Channel design

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Channel design

• Module 4 (b)
• Chapters 6, 7 8

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Lecture Overview

• What is channel design?
• Overview of the channel design decision paradigm
• recognising the need for channel design
• establishing distribution objectives
• specifying distribution tasks
• identifying alternative channel structures
• evaluating alternative structures
• selecting the best channel
• selecting channel members

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What is channel design?

• determining the channel structure
• developing new channels
• modifying existing channels
• systematic, yet complex process
• structure must reflect channel strategy and
  objectives
• can be a basis of differential advantage
• dual and multiple channels

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Channel design processFig 6.1, p. 200
Recognise the need for channel design
Establish distribution objectives
Specify distribution tasks
Identify alternative channel structures
Evaluate channel structures on relevant variables
Select the best structure
Select channel members
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Reasons for channel design or modification

• new product
• new target market
• major change in the marketing mix
• new firm, merger or acquisition
• intermediaries change of policy
• changing availability of intermediaries
• market development
• macro-environmental changes
• channel conflict
• annual review reveals need for change

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Establishing channel objectives

• must reflect firms overall and marketing mix
  objectives
• must reflect customer service output requirements
• lot size, locational convenience, waiting time
  (delivery speed), product variety, after sales
  service
• good objectives are...
• specific, time framed, measurable, quantified,
  refer to target market

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• Example
• To ensure that our product is located no more
  than a 10 minute drive from 75 of the full-time
  working women in Queensland. We plan to achieve
  this goal within 12 months of our product
  roll-out.

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Specify distribution tasks

• Vary across product and market type
• Refer to table 4.1, p. 4.10 (study guide)
• Selling
• promoting, contacting, negotiating, order taking
• Support
• research, information etc.

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Channel tasks cont..

• Physical distribution
• storage, inventory management, transporting,
  order processing
• Product modification and after-sale service
• repair, maintenance, handling returns
• Risk taking
• financing, providing credit, holding inventory

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Identifying alternative channels

• Number of channel levels
• Distribution intensity
• Type of intermediary

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Number of levels - channel length
Manufacturer
Customer
Retailer
Wholesaler
Customer
Retailer
Customer
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Channel length depends upon..

• need for control
• if high, go direct
• capital resources
• if high, can go direct
• degree of distribution expertise
• if high, can go direct
• overall sales volume
• if high, go direct

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• number of customers size of customer orders
• if small number of customers with large orders,
  go direct
• extent of market concentration
• if concentrated, go direct
• customers need for locational convenience and
  fast delivery times
• if high, use intermediaries
• willingness and availability of suitable
  intermediaries

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Distribution intensity

• number of intermediaries at each level
• Intensive
• every outlet that satisfies minimum requirements
• Selective
• a few selected outlets
• Exclusive
• one outlet in a geographic area

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Type of intermediary at each level

• Wholesalers
• Merchant
• Agents and brokers
• Manufacturers sales branch or office
• Retailers
• Various types
• Match between brand image and store image

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So, there are many possible alternative channel
structures
level
X
intensity
X
type
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Evaluate alternative channel structures

• Determining variables include
• market factors
• product factors
• company factors
• intermediary factors
• environmental factors
• behavioural factors
• Vary across product and market type
• Example table 4.5, p. 4.16 (study guide)

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Market variables

• market size
• if large, use intermediaries
• geographic dispersion
• if dispersed, use intermediaries
• market density
• if dense, go direct
• efficient congestion - high density markets allow
  greater efficiency

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• market behaviour
• when, where, how the market buys
• table 6.1, p. 214
• quantities purchased, buying behaviour, buying
  effort, habits, buying roles, service
  requirements, etc.
• refer to table 8.3, p. 270 buying behaviour

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Product variables

• bulk and weight
• if bulky, use short channel
• perishability
• if perishable, use short channel
• unit value
• if high, go direct
• degree of standardisation
• if standardised, use intermediaries

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• technical complexity
• if technically complex, go direct
• stage of PLC
• early - direct, mature - indirect

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Aspinwalls Characteristics of Goods and
Parallel Systems Approach

• Refer table 6.2, p. 220
• five characteristics of the product
• 1. replacement rate (turnover)
• 2. gross margin (margin)
• 3. adjustment (value-adding /customisation)
• 4. time of consumption
• 5. searching time (distance, time)

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Impact on channel length

• red, yellow or orange goods
• Impacts on channel length
• Refer to figure 6.6, p. 221

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Red Goods

• characteristics
• high replacement rate
• low gross margin, adjustment , consumption
  searching time
• ie convenience goods
• require
• high standardisation of distribution tasks
• longer channels

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Yellow Goods

• characteristics
• low replacement rate
• high gross margin, adjustment , consumption
  searching time
• ie custom-made goods
• require
• customisation of tasks
• shorter channels

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Orange Goods

• characteristics
• medium
• ie cars, furniture
• require
• moderate standardisation/specialisation of tasks
• suit medium length channel

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Company variables

• size of the company
• if large, may go direct
• financial capacity
• if large, may go direct
• distribution expertise
• if high, may go direct
• objectives and strategies
• desire for control
• if high, go direct

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Intermediary variables

• availability
• cost
• services offered
• ability
• willingness

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Environmental variables

• Changes in the firms environment can create the
  need to revise the channel structure
• In particular,
• new competitor
• new technology
• legal changes
• changing lifestyles

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Behavioural variables

• Changes to the channel structure can be made as a
  result of behavioural problems
• conflict
• abuse of power
• poor communication
• role ambiguity
• Likewise, changes can create problems

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Select the best channel structure

• aim is to select the optimal structure
• recognises constraints and realities
• achieve distribution objectives efficiently and
  effectively
• create a sustainable competitive advantage
• minimise dysfunctional conflict

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Decision making tools

• Aspinwalls characteristics of goods and parallel
  systems
• Financial analysis
• based on costs and earnings
• Transaction cost analysis
• vertical integration v independent intermediaries
• if transaction specific assets are high, vertical
  integration is the least risky option

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Decision making tools cont.

• Management science approaches
• Simulations
• Mathematical models
• Judgmental heuristic approaches
• Straight qualitative judgment
• Weighted score approach
• Distribution costing approach

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Weighted factor score approach

• Example table 6.3, p. 228
• What are the determinant factors?
• distribution objectives, company size and
  resources have a large impact
• not all factors are weighted evenly
• Some factors are irrelevant
• for example, services are not tangible products
  and thus product factors may be less relevant

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Problems with weighted factor approach

• Subjectivity in determining
• factors
• weights
• rating
• Should be coupled with commonsense and good
  judgment.

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Some basic criteria for evaluating alternative
channels

• Refer to table 4.5, p. 4.16 (study guide)
• Market coverage
• Control
• tasks, image, customer service
• Effectiveness
• Cost efficiency
• Flexibility

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Selecting channel members

• Selection criteria - refer to figure 7.2, p. 247
• financial status and creditworthiness
• sales strength
• products carried
• image and reputation
• market coverage
• sales performance
• management succession
• management ability and attitude
• size
• example for selecting a merchant wholesaler
• table 4.6, p. 4.18 (study guide)

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Summary

• Defined channel design
• Channel design decision paradigm
• recognising the need for channel design
• establishing distribution objectives
• specifying distribution tasks
• identifying alternative channel structures
• evaluating alternative structures
• selecting the best channel
• selecting channel members

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Tutorial Program

• Case 8 Star chemical company
• Issue for discussion 2, p. 275
• Activity 4.10, selected reading 4.1
• Revisit the snap-on-tools case.
• Apply the channel design paradigm to this case.