INTERNATIONAL MARKETING (PART-7) CHANNELS OF DISTRIBUTION 1. INTRODUCTION Hello to students! Welcome to this series on international marketing. Today we are going to study channels of distribution. In this we will cover The concept of distribution The impact of distribution on product promotion The cost and also the impact of distribution on the reach of the consumers. According to Ross Business is not doing just great deal. Business is having great products, doing great engineering and providing tremendous service to the customers. Finally business is the covet of human relationship. This shows that the relational aspect where each person and each media is important. We have to reach to the customers through the business relationships so as to build the products for the consumers. The manufacturer alone cannot take the products to the customers. He needs the support services of the channels and the distribution so that the product reaches to the consumers at lower cost. According to John Business must invest in products and people in order to create wealth. We have to invest so as to build a system where the products reach to the customers at minimum cost. And we have to invest to generate wealth; we have to reach to the global level or through the international level. 1
According to John Kennett A person buying ordinary product in a super market is in touch with his deepest emotion. So product is a bundle where you communicate to the consumers. The basic emotion and the trust and the value of the company are carried through the products where the needs and desires the passion is satisfied so as to enhance the customer relationship in a sustainable way. According to Rob Glaser on great products- Apple does great products but the end of the day we think about the consumers choices. Consumers want openness. Consumers are important and we have to satisfy the consumers in anyhow, by variety, by positioning, by promotion and by cost also. According to Robert When you are buying real growth and want real performance you buy excellent management and good products and you diversify across the industry sectors. So, it is not only manufacturer who is important but the support channels, the logistics systems and infrastructure which carries the products to the masses is also important. The physical distribution by which the products reach the masses is important because it involves lot of cost which the customers have to bear. Now the physical distribution is a term which is involved so as to penetrate the market where the products reach the customers and speak to the customers. Physical distribution channels is the term used to describe the method and means by which the products or a group of products are physically transferred or distributed from the point of production to the point which they are made available to the final customers. 2
Now let see this model where we have shown distribution channel of a company. The production- the basic function of the manufacturer is done over the years where he mixes the resources i.e. the men, material, machine and most of the resources of the physical aspects in the raw materials that combines so as to give the final shape to the product. This product- reaches to the customers through the warehouses, then goes to the retail stores May be, it goes to the brokers and then comes to the retail stores or it goes directly to the retail store or the production goes to the manufacturer warehouse comes to the retail stores The production goes to the wholesaler warehouse and then comes to the retail stores. It is the cash and carry directly to the retail store or it is the purchase carry the parcel carries to the retail stores. 3
So we have the multi channel aspects where anyhow products reach to the customers. Now the channel which is involved has lot of transition problems and involves lot of problems of the complexities and the cost. The general channels of distribution suppose, we have farms of raw materials. Now this farms of raw materials goes to the manufacturer, is combined in a better shape into the packaging, labeling, then manufactures give it to the wholesalers wholesalers give it to the retailers Retailers give it to the consumers, the government and industrial users. So the distribution channels which is taken up, makes the major differences in terms of the product cost. It is Reach -associated in terms how you handle the product Transition- the fastness Place- is decided by the channels we choose. 4
The channel selection -is important because we have to minimize the logistics i.e. inventory related and the infrastructure which is used for transaction in terms of cost. Carrying of cost is very important because they reflect the final price which the customers have to pay. The product has to offer the services related to the post purchase behavior of the consumers. So the channel is strong if these services can be given to the customers. Because if manufacturer is sitting thousands and millions of kilometers away he cannot look after the customers. The support services of channel distribution have to take care of the customers. The channel distribution is important. It is a system of interdependent organization that directly flows of the product, title position from the producers to the buyers. Here we have shown you in this model, where you have the producer the intermediary chain may be a layout or a warehouse The final consumer. The channel of distribution has is important because this system crystallizes the function where The product gives you the availability to the customers in form of time i.e. he gets the product as and when he needs the utility he wants. the combination in which he wants to combine the product the information which he wants related to the product demonstration and use The place which he wants to be associated with the product use and the position he wants. 5
We have shown you beautifully in this model that creating utilities of customers is important and this is done by the distribution channel. The channels functions support the manufacturer and support the marketing systems. 6
These models the channel function -from producer to the intermediaries and then comes to customers facilitate exchange. The accumulation and the breaking of the bulk into pieces to come to the customers. It is reducing the transition material handling becomes important creating assortment and affordable quantities assorted or the packages become important Transporting and inventory management and the cost involved with inventory carrying and inventory stock is important. Distribution channels facilitate specialization. Exchange function- Here the efficiency is thus shown over here. We have the channels where the manufacturer and the retailers are connected We have the producers where intermediary is there and then the customer is there where the flow of the information and product becomes more systematic. We have shown you this channels which makes the flow of the product easy. 7
Then the channels function also promotes the product. The promotion is done because we try to do advertising which is done in a cooperative way. In stores sales advertising and sales promotion also becomes important that is the point of sale purchase or the point of basic purchase where this the promotion influences the consumers is important. The personal selling convincing the customers, the sales you crystallize in stores also becomes important. So these stores also support the manufacturer so as to promote the product in the market. The advertising agencies and the sales promotion are important part in promoting the products to the customers. 2. THE STRATEGY FOR CHANNEL OF DISTRIBUTION The strategy- where the pull comes from the market. Producers promote the target or the audience to stimulate demand and pull the product through distribution channels to the customers. You have the producers, wholesalers, retailers and customers. The producer promotes the products to the customers. Then the customers try to go and request to the retailers. Retailers try to build order the wholesalers. Then the order is built up to the manufacturer. So pull is when the customer demands the product. 8
Institutional advertising is done at the very large scale and then the information about the product goes into the market, the customers would demand the market from the retailers. And if the retailers do not have the product they are going to go to their wholesaler and the wholesaler would give orders to the producers. So this is the full strategy. The push strategy- also promotes the product. In this the producers promote marketing intermediaries to push the product thorough the distribution channels. Now here the basic incentives and the promotional programs are given to the promoters i.e. to the wholesaler and to the dealers so that the products are pushed to the consumers. They try to educate the consumers and try to build the product as a favorable concept for the consumers. The producers promote to the wholesaler, wholesaler promotes to the retailer and the retailer convinces the customers to buy the products. So this is the push strategy. Now the channel function also supports the product. Like the support which the product requires in terms of the data, feedback i.e. product 9
information is given to the customers and the feedback from the customers i.e. the complaint and the pains of the customers taken into the manufacturer. The customer service- is also provided by the distribution channel. The delivery, the packaging and the financial and social risk which is a risk associated with the product acceptance. It is reduced by the distribution channel. The risk taking function -is a function which most of distribution channel carry because they are huge system who not only supports one manufacturer but they carry the products of hundred manufacturers. So it is the basic risk that the manufacturer, if he tries to build a system and then tries to involve cost, the cost of the manufacture will go very high. But when he bears the less cost where the system is already built up and then the legal services, the support services, are also given by the distribution channels. 3. THE DISTRIBUTION CHANNEL DESIGN The distribution channels design- is important. 10
The zero distribution where the manufacturer directly communicates to the consumers. Then we have shown in this diagram are have a channel where intermediary Traditional system is built where we have manufacturer wholesaler retailer Consumer. So this is the traditional system by which the products reach to the consumers. But the channel which we design depends on the product, contact and the cost associated with it. The IT revolution has changed the total concept of the distribution where the direct appeal to the customers has become easy through the internet. But still we have the agent and the wholesalers who support the product and the performance of the sales is enhanced through the impact of these agents. It is the easy of doing of businesses in hands it is the requirements of packaging and delivery which is taken up by these kinds of channels. The order processing and the quality control become very easy. You have the channel criteria in terms of selection where you collaborate with the system because we have to be in a competitive era with the technical services system to build up for a single manufacturer becomes difficult. We use the system of other agencies and the media so as to take the product to the consumers. We have one time delivery in the reliability concept built up which gives you the complex value of the product. The Total cost is a system cost where most of the collaborators combine to give this and try to reduce the distribution and the manufacturing cost 11
so as to give best solutions to the customers. The channel design depends on the product which is taken to the customers. Now let us see this various designs. The intense distribution- which is for fast moving products into the market i.e. pizza, bread, butter these are the FMCGs i.e. The fast moving consumer markets. The selective distribution- where the luxury goods like TV or other electronic items through selective channels or retail stores are sold. The exclusive distribution- where the luxury cars and the automobiles are sold. The designers- where the diamonds and the boutiques items are sold. The channel design depends on the cost of the market the target audience the market to which you are serving market coverage legal issues 4. THE STATEGIC ALLIANCE IN DISTRIBUTION CHANNEL Strategic alliance -related to the products where the organization tries to combine in such a way that they use the brand of the other distribution channels. Like you see we have a contractor building system or when Tata Tea is sold to the Indian airlines customers. This is the institutional, a contractor advertising wherever the sales in terms of the alliance of tea is generated by the brand which is of the Indian airlines. So they have an institutional or a strategic alliance where the Tata tea is being sold to the in-flight passengers. So we have the dual distribution system also where not only the distribution of the product is done but the 12
advertising and the brand building promotion is also taken up by the marketing agencies. The direct marketing channels- because the impact in terms of technology are immense. The personal selling is important because if the product is very costly. If the product is in cores of rupees nobody is going to buy the product through advertising. He needs a personal counseling where the total disturbance in terms of the basic confusion has to be met out. You have telemarketing toll-free phone cash on order fax order mail order The e-commerce changing the total landscape business system. We have shown you over here how the producers and the buyers are combined in this of system of direct contact where the orders are processed in such a way that the customized services to the customers 13
according to their needs and desires. A direct marketing can eliminate middlemen but not the function. Functions would be saved Taking the product Designing the product Promoting the product Educating the product would also be done by the direct channel So we can cut out the middlemen but we cannot cut out the function. Here the intermediary function is done through the information system i.e. we have the computers and internet built up so as to educate the customers directly from the companies where size and the choice of the product we have shown you in this model. Channel integration and the value chain integration- changing the total cost and the promotion of the product. The channel integrations is shown over here 14
where the manufacture combine or come into partnership with wholesaler, wholesalers comes into partnership with the retailer and the retailer comes into partnership with the consumer. The incentives given at each channel are transferred so as to reduce the cost by The forwarding integration The backward integration The franchise So this is the members acquires there is a takeover or a merger an alliance builds up the integration where the cost ethics do play an important role in reducing the total product cost. The producers, wholesalers, retailers build upon the channel where the consumers become important because all these agencies do have to reach the consumer. So, you have to combine these systems in such a way that you try to reduce the complexities and reach the customers in a simple way. 15
The horizontal integration of the channels- would be like when the contractual systems of purchasing are done where the wholesaler tries to sponsor. It is a combination of a retailer to retailer where you have the sister chain or one chain coming to one city building up chain into other cities. Or we have the franchise systems also. Now we have the distribution channels which could be vertical also and also could be backward. This could be combination of the partnership takes place at the backward channels. The supply chain integrates. So we have the issues related to the channel systems and design in such a way that the relationship management manages the cost. The channel captain- would be dominant sponsor. Every manufacturer stronger he would control the distribution channel. But sometimes the wholesalers become very strong and they are bigger than manufacturer and even the retailers could be bigger than wholesaler or could be bigger than the manufacturer. Like you have the retail chains like Wal-Mart, you have like retail chains like Pantaloons, whose turnover is more than the manufacturer. So they become the channels captains. They become the deciders. They become the basic agencies who decide the product cost. 16
So, it depends on the money power and the equation power of the channel agency who is the strongest and that will dictate the total conflict resolution and the cost associated with the transaction system. The types of the channels are related to The reward power The legal power The expertise The power with each system can try to dominate the performance of the other. So every retailer strongly can dictate the ethics to the manufacturer and he can take the product at the lower cost. So the performance of the manufacturer would reduce, we have shown you well here in this model. The supply chain management is a complex issue where the sources of channel conflict arise not only from the manufacturer to the retailer. They could be disagreement of the responsibilities the disagreement related to the delivery The increase use of multiple channels The diversifications taken place into the channels the producers and the manufacturers have to depend more than one channel so as to satisfy the customers because we are in competition and may be the channel agency is not promoting your product. Sole distribution right- where the manufacturer tries to buy the distribution channel and tries to produce and promote his own product. 5. MAREKTING THE DISTRIBUTION CHANNEL Marketing the channels -and managing the channel is a complex system where The supply chain management in long term impact is essential 17
The integration of members has to be done Their inefficiencies The cost The substitute The innovative development of the product They reach to the customers at an optimal cost It includes all the facilities and all the resources so that products are done. The products are promoted and are distributed to the customers in an effective and cooperative way. Now let us study the distribution channels functions in this model. The distribution is related to Information Promotion 18
Contact Matching Negotiation Physical Financing Risk taking Now let us see what information is The gathering of information Distributing market research to the consumer becomes important. Build the environment related to: recent updates Trends related to the product promotion. The promotion involves developing a system of trading the persuasive communication and positive communication for this product. The contact is finding the communication with the perspective and the potential customers into the market. Matching is like shaping and fitting the product to the passions and desires of the customers. Or you have to fit the product to the buyers of firm. Negotiation is agreeing on price and terms of the offer of ownership of position that can be transferred. Physical is the distribution, transportation and storing of goods. Financing is acquiring and using funds to cover the cost of the channel work. Risk taking is assuming financial risk such as the inability to sell the inventory at full margin. 19
So the system which is built in such a way that number of levels and the number of multiple aspects were reached to the consumers, involves various functions and each function becomes important because each function carries a cost. And each function tries to reduce the confusion of the customers. The number of channels- Higher is the number of channels higher is the cost. We have the zero level of channel where the manufacturer reaches to the customer directly i.e. through internet or the website or we directly contact the manufacturer. We have fax e-mail number Where we give the orders and from the manufacturer directly to the product come to the customers. The first level channel where Manufacturer contact the retailer Retailers give the product to the consumer. 20
The second level of channel where Producer Wholesaler Retailer Consumer. The third level channel where you have Producer Wholesaler Jobber Retailer Consumer. So this model shows the levels of the channels involved and each level involves a commission and a cost. The marketing of intermediaries- is important because each agent has a power and has a reach, advertising and brand system tries to give the mileage to the product. The marketing intermediaries for a travel functions. We can take for example you have 21
The tour operators Tour wholesalers Travel agents Specialist related to brokers Hotel representatives National, state and local tour agencies The consortia The representative systems for booking The global distribution system The internet. So this is the system you can reach to the customer or to the tourists. The marketing systems build with the travel agents is that it tries to convince the tourists and tour operator s tries to convince the travel agents. So in between the cost is reduced. Because whatever the tour wholesaler or the tour operator is getting he is passing that benefit to the travel agent and the travel agent is passing the benefit to the customers. See if the customers directly go to a booking for a hotel he gets a basic 10% discount. But if he goes through a travel agent may be the travel agent 22
done the bulk purchasing and he can give a 12% basic commission to the customer. So the price to the customer if he goes to the traveling agent will be lower because the travel agent is getting 15% commission from the hotel. So out of this 3% percent he can give and 12% benefit can be given to the customer. So this is how this system works and when the channel integration is strong and when channel agencies are very strong the benefit goes to the customers. Benefit of the cost, building a faithful and trustful system where you have no problems related to language, related to a cultural differences where related disturbance, the product failure, complaints. You cannot contact the manufacturer. But you have dealer, agent, travel agent who can look out your problems. The global distribution systems- are important. And they build a connection in most of the problems related to language, to the cultural differences are sorted out and these systems work out in such a way that they try to reduce the conflict, cost, associated with the systems where integration becomes important. Now when you do the conventional marketing system where the manufacturer goes to The wholesaler The retailer The consumer 23
We have vertical systems of marketing, where the manufacturer the wholesaler and the retailer all combined together and they built total brand where the cost of the advertising is shared and then they reach to the consumer. So this is the degree in a direct control over the corporate aspect and to the advertising aspect where you built a channel organization. Types of vertical marketing system- the degree of controlled over is shown here in this model. 24
We have 1) Corporate and common ownership at different levels of channels 2) The contractual i.e. the contract agreement among the channel members 3) The administered i.e. the leadership is assumed one of the few dominant members. So this is the system where the channels work. 4) The franchising - Franchising is a system where the franchiser permits the franchisee to use his trademark, name and advertising. It is by this he gets the money and the royalty by which he reaches to the larger masses of the customers. Advantages and the disadvantages of Franchising Advantages of franchising are: Need lot of capital for growth but here the capital is shared by the other intermediaries who take your name. The faster growth. The easy reach to the customer. The additional management done by the supporters The additional income. 25
Disadvantage is the Lower the potential profit The controlling of service quality becomes difficult controlling firm brand and image becomes difficult when you give you right to the other people. The franchisee is having advantage of Lower risk Having an established brand name which makes easy for the customers to recognize. The successful business plan built up. The expertise a system available. But the disadvantages The royalty fees which he has to pay The lack of freedom The decision cannot be taken in an easy way The control which is always there. So these could be the disadvantages but still this is a channel distribution which makes the product easy to reach to the customer with the brand 26
with the image the quality and service reaches to the customer in a connected way. Where you have the systems which can hold the efficiency. The contact efficiency is built in a system of channel distribution. We have shown over you how the consumers are connected to different manufacturing channels and every channel efficiently manages to reach to the customers whether directly or indirectly it depends on The cost Situation Target market But whether it is direct or indirect the efficiency has to be built up into design system which is in an ordered way, in a systematic way, where the contact and the processing of information is done in an easy way. We need advice, we need money we need support services. So distribution channels supply all these services to the customers. I hope students must have understood the concept of distribution channels, what is the impact on the cost, what is their impact in terms so as to support the manufacturer, thank you students. 27
28