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Copyright Shikhar Sarin 2012
EMBA 512 – Assessing Business Opportunities
Professor Shikhar Sarin, Ph.D.Boise State University
Channels of Distribution
Copyright Shikhar Sarin 2012
Outline
• Channel Description– Types of intermediaries– Functions
• Channel Management– Structure (length and integration)– Conflict– Motivation– Growth opportunities– Sourcing
Copyright Shikhar Sarin 2012
Channel of Distribution
Manufacturer Wholesaler Retailer Customer
• Intermediaries• Middlemen• Supply chain
Copyright Shikhar Sarin 2012
Types of Intermediaries
• Merchant intermediaries
• Agent intermediaries
Copyright Shikhar Sarin 2012
Functions of the Distribution Channel
• Matching supply and demand– Facilitate searches by buyers and sellers– Transportation & storage– Breaking bulk– Accumulating bulk– Creating assortment– Sorting
• Reducing the number of transactions• Facilitate transactions (i.e., standardizing payment terms,
delivery schedules, financing etc.)
Copyright Shikhar Sarin 2010
Channels: Market Efficiencies through Reduction of Transactions
Copyright Shikhar Sarin 2012
Channel Management
Channel Length
Manufacturer Wholesaler Retailer Customer
Direct Channel
Manufacturer Wholesaler 1 Retailer CustomerWholesaler 2
Long Channel
Short Channel
Copyright Shikhar Sarin 2010
Factors Influencing Selection of Short vs. Long Channels
Short Channels Long ChannelsCustomer Factors
•Business users
•Geographically concentrated
•Large orders
•Require specialized knowledge/ servicing
•Consumers
•Geographically dispersed
•Small orders
•Do not require specialized knowledge/servicing
Product Factors
•Perishable
•Complex
•Expensive
•Durable
•Standardized
•Inexpensive
Producer
Factors
• Channel control important
•Possesses adequate resources to perform channel functions
•Dissatisfied with current channel
•Channel control not important
•Does not possess adequate resources internally
•Satisfied with current channel
Copyright Shikhar Sarin 2012
Channel Integration
• Conventional/traditional channel– independent members, loose integration
• Vertical marketing system (VMS)– planned channel system designed to improve efficiency
and effectiveness by integrating various functions throughout the distribution chain
Types of VMS
• Corporate VMS
Manufacturer Wholesaler Retailer
Manufacturer Wholesaler Retailer
• Contractual VMS
Owner/Corporate
Legal
ContractContract
Legal
Copyright Shikhar Sarin 2012
Types of VMS Cont’d
• Administered VMS
Manufacturer Wholesaler
Retailer
Copyright Shikhar Sarin 2012
Sources/Bases of Power
• The ability to make others do what you want them to do– Reward power
– Coercive power
– Legitimate power
– Referent power
– Expert/information power
Copyright Shikhar Sarin 2012
Common Channel Conflicts
• Manufacturer’s adoption of new channels – i.e., direct marketing, internet channel
– multi-channel strategy
– disintermediation
Manufacturer Wholesaler Retailer Customer
Direct/Internet Channel
Copyright Shikhar Sarin 2012
Common Channel Conflicts
• Vertical conflict– Over profit distribution
• Horizontal conflict– Over areas/customers sharing
• Differential treatment of channel members
• Refusal to share info about end user
Copyright Shikhar Sarin 2012
Motivating Channel Members
• Margins/profit sharing
• Prime areas/customers/segments/leads
• Cooperative advertising
• Sales contests
• Slotting & display allowances
Copyright Shikhar Sarin 2012
Growth Opportunities in the Channel
HorizontalIntegration
Manufacturer Wholesaler Retailer Customer
Forward Integration
Backward Integration
Example: Horizontal Integration in the Banking Industry
Copyright Shikhar Sarin 2012
Sourcing
• In-house vs. outsourcing– Strategic vs. transaction cost analysis
• Single vs. multi-sourcing– Risk
– Trust
– Control
Copyright Shikhar Sarin 2012
Key Take Aways
• Intermediary types and functions
• Long vs. short channels
• Types of vertical marketing systems (VMS)
• Sources of channel conflict– Bases of power
• Motivating channel members
• Growth opportunities/strategies
• Sourcing decisions