Channel Organization

8/8/2019 Channel Organization

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CHANNEL

ORGANIZATION

By:

VENIKA SAINI

(37MBA09)



CHANNEL BEHAVIOUR

´ A channel will be most effective when all memberscooperate to attain overall channel goals and satisfy thetarget market.

´ Conflict occurs at two level:

« Horizontal Conflict occurs among firms at the same level of the channel, i.e retailer to retailer.

« Vertical Conflict occurs between different levels of the samechannel, i.e. wholesaler to retailer.



CONVENTIONAL MARKETING

CHANNEL

´ Comprises of isolated and autonomous units.

´ Coordination is achieved through bargaining and negotiation.

´ Low index of member loyalty and easy entry makes the network unstable.

´ Rely heavily on unrestricted open market forces to bring about a division of labor among channel members.

´ One of the best examples of dysfunctional consequences of

conventional network is distribution channel of Motion pictures.



´ The modes of Channel Organization or Governance structure

depends on three variables:

1) Frequency of interaction among the channel members.

2) Degree of uncertainty facing each of the members and the

channel as a whole.

3) Extent to which channel members have incurred transaction specific expenses in order to do business with one another.



CONVENTIONAL DISTRIBUTION CHANNEL

VS. VERTICAL MARKETING SYSTEMS



VERTICAL MARKETING SYSTEM

´ A planned distribution channel structure in which

producers, wholesalers, and retailers act as a

unified system.

´ One channel member owns the other, has

contracts with them, or has so much power that

they all cooperate.



TYPES OF VERTICAL MARKETING SYSTYPES OF VERTICAL MARKETING SYS

CORPORATECommon Ownership at Different

Levels of the Channel

CONTRACTUALContractual Agreement Among

Channel Members

ADMINISTEREDLeadership is Assumed by One or

a Few Dominant Members

Greater

Lesser

Degreeof

DirectControl





ADMINISTERED VERTICAL MANAGEMENT

SYSTEM

´ The big dog in the meat house concept.

´ A coordinated system in which the flow of products from producer to end-user is controlled by the power and size of one member of the channel

system.´ Marketing channels can be fully administered or partially administered.

´ In developing an administered system, one must couple expert power with reward power.

´ The channel members to be influenced must first be convinced that the

´administratorµ

1) Is trustworthy

2) Knows more about the situation than they do.



´ One of the major mechanism used to motivate channel members to enact specific activities in administered systems is the FUNCTIONALDISCOUNT

SYSTE M.

´ In order to develop administered systems one of the innovative approaches

has been the PROGR A

MME

D ME RCHAN

DISING

AGREE

MENT

.

(e.g. Norwalk Furniture Corporations(Ohio),HLL, P&G, Nestle, Maruti etc.))



CONTRACTUAL SYSTEMS

´ Networks in which the members have disparate goals but where there exists some formal organization for inclusive goals.

´ Independent firms at different levels of production & distribution integrating their programs on contract basis.

´ The locus of authority resides primarily with the individual members.

´ VMS that coordinates channel activities through formal agreements

among channel members like:« Wholesaler-Sponsored Voluntary Chains.

« Retail-sponsored Cooperatives.

« Franchise Systems.



VOLUNTARY AND COOPERATIVE

GROUPS

´ Wholesalers by banding together a number of independently

owned retailers in a voluntary group, can provide goods and

support services far more economically than the same retailers

could secure solely as individuals.

´ E.g. Independent Grocers Alliance (IGA)

´

Pro, liberty and Sentry (hardware field) are the wholesalers who provide retail establishments with services similar to those

found in IGA



´ Retailer-sponsored cooperative is also a voluntary association,

but the impetus for the cooperative comes from the retailers rather than from a wholesaler.

´ Retailers organize and democratically operate their own

wholesale company, which then performs services for member retailers.

´ The members receive rebates at the end of the year based on

their cumulative purchases from the cooperative.



FRANCHISE SYSTEMS

´ Franchising refers to a specific way of getting in to business and ensuring a

revenue stream once outlets are established.

´ It involves royalty payments, fees and initial charges that f ranchisee pay to f ranchisor.( however lots of franchise agreements do not involve such

cumbersome transactions )

´ The franchisor permits the franchise to use its trademark, name and

advertising.

Starting a new business: 20 percent chance for survival

Buying an existing business: a 70 percent chance for survival

Buying a franchise: a 90 percent chance for survival



TWO KINDS OF FRANCHISE

SYSTEMS:

´ Authorized Franchise System.

´ Franchisor/Franchisee system.



SOURCES OF FRANCHISOR

REVENUE

1) Initial Franchisee fees.

2) Royalty Fees.

3) Sales of products.

4) Rental and lease fees.

5) License fees.

6) Management fees.



ELEMENTS OF AN IDEAL FRANCHISE

PROGRAM

1) High Gross margin.

2) In-Store value added.

3) Secret processes.

4) Real estate profits.

5) Simplicity.



CORPORATE SYSTEMS

´ Exists when channel members on different levels of distribution for a

particular product are owned and operated by one organization.

´ Corporate forward integration occurs when a manufacturing firm decided to

establish its own sales branches, distribution centers and wholesale outlets.

´ Corporate backward integration occurs in distribution when retailers or

wholesalers assume ownership of institutions that normally precede them in

the marketing flows of goods and services



E.g.

´ Amartex

´ Bata have their own manufacturing as well as retail outlets.

´ Raymond's owns their own retail stores while producing textiles and woolens.

´ Giant food stores operates an ice making facility, soft drink

boiling operations, ice-cream plant that supplies them everything.



HORIZONTAL MARKETING SYSTEMS

Horizontal Marketing Systems: Two or more companies at one level who join to

follow a new marketing opportunity.

´ Seaworld offers tickets at a discount to an automobile club.

´ In return, Seaworld gains access to several hundred thousand automobile

club members.

Nestle and General Mills work together to market cereal outside of Nestle and General Mills work together to market cereal outside of

North AmericaNorth America



MULTI-CHANNEL MARKETING

SYSTEMS Single firms that set up two or more marketing channels to reach one or

more customer segments.

Also called hybrid marketing channels

McDonald·s sells its products through independent franchises, but owns

more than one-fourth of its outlets.



INNOVATIONS IN MARKETING

SYSTEMS

INNOVATIONS IN MARKETING

SYSTEMS

Horizontal Marketing Horizontal Marketing SystemSystem

Horizontal Marketing Horizontal Marketing SystemSystem

Hybrid Marketing Hybrid Marketing SystemSystem

Hybrid Marketing Hybrid Marketing SystemSystem

Two or more companies at one channel level

join together to

increase coverage

Example: Banks in

Grocery Stores

A single firm sets up two or more marketing channels to increase coverage

Example: Retailers,

Catalogs, and Sales Force



NEW CONCEPT IN CHANNEL

ORGANIZATION

´ Disintermediation:

«Occurs when product and service producers cut out

intermediaries and go directly to final buyers, or

when radically new types of channel intermediaries

displace traditional ones.



THANKY OU

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Channel Organization