Distribution Strategies: Channels, Length, and Management

Posted on Nov 7, 2024 in Other subjects

Distribution: Covering the Market

Strategic Environment Analysis

To define a distribution policy, it’s crucial to analyze the strategic environment, including:

  • Consumers:

    Changes in population, family structure, age, income, education, values, and lifestyle.

  • Competition:

    Among different types of stores, new systems, and life cycles.

  • Resources:

    Capital, facilities, personnel, and new technologies.

Channels: Wholesalers

  • Service Provider:

    Customer knowledge

  • Inventory Available:

    Vendors

  • Service Retail:

    Discounts, store design, administrative tips

Channels: Wholesaler Management

  • Clear and adequate margins for the channel and the manufacturer.
  • Train, supervise, and motivate vendors; provide product knowledge.
  • Train channel on product, sales, accounts, inventory, product line analysis, and market area analysis.
  • Utilize catalogs, advertising, and promotions.

Distribution Strategy

Setting the Length of the Channel

This refers to the number of intermediaries involved in bringing the product from the factory to the final consumer.

Two Main Options:

  • Direct Sales:
    • May be the most cost-effective, especially for large volumes.
    • Allows better control over distribution.
    • Better positioned to meet customer needs.
    • Provides more market information.
  • Sales Through Intermediaries:
    • Proper Channels:
      • Difficult to control.
      • Challenges in building and maintaining prices.
      • Requires better coordination of promotions.
      • Demands better customer service.
      • Needs strong financial investment and human resources.
      • Limited ability to adapt to market changes.
    • Contract Systems (Franchise):
      • Product & Brand Franchise: Entitled to market a product in a specific market area.
      • Business Format Franchise: Acquires the right to use the brand in the business, plus the right to sell.
      • Opportunity to become entrepreneurs for the licensee.
      • Provides a known brand, education, training, and ongoing support.
      • Allows for control and coordination of trade policy.
      • Expands business with capital from third parties.
      • Creates a weak position before the licensor.
    • Conventional Distribution Channels:
      • Independent intermediaries.
      • Lower investment in capital and human resources.
      • Reduces risk as the product owner is separate.
      • Offers greater flexibility.
      • Requires significant effort for coordination and negotiation.
      • Can be unstable due to low loyalty and ease of entry and exit.

Setting the Width of the Channel

  • Intensive:
    • Maximizes potential sales.
    • Commodities, poorly differentiated and low-priced products are bought at the nearest outlet.
  • Selective/Exclusive:
    • Maintains a high-fashion image for products.
    • Ensures that clients have access to specific features, including price.

Factors Influencing the Decision:

  • Product Characteristics:
    • High frequency and minimum effort = Intensive Distribution.
    • Shopping goods = Selective Distribution.
  • Consumer Behavior:
    • Selective distribution is preferred if the risk associated with the purchase decision is high (e.g., requires technical advice and after-sales service).
    • Used when brand loyalty among consumers is high.
    • Employed when the role of retail staff is important in influencing consumer purchases.
  • Degree of Control:
    • High desire for control = Selective Distribution.
    • Allows for control of price support, product explanation, and product image.

Modifying the Distribution Channel

  • A company may develop a new distribution system for several reasons:
    • Competitive pressure.
    • Serving a new consumer segment.
    • Covering a new geographic area.
  • Operating through two parallel channels increases the flexibility of the distribution policy.
  • However, it can be a significant source of conflict.

Distribution Channels

Evaluation Criteria

  • Economic:
    • Sales calculation.
    • Cost of options.
    • Break-even point and performance.
  • Control:
    • Vertical relationships in the channel.
    • Horizontal relationships.
    • Conflicts between channels.
    • Cooperation is achieved when the manufacturer assumes a leadership role and encourages channel members.
    • Channel members are independent entities with their own objectives but must work collectively.

Summary and Conclusions

Decision Making

  • Channel Length:
    • Direct Sales: More control, more market information, and closer customer relationships.
  • Channel Modifications:
    • Changes due to competitive pressures, new geographic areas, or new segments to target.

Assessment Criteria

  • Economic, Control, Adjustment/Flexibility.

Channel Management

  • Channel management is challenging because members have separate goals and there are no explicit rules in formal relationships.

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