Part 2: Developing the Marketing Channel

6
CHAPTER

Designing
Marketing
Channels

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 ① Channel Design
② Who engages in channel design
Learning Objectives

③ Channel design paradigm

④ When to make a channel design
⑤ Distribution objectives
⑥ Distribution tasks
⑦ Channel structure decisions
⑧ Variables affecting channel structure
⑨ Heuristics in channel design
⑩ Choosing an optimal channel structure 2

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Objective
Channel Design
1

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

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Objective
Who Engages in Channel Design?
2

Wholesalers Retailers
Firms

• Producers,
manufacturers, service
• Look both up • Look up the
providers, franchisors
and channel
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
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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

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 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

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Objective
Distribution Objectives
5

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
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Objective
Distribution Tasks
6
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
7

1. Number of levels in 2. Intensity at the

the channel 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

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 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
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 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])

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Objective
Variables Affecting Channel Structure
8
Categories of Variables

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

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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

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 Product Variables

Bulk & Weight

Perishability
Unit Value
Degree of Standardization
Technical versus Nontechnical
Newness

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 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

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 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.

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 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
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 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.

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Objective
Heuristics in Channel Design
9

Benefit Limitation

Fairly simple Mostly useful as

prescriptions for rough guide to
channel structure decision making

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Objective
Choosing an Optimal
10 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

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 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

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 Discussion Question #1
Best Buy Co., the largest consumer electronics retailer in the
world, is famous for its giant 40,000 square-foot “big-box” stores.
This channel has served Best Buy well over the years as consumers
wandered through the giant product displays in the cavernous stores,
and competitors such as Circuit City were literally driven out of
business by Best Buy’s dominant stores. But by the end of the first
decade of the Twenty-first century, Best Buy made a channel design
decision that focused on adding a retail channel consisting of much
smaller 3,000 square-foot stores to its large-store channel. The new
smaller stores will be located in shopping malls as well as in urban
downtown venues. Best Buy designed this new small-store channel
structure mainly to do a better job of reaching the still-growing
market for mobile phones, especially smartphones. These smaller
stores will sell almost one hundred different phones as well as the
services of nine carriers.

Do you think Best Buy’s channel design decision is a good one?

What other channel design options might Best Buy have pursued to
accomplish its distribution objective?
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 Discussion Question #2
Vending machines have existed as a mechanical channel
for distributing a variety of products for many decades.
Traditionally the typical products found in vending machines
were soft drinks, candy, cigarettes, and snack foods. But in
recent years the variety of products sold through vending
machine channels has broadened dramatically. Consumers
can now buy digital cameras, DVDs, iPods, baby diapers, and
in Germany, even solid gold bars for which the price charged
changes every two minutes with the ups and downs of the
price of gold.

From a channel design standpoint, what do you see as

the key variables to consider in determining whether
vending machines could be a feasible channel choice for any
given product of your choice?
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 Discussion Question #4
Marketing channels should be designed to make products
and services conveniently available to customers, how, when,
and where they want them. This is exactly what several
franchises such as Cousins Submarines Inc., Tasti D-Lite LLC
frozen yogurt, and Toppers Pizza Inc. intend to do by changing
their channel structures to include mobile channels consisting of
fully equipped trucks and vans that can bring many of the
products sold in their bricks and mortar stores right to customers
where they work and play. How will potential customers know
when and where these truck and van mini-restaurants will
appear? Simple customers can track the whereabouts of the
vendors by going to Facebook, Twitter, and FourSquare.

Do you think this type of mobile channel is just a novelty in

fast-food channels or does it have the potential to be a major
force for change in the channel structure of fast-food and other
product and service distribution channels?
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