1. Chapter 15
Channels of Distribution:
Conflict, Cooperation, and
Management
Sommers  Barnes
Ninth Canadian Edition
Presentation by
Karen A. Blotnicky
Mount Saint Vincent University, Halifax, NS
Copyright © 2001 by McGraw-Hill Ryerson Limited

2. Chapter Goals
To gain an understanding of:
• The nature and importance of intermediaries
• What a distribution channel is and does
• The decisions involved in designing a channel of
distribution
• Major channels used to distribute consumer goods,
business goods, and services
• Vertical marketing systems
• Intensity of distribution
• Choice of intermediaries and conflict management
• Legal considerations and channel arrangements
Copyright © 2001 McGraw-Hill Ryerson Limited
15 - 2

3. The Distribution Function
• distribution is about getting the product or
service to the customer as conveniently as
possible; it deals with access and availability
• intermediaries perform many of the
distribution functions on behalf of suppliers
• merchant intermediaries actually take title to
physical products that they distribute
• agents do not ever own the products, but they
arrange the transfer of title
Copyright © 2001 McGraw-Hill Ryerson Limited
15 - 3

4. Distribution Channels
• The role of distribution entails:
• Arranging for its sale and transfer of
title
• Promoting the product
• Storing the product
• Assuming some risk during
distribution.
• Intermediaries often perform these
activities for producer or consumer.
Copyright © 2001 McGraw-Hill Ryerson Limited
15 - 4

5. The Distribution Functions
SALES SPECIALIST PURCHASING AGENT
FOR PRODUCERS FOR BUYERS
I
N
• Provides market T • Anticipates wants
information E • Subdivides large
• Interprets consumers’ R quantities of a product
wants M • Stores products
• Promotes producers’ E • Transports products
products • Creates assortments
D
• Creates assortments • Provides financing
• Stores products
I • Makes products
• Negotiates with A readily available
customers R • Guarantees products
• Provides financing Y • Shares risks
• Owns products
• Shares risks
Copyright © 2001 McGraw-Hill Ryerson Limited
15 - 5

6. Designing the Channel
Channel design is a strategic marketing tool.
Four decisions can be help a firm design a
distribution channel:
• what role distribution is to play in achieving
objectives
• what type of channel is needed? with or
without intermediaries?
• what level of intensity of distribution?
• which specific intermediaries to use? which
will be best suited to achieve objectives?
Copyright © 2001 McGraw-Hill Ryerson Limited
15 - 6

7. The Well-Designed
Distribution Strategy
Specify
Select Determine
the role of Choose
type of appropriate
distribution specific
distribu- intensity
within the channel
tion of distri-
marketing members
channel bution
mix
Copyright © 2001 McGraw-Hill Ryerson Limited
15 - 7

8. Selecting the Type of Channel
• some firms will distribute directly; others
will use a number of intermediaries:
• producerconsumer (direct)
• producerretailerconsumer
• producerwholesalerretailer consumer
• produceragentretailerconsumer
• produceragentwholesaleretailercons
umer
• when would each of these be considered?
Copyright © 2001 McGraw-Hill Ryerson Limited
15 - 8

9. Major Distribution
Channels
• For distribution of consumer goods, five
different types of channels are widely used.
• Business goods are normally distributed
through four major types of channels.
• There are only two common channels of
distribution for services.
• Some producers are not content to use only
a single distribution channel and use
multiple channels (a.k.a dual distribution)
distribution
• Multiple channels can aggravate middlemen
and cause conflicts in the channels.
Copyright © 2001 McGraw-Hill Ryerson Limited
15 - 9

10. Consumer Channels
PRODUCERS OF CONSUMER GOODS
Agents Agents
Merchant Merchant
wholesalers wholesalers
Retailers Retailers Retailers Retailers
ULTIMATE CONSUMERS
Copyright © 2001 McGraw-Hill Ryerson Limited
15 - 10

11. Business Channels
PRODUCERS OF BUSINESS GOODS
Agents Agents
Merchant wholesalers Merchant wholesalers
(industrial distributors) (industrial distributors)
BUSINESS USERS
Copyright © 2001 McGraw-Hill Ryerson Limited
15 - 11

12. Service Channels
PRODUCERS OF SERVICES
Agents
ULTIMATE CONSUMERS OR BUSINESS USERS
Copyright © 2001 McGraw-Hill Ryerson Limited
15 - 12

13. Multiple Distribution Channels
• some firms will use several distribution
channels to reach specific markets or
segments
• dual distribution is used, for example, to
reach business and consumer markets, or to
carry different groups of products
• or may be used to reach different segments
of the seller’s market; different sizes of
buyers or different regions of the country
• some companies operate their own stores
Copyright © 2001 McGraw-Hill Ryerson Limited
15 - 13

14. Vertical Marketing
Systems (VMS)
• a tightly coordinated distribution channel
designed to improve operating efficiency and
marketing effectiveness.
• Corporate VMS: One firm owns other firms in
channel or the entire channel-- Goodyear, Roots.
• Contractual VMS: Independents work together
for much greater effectiveness: IGA, IDA.
• Administered VMS: Relies on economic power of
one channel member-- Rolex, Kraft General
Foods..
Copyright © 2001 McGraw-Hill Ryerson Limited
15 - 14

15. Intensity of Distribution
INTENSIVE SELECTIVE EXCLUSIVE
Distribution Distribution Distribution
through every through multiple, through a single
reasonable but not all, wholesaling
outlet in a reasonable middleman
market outlets in a and/or retailer
market in a market
Copyright © 2001 McGraw-Hill Ryerson Limited
15 - 15

16. Considerations in
Channel Choice
• Market Considerations: Type of market,
concentration, potential customers, order
size.
• Product Considerations: Consider unit
value, perishability, technical nature of
product.
• Intermediaries Considerations: Services
offered, availability, attitude, dominance.
• Company Considerations: Desire for
channel control, management, money and
services seller can provide to support sales.
Copyright © 2001 McGraw-Hill Ryerson Limited
15 - 16

17. Conflict and Control
in Channels
• Channel conflict exists when channel members
interfere with each others’ objectives.
• Horizontal conflict involves firms on same level--
grocery store vs. drug store.
• Vertical conflict involves firms at different levels
• producer versus wholesaler
• producer versus retailer
• Channel Power is the ability to influence or
determine behaviour of others in channel.
• Based on expertise, rewards and sanctions.
Copyright © 2001 McGraw-Hill Ryerson Limited
15 - 17

18. Producer/Retailer Conflict
Small suppliers’ complaints about large
department stores:
• Onerous logistical demands.
• Pressure to cut prices.
• Demands to give the stores exclusivity.
• Forcing suppliers to contribute advertising
and promotional dollars to the stores.
• Requiring suppliers to invest in elaborate
computerized inventory systems.
Copyright © 2001 McGraw-Hill Ryerson Limited
15 - 18

19. More Complaints
Small suppliers’ complaints about discounters:
• Being asked to supply their goods on
consignment.
• Being asked to deal directly with the retailers’
headquarters and to give to the retailer an
amount equal to the commission that would have
gone to manufacturers’ agents.
Responses from smaller suppliers:
• Quit doing business with big retailers whose
demands are too strict and outlandish.
• Become a retailer.
• Merge with another manufacturer.
Copyright © 2001 McGraw-Hill Ryerson Limited
15 - 19

20. Legal Considerations
• Dealer Selection: Refusing to sell to some
firms. Can be done carefully.
• Exclusive Dealing involves shutting out
competitors, giving most business to one
firm.
• Tying Contracts involves providing one
item on condition other lines be carried as
well.
• Exclusive Territories can create
monopolies.
Copyright © 2001 McGraw-Hill Ryerson Limited
15 - 20

21. Channels for Entering
Foreign Markets
• Exporting, through:
• An export merchant in the manufacturer's country
that buys goods and exports them.
• An export agent located in either the
manufacturer's or the destination country.
• A company’s sales branches.
• Contracting, via:
• Licensing: Right to use production process, patents
trademarks, or other assets.
• Franchising.
• Contract manufacturing: having a foreign-based
manufacturer produce the product
Copyright © 2001 McGraw-Hill Ryerson Limited
15 - 21

22. More Foreign Market Entry
Channel Options
• Direct investment, including:
• Joint venture or partnership with a
foreign company.
• Strategic alliance.
alliance
• Wholly-owned subsidiaries.
• Multinational corporation, in which the
foreign and domestic operations are
integrated and are not separately
identified.
Copyright © 2001 McGraw-Hill Ryerson Limited
15 - 22

23. The Changing Face
of Distribution
• Internet (“click and mortar” vs. “brick
and mortar”) a major factor-- where is it
heading?
• Direct Response TV sales are growing
in popularity, especially for time-
starved shoppers
• “The world’s largest bookstore” is on
the Internet! (Amazon.com)
Copyright © 2001 McGraw-Hill Ryerson Limited
15 - 23