributed through intermediaries. A part of the suc cessful differentiation strategy used by Dell, Inc.s its emphasis on Internet purchases of personal computers. Even though a variety of conditions favor direct distribution, an important caveat ‘must be noted. The decision to market directly to ultimate buyers involves the absorp: tion of all functions (contacting buyers, storage, delivery, and credit) typically per- formed by intermediaries. The marketing principle “You can eliminate intermediaries but not their functions" is particularly relevant to the manager considering direct di tribution. This point is occasionally overlooked by marketing managers when they lect to distribute directly. The costs of performing these functions can be prohibi- tive, depending on the organization's financial resources and the opportunity cost of, diverting financial resources from other endeavors, ‘Therefore, even though all signs favor direct distribution, the capacity of the organization to perform tasks normally assigned to intermediaries may eliminate this alternative from final consideration, ilar caveat must be noted with respect to intermediaries who consider acquiring functions typically performed by channel members above or below them in the ch nel (for example, a retailer who wishes to perform wholesaling functions), Blectronic Marketing Channels The Internet adds.a technological twist to the analysis, of direct versus indirect distribution.* Electronic marketing channels employ some form of electronic communication, including the Internet, to make products and services available for consumption or use by consumers and industrial users. Exhibit 7.2 on page 356 shows the electronic marketing channels for books (Ama [Link]), automobiles (Autobytel com), reservations services ([Link]), and personal computers ([Link]). A feature ofthese channels is that they often combine ‘electronic and traditional intermediaries. The inclusion of traditional intermediaries for product marketing (distributors for books and dealers for cars) is clue to the logistics ion they perform—namely, handling, storage, shipping, and so forth, This and its [Link] direct channel. It is also noteworthy that two-thirds of the sales theo [Link] involve human sales representatives—a common practice with ditect distribu tion as described earlier.356 EXHIBIT 7.2 CHAPTER 7 MARKETING CHANNEL STRATEGY AND MANAGEMENT Representative Flectronic Marketing Channels [Link] AutobyteLeom Teaveociyicom Delleom ‘Book Publisher Auto Manufacturer Commercial Aldine Dell Ine Book Distabutor Auto Deater [Link] (WVietual Rewer) ‘Avto By-Tel ‘Temvlocity (Wirwal Broker) (Virwal Agent) Ultimate Buyers Many services can be distributed through electronic marketing channels, su travel reservations marketed by [Link], financial securities by [Link], and insurance by [Link]. Software also can be marketed this way. However, many other services such as health care and auto repair still involve traditional inter ‘mediaries, Electronic marketing channels represent yet anothes, albeit important, ‘channel design option available for marketers, Like all options, it too must be assessed! on its revenue-producing capability relative to the costs of achieving market coverage and satisfying buyer requirements. Channel Selection at the Retail Level In the event that traditional intermediaries are chosen as the means for reaching tar- get markets, the channelselection decision then focuses on the type and location of intermediaries at each level of the marketing channel, beginning with the retail level, Consider the case of a manufacturer of sporting goods. If retail outlets are chosen, the question becomes, What type of retal outlet? Should hardware stores, department stores, sporting goods stores, or some combination be selected to carry the line of sporting goods? Also, where should these retail outlets be located? Should they be i urban, suburban, or tural areas, and in what parts of the country? Recognizing that numerous routes to buyers exist, three questions need to be addressed when choosing 1. Which cha market?‘TIE CHANNEL-SELECTION DECISION 357 ‘Target Market Coverage Achieving the best coverage of the target market requires attention to the density and type of intermediaries to be used at the retail level of dis Uribution, Three degrees of distribution density exist: intensive, exclusive, and selective. A. Intensive distribution atthe retail level me: ager attempts 10 distrib: tute the organization's offerings through as many retail outlets as possible. More lly. a manager may seek to gain distribution through as many outlets of: specific type (such as drugstores) as possible. In its extreme form, intensive dlis- tribution refers to gaining distribution through almost all types of retail outlets, as soft drink and candy manufucturers do. For example, CocaCokr' retail distribu tion objective is to place its produets"within an arm's reach of desi 2. Exclusive distribution is the opposite of intensive distribution in that typically one retail outlet in a geographic area or one retail chain carties the manufac- urer’s line. Usually, the geographic area constitutes the defined trade area of the retailer. Mark Cross wallet sive dist agreements with manufacturers. For instance, Radio Shack sells only’ SA’s RCA brand of audio and video products in its 7,000 stores. Occasionally, the exclusivedistribution strategy involves a contractual arrangement between & retailer anc! a manufacturer or service provider that gives the retailer exclusive rights to sella line of products or services in a defined area in return for performing specific marketing functions. A common form of an ‘exclusive agreement isa franchise agreement. Franchise agreements now exist in ‘more than 70 industry categories ranging fom tax preparation services (I & R Block) to donuts (Dunkin’ Donuts). There are over 3,000 franchise retail chains in the United States with 760,000 units, which account for more than 41 percent of all etal sales 3. Selective distribution is between these wo extremes. This strategy calls for a manufacturer to select a few retail outlets in a specific area to carry its offering, ‘This approach is often used for marketing furniture, some brands of men's cloth- ing, and quality women’s apparel. Selective distribution weds some of the mar ket coverage benefits of intensive distribution to the control over resale evident with the exclusive distribution strategy. For this reason, selective distribution hnas become popular among marketers, ‘The populaity of selective distribution has come about also because of a phe- nomenon called effective distribution. Hfective distribution means that a limited number of outlets at the retail level account for a significant fraction of the market potential, An example of effective distribution is a situation in which a marketer of expensive men’s wristwatches distributes through only 40 percent of available out lets, but these outlets account for 80 percent of the volume of the wristwatch market. Increasing the density of retail outlets to peshaps 50 percent would probably increase the percentage of potential volume to 85 percent; however, the attendant costs of this, action might lead to only a marginal profit contribution at best, ‘The decision as to which of the three degrees of density to select rests on how buyers purchase the manufacturer's offering, the amount of control over resale desired by the manufacturer, the degree of exclusivity sought by intermediates, and the contr- bution of intermediaries to the manufacturer’s marketing effort. Intensive distribution is often chosen when the offering is purchased frequently and when buyers wish to expend minimum effort in its acquisition. Almost by definition, convenience goods such as confectionery products, personal care products, and gasoline fll into this cate. gory, Limiteddistribution strategies (exclusive and selective) are chosen when the Offering requires personal selling at the point of purchase. Major household appliances and industrial goods are typically distributed exclusively or select358 (CHAPTER 7 MARKETING CHANNEL STRATEGY AND MANAGEMENT ‘The density of retail distribution varies inversely with the amount of control over resile and aura of exclusivity desired by manufseturers and retailers, ‘That is, retail density decreases as control over resale practices and desited exclusivity increases, Gucci, one of the world’s leading luxury goods prod Yves Saint Laurent, Sergio Rossi, Boucheron, Opium, and Gucci brands, hy lly dropped retail ‘outlets for its brands that have not met its stringent sales dards, Large toy retailers routinely obtain proprietary sold by Mattel, Hasbro, and other producers. Such exclusivity gives these ret competitive advantage and higher profit margins. Satisfying Buyer Requirements A second consideration in channel selection is the identification of channels and intermediaries that satisfy at least some of the interests buyers want fulfilled when purchasing a firm's products or services. These interests fl (2) convenience, @) variety and () attendant Information i cement when buyers have Himited knowledge or desire specific data about a product or service. Properly chosen intermediaries communicate with buyers through in-store displays, demonstrations, and personal selling. Consumer electronics manufacturers such as Sony and Apple Computer ha ‘opened their own retail outlets staffed with highly trained personnel to inform buyers how their products can better meet each customer's needs” Convenience has multiple meanings for buyers, sich as proximity or diving time to a retal outlet. For example, 7leven stores with more than 24,000 outlets work 1wide satisfy this interest for buyers, and candy and shack food firms benefit by gaining isplay space in these stores. For other consumers, convenience means @ minimum of time and hassle ify Lube promises to change engine oil and filters quickly, appealing {o this aspect of convenience. For those who shop on the Internet, conv that Web sites are easy to locate and navigate, and image downloads are fast. A coms ‘mon view among Web site developers is the*#second rule": Consumers will abandon their efforts to enter or navigate aWeb site if download time exceeds 8 seconds.* Variety reflects buyers’ interest in having numerous competing and complemen: tary items from which to choose. Variety is evident in both the breadth and depth of produets and brands carried by intermediaries, which enhances their attraction to buyers. Thus, manufacturers of pet food and supplies seck distribution through pet superstores such as Petco and PetsMart, which offer a wide array of pet products Attendant services provided by intermediaries are an important buying requite- ment for products such as large household appliances that require delivery, i tion, and credit, Therefore, Whiripool seeks dealers that provide such services. bility, which is determined by the margins carned (revenues minus cost) for each channel member and for the ‘channel as a whole. Channel cost is the critical dimension of profitability. These costs \clude distribution, advertising, and selling expenses associated with different types of marketing channels. ‘The extent to which channel members share these costs determines the margins received by each member and by the channel as a whole Channel Selection at Other Levels of Distribution After having determined the nature of retail distribution, the marketing manager must then specify the type, location, and density (if any) of intermediaries that will be used to reach retail outlets. These specific selection decisions closely parallel the retail net ‘work decisions made easlies. If-a seconcHlevel intermediary (wholesaler, broker, or industrial distributor) is decided on, the question becomes, What type of wholesaler? Should the manager359 vies a limited line of items within a produet les, which catties a wide assortment of products; c¢ wholesaler, which carries a complete assortment of items in a single retailing ficld;ora combination of wholesalers? Obviously, an important consideration is what types of wholesalers sell to the retail outlets desired. When Mr. Coffee decided {ose supermarkets to sell its replacement cofiee filters, it had to recruit food brokers to call on these retailers. Often the decision is based on what is available. Ifthe avail- able wholesalers (lo not meet the requirements of the manufacturer in terms of satis- fying retailers’ requirements for delivery, inventory assortment and volume, credit, and so forth, then direct distribution to retailers becomes the only viable alternative However, careful study of a wholesaler's role in distribution should precede any deci sion to bypass it, particularly in countries outside the United States. The Gillette Com- ppany’s experience in Japan is a case in point. Gillette attempted to sell its szors and, Dlades through company salespeople in Japan as it does in the United States, thus climinating wholesalers traditionally invoived in marketing toiletries. WarnerLambert Company sold its Schick razors and blades through the traditional Japanese channel involving wholesalers, The result? Gillette captured 10 percent of the Japanese nizor and blade market and Schick captured 62 percent. ‘The location of wholesalers is determined by the location of retail outlets to the ‘extent that geographical proximity affects logistical considerations such as transporta tion costs and fast delivery service. The density of wholesalers is influenced by the density of the retail network and wholesaler service capabilities. Generally, as the den- sity of retail outlets increases, the density of wholesalers necessary to service them also increases. Retail bookseller Barnes & Noble, Ine, faced this issue. It attempted to acquire the Ingram Book Group, the largest U.S. book wholesaler with 11 strategically placed distribution locations, The addition of these wholesalers could have cut trans. portation costs to its more than 1,000 stores and reduced delivery time for its growing number of online customers reached through [Link], The acquisition did not materialize, and Barnes & Noble found it necessary to expand its own whole sale distribution network." Similar kinds of decisions are required for exch level of distribution in a particular ‘marketing channel; their determination will depend on the extent of market coverage sought and the availability of intermediaries. Sufice it to say that the number of levels in a marketing channel generally varies directly with the breadth of the market sought, f_DUAL DISTRIBUTION AND MULTI-CHANNEL MARKETING ‘The discussion thus far has focused on the selection of a single marketing channel, However, many organizations use multiple channels simultaneously. Two common approaches are dual distribution and multi-channel marketing, Dual Distribution Dual distribution occurs when an organization distributes its offering through (wo ‘or more different marketing channels that may or may not compete for similar buyers, For example, General Electric sells its appliances directly to house and apartment builders but uses retailers, including Lowe's home centers, to reach consumers. Dual distribution is adopted fora variety of reasons. [Fa manufacturer produces its id. as well as a private store brand, the store brand might be distributed lirectly to that particular retailer, whereas the manufacturer's brand might be handled ifacturer may distribute directly to major large-volume retail: c and volume requirements set them apart from other retailers, and cers, whose sei360 [CHAPTER 7 MARKETING CHANNEL STRATEGY AND MANAGEMENT may use whole cr outlets. Finally, geography itself may: affect whether direct or indirect methods of distribution are used, The organization ‘might use its own sales group in high-volume and geographically concentrated markets but use intermediaries elsewhere. In some instances, companies use multiple channels when a multibrand strategy is used (see Chapter 5). Hallmark sells its Hallmark brand, greeting cards through its franchised Hallmark stores and select department stores, and its Ambassador brand of cards through discount and drugstore chains, ‘The viability of the duatdistribution approach is highly situational and will depend on the relative strengths of the manufteturer and retailers, Ifa manufacturer decides to distribute disectly to ultimate buyers ina retailer's territory, the retailer m: drop the manufacturer's line, The likelihood of this depends on the importance of the manufacturer's line to the retailer and the availability of competitive offerings. If a setailer accounts for a sufficiently large portion of the manufacturer's volume, elimina- tion of the line could have a negative effect on the manufacturer's sales volume. This happened to Shaw Industries, the world’s largest carpet and rug manufacturer, When, Shaw Industries announced it would begin operating its own retail stores and com- mercial dealer network, Home Depot dropped Shaw Industries as a carpet and rug, supplier and switched to Mohawk Industries’ products." Multi-Channel Marketing Like cual distribution, multi-channel marketing involves the use of two or more market ing channels that may or may not compete for similar buyers. Mult-channel marketing involves the blending of an electronic marketing channel (electronic storefront or Web site) and a traditional channel in ways that are mutually reinforcing in attracting, retain- ing, and building relationships with customers. Multi-channel marketing is pursued fora number of reasons." Fits, the addition of an electronic marketing channel can provide incremental revenue. Consider Victoria’s Secret, the wellknown specialty retailer of intimate apparel for women age 18 (0 45. It reports that almost 60 percent of the buyers at its Web site are men, most of whom gen crate new sales for the company. Second an electronic marketing channel can leverage the presence of a traditional channel. Ethan Allen, the furniture manufacturer, markets its products through [Link] and also through some 300 retail stores in the United States. Customers can browse and buy at its electronic storefront or in its retail furniture store, Ethan Allen’s Web site prominently lists retail store locations, and cus- tomers who buy online can have their furniture shipped from a nearby store, reducing livery charges. Finally, multi-channel marketing can satisfy buyer requirements, The Clinique Division of Estée Lauder Companies, which markets cosmetics through depart: ‘ment stores and through [Link], provides information about its products, skin care, and cosmetic applications through its Web site. Clinique reports that 80 percent of current customers who visit its Web site later purchase a Clinique product ata depart _ment store; 37 percent of browsers make a Clinique purchase after visiting the com pany’s Web site “The viability of multichannel marketing depends on a variety of considerations." ‘major consideration is the extent to which an electronic marketing channel generates incremental revenue or simply cannibalizes sales from traditional channel intermediaries. In general, incremental revenue is more likely i (1) an electronic channel reaches a dif ferent segment of customers than the traditional channel or (2) traditional and electronic channels are mutually reinforcing in atracting, retaining, and building customer relation- ships. Relatedly, companies are increasingly focused on the incremental cost to launch and sustain an electronic storefront relative to forecasted incremental. revenues. Although estimates vary, the up-front cost to build a Web site with static content, simple search tools, and merchandising that is not personalized is about $350,000 with ongoing annual costs of $140,000. The up front cost to builel a Web site with interactive content,SATISFYING INTERMEDIARY REQUIREMENTS AND TRADE RELATIONS 361 sophisticated scarch tools, and highly personalized merchandising can run as high as 4 million with an ongoing cost of $2 million. Not surprisingly, highmargin and high: Volume products are best suited for electronic marketing channels. Relationships between a manuftcturer or service provider snd :klional channel intermediaries also must be considered. Intermediaries, and pasticuladly retailers, are concerned With disintermediation—the practice whereby 4 taditional intermediary member is dropped from a marketing channel ancl replaced by an electronic storefront, Disinterme- ition is considered more serious than cannibslization by intermediaries, Whereas can nibalism affects only a portion of an intermediary's sles, dsintermediation affects theit survival, Companies have avoided multichannel marketing because of complaints by intermediaries andl threats to discontinue carrying their products and delivering their services. For example, Levi Strauss and Norwegian Cruise Line discontinued their elec- tronic storelronts for jeans and online booking reservations, respectively, followis retailer and wavel agent complaint, @_ SATISFYING INTERMEDIARY REQUIREMENTS AND TRADE RELATIONS ‘The role of intermediaries in channel selection has been cited several times;however, a number of specific points require elaboration. The impression given so far may be that intermediaries are relatively docile clements in a marketing channel. Nothing could be further from the truth! Even though reference has been made to “selecting” intermediaries, selection in ‘actual practice is a two-way strect. Intermediaries often choose those suppliers with whom they wish to deal. The previously described decisions by Radio Shack to sell only RCA audio and video products and Home Depot to replace carpeting from Shaw Industries with Mohawk Industries’ products vividly illustrate this point. Intermediary Requirements Experienced marketing managers know that they must be sensitive to possible requite- ‘ments of intermediaries that must be met in order to establish profitable exchange rela: tionships. Intermediaries are concerned with the adequacy of the manufacturer's offering in improving its product assortment for its own target markets. If the product line or individual offering is inadequate, then the intermediary must look elsewhere. Intermediaries also seek marketing support from manufacturers, For wholesalers, sup- port often involves promotional assistance; for industrial distributors, it includes techni- cal assistance, As noted earlier,intermediaties concerned with competition usually seek a degree of exclusivity in handling the manufacturer's offering, The ability of the inter- ‘mediary to provide adequate market coverage, given an exclusive agreement, will deter- ‘mine whether this interest can be satisfied by the manufacturer, Finally, intermediaties expect a profit margin on sales consistent with the functions they are expected to per. form. In short, trade discounts, fllrate standards (that is, the ability of the manufacturer to supply quantities requested by intermediaries), cooperative advertising and other Promotional support, leacltime requirements (that is, the length of time from order placement to receipt), and productscrvice exclusivity agreements each contribute to long-term exchange relationships. A manager who fails to recognize these facts of life ry to satisfy buyer requirements, such as sales con- adlequate inventory, service, and delivery, are not being performed, ‘Trade Relations ‘Trade relations also are an important consideration in marketing channel management and strategy. Marketing managers recognize that conflicts often arise in trade relations.362 @_CHANNEL-MODIFICATION DECISIONS ANNEL STRATEGY AND MANA ‘CHAPTER 7 MARKENNG € MENT Channel Conflict Channel eonjtiet arises when one channel member (such as a manufacturer or an intermediary) believes another channel member is engaged i behavior that is preventing it from achieving its goals, Four sources of conflict are common." First, conflict arises when a channel member bypa and sells or buys direct. When Wal-Mart elected to purchase products directly from, manufacturers rather than through manufacturers’ agents, these agents picketed Wal- Mart stores and placed ads in the Wil Street journal critical of the company. Second, there can be conflict over how profit margins are distributed among channel members. For example, when General Motors and Fiat demanded lower prices for original equipment tires supplied by Michelin, the tire maker refused and canceled the supply contract when its term endled. The lower prices prohibited Michelin from ng its targeted profit margin goals, A third source of conflict arises when ¢ wholesalers or retailers are not giving their products adequate «eation, For example, Nike stopped shippi to Foot Locker in retaliation for the retailer's decision to give more shelf space to shoes costing under $120, The fourth source of conflict occurs when a manuficturer engages in dual distribution and particularly when different retailers or dealers carry 13s, For example, Tupperware's decision to sell its merchandise in Target stores alienated many independent dealers who built their businesses hosting ‘Tupperware parties in homes. Tupperware’s U.S. sales plummeted and the company pulled its merchandise from Target. Channel Power Conflict can have destructive effects on the workings of a marketing, ‘channel, To reduce the likelihood of conflict, one member of the channel sometimes seeks to coordinate, direct, and support other channel members, This channel member assumes the role of a channel captain because of its power to influence the behavior of ‘other channel members, Channel power can take four forms. First, economic power arises from the ability ‘ofa firm to reward of coesce other members, given its strong financial position oF con: sumer franchise, Microsoft Corporation and WalMart have economic power. Expert: ness is a second source of power. For example, American Hospital Supply helps its ‘customers—hospitals—manage order processing for hundreds of medical supplies Identification with a particular channel member may also bestow power on a firm, For instance retailers may compete to carry Ralph Lausen, or clothing manufacturers may compete to be displayed by Neiman-Marcus or Nordstrom. Finally, power can arise from the legitimate right of one channel member to dictate the behavior of other mem: bers. This would occur under contractual arrangements (Such as franchising) that allow one channel member to legally direct how another behaves. ‘An organization's marketing channels are subject (o modification but less so than product, price, and promotion. Shifts in the geographical concentration of buyers, the inability of existing intermediaries to meet the needs of buyers, and the costs of distri: bution represent common reasons for modifying existing marketing channels. An organization might initiate a channel-modification program as part of a change in m keting strategy. Nike, for example, stopped supplying Sears with its flagship Nik hhrand as part of an effort to segmeat the shoe and appare! markets with different brands it controls, including Starter, Cole Haan, and Converse, Nike di not want its Nike brand sold in discount stores." Whatever the eason for modifying an orga tion's marketing channels, at the base of the channel-moliication decision shoukd lie the marketing manager's intent to (1) provide the best coverage of the target market{NEL-MODIFICNTION DECISIONS 363 sought, (2) satisfy the buy revenue and minimize cost. Channel-modifi both the benerits and costs of making a change. 14 requirements of the target marker, and (3) maximize jon decisions involve an assessment of Qualitative Factors in Modification Decisions ‘The qualitative assessment of a modification decision rests on a series of questions, ‘These questions imply that the modification decision involves a comparative analysis, of the existing and new channels, 1, Will the change improve the effective coverage of the target markets sought? 2, Will the change improve the satisfaction of buyer needs? How? 3. Which marketing functions must he absorbed in order to n 4. Does the organization hi ve the resources to perform the new functions? 5. What effect will the change have on other channel partic 6. What will be the effect of the change on the achievement of long-range orga zational objectives? Quantitative Assessment of Modification Decisions A quantiativ of the chang assessment of the modification decision considers the financial impact in terms of revenues and expenses, Suppose an organization is consid! ering replacing its wholesalers with its own distribution centers. Wholesalers receive {$5 million annwally from the margin on sales of the organization's offering. The orga nizations cost of servicing the wholesalers is $500,000 annually, Therefore, the cost Of using wholesalers in this instance is the margin received by wholesalers plus the $500,000 devoted to servicing them, for a total oF $5.5 million. Stated differently, the organization would save this amount if the wholesalers were eliminated. ed the wholesalers, however, the organization would have to assume their functions, including the costs of sales to retail accounts formerly assumed by the Wholesalers. Sales administration costs would be incurred also. In addition, since the inventories to service retail accounts, the cost of carrying the ory would have to be assumed, as well as the expenses of delivery and storage. F since wholesalers extend credit to retailers, the cost of carrying the accounts receiy- able must be included, Once the costs incurred by climinating the wholesaler have been estimated, an evaluation of the modification decision from a financial perspective is possible, Such an ‘evaluation follows with illustrative dollar valu Cost of Wholesalers Cost of Distribution Centers Margin to wholesalers $5,000,000 Sales o retailers $1,500,000 Service expense 500,000 Sales administration 250,000 Total cost $5,500,000 Inventory cost 935,000 Delivery and st 1,877,000 Accounts receivable 438,000 Total cost $5,000,000 Since using wholesalers costs $5.5 million and the cost of distribution centers would be $5 million, cost perspective suggests selection of the ltter option. However, the effect on revenues must be considered. This effect can be determined by’ first addressing the questions noted earlier and then translating market coverage, the satis faction of buyer needs, and channel participant response into dollar values.364 (CHAPTER 7 MARKETING CHANN! IRATHGY AND MANAGEMENT NOTES mse NE EDN aE SNS NN 1, Anne Couglan, Erin Anderson, Louis W. Stern, and Adel I. EtAnsary, Marketing Channels, 6th ed, (Opper Saddle River, NI:-Premtice all, 2001): Chapter 2 2. [Link], downloaded June 15, 2005, “Calling Avon's Lady Newstovele (December 2004):28-30. 3. Portions ofthis discussion are based on Bert Rosenbloom, Marketing Channels, 7th ed (Cincinnati, OH:Southwesteen Publishing, 2004):Chapter 15. 4, ~Raalio Shack Campaign Touts lis RCA Alliance, Advertising Age une 5, 2000):61 5. lnteenational Franchise Assockation, January 4, 2006. 6. Joshua Levine ancl Matthew Swibel, “De. No,’ Forbes (May 28, 2001): 72-76;*Retailers ‘Won't Shire Their Toys; Wall Siret Journal (December §, 2001): 1, Bs 7. NicWingleld,"How Apple's Store Strategy’ Beat the Odds? Wall Street Journal (May 17, 2006): B1, BLO, "Boutiques for Flogging the Brand" Business Week (May 24,2004): 48, 8, Jonathan Mandell, "Speed It Up Webmaster, We're Losing Billions Every Second New York Times (eptember 22, 1999): 58D. 9. “Gillete Tries to Nick Schick in Japan 10. “Barnes & Noble Likely to Build Centers for Distribution If Ing Street journal June 2, 1999):BB. LL. “Cagpet Fiem’s Dynamic Chiet Must Weave Succession” WallStreet Journal (August 19, 1998). 12, This discussion is based on Mult Channel Integration: The New Retail Battleground (Columbus, OH: PricewaterhouseCoopers, March 2001); and ‘Online Stores Try New Pitch Fetch It Yourself” Wall Street fournat (November 19,2003)-D1, D4. 113, This discussion is based on"Multichannel Marketing: Channiaism?*[Link], down londed August 25, 2005; and Jeffrey F Rayport and Bernard J. Jaworski, eConnmerce, 2nd ed, (ute Ridge, Il: McGraw HillArwin 2008), 14, “Feud with Seller Hurts Nike Sales, Shares, Dallas Morning News June 28, 2003):30; Rick Brooks, “A Deal with Target Put Lid on Revival at Tupperware,” Wall Street Journal February 18, 2004): Al, A9;*Michelin Cancels Supply Contract with GM Europe” Wall Street _Jovarnat (My 30, 2002): D6;and Christine B, Bueklin etal, “Channel Conflict-When Is It Dan- ‘gerous?” The McKinsey Quuarterty (Number 3, 1997): 36-43, 15, Stephanie Kang, Nike to Stop Selling Brand at Searsy Wall Street Journal (May 5, 2005):88. Wall Servet Journal (February 4, 1991: B3, BA Deal Pails? Wei!