SMU MBA ASSIGNMENTS

Distribution channels

Buying a computer in the post, petrol at a supermarket, mortgages over the phone and phones themselves from vending machines are just some innovations in distribution which create competitive advantage as customers are offered newer, faster, cheaper, safer and easier ways of buying products and services.

Without distribution even the best product or service fails. Author Jean-Jacques Lambin believes a marketer has two roles: (1) to organise exchange through distribution and (2) to organise communication.

Physical distribution, or Place, must integrate with the other ‘P’s in the marketing mix. For example, the design of product packaging must fit onto a pallet, into a truck and onto a shelf; prices are often determined by distribution channels; and the image of the channel must fit in with the supplier’s required ‘positioning’. You can see how Coca Cola further integrate the timing of distribution and promotion in the Hall Of Fame later. In fact, they see distribution as one of their “core competencies”.

Distribution is important because:

Firstly, it affects sales – if it’s not available it can’t be sold. Most customers won’t wait.

Secondly, distribution affects profits and competitiveness since it can contribute up to 50 percent of the final selling price of some goods. This affects cost competitiveness as well as profits since margins are squeezed by distribution costs.

Thirdly, delivery is seen as part of the product influencing customer satisfaction. Distribution and its associated customer service play a big part in relationship marketing.

Decisions about physical distribution are key strategic decisions. They are not short term. Increasingly it involves strategic alliances and partnerships which are founded on trust and mutual benefits. We are seeing the birth of strategic distribution alliances. You can see South western Bell in the Hall Of Fame explain how marketing marriages provide new ways of getting products and services in front of customers.

Channels change throughout a product’s life cycle. Changing lifestyles, aspirations and expectations along with the IT explosion offer new opportunities of using distribution to create a competitive edge.

Controlling the flow of products and services from producer to customer requires careful consideration. It can determine success or failure in the market place.

The choice of channel includes choosing among and between distributors, agents, retailers, franchisees, direct marketing and a sales force.

Deciding between blanket coverage or selective distribution, vertical systems or multi-channel networks, strategic alliances or solo sales forces, requires strong strategic thinking.

Decisions about levels of stock, minimum order quantities, delivery methods, delivery frequency and warehouse locations have major cash flow implications as well as customer satisfaction implications.

All of these questions are considered in more detail in the sections on channels and strategies. Meanwhile remember Lambin – “distribution is one of the two main roles of marketing.”

Distribution Strategy

Distribution strategy is influenced by the market structure, the firm’s objectives, its resources and of course its overall marketing strategy. All these factors are addressed in the section on selecting Distribution Channels.

The first strategic decision is whether the distribution is to be: Intensive (with mass distribution into all outlets as in the case of confectionery); Selective (with carefully chosen distributors e.g. speciality goods such as car repair kits); or Exclusive (with distribution restricted to upmarket outlets, as in the case of Gucci clothes).

The next strategic decision clarifies the number of levels within a channel such as agents, distributors, wholesalers, retailers. In some Japanese markets there are many, many intermediaries involved.

Next comes a sensitive strategic decision whether to go single channel or multi-channel. Some producers, like Manchester United FC, use multi-channels – they use many different routes, direct and indirect, to bring their products to their customers. Multi-channel Systems like this are common where intensive distribution is required. So direct marketing is combined with indirect marketing through intermediaries.

Then comes the next level of strategic decisions concerning strategic relationships and partnerships. Two common strategies are Vertical Marketing Systems and Horizontal Marketing Systems.

Vertical Marketing Systems involve suppliers and intermediaries working closely together instead of against each other. They plan production and delivery schedules, quality levels,promotions and sometimes prices. Resources, like information, equipment and expertise, are shared. The system is usually managed by a dominant member, or ‘channel captain’. VMS is more flexible than vertical integration where the manufacturer actually owns the distribution channel, for example, Doctor Martens boot manufacturers own their own retail store.

Horizontal Marketing Systems occur where organisations operating on the same channel level (e.g. two suppliers or two retailers) co-operate. They then share their distribution expertise and distribution channels. This can speed up the time taken to penetrate the market. There is room for creative alliances here. See Southwestern Bell’s alliance with Granada TV Shops in the Hall Of Fame.

Resources available affect distribution strategy. Who can handle outbound logistics, marketing and sales, and servicing? Can the supplier afford to deliver small quantities, can it provide more trucks, can its sales force ‘push’ products into national retail chains? Can the organisation deal with thousands, maybe even millions of customers – can it cope? Does it want to devote huge resources here or would it prefer to utilise someone else’s resources in return for a slice of the profits?

Difficult marketing dilemmas which make distribution strategy both critical and interesting. The sections on Distribution Channels explore this in more detail.

Selecting members within a channel

Having decided to go through intermediaries the next question is whether to use agents or distributors and also how many. Unlike distributors, agents don’t hold stocks – they only act as sales agents finding customers, collecting orders and passing them on to the supplier in return for a percentage commission.

How would you select a distributor or an agent? Here are some criteria:

1. Market Coverage, 2. Sales Forecast, 3. Cost, 4. Other Resources, 5. Profitability, 6. Control, 7. Motivation, 8. Reputation, 9. Competition, 10. Contracts

1. Market Coverage: – does the profile of existing customers match your target market profile? – is the number of customers big enough to meet the required distribution penetration? – is the existing sales force big enough to cover the territory? – are they dependant on a single individual? – are the existing delivery fleet and warehouse facilities adequate?

2. Sales Forecast: How many can they sell? What are their forecasts based upon? Do they give a ‘best, worst and average’ forecast? Will they invest in large stock commitment? Do they have budgets to run promotions? Some suppliers even ask their distributors for a marketing plan showing how they intend to market the supplier’s products.

3. Cost: What will it cost in terms of discounts, commissions, stock investment and marketing support?

4. Other Resources: Does the target market require anything special such as technical advice, installation, quick deliveries, instant availability? If so can the distributor provide it?

5. Profitability: How much profit will the distributor generate for the supplier?

6. Control: Do they have a reporting system in place? How do they deal with problems? How often are review meetings scheduled? Can you influence the way they present your products?

7. Motivation: Does the agent or distributor convey a sense of excitement and enthusiasm about the product? What about its sales force – what’s their reaction?

8. Reputation: Has it got a good track record? This includes the number of years in business, growth and profit record, solvency, general stability and overall reliability. Is it dependant on one key player?

9. Competition: Do they distribute any competitor’s products?

10. Contracts: Some distributors demand exclusivity. Some agreements tie the supplier in for certain periods of time. Check for flexibility in case things go wrong.

The bottom line is: Can the agent or distributor be motivated, controlled and trusted? Motivated to sell your product among a range of others. Controlled to feed back results or change strategy if requested. And trusted to act as a reliable ambassador of your product?

Motivating Channel Members

Imagine these three scenarios:

You are a producer of ‘Grand Pens’ a brand of fountain pens.

A customer seeks advice from a pen shop on which pen to buy and the retailer strongly recommends yours.

A customer asks a retailer, who stocks your pen, for another brand called ‘Bad Pens’. The retailer recommends and offers your pen as superior.

A retailer actively solicits business for you by asking customers buying other products to come and have a look at the exquisite ‘Grand Pen’.

This retailer is obviously very motivated. ‘Mindshare’, as it is called in the USA, has to do with how important your product is in the distributor’s mind relative to the other lines they carry. Winning the battle for the distributor’s share of mind can be more important than many other marketing strategies. It applies in industrial markets and consumer markets where intermediaries play important roles in the distribution channel.

In reality, maintaining continually high levels of motivation among intermediaries presents a challenge. It requires a reasonable quality product, creative promotions, product training, joint visits between producer and distributor, co-operative advertising, merchandising and display.

Most of these apply to agents as much as distributors and retailers.

Keeping the intermediary stimulated is important. Positive motivators, like sales contests are preferred to negative motivators like sanctions such as reduced discounts and the threat of terminating the relationship.

A positive reward works better than a negative punishment. Ideally there should be a shared sense of responsibility – a partnership – a strategic partnership. The supplier and intermediary are there to help each other. Vertical Marketing Systems are a good example.

Clear communications, covering sales goals, review meetings, reporting procedures, marketing strategy, training , market information required, suggestions for improvements, all help. Regular contact through visits, review meetings, dinners, competitions, newsletters, thank you letters, congratulatory awards all help to keep everyone working closely together.

These are all non-financial incentives which provide a form of psychic income as opposed to financial income. That’s not to say that financial incentives aren’t useful motivators, it just means that there are other motivations there too. In fact the money spent on financial incentives is often spent more effectively when the sales person is rewarded with a plaque, a gold pen or a holiday in the Bahamas rather than just the cash which tends to get soaked up and lost in a sea of ordinary household daily expenditure.

Non cash rewards appeal to the higher levels of Maslow’s Hierarchy of Needs – belonging, esteem and self actualisation.

Despite this, conflict can occur when too many distributors are appointed within close proximity of each other, or the producer engages in a multiple channel strategy of direct marketing as well as marketing through intermediaries.

Carefully motivating distributors is vital if goods are to flow smoothly through the channel and reach satisfied customers.