Principles of Marketing, Arab World Edition Philip Kotler, Gary Armstrong, Anwar Habib, Ahmed Tolba Presentation prepared by Annelie Moukaddem Baalbaki CHAPTER FOURTEEN Managing Marketing Channels Chapter Learning Outcomes Topic Outline 12.1 Supply Chains and the Value Delivery Network 12.2 The Nature and Importance of Marketing Channels 12.3 12.4 Channel Design Decisions 12.5 Channel Decisions 12.6 Marketing Logistics and Supply Chain Lecturer: Prof. Eli Nohra Ch 14-0 Ch 14-1 Chapter Learning Outcomes Topic Outline Supply Chains and the Value Delivery Network Supply Chain Partners 12.7 Retailing 12.8 Retailer Marketing Decisions 12.9 Wholesaling 12.10 Agents and Distributors Upstream partners include raw material suppliers, components, parts, information, finances, and expertise to create a product or service. Downstream partners include the marketing channels or distribution channels that look toward the customer. E.g. wholesalers and retailers. Ch 14-2 Ch 14-3 1
Supply Chains and the Value Delivery Network Supply Chain Views Supply chain suggests a make-and-sell view which includes the firm s raw materials, productive inputs, and factory capacity. The term supply chain may be too limited it takes a make-and-sell view of the business. A better term would be demand chain because it suggests a senseand-respond view of the market. Demand chain suggests that planning starts with the needs of the target customer, and the firm responds to these needs by organizing a chain of resources and activities with the goal of creating customer value. Supply Chains and the Value Delivery Network Value Delivery Network Value delivery network is made up of the company, suppliers, distributors, and ultimately customers who partner with each other to improve the performance of the entire system. We will now examine four major questions concerning marketing channels: 1. What is the nature of marketing channels and why are they important? 2. How do channel firms interact and organize to do the work of the channel? 3. What problems do companies face in designing and managing their channels? 4. What role do physical distribution and supply chain management play in attracting and satisfying customers? Ch 14-4 Ch 14-5 The Nature and Importance of Marketing Channels Marketing Channels (aka intermediaries or distribution channels): A set of interdependent organizations that help make a product or service available for use or consumption by the consumer or business user. Through their contacts, experience, specialization, and scale of operations, intermediaries usually offer the firm more than it can achieve on its own. Distribution channel decisions often involve long-term commitments to other firms. Companies cannot readily replace their distribution channels say with company-owned stores or their own websites if conditions change. The Nature and Importance of Marketing Channels How Channel Members Add Value Producers use intermediaries because they create greater efficiency in making goods available to target markets (see next slide) From the economic system s point of view, the role of marketing intermediaries is to: Transform the assortment of products made by producers into assortments wanted by consumers. e.g. Unilever makes millions of bars of Lux hand soap each day, but you want to buy only a few bars at a time. So, Hypermarkets like Carrefour buy Lux by the truckload and stock it on their store s shelves. In turn, you can buy a single bar of Lux soap, along with a shopping cart full of small quantities of toothpaste, shampoo, and other related products as you need them. Play a role in matching supply and demand Add value by bridging the major time, place, and possession gaps that separate goods and services from those who would use them Ch 14-6 Ch 14-7 2
The Nature and Importance of Marketing Channels Figure 14.1 shows how using intermediaries can provide economies. Figure 14.1A shows three manufacturers, each using direct marketing to reach three customers. This system requires nine different contacts. Figure 14.1B shows the three manufacturers working through one distributor, which contacts the three customers. This system requires only six contacts. In this way, intermediaries reduce the amount of work that must be done by both producers and consumers. The Nature and Importance of Marketing Channels How Channel Members Add Value Members of the marketing channel perform many key functions. Some help to complete transactions: [ ] Information Promotion Contact Matching Negotiation Physical distribution Financing Risk taking Ch 14-8 Ch 14-9 The Nature and Importance of Marketing Channels The Nature and Importance of Marketing Channels How Channel Members Add Value Members of the marketing channel perform many key functions: Information: Gathering and distributing marketing research and intelligence information about actors and forces in the marketing environment needed for planning and aiding exchange. Promotion: Developing and spreading persuasive communications about an offer. Contact: Finding and communicating with prospective buyers. Matching: Shaping and fitting the offer to the buyer s needs, including activities such as manufacturing, grading, assembling, and packaging. Negotiation: Reaching an agreement on price and other terms of the offer so that ownership or possession can be transferred. Others help to fulfill the completed transactions: Physical distribution: Transporting and storing goods. Financing: Acquiring and using funds to cover the costs of the channel work. Risk taking: Assuming the risks of carrying out the channel work. Channel 1, called a direct marketing channel, has no intermediary levels; the company sells directly to consumers. In the Arab world, there has been less direct-to-consumer selling than in other global regions, but companies such as VIE in Lebanon and Tianshi in the UAE, Lebanon, and Kuwait are starting to grow. The remaining channels in Figure 14.2A are indirect marketing channels, containing one or more intermediaries. Figure 14.2B shows some common business distribution channels. The business marketer can use its own sales force to sell directly to business customers. Or it can sell to various types of intermediaries, who in turn sell to these customers. Ch 14-10 Ch 14-11 3
The Nature and Importance of Marketing Channels Number of Channel Levels From a producer s point of view, a greater number of levels means less control and greater channel complexity. Moreover, all of the institutions in the channel are connected by several types of flows. These include the: 1. Physical flow of products 2. Flow of ownership 3. Payment flow 4. Information flow 5. Promotion flow These flows can make even channels with only one or a few levels very complex. Channel Behavior Marketing channel consists of firms that have partnered for their common good with each member playing a specialized role. E.g. A Nokia dealer depends on Nokia to design mobile phones that meet customer needs. In turn, Nokia depends on the dealers to attract and persuade customers to buy Nokia mobiles, and to service mobiles after sale. All Nokia dealers also depend d on each other to provide good sales and service that will uphold the brand s reputation. Channel conflict refers to disagreement over goals, roles, and rewards by channel members. 1. Horizontal conflict occurs among firms at the same level of the channel. E.g. Nokia dealers in Riyadh might complain that the other dealers in the city steal sales away from them by pricing too low or by advertising outside their assigned territories. 2. Vertical conflict occurs between different levels of the same channel. E.g. Goodyear created hard feelings and conflict in the US market with its premier independent dealer channel when it began selling through Walmart, Sears & its own Just Tires discount stores. Ch 14-12 Ch 14-13 Conventional Distributions Systems Vertical Marketing Systems A Conventional distribution channel consists of one or more independent producers, wholesalers, and retailers. Each seeks to maximize its own profits, and there is little control over the other members and no formal means for assigning roles and resolving conflict. Historically, such conventional distribution channels have lacked the leadership and the power to assign roles and manage conflicts. The result was damaging g conflict and poor performance. In contrast, Vertical marketing systems (VMSs) do provide channel leadership. They encompass producers, wholesalers, and retailers acting as a unified system. One channel member owns the others, has contracts with them, or wields such power that they must all co-operate. The VMS can be dominated by the producer, wholesaler, or retailer. There are 3 major types of VMSs: [ ] 1. Corporate Marketing Systems 2. Contractual Marketing Systems 3. Administered Marketing Systems Ch 14-14 Ch 14-15 4
Vertical Marketing Systems Vertical Marketing Systems A Corporate Vertical Marketing System integrates successive stages of production and distribution under single ownership. Coordination and conflict management are attained through regular organizational channels. e.g. Abu Dhabi National Oil Company (ADNOC) is a major UAE group owning a diverse range of energy and petrochemical companies and producing over 2.7 million barrels of oil a day. ADNOC integrates a range of upstream and downstream activities, each carried out by one of the group s 14 specialist subsidiary and joint venture companies. ADNOC s upstream operation includes exploration, development, and production of the oil and gas; its downstream operation includes the distribution, marketing, and shipping of the products. ADNOC Distribution operates a vast network of service stations and convenience stores. Ch 14-16 Ch 14-17 Vertical Marketing Systems A Contractual Vertical Marketing System (VMS) consists of independent firms at different levels of production and distribution who join together through contracts to obtain more economies or sales impact than each could achieve alone. The most common form is the franchise organization, in which a channel member, called a franchisor, links several stages in the production-distribution process. [ ] Vertical Marketing Systems There are 3 types of franchises: 1. Manufacturer-sponsored retailer franchise system. E.g. Toyota and its network of franchised dealers. 2. Manufacturer-sponsored wholesaler franchise system. E.g. Coca-Cola licenses bottlers (wholesalers) such as Dubai Refreshments who buy Coca-Cola syrup concentrate and then bottle and sell the finished product to retailers in local markets. 3. Service firm-sponsored retailer franchise system. E.g. Hertz, Avis, McDonald s, Burger King, Holiday Inn, Ramada Inn. The franchise market in the Arab world is estimated to be worth US$30 billion, with average annual growth of 25 percent. Ch 14-18 Ch 14-19 5
Vertical Marketing Systems Horizontal Marketing System Administered Vertical Marketing System (VMS) has a few dominant channel members without common ownership. Leadership comes from size and power. e.g. Sony, Procter & Gamble, and the food company Kraft can command unusual co-operation from resellers regarding displays, shelf space, promotions, and price policies. Large retailers such as Carrefour, Azizia Panda, and Lulu can exert strong influence on the manufacturers that supply the products they sell. Horizontal Marketing Systems are when two or more companies at one level join together to follow a new marketing opportunity. Companies combine financial, production, or marketing resources to accomplish more than any one company could alone. e.g. McDonald s & Subway operate their restaurants in or alongside petrol stations in Dubai. e.g. Coca-Cola C and Nestlé formed a joint distribution ib ti venture, Beverage Partners Worldwide, to market ready-to-drink coffees, teas, and flavored milks in more than 40 countries worldwide. Ch 14-20 Ch 14-21 Multichannel Distribution Systems Multichannel Distribution System (aka Hybrid Marketing Channel) refers to a single firm that sets up two or more marketing channels to reach one or more customer segments. [ ] e.g. Aftron Electronics, part of Al-Futtaim Group which is based in the UAE, distributes its products through different marketing channels (direct and indirect). These include its own showrooms & large network of retailers such as Géant and EMKE Group Advantages Increased sales and market coverage New opportunities to tailor products and services to specific needs of diverse customer segments Challenges Hard to control Create channel conflict Ch 14-22 Ch 14-23 6
Changing Channel Organization Channel Design Decisions Marketing channel design calls for: Disintermediation occurs when product or service producers cut out intermediaries i and go directly to final buyers, or when radically new types of channel intermediaries displace traditional ones. Analyzing consumer needs Setting channel objectives e.g. Emirates Airlines & Air Arabia now sell directly to final buyers, cutting travel agents from their marketing channels. Identifying major channel alternatives Evaluation Ch 14-24 Ch 14-25 Channel Design Decisions Analyzing Consumer Needs Designing g the marketing channel starts with finding out what target consumers want from the channel: 1. Do consumers want to buy from nearby locations or are they willing to travel to more distant centralized locations? 2. Would they rather buy in person, by phone, or online? 3. Do they value breadth of assortment or do they prefer specialization? 4. Do consumers want many add-on services (delivery, repairs, installation), or will they obtain these elsewhere? Channel Design Decisions Setting Channel Objectives Companies should state their marketing channel objectives in terms of: Targeted levels of customer service; the aim is to minimize the total channel cost of meeting customer service requirements. Objectives are influenced by the nature of the company, marketing intermediaries, competitors, and the environment. E.g. companies selling perishable dairy products may require more direct marketing to avoid delays and too much handling What segments to serve Best channels to use Minimizing the cost of meeting customer service requirements Ch 14-26 Ch 14-27 7
Channel Design Decisions Identifying Major Alternatives 1. Types of intermediaries Sales force, manufacturer's agency, industrial distributors 2. Number of marketing intermediaries Intensive, exclusive, selective 3. Responsibilities of channel members Price policies, conditions of sale, territorial rights Channel Design Decisions Identifying Major Alternatives Intensive distribution Exclusive distribution Selective distribution Candy and toothpaste Luxury automobiles and prestige clothing Television and home appliances Intensive distribution: Stocking the product in as many outlets as possible. Exclusive distribution: Giving a limited number of dealers the exclusive right to distribute the company s products in their territories. Selective distribution: The use of more than one, but fewer than all, of the intermediaries who are willing to carry the company s products. Ch 14-28 Ch 14-29 Channel Design Decisions Evaluating the Major Alternatives Each alternative should be evaluated against: Economic criteria -Using economic criteria, a company compares the likely sales, costs, and profitability of different channel alternatives. Control - The company must also consider control issues. Using intermediaries usually means giving them some control over the marketing of the product, and some intermediaries take more control than others. Other things being equal, the company prefers to keep as much control as possible. Adaptive criteria - Finally, the company must apply adaptive criteria. Channels often involve long-term commitments, yet the company wants to keep the channel flexible so that it can adapt to environmental changes. Ch 14-30 Channel Design Decisions Designing International Distribution Channels Channel systems can vary from country to country Must be able to adapt channel strategies to the existing structures within each country A good example about International channel complexities is Avon. When the Chinese government banned door-to-door selling, Avon had to abandon its traditional directmarketing approach and sell through retail shops. 8
Channel Decisions Public Policy and Distribution Decisions Public Policy Exclusive distribution is when the seller allows only certain outlets to carry its products. Selecting channel members Managing and Motivating channel members Exclusive dealing is when the seller requires that the sellers not handle competitor s products. Exclusive territorial agreements are where the producer or seller limit territory. Tying agreements are agreements where the dealer must take most or all of the line. Ch 14-32 Ch 14-33 Marketing Logistics and Supply Chain Nature and Importance of Marketing Logistics Marketing logistics (physical distribution) involves planning, implementing, and controlling the physical flow of goods, services, and related information from points of origin to points of consumption to meet consumer requirements at a profit. 1. Outbound distribution - moving products from the factory to resellers and consumers. 2. Inbound distribution - moving products and materials from suppliers to the factory. 3. Reverse distribution - moving broken, unwanted, or excess products returned by consumers or resellers. Marketing Logistics and Supply Chain Ch 14-34 Ch 14-35 9
Marketing Logistics and Supply Chain What is the importance of logistics? Competitive advantage by giving customers better service at lower prices. Cost savings to the company and its customers. Product variety requires improved logistics. Information technology has created opportunities for distribution efficiency. Marketing Logistics and Supply Chain Nature and Importance of Marketing Logistics Supply chain management is the process of managing upstream and downstream value-added flows of materials, final goods, and related information among suppliers, the company, resellers, and final consumers. Ch 14-36 Ch 14-37 Marketing Logistics and Supply Chain Goals of the Logistics Functions [ ] The goal of marketing logistics should be to provide a targeted level of customer service at the least cost. Some companies state their logistics objective as providing maximum customer service at the least cost. Unfortunately, no logistics system can both maximize customer service and minimize distribution costs. Maximum customer service implies rapid delivery, large inventories, flexible assortments, liberal returns policies, and other services all of which raise distribution costs. In contrast, minimum distribution costs imply slower delivery, smaller inventories, and larger shipping lots which represent a lower level of overall customer service. Marketing Logistics and Supply Chain Goals of the Logistics Functions A company must first research the importance of various distribution services to customers and then set desired service levels for each segment. Ch 14-38 Ch 14-39 10
Marketing Logistics and Supply Chain Major Logistics Functions Marketing Logistics and Supply Chain Integrated Logistics Warehousing Transportation Inventory management Logistics information management Integrated logistics management: The logistics concept that emphasizes teamwork, both inside the company and among all the marketing channel organizations, to maximize the performance of the entire distribution system. 1. Cross-functional teamwork inside the company 2. Building logistics partnerships 3. Third party logistics [ ] Ch 14-40 Ch 14-41 Marketing Logistics and Supply Chain Integrated Logistics Third party logistics offers the following: Provide logistics functions more efficiently Provide logistics functions at lower cost Allow the company to focus on its core business Are more knowledgeable of complex logistics Retailing [ ] Retailing includes all the activities involved in selling gproducts or services directly to final consumers for their personal, nonbusiness use. Retailers are businesses whose sales come primarily il from retailing. Ch 14-42 Ch 14-43 11
Retailing [ ] Retailing plays a very important role in most marketing channels. Each year, retailers account for more than US$100 billion of sales to final consumers in the GCC. They connect brands to consumers in what marketing agency, OgilvyAction, calls the last mile the final stop in the consumer s path to purchase. It s the distance a consumer travels between an attitude and an action, explains OgilvyAction s CEO. Nearly 70 percent of purchase decisions are made near or in the store. Thus, retailers reach consumers at key moments of truth, ultimately [influencing] their actions at the point of purchase. Major Store Retailer Types Ch 14-44 Ch 14-45 Retailing Types of Retailers Amount of service 1. Self-service retailers serve customers who are willing to perform their own locate-compare-select l process to save money. They include: Wal-Mart and Supermarkets. 2. Limited service retailers provide more sales assistance because they carry more shopping goods about which customers need more information. Examples include electrical retailers and department stores. 3. Full-service retailers assist customers in every phase of the shopping process, resulting in higher costs that are passed on to the customer as higher prices. Includes department stores and specialty stores. Retailing Types of Retailers Product Line 1. Specialty stores 2. Department stores 3. Supermarkets 4. Convenience stores 5. Hypermarkets 6. Service retailers Ch 14-46 Ch 14-47 12
Retailing Types of Retailers Relative Prices 1. Discount stores sell standard d merchandise at lower prices by accepting lower margins and selling higher volume. 2. Independent off-price retailers are either independently owned and run or are divisions of larger retail corporations. 3. Factory outlets are manufacturer-owned and operated stores. Retailing Types of Retailers Organizational Approach [Table 14.2 describes the different major types of retail organizations] 1. Chain stores Corporate chains Voluntary chains Retailer cooperative 2. Franchise organizations 3. Merchandizing conglomerates Ch 14-48 Ch 14-49 Retailer Marketing Decisions [ ] Retailer Marketing Decisions Segmentation targeting, differentiation, and positioning Retailers must first segment and define their target markets then decide how they will differentiate and position themselves in these markets. Retailers should decide whether they want to focus on upscale, midscale, or downscale shoppers They should know whether target shoppers want variety, depth of assortment, convenience, or low prices Until they define and profile their markets, retailers cannot make consistent decisions about product assortment, services, pricing, advertising, store decor, or any of the other decisions that must support their positions. Ch 14-50 Ch 14-51 13
Retailer Marketing Decisions Product Assortment and Service Product assortment and services decisions include: 1. Product assortment should differentiate the retailer while matching target shoppers expectations. Offers merchandise that no other competitor carries: Private or national brands Merchandising events Highly targeted product assortment 2. Services mix should also serve to differentiate the retailer from the competition with customer support. 3. Store atmosphere is the physical layout that makes moving around the store hard or easy. Retailer Marketing Decisions Price Decision Price policy must fit the target market and positioning, product and service assortment, and competition. High markup on lower volume Low markup on higher volume High-low pricing Everyday low price - EDLP Ch 14-52 Ch 14-53 Retailer Marketing Decisions Promotion Decision Advertising Personal selling Sales promotion Public relations Direct marketing Retailer Marketing Decisions Place Decision A shopping center is a group of retail businesses planned, developed, owned, and managed as a unit. Retailers should select locations that are accessible to the target market in areas that are consistent with the retailer s positioning. Shopping centers can be: Regional shopping centers Community shopping centers Neighborhood shopping centers Ch 14-54 Ch 14-55 14
Wholesaling Wholesaling Wholesaling includes all activities involved in selling goods and services to those buying for resale or business use. Selling and promoting Buying and assortment building Bulk breaking Warehousing Transportation Financing Risk bearing Market information services and advice Selling and promoting involves the wholesaler s sales force helping the manufacturer reach many smaller customers at a lower cost. Buying and assortment building involves the selection of items, and building of assortments needed by their customers, saving the customers work. Bulk breaking involves the wholesaler buying in larger quantity and breaking into smaller lots for its customers. Ch 14-56 Ch 14-57 Wholesaling Wholesaling Warehousing involves the wholesaler holding inventory, reducing its customers inventory cost and risk. Transportation involves the wholesaler providing quick delivery due to its proximity to the buyer. Risk bearing involves the wholesaler absorbing risk by taking title and bearing the cost of theft, damage, spoilage, and obsolescence. Market information involves the wholesaler providing information to suppliers and customers about competitors, new products, and price developments. Financing involves the wholesaler providing credit and financing suppliers by ordering earlier and paying on time. services and advice involves wholesalers helping retailers train their sales clerks, improve store layouts, and set up accounting and inventory control systems. Ch 14-58 Ch 14-59 15
Agents And Distributors Local Agent: An agent who acts as a broker between a local buyer and a foreign company. Exclusive distributor: A representative who buys, stocks, and sells the products of a foreign company to a retailer and wholesaler in his or her territory. Ch 14-60 16