Multimedia Marketing/Marketing.iso/market/chapter6.5p

Text File | 1996-08-22 | 16KB | 335 lines

SECTION 6.5  Specific Channel Configuration Decisions

INSTRUCTIONS Try to answer this question: "How could a producer motivate and
control intermediaries so that they perform in a manner that supports the goals of the producer?"

EXAMPLE

It can be very difficult for a manufacturer to motivate intermediaries
to act in its behalf. This is especially the case because some
retailers have become so large that they demand that the producer
conform to their plans, rather than vice versa.

Several large discount chains control a major portion of the retail
market. They are so large that many producers realize that they
must have at least one of these chains in their channels, in order
to survive. The chains have taken advantage of this. They have
required lower prices, more favorable terms of sale, favorable
delivery, and other concessions, as a prerequisite for carrying the
products. Some even charge "slotting fees"--funds given to the
retailer in exchange for carrying the product.

DETAILS

Once producers have decided upon an overall strategy, it remains
necessary for them to make specific channel attribute decisions.
The overriding set of criteria to use as guidelines consist of the
marketing activities that must be performed to permit effective
market penetration. Two major alternatives exist: ownership or
contractual arrangement.

The first question to be addressed is whether the firm should farm
out marketing tasks to intermediaries or carry them out itself.
When a company desires to perform tasks for itself that are not
normally thought to be carried out on its level in a channel( e.g.,
a producer also serving as a wholesaler to retailers), the process
is termed "vertical integration" or a "vertical marketing system."
In other words, vertical integration involves expanding a firm's
activities to other channel levels.

Forward vertical integration means that operations are expanded toward
target customers. For instance, a sewing machine producer integrated
its operations forward by opening company-owned retail sewing centers.
This method's chief advantages are that the firm can maintain control
of marketing activities and capture a greater profit margin.

Integration of a channel can also extend away from target customers,
toward the source of supply. Termed backward vertical integration,
the strategy may involve a producer who manufactures rather than
buys parts and supplies. Another form is where a retailer performs
wholesaling or manufacturing activities. Backward vertical integration
can offer the advantages of assuring a steady supply, quality and
profit control, and the potential to retain a large portion of an
item's profit margin.

Integration is not an "all-or-nothing" proposition. A fully integrated
firm is one that extends all the way from raw materials to ultimate
buyers. Many service firms are fully integrated, but those involved with
manufactured products seldom are because of investment requirements
and other more favorable opportunity alternatives. Once a company
establishes how far it wishes to vertically integrate, if at all,
it must then address the question of establishing contractual
arrangements with other firms.

PROBLEM 1

A software producer is thinking about going into the retail business.
A major advantage of this strategy is:

A. The firm can control marketing activities at the retail level.
B. The producer will be assured of getting a steady supply of software.
C. The producer will be able to better control the quality of its
   products.
D. The producer will be able to lengthen the distribution channel.

WORKED

If a software producer is thinking about going into the retail business,
a major advantage is the firm can control marketing activities at the
retail level. The producer can be assured that its prices are
appropriate for the target consumer, that the products are properly
promoted, and that optimal inventory levels are maintained. It can
aggressively promote its own software to target consumers, something
that it cannot do if it depends on independent retailers. Further,
it can train retail managers and other employees so that they are
well informed about company software and its major advantages.

ANSWER  A
INSTRUCTIONS Try to answer this question: "How could a producer motivate and
control intermediaries so that they perform in a manner that supports the goals of the producer?"

EXAMPLE

It can be very difficult for a manufacturer to motivate intermediaries
to act in its behalf. This is especially the case because some
retailers have become so large that they demand that the producer
conform to their plans, rather than vice versa.

Several large discount chains control a major portion of the retail
market. They are so large that many producers realize that they
must have at least one of these chains in their channels, in order
to survive. The chains have taken advantage of this. They have
required lower prices, more favorable terms of sale, favorable
delivery, and other concessions, as a prerequisite for carrying the
products. Some even charge "slotting fees"--funds given to the
retailer in exchange for carrying the product.

DETAILS

Contractual arrangements are the agreements between independent
firms at different levels of a channel. These arrangements may
be formal and relatively permanent, as in the case of franchise
organizations, or they might be less formal and permanent, as
when a supermarket decides to buy dairy products from a dairy.

Three types of decisions are relevant in entering into these
arrangements: adaptability requirements; appropriate motivation and
control mechanisms; and the number, type, and identity of other
firms needed.

Adaptability is an important consideration. Before establishing a
channel, management is wise to consider the long-range prospects
that could require future changes. Technological developments,
changes in a product's life cycle, economic and legal developments,
and competition, can cause a channel to be dated.

A personal computer manufacturer, for instance, found it necessary
to drop wholesalers and to sell its personal computers direct to
retailers via it own 350 person sales force as a means of more
fully coordinating efforts with retailers. Thus, before attempting
to establish formal and relatively permanent contractual arrangements
with other firms, successful managers first attempt to estimate
future conditions.

PROBLEM 2

Which of the following types of producers should choose channels
that are flexible--capable of change when conditions dictate?

A. A producer of automobile seat covers.
B. A producer of lunch boxes for school children.
C. A producer of toys.
D. A producer of office desks for business use.

WORKED

A producer of toys should choose channels that are flexible--capable
of change when conditions dictate. This is the case because the toy
industry is subject to considerable change over time. Consumer
(both parent and child) preferences change radically from one time
period to another. Last year's favorite item may be completely passe
this year. Technology affects the industry, as in the case of computer
games and new kinds of lifelike dolls and other products. Competition
varies considerably, as market share of both domestic and foreign
companies wax and wane without much advance notice. Prices vary
accordingly. Hence, the volatility of this industry should dictate
to management that the channels should be flexible.

ANSWER C
INSTRUCTIONS Try to answer this question: "How could a producer motivate and
control intermediaries so that they perform in a manner that supports the goals of the producer?"

EXAMPLE

It can be very difficult for a manufacturer to motivate intermediaries
to act in its behalf. This is especially the case because some
retailers have become so large that they demand that the producer
conform to their plans, rather than vice versa.

Several large discount chains control a major portion of the retail
market. They are so large that many producers realize that they
must have at least one of these chains in their channels, in order
to survive. The chains have taken advantage of this. They have
required lower prices, more favorable terms of sale, favorable
delivery, and other concessions, as a prerequisite for carrying the
products. Some even charge "slotting fees"--funds given to the
retailer in exchange for carrying the product.

DETAILS

Management should also consider appropriate motivation and control
mechanisms. All efforts of a channel's members should interact in
harmony for a marketing program to attain its maximum impact.
In fact, some experts argue that intermediaries and producers are
well-advised to see themselves as partners by coordinating their
efforts for their mutual benefit.

However, while a carefully coordinated effort is a desirable goal,
a harmonious relationship is not automatic. All channels, especially
those involving contractual arrangements, contain some degree of
conflict that strains relationships and can weaken performance.

Conflict is inherent in channels because of nonparallel goals
among channel members. For instance, a recreational vehicle producer
chose to install a new engine in its RV's to get better fuel mileage.
This alienated many dealers because their mechanics were not trained
to work on these motors. An automobile producer decided to raise
its prices to improve future cash flow, despite company sales being
down at the time. In turn, dealers were concerned about their own
cash flow problems as inventories climbed. These types of decisions
strain channel relations.

Conflict also stems from competition within the channel itself.
Intermediaries are often competitors with each other, putting stress
on the entire system. If one service station cuts the price of its
gasoline, for instance, it may raise the ire of other nearby dealers.
Similarly, large intermediaries often seek to gain favorable prices
or delivery schedules, which upsets smaller firms. For instance,
a manufacturer found that many full-retail-price druggists removed
its brand of toothpast from their shelves because large discounters
began to cut prices.

Finally, Intermediaries are usually a part of multiple channel
systems. Department stores, for instance, offer several brands of
furniture. Naturally conflict may develop in their relationships
with a given manufacturer since they attempt to balance their
efforts on the lines they carry and even attempt to play one against
the other in striking better deals.

A moderate degree of conflict can actually increase a channel's
effectiveness by helping to reduce apathy. But too much is
counterproductive. To strike a balance, management should work on
developing an equitable system of motivating and controlling an
integrated channel effort, including appropriate marketing plans,
intermediary training sessions, margins and allowances, quotas,
delivery schedules, and other moves designed to motivate members and
spell out the activities for which they are responsible. This should
be done before the system is formed, so that all parties know what is
expected of them and what may be done in the event of non-compliance.

Finally, management needs to make specific decisions about the
number and type of other firms to include in a channel, including
the number of trade areas to cover, the number of representatives
in each trade area, the channel level best able to service each area,
and the specific firms to include. Economic factors,  along with
needed marketing activities, are the primary criteria for guiding
such decisions.

PROBLEM 3

A major potential source of conflict between an automobile producer
and its dealers is:

A. Nonparallel goals among channel members.
B. Dealers who are willing to be adaptable.
C. Competition between the channel and other channels.
D. Most dealers handle only the products manufactured by one producer.

WORKED

A major potential source of conflict between an automobile producer
and its dealers is nonparallel goals among channel members. Producers
in this industry are motivated to sell large numbers of cars. They
prefer for dealers to stock large inventories, in order to enhance
sales. Dealers, on the other hand, prefer to keep inventories to a
minimum, because of their high costs. Many manufacturers prefer low
prices, as a means of moving their product line. On the other hand,
many dealers resist price decreases, since it reduces their margins.
These and other differing goals cause considerable conflict in this
industry.

ANSWER A
INSTRUCTIONS Try to answer this question: "How could a producer motivate and
control intermediaries so that they perform in a manner that supports the goals of the producer?"

EXAMPLE

It can be very difficult for a manufacturer to motivate intermediaries
to act in its behalf. This is especially the case because some
retailers have become so large that they demand that the producer
conform to their plans, rather than vice versa.

Several large discount chains control a major portion of the retail
market. They are so large that many producers realize that they
must have at least one of these chains in their channels, in order
to survive. The chains have taken advantage of this. They have
required lower prices, more favorable terms of sale, favorable
delivery, and other concessions, as a prerequisite for carrying the
products. Some even charge "slotting fees"--funds given to the
retailer in exchange for carrying the product.

DETAILS

Utimately, management must decide which particular firms to include
in a channel and what their tasks are to be. Ideally, they should
select channel members whose strengths most closely match task
requirements. This involves considering inventory policies, advertising
ability, personal selling efforts, return and allowance policies,
pricing practices, and the entire array of marketing activities.

For example, certain retailers have prestige images, such as the
shops along Rodeo Drive in Los Angeles. If the producer selects a
prestige oriented target consumer, it should include such retailers.

The selection process can be the most difficult part of channel
decision making, as the most desirable intermediaries may already
be comnmitted to competitors' products. For example, a new appliance
manufacturer would have extreme difficulty in getting prime retailers
to handle its products because other established producers have
already secured the best ones. Accordingly,  management may find it
necessary to accept less-than-ideal channel members.

PROBLEM 4

A producer of high-quality furniture is seeking retail dealers.
The optimum type of retailer probably would be:

A. Department stores.
B. Discount stores.
C. Furniture stores.
D. Appliance stores.

WORKED

A producer of high-quality furniture is seeking retail dealers. The
optimum type of retailer probably would be furniture stores that
cater to upper income consumers. Department store employees typically
do not have the depth of training to do a good job of selling quality
furniture. This is also true of discount stores, with the added
disadvantage that their target customers are not compatible with
quality furniture. Further, their image is not compatible. Appliance
stores carry lines that are not congruent with quality furniture and
their strategy is dominated by price dealing. Furniture stores that
appeal to upscale consumers employ carefully-selected and well-
trained employees that are very closely attuned to customer service.
These stores offer many services needed by the furniture producer and
they have a prestige image.

ANSWER  C