Title: PowerPoint Slides to Accompany Marketing Channels, 7th Edition
1PowerPoint Slides to AccompanyMarketing
Channels, 7th Edition
- Anne T. Coughlan, Northwestern University
- Erin Anderson, INSEAD
- Louis W. Stern, Northwestern University
- Adel I. El-Ansary, University of North Florida
2Chapter 1Marketing Channels Structure and
Functions
3 FIGURE 1-1 CONTACT COSTS TO REACH THE MARKET
WITH AND WITHOUT INTERMEDIARIES
4 FIGURE 1.2 MARKETING FLOWS
IN CHANNELS Physical Physical
Physical Possession Possession Possession
Ownership Ownership Ownership Promotion Pro
motion Promotion Negotiation Negotiation Ne
gotiation Consumers Producers Wholesalers Retai
lers Industrial Financing Financing Financing
and Household Risking Risking Risking
Ordering Ordering Ordering Payment Paym
ent Payment Commercial
Channel Subsystem
5 FIGURE 1-3 FRAMEWORK FOR CHANNEL DESIGN AND
IMPLEMENTATION
Channel Design Process SEGMENTATION
Recognize and respond to target customers
service output demands Decisions About Efficient
Channel Response CHANNEL STRUCTURE What kinds
of intermediaries are in my channel? Who are
they? How many of them? SPLITTING THE
WORKLOAD With what responsibilities? DEGREE
OF COMMITMENT Distribution alliance?
Vertical integration/ownership? GAP ANALYSIS
What do I have to change?
Channel Implementation Process
CHANNEL CONFLICT Identify actual and potential
sources
CHANNEL POWER Identify sources for all channel
members
MANAGE/DEFUSE CONFLICT Use power sources
strategically, subject to legal constraints
GOAL Channel Coordination
INSIGHTS FOR SPECIFIC CHANNEL INSTITUTIONS Retail
ing, Wholesaling and Logistics, Franchising
6TABLE 1-1 SERVICE OUTPUT DEMAND DIFFERENCES (an
example of segmentation in the book-buying market)
7FIGURE 1-4 ORGANIZATION OF THE TEXT
8Chapter 2Segmentation for Marketing Channel
Design Service Outputs
9TABLE 2-1 ESTIMATED NUMBER OF U.S. CONSUMERS
USING ONLINE BILL PAYMENT, VARIOUS YEARS
Notes 1998 in 1998, just 2 of U.S. households
used online bill payment, according to Tower
Group (Bielski 2003). From U.S. Census data, in
1998, there were 100 million households in the
U.S., with an average of 1.7 adults per
household thus, 2 million households or 3.4
million adults were using online bill payment in
1998. 2001 A Forrester Research report said
that nearly 17 million U.S. households will pay
bills online in 2002, up 41 percent from 2001
numbers (Higgins 2002). Thus, in 2001, 12
million U.S. households paid bills online. From
U.S. Census data, there were 108 million
households in the U.S., with an average of 2.58
adults per household thus, there were 20.4
million adults using online bill payment in
2001. 2002 The same Forrester Research report
said that nearly 17 million U.S. households will
pay bills online in 2002 (Higgins 2002), while a
Tower Group report said that 13.7 of U.S.
households did pay bills online in 2002 (Bielski
2003). The table therefore reports the numbers
from Bielski. There were 109 million households
in the U.S. in 2002 thus, 15 million households
paid bills online. Further, there were an
average of 2.58 adults per household in the U.S.
in 2002 (from U.S. Census data), yielding the
estimate of 25.5 million adult online bill payers
in 2002. 2003 and 2004 A Gartner study cites 65
million U.S. consumers paying at least some bills
online, and reports this is almost twice as many
as in 2003 (Park, Elgin et al. 2004). We
therefore estimate that 35 million U.S. consumers
paid bills online in 2003.
10TABLE 2-2 ONLINE BILL PAYMENT THE CONSUMER
EXPERIENCE
11TABLE 2-3 BUSINESS-TO-BUSINESS CHANNEL SEGMENTS
FOR A NEW HIGH-TECHNOLOGY PRODUCT
Respondents allocated 100 points among the
following supplier-provided service outputs
according to their importance to their company
Additional Important Attributes
Greatest Discriminating Attributes
Source Reprinted with permission of Rick Wilson,
Chicago Strategy Associates, ?2000.
12FIGURE 2-1 IDEAL CHANNEL SYSTEM FOR
BUSINESS-TO-BUSINESS SEGMENTS BUYING A NEW
HIGH-TECHNOLOGY PRODUCT
Manufacturer (New High Technology Product)
Associations, Events, Awareness Efforts
Third-Party Supply Out-source
VARs
Pre-Sales
Dealers
TeleSales/ TeleMktg
Sales
Internal Support - Install, Training Service
Group
Post-Sales
Full-Service
Responsive Support
References/ Credentials
Lowest Total Cost
Segment
Source Reprinted with permission of Rick
Wilson, Chicago Strategy Associates, ?2000.
13TABLE 2-4 SHIPPING CHARGES FOR 150 PURCHASE OF
SHIRTS FROM LANDS END
Source www.landsend.com website.
14 FIGURE 2-2 ADVERTISING COPY FOR AN AD FOR BN.COM
Source advertisement for bn.com in Wall Street
Journal, November 20, 2002, p. A11.
15TABLE 2-5 THE SERVICE OUTPUT DEMANDS (SOD)
TEMPLATE
INSTRUCTIONS If quantitative marketing-research
data are available to enter numerical ratings in
each cell, this should be done. If not, an
intuitive ranking can be imposed by noting for
each segment whether demand for the given service
output is high, medium, or low.
16Chapter 3Supply Side Channel AnalysisChannel
Flows and Efficiency Analysis
17FIGURE 3-1 MARKETING FLOWS IN CHANNELS
Physical Physical Physical Posses
sion Possession Possession Ownership Ownershi
p Ownership Promotion Promotion Promotion
Negotiation Negotiation Negotiation Consume
rs Producers Wholesalers Retailers Industrial
Financing Financing Financing and House
hold Risking Risking Risking Ordering Or
dering Ordering Payment Payment Payment
Commercial Channel Subsystem
The arrows above show flows of activity in the
channel (e.g. physical possession flows from
producers to wholesalers to retailers to
consumers). Each flow carries a cost. Some
examples of costs of various flows are given
below
18TABLE 3-1 CDWS PARTICIPATION IN VARIOUS CHANNEL
FLOWS
19TABLE 3-2 PRODUCT RETURNS A LARGE-SCALE PROBLEM
Furthermore, returns are very significant in many
industries. In a survey of over 300 reverse
logistics managers in 1998, researchers found the
following ranges for return percentages
TABLE 3-3 PRODUCT RETURNS PERCENTAGE RANGES
20TABLE 3-4 DIFFERENCES BETWEEN FORWARD AND
REVERSE LOGISTICS
21FIGURE 3-2 POSSIBLE PATHWAYS FOR RETURNED
PRODUCT
Key solid lines denote product to be salvaged
for subsequent revenue. Dotted lines denote
non-revenue-producing product flows.
22FIGURE 3-3 THE EFFICIENCY TEMPLATE
Entries in column must add up to 100 points.
Entries across row (sum of proportional flow
performance of channel members 1 through 4) for
each channel member must add up to 100
points. Normative profit share of channel
member i is calculated as (final weight,
physical possession)(channel member i's
proportional flow performance of physical
possession) (final weight,
payment)(channel member i's proportional flow
performance of payment). Entries across row (sum
of normative profit shares for channel members 1
through 4) must add up to 100 points.
23FIGURE 3-4 THE BULLWHIP EFFECT
Source Based on the lecture notes of Enver
Yücesan at INSEAD.
24TABLE 3.APP3A-1 BUILDING MATERIALS COMPANY
EFFICIENCY TEMPLATE FOR CHANNEL SERVING END-USERS
THROUGH RETAILIERS UNDISGUISED DATA
25TABLE 3.APP3A-2 BUILDING MATERIALS COMPANY
EFFICIENCY TEMPLATE FOR CHANNEL SERVING END-USERS
THROUGH RETAILERS RANK-ORDER DATA
26TABLE 3.APP3A-3 BUILDING MATERIALS COMPANY
EFFICIENCY TEMPLATE FOR CHANNEL SERVING END-USERS
THROUGH RETAILERS TRANSFORMED RANK-ORDER DATA
27Chapter 4Supply-Side Channel Analysis Channel
Structure and IntensityLearning Objectives
28 FIGURE 4- 1 SAMPLE REPRESENTATIONS OF THE
COVERAGE/MARKET SHARE RELATIONSHIP FOR FAST
MOVING CONSUMER GOODS
Based on Reibstein, David J., and Paul W. Farris
(1995), "Market Share and Distribution A
Generalization, A Speculation, and Some
Implications," Marketing Science, 14 (3),
G190-G202.
29FIGURE 4- 2 SELECTIVE COVERAGE--THE
MANUFACTURERS CONSIDERATIONS
30FIGURE 4- 3 CATEGORY SELECTIVITY THE DOWNSTREAM
CHANNEL MEMBERS CONSIDERATIONS
31Chapter 5Gap Analysis
32FIGURE 5-1 THE GAP ANALYSIS FRAMEWORK
33FIGURE 5-2 ONLINE BILLING AND PAYMENT GAP
ANALYSIS
34FIGURE 5-3 ONLINE BILLING AND PAYMENT A
VIRTUOUS CYCLE
Note the B2B process exhibits a similar path,
with the added inducement to payers of the
development of technologies to integrate bill
payment information with back-office (accounts
payable, inventory management, and ordering)
processes.
35FIGURE 5-4 APPLYING THE GAP ANALYSIS FRAMEWORK
TO REVERSE LOGISTICS
36FIGURE 5-5 PATH FOLLOWED BY A COPY OFTHE
PERRICONE PROMISE
37TABLE 5-1 U.S. RETAIL MUSIC SALES, 1999-2003
38TABLE 5-2 AVERAGE RETAIL CD PRICES IN THE U.S.
TABLE 5-3 SHARE OF ALBUMS SOLD BY CHANNEL,
2002
Notes 680.9 million albums were sold in total in
2002. Mass merchant channel includes Best Buy,
Kmart, Wal-Mart, Costco, and Target.
39FIGURE 5-6 TYPES OF GAPS
40FIGURE 5-7 CHANNEL COSTS AND THE PRINCIPLE OF
POSTPONEMENT-SPECULATION
Source Adapted from Louis P. Bucklin, A Theory
of Distribution Channel Structure (Berkeley, CA
IBER Publications, University of California,
1966), pp. 22-25.
41FIGURE 5-8 DEMAND-SIDE GAP ANALYSIS TEMPLATE
- Notes and directions for using this template
- Enter names and/or descriptions for each segment.
- Enter whether SOSgtSOD, SOSltSOD, or SOSSOD for
each service output and each segment. Add
footnotes to explain entries if necessary. If
known and relevant, footnote can record any
supply-side gaps that lead to each demand-side
gap. - Record major channel used by each segment, i.e.,
how does this segment of buyers choose to buy?
42FIGURE 5-9 SUPPLY-SIDE GAP ANALYSIS TEMPLATE(to
be used in conjunction with Demand-SideGap
Analysis Template, Figure 5-8)
- Notes
- Record routes to market in the channel system.
List should include all channels recorded in
Figure 5-4 above. Note the segment or segments
targeted through each channel. - Summarize channel members and key flows they
perform (ideally, link this to the Efficiency
Template analysis in Chapter 3). - Note any environmental or managerial bounds
facing this channel. - Note all supply-side gaps in this channel, by
flow or flows affected. - If known, record techniques currently in use or
planned for use to close gaps (or note that no
action is planned, and why). - Analyze whether proposed/actual actions have
created or will create other gaps.
43FIGURE 5-10 DEMAND-SIDE GAP ANALYSIS TEMPLATE
CDW EXAMPLE
44FIGURE 5-11 SUPPLY-SIDE GAP ANALYSIS TEMPLATE
CDW EXAMPLE(to be used in conjunction with
Demand-Side Gap Analysis Template,Figure 5-10)
Note all channel members perform all flows to
some extent. Key channel flows of interest are
promotion, negotiation, and risking.
45Chapter 6Channel Power Getting It, Using It,
Keeping ItLearning Objectives
46FIGURE 6-1 THE NATURE AND SOURCES OF CHANNEL
POWER
47FIGURE 6-2 USING POWER TO EXERT INFLUENCE
48Chapter 7Managing Conflict to Increase Channel
Coordination
49 FIGURE 7- 1 HOW HIGH LEVELS OF CONFLICT
ERODE CHANNEL RELATIONSHIP
50FIGURE 7-2 NATURAL SOURCES OF CONFLICT
INHERENT DIFFRENCES IN VIEWPOINTS OF
SUPPLIERSAND RESELLERS
51FIGURE 7- 3 CONFLICT RESOLUTION STYLES
52Chapter 8Strategic Alliances in Distribution
53 FIGURE 8-1 SYMPTOMS OF COMMITMENT IN MARKETING
CHANNELS
- A committed party to a relationship (a
manufacturer, a distributor, or another channel
member) views its arrangement as a long-term
alliance. Some manifestations of this outlook
show up in statements such as these, made by the
committed party about its channel partner. - We expect to be doing business with them for a
long time. - We defend them when others criticize them.
- We spend enough time with their people to work
out problems and misunderstandings. - We have a strong sense of loyalty to them.
- We are willing to grow the relationship.
- We are patient with their mistakes, even those
that cause us trouble. - We are willing to make long-term investments in
them, and to wait for the payoff to come. - We will dedicate whatever people and resources
it takes to grow the business we do with them. - We are not continually looking for another
organization as a business partner to replace or
add to this one.
54FIGURE 8-2 MOTIVES TO CREATE AND MAINTAIN
STRATEGIC ALLIANCES IN CHANNELS
55FIGURE 8-3 THE CIRCLE OF COMMITMENT
56FIGURE 8- 4 PHASES OF RELATIONSHIPS IN MARKETING
CHANNELS
57Chapter 9Vertical Integration in Distribution
58FIGURE 9-1 THE CONTINUUM OF DEGREES OF VERTICAL
INTEGRATION
59FIGURE 9-2 EXAMPLES OF INSTITUTIONS PERFORMING
SOME CHANNEL FUNCTIONS
60FIGURE 9-3 HOW ENVIRONMENTAL UNCERTAINTY IMPACTS
VERTICAL INTEGRATION
61FIGURE 9-4 THE EFFECTS OF OUTSOURCING
62FIGURE 9-5 ROAD MAP TO THE VERTICAL INTEGRATION
DECISION
63Chapter 10Legal Constraints on Marketing Channel
Policies
64FIGURE 10-1 PRINCIPAL U.S. FEDERAL LAWS
AFFECTING MARKETING CHANNEL MANAGEMENT
65FIGURE 10-2 LEGAL RULES USED IN ANTITRUST
ENFORCEMENT
Per se illegality The marketing policy is
automatically unlawful regardless of the
reasons for the practice and without extended
inquiry into its effects. It is only
necessary for the complainant to prove the
occurrence of the conduct and antitrust
injury. Modified rule of reason (also called
"Quick Look") The marketing policy is presumed
to be anticompetitive if evidence of the
existence and use of significant market power
is found, subject to rebuttal by the
defendant. Rule of reason Before a decision is
made about the legality of a marketing policy,
it is necessary to undertake a broad inquiry
into the nature, purpose, and effect of
the policy. This requires an examination of
the facts peculiar to the contested policy,
its history, the reasons why it was
implemented, and its competitive significance.
Per se legality The marketing policy is
presumed legal.
66Chapter 11Retailing
67TABLE 11-1 THE WORLDS TOP 100 RETAILERS (2003)
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74Notes Source 2005 Global Powers of
Retailing, Stores, January 2005, available on
http//www.stores.org . (i) Continents are
abbreviated as follows Af. Africa N. Am.
North America C. Am. Central America S. Am.
South America Asia Asia Eur. Europe Pac.
Pacific (Australia, New Zealand). (ii) Target was
part of Dayton-Hudson Corporation in 1998.
Dayton-Hudson itself was ranked 14th in 1998
sales, and if Targets 1998 sales are taken
alone, it would have ranked 25th in sales in 1998
among global retailers. n.l. not listed in
top 100 retailers in 1998.
75TABLE 11-2 PROFIT PERCENTAGES AT SAKS FIFTH
AVENUES FLAGSHIP STORE (1996)
Source adapted from Jennifer Steinhauer (1997),
"The Money Department," The New York Times,
Magazine Section 6, April 6, pp. 62-64.
76TABLE 11-3 EXAMPLE OF ASSORTMENT AVAILABLE
ATBOOK BARON (www.bookbaron.com)
Author Sue Grafton, a popular mystery writer
book titles each start with a letter of the
alphabet, beginning with A is for Alibi,
published in 1982. R is for Ricochet was
published in 2004. Some of the Sue Grafton books
available at www.bookbaron.com on July 5, 2005
77TABLE 11-4 SALES, GENERAL ADMINISTRATIVE
(SGA) COSTS AS A PERCENTAGE OF NET SALES FOR
SELECTED RETAILERS
Source annual reports for 2004/2005 for each
company. Depending on the companys fiscal year
end, 2004 or 2005 figures are used. The actual
fiscal years overlap in all cases.
78TABLE 11-5 A TAXONOMY OF RETAILER TYPES
79FIGURE 11-1 U.S. E-COMMERCE SALES, IN MILLION
AND AS A PERCENTAGE OF TOTAL U.S. RETAIL SALES
Source U.S. Census Bureau, Released May 20,
2005, available at http//www.census.gov/mrts/www.
ecomm.html .
80FIGURE 11-2 PERCENTAGE CHANGE FROM ONE YEAR
AGO, IN TOTAL U.S. RETAIL SALES AND U.S.
E-COMMERCE SALES
Source U.S. Census Bureau, Released May 20,
2005, available at http//www.census.gov/mrts/www.
ecomm.html
81FIGURE 11-3 PERCENTAGE DISTRIBUTION OF
E-COMMERCE SALES BY MERCHANDISE LINE, 2003 (for
U.S. Electronic Shopping and Mail-Order Houses)
82FIGURE 11-4 E-COMMERCE AS A PERCENT OF SALES,
2003(for U.S. Electronic Shopping and Mail-Order
Houses)
83TABLE 11-6 DIRECT SALES BY COUNTRY
84TABLE 11-6 DIRECT SALES BY COUNTRY (CONTINUED)
85FIGURE 11-5 A SAMPLE MULTI-LEVEL DIRECT SELLING
ORGANIZATION STRUCTURE AND COMPENSATION
Source Anne T. Coughlan and Kent Grayson
(1998), "Network marketing organizations
Compensation plans, retail network growth, and
profitability," International Journal of Research
in Marketing, Vol. 15, p. 403.
COMMISSION SCHEDULE
86FIGURE 11-6 DESCRIPTION OF TRADE DEALS FOR
CONSUMER NONDURABLE GOODS
- Off invoice. The purpose of an off-invoice
promotion is to discount the product to the
dealer for a fixed period of time. It consists
of a temporary price cut, and when the time
period elapses, the price goes back to its normal
level. The specific terms of the discount
usually require performance, and the discount
lasts for a specified period (e.g., 1 month).
Sometimes the trade can buy multiple times and
sometimes only once. - Bill-back. Bill-backs are similar to off-invoice
except that the retailer computes the discount
per unit for all units bought during the
promotional period and then bills the
manufacturer for the units sold and any other
promotional allowances that are owed after the
promotional period is complete. The advantage
from the manufacturer's position is the control
it gives and guarantees that the retailer
performs as the contract indicates before payment
is issued. Generally, retailers do not like
bill-backs because of the time and effort
required. - Free goods. Usually free goods take the form of
extra cases at the same price. For example, buy
3 get 1 free is a free-goods offer. - Cooperative advertising allowances. Paying for
part of the dealers' advertising is called
cooperative advertising, which is often
abbreviated as co-op advertising. The
manufacturer either offers the dealer a fixed
dollar amount per unit sold or offers to pay a
percentage of the advertising costs. The
percentage varies depending on the type of
advertising run. If the dealer is prominent in
the advertisement, then the manufacturer often
pays less, but if the manufacturer is prominent,
then he pays more. - Display allowances. A display allowance is
similar to cooperative advertising allowances.
The manufacturer wants the retailer to display a
given item when a price promotion is being run.
To induce the retailer to do this and to help
defray the costs, a display allowance is offered.
Display allowances are usually a fixed amount
per case, such as 50 cents per case.
87FIGURE 11-6 DESCRIPTION OF TRADE DEALS FOR
CONSUMER NONDURABLE GOODS (CONTINUED)
- Sales drives. For manufacturers selling through
brokers or wholesalers, it is necessary to offer
incentives. Sales drives are intended to offer
the brokers and wholesalers incentives to push
the trade deal to the retailer. For every unit
sold during the promotional period, the broker
and wholesaler receive a percentage or fixed
payment per case sold to the retailer. It works
as an additional commission for an independent
sales organization or additional margin for a
wholesaler. - Terms or inventory financing. The manufacturer
may not require payment for 90 days, thus
increasing the profitability to the retailer who
does not need to borrow to finance inventories. - Count-recount. Rather than paying retailers on
the number of units ordered, the manufacturer
does it on the number of units sold. This is
accomplished by determining the number of units
on hand at the beginning of the promotional
period (count) and then determining the number of
units on hand at the end of the period (recount).
Then, by tracking orders, the manufacturers know
the quantity sold during the promotional period.
(This differs from a bill-back because the
manufacturer verifies the actual sales in
count-recount.) - Slotting allowances. Manufacturers have been
paying retailers funds known as slotting
allowances to receive space for new products.
When a new product is introduced the manufacturer
pays the retailer X dollars for a "slot" for the
new product. Slotting allowances offer a fixed
payment to the retailer for accepting and testing
a new product. - Street money. Manufacturers have begun to pay
retailers lump sums to run promotions. The lump
sum, not per case sold, is based on the amount of
support (feature advertising, price reduction,
and display space) offered by the retailer. The
name comes from the manufacturer's need to offer
independent retailers a fixed fund to promote the
product because the trade deal goes to the
wholesaler. - Source Robert C. Blattberg and Scott A. Neslin
(1990), Sales Promotion Concepts, Methods, and - Strategies (Englewood Cliffs, NJ
Prentice-Hall), pp. 318-319.
88TABLE 11-7 OBJECTIVES OF TRADE DEALS FOR
NONDURABLE GOODS
Objectives Retailer merchandising
activities Loading the retailer. Gaining or
maintaining distribution. Obtain price
reduction. Competitive tool. Retailer
"goodwill." Source Robert C. Blattberg and Scott
A. Neslin (1990), Sales Promotion Concepts,
Methods, and Strategies (Englewood Cliffs, NJ
Prentice-Hall), p. 321.
89Chapter 12Wholesaling
90TABLE 12-1 SOME SOURCES OF INFORMATION ABOUT THE
WHOLESALING SECTOR
91TABLE 12-2 PRINCIPAL SERVICES PROVIDED BY MAJOR
HARDWARE WHOLESALER-SPONSORED VOLUNTARY GROUPS
AND WHOLESALER BUYING GROUPS IN THE U.S.
92FIGURE 12-1 A REPRESENTATIVE MASTERDISTRIBUTOR
CHANNEL
Based on Narayandas, Das and V. Kasturi Rangan
(2004), "Building and Sustaining Buyer-Seller
Relationships in Mature Industrial Markets,"
Journal of Marketing, 68 (3), 63-77.
93Chapter 13Franchising
94TABLE 13-1 SECTORS WITH SUBSTANTIAL FRANCHISE
PRESENCE, U.S. AND FRANCE
Amusementi Automobiles Rental Service Equipm
ent Business Services Building Products and
Services Childrens Products, Including
Clothing Cleaning Services and Equipment Education
al Services Employment Agencies Health and Beauty
(Includes Hair Styling and Cosmetology) Home
Furnishings/Equipment Lodging/Hotels Maintenance M
iscellaneous Retail Miscellaneous Services,
including Training Personal Services and
Equipment Pet Services Photography and
Video Printing Quick Services Real
Estate Restaurants Fast Food Traditional Retail
Food Shipping and Packing Travel
i Categorization adapted from Shane and Foo
(1999), already cited, and the French Federation
of Franchising website www.franchise-fff.com
95TABLE 13-2 THE FRANCHISE CONTRACT
- The International Franchise Guide of the
International Herald Tribune suggests that any
franchise contract should address these subjects. - Definition of terms
- Organizational structure
- Term of initial agreement
- Term of renewal
- Causes for termination or non-renewal
- Territorial exclusivity
- Intellectual property protection
- Assignment of responsibilities
- Ability to sub-franchise
- Mutual agreement of pro forma cash flows
- Development schedule and associated penalties
- Fees front end, ongoing
- Currency and remittance restrictions
- Remedies in case of disagreementi
i Moulton, Susan L.(ed.) (1996), International
Franchise Guide, Oakland, California Source
Books Publications.
96TABLE 13-3 WHEN DO FRANCHISORS ENFORCE THE
FRANCHISE CONTRACT?
- Consider the scenario of a well-established
franchisor that has built a network of
franchisees. In theory, such a franchisor should
be quick to punish transgressions, such as - sourcing from a supplier of ones one choice,
rather than suppliers approved by the franchisor - failing to maintain the look and ambiance of the
premises - violating the franchisors standards and
procedures - failing to pay advertising fees--or even the
franchisors royalty! - Such violations happen surprisingly often. When
do franchisors exercise their legitimate right to
enforce their contracts by punishing the
franchisee? - Research indicatesi franchisors weigh the costs
and benefits, taking into account the
system-investments they need to protect, their
own power, and the countervailing power of the
franchisee and the franchise network. In
particular, in their actions, franchisors appear
to consider what signals they are sending to
franchisees, both current and potential, by what
they tolerate and what they enforce. With this
in mind, franchisors pick their battles, rather
than enforcing their contracts every time they
are violated. - When it is particularly costly to enforce,
franchisors are more likely to overlook a
violation. This is more likely in the following
circumstances. - The franchisees have a very dense, tightly knit
network among themselves. Hence, the franchisor
fears a reaction of solidarity, with other
franchisees siding with the violator.
i Antia, Kersi D. and Gary L. Frazier (2001),
"The Severity of Contract Enforcement in
Interfirm Channel Relationships," Journal of
Marketing, 65 (4), 67-81.
97TABLE 13-3 WHEN DO FRANCHISORS ENFORCE THE
FRANCHISE CONTRACT?(CONTINUED)
- The violator is a central player in the
franchisees networkwith one exception, to be
presented below. - The franchisor suffers from performance
ambiguity, meaning its information systems are
not sensitive enough to be sure what is the
situation. Such a franchisor cannot monitor
well, and therefore cannot be sure its case
against the violator is strong. - The franchisor has built strong relational
governance, in which the system operates on norms
of solidarity, flexibility, and exchange of
information. Such a franchisor doesnt want to
risk ruining these normsand has other ways to
deal with the violation in any case. - These are the costs of enforcing the contract.
But there are circumstances under which the
benefits of enforcement outweigh these costs.
The franchisor is more likely to take punitive
action to enforce its contract when - The violation is a critical one, such as missing
a large royalty payment or operating a very
shabby facility in a highly visible location. - - This is particularly the case when the
franchisee is a central player in the network.
Ordinarily, central players are protected (as
noted above), as the franchisor fears a system
backlash. But when a central player violates the
contract in a critical way, franchisors choose
to enforce because it sends a strong signal that
the rules are the rules. Put another way,
tolerating a major violation by a central player
would signal other franchisees that the
contract is just a piece of paper with no real
weight.
98TABLE 13-3 WHEN DO FRANCHISORS ENFORCE THE
FRANCHISE CONTRACT?(CONTINUED)
- When the violator is a master franchisee, that
is, with multiple units. Here, the risk is that
the violation propagates across this franchisees
units and become a large-scale problem if the
franchisor does not enforce. - The franchisor has invested a great deal in the
franchise system (as opposed to this particular
franchisee). The franchisor needs to protect its
investment and the capabilities it has created
while building the system. This is true even
when the franchisor does enjoy strong relational
governance. The franchisor will risk upsetting a
given relationship to protect its system
investments. - When the franchisor is large
- When there is high mutual dependence in the
franchisee-franchisor relationship (so that it
can withstand the conflict that enforcement will
create) - Or when the franchisor is much more powerful than
the franchisee (so that the franchisor can coerce
the franchisee to tolerate enforcement). - Taken together, it is clear that the franchisor
weighs the power of both sides and the impact of
each act of enforcement on its entire franchise
system. Franchisees thus have more power than
would appear to be the case if one examines each
dyad (franchisor/franchisee) in isolation.
99FIGURE 13-1 TYPICAL SALES-TO-PROFIT
RELATIONSHIPS FOR FRANCHISORS AND FRANCHISEES
Adapted from Carmen and Klein (1986)
100Chapter 14Logistics and Supply Chain Management
101FIGURE 14- 1 TYPES OF GOODS FOR SUPPLY CHAIN
MANAGEMENT
Adapted from Fisher (1997)
102FIGURE 14-2 TWO KINDS OF SUPPLY CHAINS
Adapted from Fisher (1997)