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Chapter 12: Distribution - Coggle Diagram

- - - - Under this view, planning starts by identifying the needs of target customers, to which the company responds by organizing a chain of resources and activities with the goal of creating customer value.
      - Yet even a demand chain view of a business may be too limited because it takes a step by-step, linear view of purchase-production-consumption activities. Instead, most large companies today are engaged in building and managing a complex, continuously evolving 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.
  - - - Pricing depends on whether the company works with national discount chains, uses high-quality specialty stores, or sells directly to consumers online.
      - The firm’s sales force and commu nications decisions depend on how much persuasion, training, motivation, and support its channel partners need.
      - Whether a company develops or acquires certain new products may depend on how well those products fit the capabilities of its channel members.
    - - But when they set up distribution channels through contracts with franchisees, independent dealers, or large retailers, they cannot readily replace these channels with company-owned stores or internet sites if the conditions change. Therefore, management must design its channels carefully, with an eye on both today’s likely selling environment and tomorrow’s as well
    - - Why do producers give some of the selling job to channel partners? After all, doing so means giving up some control over how and to whom they sell their products.
        
        Producers use intermediaries because they create greater efficiency in making goods available to target markets. Through their contacts, experience, specialization, and scale of operation, intermediaries usually offer the firm more than it can achieve on its own.
      - From the economic system’s point of view, the role of marketing intermediaries is to transform the assortments of products made by producers into the assortments wanted by consumers. Thus, intermediaries play an important role in matching supply and demand.
        
        Producers make narrow assortments of products in large quantities, but consumers want broad assortments of products in small quantities. Marketing channel members buy large quantities from many producers and break them down into the smaller quantities and broader assortments desired by consumers.
      - In making products and services available to consumers, channel members add value by bridging the major time, place, and possession gaps that separate goods and services from those who use them. Members of the marketing channel perform many key functions. Some help to complete transactions:
        
        Information. Gathering and distributing information about consumers, producers, and other 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 engaging customers and prospective buyers.
        
        • Matching. Shaping offers to meet the buyer’s needs, including activities such as manufacturing, grading, assembling, and packaging.
        
        • Negotiation. Reaching an agreement on price and other terms 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
      - The question is not whether these functions need to be performed—they must be—but rather who will perform them
        
        To the extent that the manufacturer performs these functions, its costs go up; therefore, its prices must be higher.
        
        When some of these functions are shifted to intermediaries, the producer’s costs and prices may be lower, but the intermediaries must charge more to cover the costs of their work.
        
        In dividing the work of the channel, the various functions should be assigned to the channel members that can add the most value for the cost.
      - Distribution channels Functions
        
        Channel intermediaries operate like manufacturers, with a profit motive.
        
        Their role is to provide customer benefits that consumers value and are willing to pay for.
        
        Examples of benefits provided by intermediaries include:
        
        Convenience (e.g. local neighbourhood shops)
        
        Cost savings (e.g. supermarkets)
        
        Product quality and variety (e.g. delicatessens)
        
        Essential channel functions include:
        
        Stock carrying
        
        Selling
        
        Providing after-sales service
        
        Extending credit to customers
        
        channel-structure theory
        
        consumers prefer to deal with marketing channels that provide higher levels of service outputs. These outputs can be considered in terms of:
        
        The greater the level of these service inputs required by the consumer, the more intermediaries there will be
        
        waiting time
        
        product variety.
        
        lot size (people preferring to buy 250 g of coffee, rather than a 5kg bag)
        
        spatial convenience (going to a shop nearer to you rather than further
        away)
        
        Risk Incurred
        
        Marketing channels are organised to provide utility (benefits) to consumers (end users). Higher levels of customer utility generally lead to higher profits for channel intermediaries.
        
        Providing additional benefits often involves handling risk.
        
        Intermediaries can:
        
        Reduce their level of risk,
        
        Pass risk on to other intermediaries,
        
        Or deliberately take on more risk themselves.
        
        Intermediaries may accept more risk because it can result in higher profits.
        
        Channel members perform specific marketing functions that are essential to the distribution process.
        
        Efficiency
        
        Efficiency within a marketing channel is improved if exchange is centralised rather than decentralised.
        
        You find it more efficient to visit a supermarket to buy products from a range of manufacturers than to visit each one of them individually. Similarly, channel members find it more efficient to reach you via a supermarket rather than visit you.
        
        The extent to which exchange is centralised is limited due to:
        
        If there are too many layers in the distribution channel, the level of noise will increase
        
        ‘noise’ refers to the idea that information received by retailers (for example, about consumer tastes) will not be understood by manufacturers because it has to pass through a number of layers of intermediaries who may distort the message
        
        the effectiveness/efficiency of institutions and the quality of contact.
        
        costs of communications
        
        Bridging Producer–Consumer Discrepancies
        
        Discrepancy between production and consumption: Manufacturers produce large quantities of a limited range of products, while consumers demand small quantities of a wide variety of goods.
        
        Sorting: Intermediaries grade and sort products received from manufacturers, especially important for fresh produce.
        
        Accumulation: Bringing together similar products from multiple manufacturers into one place.
        
        Allocation: Buying goods in large quantities (e.g. truckloads) and selling them in smaller quantities (e.g. case lots) suitable for consumers.
        
        Convenience vs. cost trade-off: Hypermarkets offer lower prices by selling in bulk, while convenience stores sell smaller quantities at higher prices, saving consumers storage and effort.
        
        Assorting: Retailers create a wide assortment of different products for consumers, such as fruits from different countries.
        
        Routinisation of transactions
        
        Costs can be reduced by increasing the extent to which transactions are ‘routinised’
        
        the greater the extent to which bargaining takes place, the greater the costs – because every time the transaction takes place you have to work out the price to be charged.
        
        Routinisation is an important aspect of exchange; it leads to standardisation of goods and services
        
        Postponement–speculation and channel structure
        
        the concepts of postponement and speculation help marketers to decide where and when to add value in distribution channels. Speculation involves making changes to the product as early as possible in the distribution channel, in order to benefit from economies of scale.
        
        Postponement is the polar opposite of speculation – it assumes that there are changes in the marketing environment in the future thus it is too risky to make changes early on and so any changes should be delayed.
        
        trade-off between speculation and postponement is therefore one of minimising costs versus minimising risks
        
        Channel efficiency is achieved by postponing product changes and inventory placement to the latest possible stage in the marketing process.
        
        Postponement reduces risk and uncertainty costs, especially for highly differentiated products (many models or variants).
        
        Holding products in an undifferentiated state (e.g. parts) lowers physical distribution and inventory costs.
        
        Producing only after confirmed orders reduces the risk of unsold stock.
        
        Risk can be shifted between channel members (e.g. retailers delay orders; wholesalers hold more stock).
        
        Speculation is the opposite of postponement:
        
        Changes are made early in the process.
        
        Benefits include economies of scale, lower production and distribution costs, and fewer stockouts.
        
        Risks increase if customers do not want the products produced.
        
        Postponement:
        
        Changes are made close to the point of purchase.
        
        Risks are lower because products better match customer demand.
        
        Costs may be higher due to smaller-scale operations.
        
        Logistics postponement:
        
        Finished goods are stored centrally and shipped only when demand arises.
        
        Distribution costs increase, but inventory levels decrease.
        
        Common in just-in-time systems, catalogues, and e-commerce.
        
        Manufacturing postponement:
        
        Semi-finished goods are shipped closer to the market.
        
        Final customization occurs near customers (e.g. coffee packaged in-store).
        
        Reduces inventory risk but increases local finishing costs.
        
        Full postponement:
        
        Manufacturing begins only after the customer places an order.
        
        Effective when customisation is highly valued and customers are willing to wait.
        
        Packaging postponement:
        
        Useful for global standard products adapted for local markets.
        
        Allows easier movement of products between regions.
        
        Reduces risk when demand is uncertain or packaging may become obsolete.
        
        https://drive.google.com/file/d/19mHN8hz679gFT5Wd6RIfno786_mMirPH/view?usp=sharing
    - - Companies can design their distribution channels to make products and services avail able to customers in different ways.
      - Each layer of marketing intermediaries that performs some work in bringing the product and its ownership closer to the final buyer is a channel level. Because both the producer and the final consumer perform some work, they are part of every channel.
      - The number of intermediary levels indicates the length of a channel.
        
        a direct marketing channel, has no intermediary levels—the company sells directly to consumers.
        
        indirect marketing channels, containing one or more intermediaries.
      - From the producer’s point of view, a greater number of levels means less control and greater channel complexity.
        
        Moreover, all the institutions in the channel are connected by several types of flows. These include the physical flow of products, the flow of ownership, the payment flow, the information flow, and the promotion flow. These flows can make even channels with only one or a few levels very complex.
  - - - the use of intermediaries does involve giving control of some marketing activities to other companies. To a large extent the ways in which a product is promoted within a store will depend on the store owner. Manufacturers, therefore, trade control for gaining a wider distribution of their goods
- - - - Cooperating to achieve overall channel goals sometimes means giving up individual company goals. Although channel members depend on one another, they often act alone in their own short-run best interests.
      - They often disagree on who should do what and for what rewards. Such disagreements over goals, roles, and rewards generate channel conflict.
        
        Horizontal conflict occurs among firms at the same level of the channel.
        
        Vertical conflict, conflict between different levels of the same channel
        
        Some conflict in the channel takes the form of healthy competition. Such competition can be good for the channel; without it, the channel could become passive and noninnovative
        
        However, severe or prolonged conflict can disrupt channel effectiveness and cause lasting harm to channel relationships.
  - - - A conventional distribution channel consists of one or more independent producers, wholesalers, and retailers. Each is a separate business seeking to maximize its own profits, perhaps even at the expense of the system as a whole.
        
        No channel member has much control over the other members, and no formal means exists for assigning roles and resolving channel conflict.
      - A vertical marketing system (VMS) consists of producers, wholesalers, and retailers acting as a unified system. One channel member owns the others, has contracts with them, or wields so much power that they must all cooperate. The VMS can be dominated by the producer, the wholesaler, or the retailer.
        
        three major types of VMSs: corporate, contractual, and administered
        
        Contractual VMS
        
        consists of independent firms at different levels of production and distribution that join together through contracts to obtain more economies or sales impact than each could achieve alone.
        
        The franchise organization is the most common type of contractual relationship. In this system, a channel member called a franchisor links several stages in the production distribution process.
        
        Administered VMS
        
        leadership is assumed not through common ownership or contractual ties but through the size and power of one or a few dominant channel members. Manufacturers of a top brand can obtain strong trade cooperation and support from resellers.
        
        For example, P&G and Apple can command unusual cooperation from many resellers regarding displays, shelf space, promo tions, and price policies. In turn, large retailers such as Walmart, Home Depot, Kroger, and Walgreens can exert strong influence on the many manufacturers that supply the products they sell.
        
        EX: Metro and Dina farms conflict
        
        Corporate VMS
        
        integrates successive stages of production and distribution under single ownership.
        
        Coordination and conflict management are attained through regular organizational channels.
        
        EX: Luxottica that own multiple eyewear brands
        
        https://drive.google.com/file/d/1ZiBPp790TY8Johm0UZd4cDjggUg9BguX/view?usp=sharing
  - - - Channel innovators who find new ways to add value in the channel can displace traditional resellers and reap the rewards. In turn, traditional intermediaries must continue to innovate to avoid being swept aside.
      - Like resellers, to remain competitive, product and service producers must develop new channel opportunities, such as the internet and other direct channels.
        
        However, developing these new channels often brings them into direct competition with their established channels, resulting in conflict. To ease this problem, companies often look for ways to make going direct a plus for the entire channel.
  - - - Not being dependent, a state of independence refers to the concept of autonomy. Dependence poses constraints in the freedom of choice of actions. A company becomes vulnerable when it loses control over resources to its exchange partners and finds itself dependent on its partner. With increased dependence also comes strategic vulnerability
    - - • coercive – the opposite of reward power and refers to the ability to punish
      - • reward – ability to reward desirable behaviour
      - • legitimate – derived from authority
      - • referent – where power is derived because others admire and wish to Emulate
      - • expert – comes from knowledge that is valued by others
      - • informational power – where power is derived from having access to more information than others
    - - • the percentage of a channel member’s business which they contract with another member and the size of the contribution which that business makes to their profits
      - • the commitment of a channel member to another member in terms of the relative importance of the latter’s marketing policies
      - • the difficulty in effort and cost faced by a channel member in attempting to replace another member as a source of supply or as a customer.
    - - external (ESI): relates to information about customers and competitors
      - internal (ISI): whereas ISI relates to information about the organisation’s future plans and is likely to be both sensitive and proprietary;
      - A high degree of supplier dependence on a distributor will mean that the supplier will be less likely to commit opportunistic acts that damage the distributor; this means that distributors who are more powerful than the suppliers they deal with are likely to perceive lower risks of sharing ESI and ISI.
  - - - outcome-based coordination efforts
        
        focus of outcome-based coordination efforts is on short-term ‘bottom-line’ results like sales growth, market share, target achievement
      - behaviour-based coordination efforts
        
        focus on process issues such as customer education, sales person training, selling techniques, etc. Behaviour-based efforts also involve greater information exchange and sharing expertise.
        
        Behaviour-based coordination is inherently more relationship oriented since issues related to the task of accomplishing results are focused on the relationship rather than on the results themselves.
        
        Behaviour-based control systems are considered to be ‘nurturant’ providing guidance and feedback, focusing much less on short-term results and more on long-term results.
  - - - Opportunistic behaviour can take place in these situations where firms can undertake ‘passive’ or ‘active’ attempts to break written contracts or social contracts, which underpin the exchanges between them.
      - EX: placement on shelves (metros and Dina farms)
    - - Economic satisfaction is described as ‘a channel member’s evaluation of the economic outcome that flows from the relationship with its partners such as sales volume, margins and discounts.’
      - Social satisfaction depends on a channel member’s evaluation of the psychological aspects of its relationship, in that interactions with the exchange partner are fulfilling and gratifying.
- - - - The success of modern discount retailing shows that consumers often accept lower service levels in exchange for lower prices
  - - - For example, in a depressed economy, producers will want to distribute their goods in the most economical way, using shorter channels and dropping unneeded services that add to the final price of the goods
  - - - A firm should identify the types of channel members available to carry out its channel work. Most companies face many channel member choices.
      - Using many types of resellers in a channel provides both benefits and drawbacks:
        
        by selling through retailers and value-added resellers in addition to its own direct channels, they can reach more and different kinds of buyers.
        
        However, these are more difficult to manage and control. In addition, the direct and indirect channels compete with each other for many of the same customers, causing potential conflict.
    - - Three strategies are available: intensive distribution, exclusive distribution, and selective distribution.
        
        Producers of convenience products and common raw materials typically seek intensive distribution—a strategy in which they stock their products in as many outlets as possible. These products must be available where and when consumers want them EX: toothpaste, Candy
      - By contrast, some producers purposely limit the number of intermediaries handling their products. The extreme form of this practice is exclusive distribution, in which the producer gives only a limited number of dealers the exclusive right to distribute its products in their territories. Exclusive distribution is often found in the distribution of luxury brands. EX: Breitling
      - Between intensive and exclusive distribution lies selective distribution— the use of more than one but fewer than all of the intermediaries who are willing to carry a company’s products EX: electronics
      - https://drive.google.com/file/d/1S25fUwDhBiEnOhMhAgpT8YeUjbATAvcj/view?usp=sharing
    - - The producer and intermediaries need to agree on the terms and responsibilities of each channel member. They should agree on price policies, conditions of sale, territory rights, and the specific services to be performed by each party.
      - The producer should establish a list price and a fair set of discounts for the intermediaries. It must define each channel member’s territory, and it should be careful about where it places new resellers.
- - - - The company should recognize and reward intermediaries that are performing well and adding good value for consumers. Those that are performing poorly should be assisted or, as a last resort, replaced.
- - - - First, companies can gain a powerful competitive advantage by using improved logistics to give customers better service or lower prices.
      - Second, improved logistics can yield tremendous cost savings to both a company and its customers.
      - Third, the explosion in product variety has created a need for improved logistics management.
      - Finally, more than almost any other marketing function, logistics affects the environment and a firm’s environmental sustainability efforts. Transportation, warehousing, pack aging, and other logistics functions are typically the biggest supply chain contributors to the company’s environmental footprint. Therefore, many companies are now developing green supply chains
      - Improvements in information technology have also created opportunities for major gains in distribution efficiency.
        
        companies are using sophisticated supply chain management software, internet-based logistics systems, point of-sale scanners, RFID tags, satellite tracking, and electronic transfer of order and payment data. Such technology lets them quickly and efficiently manage the flow of goods, information, and finances through the supply chain.
  - - - if they don’t green up voluntarily, a host of sustainability regulations enacted around the world will soon require them to.
      - many large customers—from Walmart and Nike to the federal government—are demanding it. Even consumers are demanding it
    - - Not only are sustainable channels good for the world, they’re also good for a company’s bottom line
      - Companies green up their supply chains through greater efficiency, and greater efficiency means lower costs and higher profits. In other words, developing a sustainable supply chain is not only environmentally responsible, it can also be profitable.