Channel Management Decisions

CHANNEL MANAGEMENT DECISIONS AND CHANNEL INTEGRATION 1. INTRODUCTION A marketing channel is ‘an organized network of agencies and institutions which, in combination, perform all the activities required to link producers with users to accomplish the marketing task. This channel must be designed such that it delivers a level of value to the customer that creates a sustainable competitive advantage for the supply chain. This ‘value’ can take many forms depending upon the requirements of the customer. The relationship between the value of the product and the shopping experience is particularly important and the skill of the value chain is in the positioning of the total offer in a profitable way. Sales managers play integral, multifarious roles in organizations. They are trainers, motivators, coaches, evaluators, and counselors for their salespeople. They provide strategic and tactical input on sales- and marketing- related issues and often have customer account responsibilities. For most manufacturers, success or failure is determined by how effectively and efÏciently their products are sold through their marketing channel members (e.g., agents, wholesalers, distributors, and retailers). Given this situation, considerable marketing channel research has focused on how interrelationships among a firm and its channel members can be managed better. The combination of supervisory, managerial, administrative, and leadership skills required for superior performance at lower sales management levels seemingly is not consonant with that needed at higher levels. Exploring the influence of sales management hierarchical level on channel management activities is important for several reasons. First, conventional wisdom and sales management and marketing textbooks suggest that sales managers play a critical role in planning, organizing, managing, directing, and controlling the sales department. If their efforts, however, also focus on channel management, then expansion and revision of the traditional role of sales managers will be necessary. Second, if channel management activities performed by sales managers vary by managerial level, then companies need to redesign their development and training programs to adjust to the unique requirements of each sales management level. An important objective of the present research is to obtain useful information that organizations can utilize to provide appropriate channel management training to sales managers at different hierarchical levels congruent with the nature of the tasks performed. Otherwise, companies may waste large amounts of time, money, and resources in providing inappropriate training to their sales managers. 2. MARKETING CHANNEL MANAGEMENT Marketing channels are sets of interdependent organizations involved in the process of making a product or service available for use or consumption. A marketing channel performs the work of moving goods from producers to consumers, overcoming the time, place, and possession gaps that separate goods and services from those who need or want them. Members of the marketing channel perform a number of key functions:  They gather information about potential and current customers, competitors, and other factors and forces in the marketing environment.  They develop and disseminate persuasive communications to stimulate purchasing.  They reach agreement on price and other terms so that transfer of ownership or possession can be affected.  They place orders with manufacturers.  They acquire the funds to finance inventories at different levels in the marketing channel.  They assume risks connected with carrying out channel work.  They provide for the successive storage and movement of physical products.  They provide for buyers’ payment of their bills through banks and other financial institutions.  They oversee actual transfer of ownership from one organization or person to another. Five flows are illustrated in Figure 1-1 for the marketing of forklift trucks. Figure 1-1 Five Marketing Flows in the Marketing Channel for Forklift Trucks 3. CHANNEL MANAGEMENT DECISIONS 3.1 Selecting Channel Members During the selection process, producers should determine what characteristics distinguish the better intermediaries. They will want to evaluate no. of years in business, other lines carried, growth and profit record, solvency, cooperativeness, and reputation. If the intermediaries are sales agents, producers will want to evaluate the number and character of other lines carried and the size and quality of the sales force. If the intermediaries are store or Internet retailers that want exclusive distribution, the producer will want to evaluate locations, brand strength, and future growth potential. 3.2 Training Channel Members Companies need to plan and implement careful training programs for their distributors and dealers because the intermediaries will be viewed as the company by end users. Microsoft, for example, requires third-party service engineers who work with its software applications to complete a number of courses and take certification exams. Those who pass are formally recognized as Microsoft Certified Professionals, and they can use this designation to promote business. 3.3 Motivating Channel Members More sophisticated companies go beyond merely gaining intermediaries’ cooperation and instead try to forge a long-term partnership with distributors. The manufacturer communicates clearly what it wants from its distributors in the way of market coverage, inventory levels, marketing development, account solicitation, technical advice and services, and marketing information. The manufacturer then seeks distributor agreement with these policies and may introduce a compensation plan or other rewards for adhering to the policies. For example, Day co Corporation, a maker of engineered plastics and rubber products, strengthens channel partnerships by running an annual week-long retreat with 20 distributors’ executives and 20 Day co executives. 3.4 Evaluating Channel Members Pro ducers must periodically evaluate intermediaries’ performance against such standards as sales-quota attainment, average inventory levels, customer delivery time, treatment of damaged and lost goods, and cooperation in promotional and training programs. As one example, a manufacturer that was compensating a distributor for holding inventories found that the inventories were actually held in a public warehouse at the manufacturer’s expense. Producers should therefore set up functional discounts in which they pay specified amounts for the trade channel’s performance of each agreed-upon service. 3.5 Modifying channel design and arrangements Not working as planned. Consumer buying patterns change, the market expands, new competition arises, innovation distribution channel emerge. No Marketing Channel remain effective over the whole product life cycle. 4. CHANNEL INTEGRATION AND SYSTEMS 4.1 Vertical Marketing Systems A vertical marketing system (VMS), comprises the producer, wholesalers, and retailers acting as a unified system. One channel member, the channel Captain, owns the others or franchises them or has so much power that they all cooperate. The channel captain can be the producer, the wholesaler, or the retailer. There are three types of VMS: corporate, administered, and contractual.  A corporate VMS combines successive stages of production and distribution under single ownership. Vertical integration is favored by companies that desire a high level of control over their channels. For example, Sears obtains over 50 percent of the goods it sells from companies that it partly or wholly owns; Sherwin-Williams makes paint but also owns and operates 3,000 retail outlets.  An administered VMS coordinates successive stages of production and distribution through the size and power of one of the members. Manufacturers of a dominant brand are able to secure strong trade cooperation and support from resellers. Thus Kodak, Gillette, Procter & Gamble, and Campbell Soup are able to command high levels of cooperation from their resellers in connection with displays, shelf space, promotions, and price policies.  A contractual VMS consists of independent firms at different levels of production and distribution integrating their programs on a contractual basis to obtain more economies or sales impact than they could achieve alone. Johnston and Lawrence call them “valueadding partnerships” (VAPs). 4.2 Horizontal Marketing Systems Another channel development is the horizontal marketing system, in which two or more unrelated companies put together resources or programs to exploit an emerging marketing opportunity. Each company lacks the capital, know-how, production, or marketing resources to venture alone, or it is afraid of the risk. The companies might work with each other on a temporary or permanent basis or create a joint venture company. E.g., we have Post OfÏces selling insurance and mutual funds. 4.3 Multichannel Marketing Systems Multichannel marketing occurs when a single firm uses two or more marketing channels to reach one or more customer segments. As one example, the Parker-Hannifin Corporation (PHC) sells pneumatic drills to the lumber, fishing, and aircraft industries. Instead of selling through one industrial distributor, PHC has established three separate channels—forestry equipment distributors, marine distributors, and industrial distributors. There appears to be little conflict because each type of distributor sells to a separate target segment. 5. CHANNEL CONFLICT Channel conflict occurs when one member’s actions prevent another channel from achieving its goal. 5.1 Types of Conflict (a)Vertical channel conflict means conflict between different levels within the same channel. E.g., General Motors has come into conflict with its dealers in trying to enforce policies on service, pricing, and advertising. (b)Horizontal channel conflict involves conflict between members at the same level within the channel. Horizontal channel conflict erupted, for instance, when some Pizza Inn franchisees complained about other Pizza Inn franchisees cheating on ingredients, maintaining poor service, and hurting the overall Pizza Inn image. (c)Multichannel conflict exists when the manufacturer has established two or more channels that sell to the same market. For instance, when Goodyear began selling its tires through Sears, Wal-Mart, and Discount Tire, the move angered its independent dealers. Goodyear eventually placated them by offering exclusive tire models that would not be sold in other retail outlets. 5.2 Causes of Channel Conflict Some causes of channel conflict are easy to resolve, others are not. Conflict may arise from:  Goal incompatibility. E.g., the manufacturer may want to achieve rapid market penetration through a low-price policy. Dealers, in contrast, may prefer to work with high margins and pursue short-run profitability.  Unclear roles and rights. HP may sell personal computers to large accounts through its own sales force, but its licensed dealers may also be trying to sell to large accounts. Territory boundaries and credit for sales often produce conflict.  Difference in perception. The manufacturer may be optimistic about the short-term economic outlook and want dealers to carry higher inventory. Dealers may be pessimistic. In the beverage category, it is not uncommon for disputes to arise between manufacturers and distributors about the optimal advertising strategy.  Intermediaries’ dependence on the manufacturer. The fortunes of exclusive dealers, such as auto dealers, are profoundly affected by the manufacturer’s product and pricing decisions. This situation creates a high potential for conflict. 5.3 Managing Channel Conflict There are several mechanisms for effective conflict management:  Adoption of super ordinate goals. Channel members come to an agreement on the fundamental goal they are jointly seeking, whether it is survival, market share, high quality, or customer satisfaction. They usually do this when the channel faces an outside threat, such as a more efÏcient competing channel, an adverse piece of legislation, or a shift in consumer desires.  Exchange persons between channel levels. General Motors executives might work for a short time in some dealerships, and some dealers might work in GM’s dealer policy department, as a way of helping participants appreciate each other’s viewpoint.  Cooptation. Cooptation is an effort by one organization to win the support of the leaders of another organization by including them in advisory councils, boards of directors, trade associations, and the like. As long as the initiating organization treats the leaders seriously and listens to their opinions, cooptation can reduce conflict.  Diplomacy, mediation, arbitration for chronic or acute conflict. Diplomacy takes place when each side sends a person or group to meet with its counterpart to resolve the conflict. Mediation means having a skilled, neutral third party reconcile the two parties’ interests. Arbitration occurs when the two parties agree to present their arguments to an arbitrator and accept the arbitration decision. 6. CONCLUSION The management of marketing channels plays an important role for the success of most manufactures. Most producers do not sell their goods directly to final users. Between producers and final users stands one or more marketing channels, a set of marketing intermediaries performing a variety of functions. Companies use intermediaries when they lack the financial resources to carry out direct marketing, when direct marketing is not feasible, and when they can earn more by going through intermediaries. Manufacturers have many alternatives for reaching a market. They can sell direct through a zero-level channel or use one-, two-, or three-level channels. Deciding which type of channel to use calls for analyzing customer needs, establishing channel objectives, and identifying and evaluating the major alternatives. Effective channel management calls for selecting intermediaries, then training and motivating them. The goal is to build a long-term partnership that will be profitable for all channel members. Individual members must be evaluated periodically against pre established standards, and overall channel arrangements may need to be modified over time. All marketing channels have the potential for conflict and competition resulting from such sources as goal incompatibility, poorly defined roles and rights, perceptual differences, and interdependent relationships. Companies can manage conflict by striving for super ordinate goals, exchanging people among two or more channel levels, co-opting the support of leaders in different parts of the channel, and through diplomacy, mediation, or arbitration to resolve chronic or acute conflict. Channel arrangements are up to the company, but there are certain legal and ethical issues to be considered with regard to practices such as exclusive dealing or territories, tying agreements, and dealers’ rights.