CHAPTER IV

MARKETING CHANNEL SYSTEMS

4.1 Marketing Channel Concepts

Individual consumers and corporate/organizational buyers are aware that literally (kale bekal)
thousands of goods and services are available through a very large number of diverse channel
outlets. What they might not be as well aware of is the fact that the channel structure, or the set
of institutions, agencies, and establishments through which the product must move to get to
them, can be amazingly complex. Usually, combinations of institutions specializing in
manufacturing, wholesaling, retailing, and many other areas join forces in marketing channel
arrangements to make possible the delivery of goods to industrial users or customers and to final
consumers.

From the outset, it should be recognized that not only do marketing channels satisfy demand by
supplying goods and services at the right place, quantity, quality, and price: but they also
stimulate demand through the promotional activities of the units (e.g., retailers, manufacturers’
representatives, sales offices, and wholesalers) constituting them. Therefore, the channel should
be viewed as an orchestrated network that creates value for end-users by generating form,
possession, time, and place utilities.
Channels of distribution evolve to serve customer needs. Furthermore, channel members ’ roles
and the context of their cooperation may vary from one context to another.
A major focus of marketing channel management is delivery. It is only through distribution that
public and private goods and services can be made available for use or consumption. Producers
of such goods and services are individually capable of generating only form or structural utility
for their products and services.
As marketers continue to face hostile, unstable, and competitive environments, distribution will
play an increasingly important role. Companies are already moving into new distribution
channels that match up with market segments more precisely and effectively.
Growing Importance of Marketing Channels—as a strategic marketing tool, the field of
marketing channels had, for many years, taken something of a “back seat” to the other three
strategic areas of the marketing mix: product, price, and promotion. Many firms marketing
channel strategy as somewhat of a “leftover” after the more “important ” product, price, and
promotional strategies had been considered.
But in recent years this relative neglect of marketing channels has been changing —in many cases
to a keen interest in the area. Why has this happened? At least five developments underlie this
shift in emphasis:
1. Greater difficulty of gaining a sustainable competitive advantage
2. Growing power of distributors, especially retailers in marketing channels
3. The need to reduce distribution costs
4. The new stress on growth
5. The increasing role of technology
4.2 Functions & Flows in Marketing Channels

Marketing Distribution and Logistics Management 1

 Functions in Marketing Channels
Manufacturers, wholesalers, and retailers as well as other channel members exist in channel
arrangements to perform one or more of the following generic functions:
 Carrying of inventory
 Demand generation, or selling
 Physical distribution
 After sale service and
 Extending credit to customers.
In getting its goods to end-users, a manufacturer must either assume all these functions or shift
some or all of them to channel intermediaries.
The foregoing discussion underscores three important principles in the structure of marketing
channels:
1) One can eliminate or substitute institutions in the channel arrangement.
2) The functions these institutions perform, however, cannot be eliminated.
3) When institutions are eliminated, their functions are shifted either forward or backward in
the channel and, therefore, are assumed by other members.
To the extent that the same function is performed at more than one level of the marketing
channel, the workload for the function is shared by members at all levels. For example,
manufacturers, wholesalers, and retailers may all carry inventory. This duplication and
redundancy in the channel may increase the distribution cost. However, the increase in cost is
justifiable to the extent that it may be necessary in order to provide goods to customers at the
right quantity, time, and place. If the increase in cost cannot be justified, then redundancy is
wasteful and inefficient

Flows in Marketing Channels

A flow is a set of functions performed in sequence by channel members. Therefore, the term
flow is descriptive of movement. There are eight universal flows or functions. Physical
possession, ownership, and promotion are typically forward flows from producer to consumer.
Each of these moves”down” the distribution channel—a manufacturer promotes its product to a
wholesaler, which in turn promotes it to a retailer, and so on. The negotiation, financing, and
risking flow move in both directions whereas ordering and payment are backward flows.

Negotiations are prevalent throughout the channel. Manufacturers, wholesalers, and retailers
negotiate product assortments, prices, and promotions. Some channel members, such as
manufacturer representatives and sales representatives, specialize in negotiations. They do not
carry title or take physical possession of the goods.
It is important to note that one member of the channel system holds any time inventories; a
financing operation is under way.
Channel Member Specialization in Marketing Functions and Participation in channel
Flows—all of the flows or functions in the distribution channel are indispensable —at least one
institution or agency within the system must assume responsibility for each of them if the
channel is to operate at all. But it is not necessary that every institution participate in the
furtherance of all of the flows. Certain agencies specialize in one or more of the flows, as
indicated in the following figure.

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CHANNEL INSTITUTIONS PARTICULAR TO SELECTED MARKETING
FLOWS

The use of these and other intermediaries largely boils down to their superior efficiency in the
performance of basic marketing tasks and functions. Marketing intermediaries, through their
experience, specialization, contacts, and scale, offer other channel members more than they can
usually achieve on their own in terms of their superior efficiency in the performance of basic
marketing tasks and functions.
From a managerial perspective, participation by channel members in different flows is akin to
their being members of a number of different channels, such as an ownership or title channel,
and a promotions channel. The task of channel member coordination should be extended to
these different channels. Often, new product introduction by manufacturers fails as a result of
lack of synchronization of physical and promotional flows or channels. Although national
promotion may vigorously proceed on schedule, delays in transportation and lack of distribution
warehouse space may impede the availability of the product at retail outlets.
The key to coordination of the channel flows is information sharing among channel members.
Information exchange is inherent in each channel flow. Manufacturers, wholesalers, retailers,
banks, and other channel members deploy information and telecommunication systems
technology to ensure the exchange of information required to coordinate the channel and
enhance customer service.

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4.3 Analyzing Marketing Channel Structures

Marketing channels evolve over time in response to forces of change, and this evolution process
is continuous. The basic economic rationale for the emergence of channel intermediaries and
institutional arrangements can be understood in terms of the need for exchange and exchange
efficiency, minimization of assortment discrepancies, and the facilitation of search procedures.
But such a rationale provides little information as to why channels are structured one way or
another to satisfy this need. More specifically, how can one account for the variations in channel
structure in terms of the number of levels and the extent of specialization of functions or flows?
4.3.1 Channels as a Network of Systems
Channels consist of interdependent institutions and agencies, in other words, that their members
are interdependent relative to task performance. A channel can be viewed as a system because of
this interdependency—it is a system of interrelated and interdependent components engaged in
producing an output. A distribution channel comprises two major sectors:
 Commercial and
 End user
The commercial subsystem includes a set of vertically aligned marketing institutions and
agencies, such as manufacturers, wholesalers, and retailers. Each commercial channel member is
dependent on other institutions for achieving its goal(s). A producer is dependent on others in
getting its product to the end-user and, thereby, in gaining its objectives.
The marketing channel has boundaries, as all systems do. These include:
 Geographic (market area),
 Economic (the capability to handle a certain volume of goods or services), and
 Human (the capability to interact)

Furthermore, a channel, like other systems, is part of a larger system that provides it with inputs
and imposes restrictions on its operation. A channel exists as part of an economy ’s distribution
structure that encompasses other channels. The economy ’s distribution structure is a subsystem
of the national environment, which is a subsystem of the international environments. Both the
national and international environments encompass physical, economic, social, cultural, and
political subsystems that influence the development of and impose constraints on the focal
channel system.
It is important here to recognize that marketing channels evolve and function in dynamic
environments. A channel structure is determined in part by the environment in which the
channel operates.
The survival and growth of certain channel members and the demise of others is best explained
by viewing the channel as an open system. Channel members must adapt to a changing
environment. As they alter their functions and adjust their organizations and programs to cope
with the changing environment, they impact the entire channel organization. Therefore, the
evolution of channel systems is an ongoing adaptation of organizations to economic,
technological, and sociopolitical forces both within the channel and in the external environment.

4.3.2 Service Outputs as Determinants of Channel Structure

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To explain the key elements that determine how channels are structured, Bucklin has developed
a rather elaborate theory, the rudiments of which are outlined briefly here. In essence, Bucklin
argues that channel members perform various marketing functions to meet expressed demand for
service outputs. In order to remain viable in the long run, channel members must perform these
functions and participate in channel flows in a manner conducive to the reduction of consumers’
search, waiting time, storage, and other costs. Other things being equal (especially price), end-
users will prefer to deal with a marketing channel that provides a higher level of service outputs.
Bucklin has specified four generic service outputs:
1. Spatial convenience (or market decentralization),
2. Lot size,
3. Waiting or delivery time, and
4. Product variety (or assortment depth and breadth).

Spatial Convenience—provided by market decentralization of wholesale and/or retail outlets

increases consumers’ satisfaction by reducing transportation requirements and search costs.
Community shopping centers and neighborhood supermarkets, convenience stores, vending
machines, and gas stations are but a few examples of channel forms designed to satisfy
consumer’s demand for spatial convenience.
Lot Size— the number of units to be purchased at each transaction is dependent on the
customers’ buying power.
Waiting Time—the third service output identified by Bucklin, is defined as the time period that
the industrial or household consumer must wait between ordering and receiving goods.
Product Variety—the wider the breadth of assortment or the greater the product variety
available to the consumer, the higher the output of the marketing channel and the higher the
distribution cost, because greater assortment entails carrying more inventory

The main goal underlying all of these service outputs is the delivery of service quality. Service
quality is defined as the gap between the consumers ’ expectations and perceptions; that is, the
quality of a service will be rated high when the service delivered exceeds the consumer ’s
expectations, and it will be rated poor when it does not meet them. High quality should be
designed into the channel service system in response to the customer or end-user ’s expectations
in designing each elements of the service.

These service outputs are achieved through the performance of the marketing functions or flows.
The decisions on the amount of output to be delivered by channel members are directly
influenced by:
 The resource base,
 Capabilities of channel members to perform various marketing functions, and
 The kind of service outputs desired by the end-users.
he result of the interaction between channel member resources and end-user requirements is a
channel structure or arrangement that is capable of satisfying the needs of both channel members
and end-users. Under reasonably competitive conditions and low barriers to entry, the channel
structure that evolves over the long run should comprise a group of institutions so well adjusted
to the structure’s task and environment that no other type of arrangement could create greater
returns (e.g., profits or other goals), or more end-user satisfaction per Birr of product cost. This

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arrangement is called the normative structure. The determination of channel structure by
service output is illustrated in the following figure.

The Determination of Channel Structure

Lot Size
Service Waiting Time End-User Demand
Output Market Decentralization for
Levels Product Variety Service Outputs

Organization of
The Marketing
Functions or
Flows

Channel Structure
(institution and
establishment
arrangement)

The more service outputs required by end-users, the more likely it is that intermediaries will be
included in the channel structure. Thus, if end-users wish to purchase in small lots, then there
are likely to be numerous intermediaries performing sorting operations between mass producers
and the final users. If waiting time is to be reduced, then decentralization of outlets must follow,
and, therefore, more intermediaries will be included in the channel structure. The same type of
reasoning can be applied to all of the service outputs. As service outputs increase, however,
costs will undoubtedly increase, and these higher costs will tend to be reflected in higher prices
to end-users.

End-users are usually faced with a choice between channel structures that provide few service
outputs bet relatively low prices and structures in which both service outputs and prices are high.
The more the end-users participate in the marketing flows (in terms of search, physical
possession, financing, and the like), the more they should be compensated for their efforts.
Where channel service outputs are low, end-users are supposedly compensated for their
additional efforts through the lower relative prices provided by such channel structures.

Thus, when construction machinery manufacturers purchase brake parts in carload quantities
from firms and are willing to wait several months for delivery from distant plants, they can
expect to pay lower prices than if they were to order the same parts from a local warehouse
distributor who is willing to ship in smaller quantities and to deliver the parts much more
quickly. The lower the level of service outputs provided, the greater the economy that can be
achieved by channel members, and vice versa.

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The final structure that emerges is, therefore, a function of the desire of channel members to
achieve economies of scale relative to each of the marketing flows and the demand of consumers
for various service outputs. An optimal structure is one that minimizes the total costs of the
system (both commercial and end-user) by appropriately adjusting the level of the service
outputs. Within a channel, members can attempt to shift the degree of their participation in each
flow in order to provide the greatest possible service output at the lowest possible cost. But such
shifting calls for a tremendous amount of coordination and cooperation. This is one reason the
management of channel systems is so critical.

4.4 Channel Management, Channel Relationships, and Competitive Dynamics

Channel Management
Economic battles involving producers versus producers or intermediaries versus intermediaries
will not, in long run, determine the ultimate victors in the marketplace. Rather, the relevant unit
of competition is an entire distribution system comprising a network of interrelated institutions
and agencies.

What do Hallmark, Bata Shoe, Caterpillar Tractor, Sony, and Compaq Computer all have in
common? What these companies all share are solid ties to distribution channels that distinguish
them from competitors and allow them to exploit their product lines and individual brand
advantages. By cleverly managing their chosen channels, these companies have successfully
differentiated themselves in their respective markets.
Now for the million-dollar question—how can a firm distinguish itself with distribution channel
that will set it apart from its rivals? The following are strategies that can furnish this kind of
competitive advantage.
THE EXCLUSIVITY ROUTE
Exclusivity provides the supplier with tighter “image control,” that is, display, sale installation,
or repair. It also regulates the number and type of intermediaries, which is a key advantage in
managing the network. Exclusivity may put the channel in financial jeopardy if insufficient
demand exists to sustain a typical dealer’s cash flow. Moreover, if some end-users defect to new
or different channels to buy the same category of product, this route may also fail.
ENTER THE SECOND BRAND
Another classic differentiation strategy is for a supplier to develop unique second brands for
distribution channels with markedly different price positions in a market. Unfortunately, if the
second brand is not noticeably different from the primary brand, this strategy can backfire.
Obviously, people will buy the discount brand believing that they are getting the same thing for
less, thus biting into the primary brand sales.
LET’S BE UNIQUE
Another way to differentiate is by using nontraditional channels. Although unique channels may
limit a brand’s coverage, for niche marketers in a market they can represent a way to gain market
access and customer attention. Going through distribution channels where competitors are not
present can powerfully differentiate a company from rivals and will often avoid head-to-head
price wars.
CALL THE EXPERTS
A way to rise above adversaries in an industry is to create and nurture dealers, distributors, or
agents who are rated a cut above the rest in regard to customer-service quality. This nurturing
requires time, commitment, and follow-up. Developing these relationships within the

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distribution channel allows for differentiation from competitors because the distribution partners
work together cooperatively to ultimately meet customer needs.
Channel Relationships: From Transactions to Partnerships and
Strategic Alliances
In every marketing channel, the members that do business together have some kind of working
relationships.

TYPOLOGY OF RELATIONSHIP MARKETING

Relationship
Nature

Ad Hoc Ongoing

Strategic Alliance Partnering

Relationship Relationship

Relationship
Purpose

Transaction Cooperative
Operational Relationship Relationship

The dichotomy is helpful in defining the range of relationship types in the channels according to
their nature (ad hoc or ongoing), and purpose (strategic or operational). Transactional
relationships occur when the customer and supplier focus on the timely exchange of basic
products for highly competitive prices. Partnering relationships, or partnerships, occur through
extensive social, economic, service, and technical ties over time. The intent in a strategic
partnership is to lower total costs and/or increase value for the channel, thereby achieving mutual
benefit. Partnering relationships require communication, cooperation, trust, and commitment
among channel members.

Channel partnership is an in-depth collaboration between suppliers and their intermediaries or

between suppliers and their customers. Parties must agree on objectives, policies, and
procedures for ordering and physically distributing products. They must experiment with, and in
some cases, zealously adopt radically new ways of sharing responsibilities for order fulfillment,
inventory management, distribution, purchasing, and post-sales service.
Generally strategic alliances and partnerships require certain conditions in order to be effective:
1. Recognition of the interdependence of channel members,
2. Close cooperation between channel members,
3. Careful specification of the roles and functions, that is, joint rights and responsibilities
each play in the marketing channel,
4. Coordinated effort focused on a common goal(s), and

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 5. Trust and communication between channel members.
Competitive Dynamics
Viewing channels as competitive units is significant for all companies, including those that
market their products through a number of different channels and those that develop assortments
of goods and services by purchasing from a variety of supplies. The way individual
manufacturers coordinate their activities with the various intermediaries with whom they deal,
and vice versa, will determine the viability of one type of channel alignment versus other channel
alignments made up of different institutions and agencies handling similar or substitutable
merchandise.
If, within a given marketing channel, an institution or agency does not see fit to coordinate
effectively and efficiently with other members of the same network, but rather pursues its own
goals in an independent, self-serving manner, it is possible to predict the eventual demise of the
channel alignment.
Myopic channel members are most concerned about the dealings that take place with those
channel members immediately adjacent to them, from whom they buy and to whom they sell. In
this sense, such channel intermediaries are not, in fact, functioning as enlisted components of a
distribution system, but rather are acting individually as independent markets, with each one
choosing those products and suppliers that best help him serve the target groups for whom he
acts as a purchasing agent.
This notion of each channel intermediary acting as an independent market must be qualified and
analyzed with regard to total channel performance. Although an “independent” orientation on
the part of any channel member may indeed be warranted at times, it is put into effect only at the
risk of sacrificing the levels of coordination necessary for overall channel effectiveness,
efficiency, growth, and long-run survival.