Chapter 9

Channel design and selection

Prepared by:
Noraishah Binti Kamarolzaman

Channel Management 1
 Learning Outcome
• To determine when the design of a channel should
be undertaken.
• To clarify the phases involved in channel design.
• To develop channel objectives.
• To evaluate channel length, width and types of
intermediary requirements.
• To assess relevant factors that affect channel
length.
• To address issues relating to channel member
selection.

Channel Management 2
Objective
Channel Design

Channel Design: Decisions

involving the development of new
marketing channels either where
none had previously existed or to
the modification of
existing channels

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 Channel Design
Distinguishing points of the definition include:

1. A decision made by the marketer

2. The creation or modification of channels
3. The active allocation of distribution tasks in an
attempt to develop an efficient structure
4. The selection of channel members
5. A strategic tool for gaining a differential
advantage
Objective
Who Engages in Channel Design?

Wholesalers Retailers
Firms

• Producers,
manufacturers, service • Look both up • Look up the

channel
providers, franchisors and

down to secure
• Look down the the channel suppliers

channel
toward the market
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Objective
Channel Design Paradigm
3
1. Recognize the need for
channel design decision

7. Select 2. Set & coordinate

channel members distribution objectives

6. Choose the “best” 3. Specify

channel structure distribution tasks

5. Evaluate 4. Develop alternative

relevant variables channel structures

©2013Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Objective
When to Make a Channel
4 Design Decision
• Developing a new product or product line
• Aiming an existing product at a new market
• Making a major change in some other component of
the marketing mix
• Establishing a new firm
• Adapting to changing intermediary policies that may
inhibit attainment of distribution objectives

©2013Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 When to Make a Channel
Design Decision

• Dealing with changes in availability of particular kinds

of intermediaries
• Opening up new geographic marketing areas
• Facing the occurrence of major environmental
changes
• Meeting the challenge of conflict or other behavioral
problems
• Reviewing and evaluating
Objective
Distribution Objectives

Setting distribution objectives

requires knowledge of which,
if any, existing objectives
& strategies may impinge
on these distribution objectives.

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 The Need for Congruency

Firm’s
overall
objectives
&
strategies

General
marketing
objectives &
strategies

Product Pricing Promotion Distribution

marketing marketing marketing marketing
objectives & objectives & objectives & objectives &
strategies strategies strategies strategies
Objective
Distribution Tasks
Outlining distribution tasks is specific
and situationally dependent on the firm.

For example: Distribution tasks for a

manufacturer of consumer products
differs from those for products sold
in industrial markets.
=
Distribution tasks are a function of the distribution
objectives and the types of firms involved.
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Objective
Channel Structure Dimensions

1. Number of levels in the channel 2. Intensity at the various levels

Allocation Alternatives

3. Types of intermediaries at each level

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Number of Levels

• Range from two to five or more

• Number of alternatives is limited to two or
three choices
• Limitations result from the following
factors:
✓ Particular industry practices
✓ Nature & size of the market
✓ Availability of intermediaries
 Intensity at the Various Levels

Relationship between the intensity of

distribution dimension & number of retail
intermediaries used in a given market area.

Intensity Dimension

Intensive Selective Exclusive

Numbers of Intermediaries (retail level)

Many Few One

 Types of Intermediaries

• Numerous types
• Manager’s emphasis on types of distribution
tasks performed by these intermediaries
• Watch emerging types
• Electronic online auction firms (eBay)
• Industrial products sold in B2B markets
(Chemdex, [Link])
Objective
Variables Affecting Channel Structure

Categories of Variables

1. Market Variables
2. Product Variables
3. Company Variables
4. Intermediary Variables
5. Environmental Variables
6. Behavioral Variables

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 Market Variables

Market Geography Location, geographical size,

& distance from producer

Market Size Number of customers in a

market

Market Density Number of buying units

(consumers or industrial
firms) per unit of land area

Market Behavior Who buys, & how, when, and

where customers buy
 Product Variables

Bulk & Weight

Perishability
Unit Value
Degree of Standardization
Technical versus Nontechnical
Newness
 Company Variables

Size The range of options is relative to a firm’s size

Financial The greater the capital, the capacity lower the

dependence on intermediaries

Managerial Intermediaries are necessary expertise when

managerial experience is lacking

Objectives Marketing & objectives may & strategies limit

use of intermediaries
 Intermediary Variables

Availability Availability of intermediaries influences channel structure.

Cost Cost is always a consideration in channel

structure.

Services Services that intermediaries offer are closely

related to the selection of channel members.
 Environmental Variables
The impact of environmental forces is
a common reason for making
channel design decisions.
Economic Forces

Competitive Forces

Legal Forces

Technological Forces

Sociocultural Forces
Behavioral Variables

Develop congruent roles for channel members.

Be aware of available power bases

Attend to the influence of behavioral problems

that can distort communications.
Objective
Heuristics in Channel Design

Benefit Limitation

Fairly simple Mostly useful as

prescriptions for rough guide to
channel structure decision making

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Objective
Choosing an Optimal
Channel Structure
Why is choosing an optimal channel structure
not possible?

1. Management is incapable of knowing all

possible alternatives.

2. Precise methods for calculating the exact payoffs

associated with each alternative structures do not exist.

BUT
Techniques exist for developing
more exact methods.
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 Approaches for Choosing
Channel Structure

• “Characteristics of Goods & Parallel Systems” Approach

• Financial Approach

• Transaction Cost Analysis Approach

• Management Science Approaches

• Judgmental-Heuristic Approach
 Approaches for Choosing
Channel Structure
• Transaction Cost Analysis Approach
offers manufacturer the option of performing the distribution tasks
through vertical integration or using independent intermediaries.
• Institutional and Functional Approach
institutional focuses on the activities of typical channel participants
(recognize the contribution of channel members).
functional more to specific functions performed by channel
members that affect the length of channel structure.
• Behavioural Approach.
relates to relational exchange among channel members.

Channel Management 26
Judgmental-Heuristic Approaches

IF Management’s ability to make sharp judgments is high

+ Good empirical data on costs

and revenues is available

It’s possible to make highly satisfactory channel-choice decisions using

judgmental-heuristic approaches
 Channel Member Selection

The last phase of channel design

Selection may or may not be the result of channel design.

Firm may need additional
outlets to allow for growth

To replace channel
members that have left

Channel Management 28
The Selection Process

2. Applying
3. Securing the
1. Finding prospective selection criteria
prospective
channel members to determine the
channel members
suitability of
as actual
prospective
channel members
channel members

Channel Management 29
Finding Members

1. Field sales
organization

7. Other sources 2. Trade sources

6. Trade shows 3. Reseller inquiries

5. Advertising 4. Customers
Channel Management 30
 Field Sales Organization
Salespeople are the
best positioned to
know about potential BUT:
intermediaries

• They are often able to • The manufacturer must

pick up information adequately reward
about likely salespeople for their time
intermediaries. & effort establishing
• They may have lined up connections.
prospective
intermediaries.
Channel Management 31
 Trade Sources

For Example:
• Industrial Distribution
• Trade associations magazine
• Trade publications • The Verified Directory of
• Directories Manufacturers’
Representatives
• Trade shows
• The National Association of
• Firms selling similar Wholesaler-Distributors
products • The National Retail
• The “grapevine” Federation
• The Encyclopedia of
Associations

Channel Management 32
Reseller Inquiries

Many firms learn about direct

inquiries from intermediaries
interested in handling their product.

This is the main source of

information about potential new channel
members for some manufacturers.

Firms receiving the highest number

of inquiries are the more
prestigious in their industry.

Reseller
Inquiries

Channel Management 33
Customers
Customers are willing to give frank opinions
about the intermediaries who call on them.

Manufacturer conducts formal or informal surveys of

customers’ views of various distributors.

=
Manufacturer obtains information about
potential intermediaries.

Channel Management 34
Advertising

Trade magazine advertising

can generate a large number
of inquiries from prospective
Members.

It therefore can provide a large

pool from which to make selections.

Channel Management 35
Trade Shows

Wholesale and retail trade associations

hold annual conventions.

Attending manufacturers have access to a

wide variety of potential channel members.

** Small manufacturers meet face-to-face with

wholesalers & retailers.

Channel Management 36
Other Sources

1. Chambers of commerce, banks, & local real estate

dealers
2. Classified telephone directories or the yellow pages
3. Direct-mail solicitations
4. Contacts from previous applications
5. Independent consultations
6. List brokers that sell lists of names of businesses
7. Business databases
8. The Internet

Channel Management 37
Selection Criteria

• Credit & Financial • Sales Performance

Condition • Management Succession
• Sales Strength • Management Ability
• Product Lines • Attitude
• Reputation • Size
• Market Coverage

Channel Management 38
Adapting Selection Criteria

Because no list of criteria is adequate

for a firm under all conditions,

the channel manager should be flexible when

using selection criteria.

Channel Management 39
Who Selects?

Who does the selecting?

Producers & Manufacturers

Wholesale Intermediaries

Retail Intermediaries

Channel Management 40
Selecting channel members that meet the needs of
the distribution channel

Good, profitable product line

Advertising & promotional support

Management assistance

Fair dealing policies &

Friendly relationships

Channel Management 41
Product Line

Product line inducements:

1. Manufacturer offers good product line with

strong sales & profit potential

2. Stress value of good product line from

channel members’ perspective

Channel Management 42
Advertising & Promotion

Advertising & promotion inducements

Consumer Market:
Gain immediate credibility by using a strong program
of national advertising.

Industrial Market:
Gain recognition by using a strong program of
trade paper advertising.

Channel Management 43
Management Assistance

Management assistance inducements:

Prospective members want to know whether the

Manufacturer will help with the following:

• training programs
• financial analysis & planning
• market analysis
• inventory control procedures
• promotional methods

Channel Management 44
Fair Dealing &
Friendly Relationship

Manufacturer’s Responsibility:

To convey to prospective channel members that

he or she is genuinely interested in
establishing a good relationship based on trust
and concern for their welfare as both business
Entities and as people

Channel Management 45
 Past Semester Question
• Elaborate with example any two (2) possible criteria
for a company to consider in selecting channel
members (10 marks, JUNE 2018)
• Channel structure is a group of channel members
that perform a set of distribution tasks to accomplish
the firm’s distribution objectives. Using a diagram
describe the Two-level, Three-level and Four-level
channel structure of consumer goods (15 marks,
JULY 2017)
• The number of intermediaries that are needed at
each level in the channel structure is reflected in the
channel intensity. With examples, name and briefly
explain the three (3) common types of distribution in
channel structure (9 marks, JUNE 2016)
Channel Management 46
 Continue
• The first step in channel design is the recognition of
channel design needs. With examples, elaborate
four (4) situations that may push the channel
manager to initiate the first step in the channel
design (16 marks, JUNE 2016)
• Having laid out alternative channel structures, the
channel manager should then evaluate a number of
variables to determine how they are likely to
influence various channel structures. Explain five (5)
major categories of variables that should be
considered when evaluating alternative channel
structures (25 marks, JUNE 2015)

Channel Management 47
 Continue
• Every distribution channel firm should follow
certain steps in designing their distribution channel
structure. With the aid of a flowchart, briefly
describe each and every step involved (15 marks,
JUNE 2015)
• The first step in channel design is the recognition of
channel design needs. With examples, elaborate
four (4) situations that may push the channel
manager to initiate the first step in the channel
design (16 marks, DEC 2014)

Channel Management 48
THANK YOU

Channel Management 49