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LEARNING OBJECTIVES
LO 12-2 Identify various types of intermediaries and distribution channels.
LO 12-4 Explain the different types of vertical marketing systems.
LO 12-6 Identify the logistics aspects of supply chain management.
LO 12-7 Understand the role of retailing and e-commerce in delivering the value offering to
the customer.
CHAPTER OUTLINE
I. THE VALUE CHAIN AND VALUE NETWORKS
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II. CHANNELS AND INTERMEDIARIES
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III. FUNCTIONS OF CHANNEL INTERMEDIARIES
A. Physical Distribution Functions
i. Breaking Bulk
ii. Accumulating Bulk and Sorting
B. Transaction and Communication Functions
C. Facilitating Functions
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IV. DISINTERMEDIATION AND E-CHANNELS
V. VERTICAL MARKETING SYSTEMS
A. Corporate Systems
B. Contractual Systems
VI. CHANNEL BEHAVIOR: CONFLICT AND POWER
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VII. SELECTING CHANNEL APPROACHES
A. Distribution Intensity
i. Intensive Distribution
B. Channel Control and Adaptability
C. Prioritization of Channel Functions – Push versus Pull
Strategy
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VIII. LOGISTICS ASPECTS OF SUPPLY CHAIN
MANAGEMENT
A. Order Processing
B. Warehousing and Materials Handling
C. Inventory Management
D. Transportation
IX. LEGAL ISSUES IN SUPPLY CHAIN MANAGEMENT
A. Exclusive Dealing
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X. RETAILING AND ELECTRONIC COMMERCE
A. Business-to-Consumer Electronic Commerce
i. Advantages of E-Retailing
a. Extensive Selection
b. Considerable Information Available for
Product Research and Evaluation
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B. B2B E-commerce
XI. SUMMARY
KEY TERMS
supply chain A complex logistics network characterized by high levels of coordination and
integration among its members.
supply chain management The process of managing the aspects of the supply chain.
value network An overarching system of formal and informal relationships within which the
firm participates to procure, transform, and enhance, and ultimately supply its offerings in final
form within a market space.
intermediaries Organizations that play a role in the exchange process between producers and
consumers.
merchant intermediaries Intermediaries who take title to the product during the exchange
process.
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agent intermediaries Intermediaries who do not take title to the product during the exchange
process.
Direct channel A channel of distribution arrangement in which there are no intermediaries,
operating strictly from product to end-user consumer or business user.
indirect channel A channel of distribution arrangement containing one or more intermediary
levels.
sorting The process of classifying products for sale through different channels.
creating assortments The process of accumulating products from several sources to then make
those products available down the channel as a convenient assortment for consumers.
reducing transactions The process of lowering the number of purchasing transactions carried
out by a firm by utilizing the services of intermediaries.
transportation and storage Commonly provided intermediary functions for producers that do
not perform these functions themselves.
facilitating functions Activities that help fulfill completed transactions and also maintain the
viability of the channel relationships.
corporate VMS The investment of a channel member in backward or forward vertical
integration by buying controlling interest in other intermediaries.
vertical integration Buying a controlling interest in other intermediaries.
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contractual VMS The binding of otherwise independent entities in the vertical marketing
system legally through contractual agreements.
(VMS).
partner relationship management (PRM) A strategic alliance that includes connectivity of
inventory, billing systems, and market research among marketing channel members.
channel power The degree to which any member of a marketing channel can exercise influence
over the other members of the channel.
channel conflict Disagreements among channel members that can result in their relationship
becoming strained or even falling apart.
coercive power An explicit or implicit threat that a channel captain will invoke negative
consequences on a channel member if it does not comply with the leader’s request or
expectations.
intensive distribution A distribution strategy designed to saturate every possible intermediary,
especially retailers.
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convenience goods Frequently purchased, relatively low-cost products for which customers have
little interest in seeking new information about or considering other product options.
slotting allowance (shelf fee) Extra incentives paid to wholesalers or retailers by the
manufacturer for placing a particular product into inventory.
pull strategy Promotional and distribution strategy in which the focus is on stimulating demand
for an offering directly from the end user.
outbound logistics The process of a product’s movement from production by the manufacturer
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exclusive territory The protection of an intermediary from having to compete with others
selling a producer’s goods.
tying contract A formal requirement by the seller of an intermediary to purchase a
supplementary product to qualify to purchase the primary product the intermediary wishes to
buy.
omnichannel retailing Use of a variety of channels in a customer’s shopping experience,
including research before a purchase.
market makers Dedicated B2B sites that facilitate the exchange of products and services,
improving market efficiency by quickly bringing buyers and sellers together.
customer communities Websites (often gated) where customers come to engage with other
customers, the sponsoring firm, and others in the ecosystem to share ideas and collaborate on
topics of mutual interest.
APPLICATION QUESTIONS
1. Consider the concept of value co-creation.
a. In your own words, explain the concept of value co-creation.
Value co-creation occurs when the members of the value network — participating
b. What are some specific ways value can be co-created?
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Value can be created with one partner by eliminating many in-house business functions
and activities in favor of focusing only on those aspects for which it is best equipped to
c. Provide an example of a specific value network you believe results in a high level of
value co-creation.
Hewlett-Packard co-creates value when the customer decides to configure their computer
purchase rather than selecting a computer pre-configured.
d. Provide an example of a specific firm or firms that could benefit by establishing a value
network and engaging in value co-creation. In what ways would this approach be an
improvement over their existing business approach?
2. The chapter discusses the importance of being “nimble” in all aspects of a firm’s operation –
that is, to be in a position to be maximally flexible, adaptable, and speedy in response to
change.
a. Identify two firms in two different industries that you believe exhibit a nimble nature in
their operations.
b. What specific evidence leads you to believe these firms are nimble, especially in their
channel and supply chain activities?
Owens Corning utilizes various software to standardize on just a few IT vendors’
products. This lessens integration headaches if circumstances require that the global
3. Consider the issue of disintermediation in electronic channels.
a. Do you believe that all channels will disintermediate down to simple direct channels over
time? Why or why not?
b. Does your opinion change if the question is asked only about B2C channels? Only for
B2B channels? Why?
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4. Consider this statement: “It’s important in business today for all firms to work to cut out the
middleman. Intermediaries represent costs that can be saved by finding ways to cut them out
of the system. Down-channel buyers always benefit when this happens.” Do you agree with
this statement? Why or why not? Be specific in arguing your point based on what you
learned in the chapter.
Cutting out intermediaries is not a guarantee that the consumers will benefit. In any channel
structure, in the long run channel intermediaries tend to continue to participate in a channel
5. Exhorting firms to develop networks and alliances for purposes of value co-creation sounds
like a good idea. However, is there a point at which such approaches can be taken too far (a)
from a legal perspective, (b) from an ethical perspective, and (c) from a strategic perspective?
Explain your viewpoint.
Firms must avoid three key legal issues related to distribution: exclusive dealing, exclusive
territories, and tying agreements.
• When a supplier creates a restrictive agreement that prohibits intermediaries that
handle its product from selling competing firms’ products, exclusive dealing has
occurred.
6. Consider your school’s e-commerce capabilities.
a. From a student’s perspective, what e-commerce functions are available on your campus
website (for example, class registration, payment, delivery of course materials)?
b. How would you rate the websites ease of use for the functions you identified?
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c. What functions does the campus website perform well and what functions does it perform
poorly? Explain.
d. What e-commerce functions do you think should be added to the website’s capabilities
that are not presently offered?
Due to differences with every school’s web portal, student answers will vary.
MANAGEMENT DECISION CASE
Restoration Hardware— Using the Brick & Mortar Store as a “3D Catalog”
Although many students will not have shopped at Restoration Hardware, this case is focused on
two areas upon which most will be experts: shopping in retail stores and shopping via the
internet. The case can be introduced by asking students to share how they have seen retail
change in the internet age—what stores (or even malls) they have seen close and how their
Questions for Consideration
1. RH’s CEO believes that the internet is limited in its ability to facilitate differentiation among
retailers. Do you agree? Which retailers do a particularly effective job at presenting their
products through their websites?
Students will likely disagree with RH’s CEO and may offer examples of online retailers who
have distinguished themselves through special capabilities. Here, it would be good to
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experience. These two links provide lists of award winning ecommerce websites; note that
many are web-only retailers:
2. Does the RH strategy work only for high end/prestige products or are there elements of their
approach that would be appropriate for retailers at all price levels? Choose one of your
favorite retailers and discuss how that company could best apply the approach that RH is
using.
While the precise strategy (elaborate galleries in historic buildings) is probably most
appropriate for high end products, the general concept should be transferable. There are
two broad components to the approach: 1) showing the products in more of a “real world”
setting (the gallery concept) and 2) providing entertainment and/or other services that make
3. Is it environmentally responsible for RH to produce and distribute such large paper catalogs?
Are there ways they could mitigate the environmental impact of this program? How could
they best deal with the likely negative reaction from “green” customers?
Articles in the case reference list provide some background on the controversy around RH’s
extravagant use of catalogs. There will likely be different opinions on the topic, with some
students pointing out that all of the information in the “source books” could be (and in fact
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books are also made of recyclable material. Through a partnership with UPS, RH purchases
carbon offsets to compensate for their negative environmental impact.
To deal with the negative reaction, RH could 1) communicate the info above (which they do)
and 2) make it easy for environmentally-conscious customers to opt out of source books and
4. What are some other novel ways that retailers could define the role of their brick and mortar
stores to optimize their effectiveness in contributing to increasing firm revenues and profits?
Since the goal is to get customers to go to the trouble of going to a store, students should be
asked what causes them to do this versus just shopping online. Several prompts could help
the brainstorming process:
• Social—how could stores create networking opportunities for customers to
experience the stores with friends or to meet new people?
SUGGESTED VIDEO
Creston Vineyard’s Distribution Channels (10:47 minutes)
Description: Creston Vineyards outlines their structure of distribution channels. Video discusses
the process it takes to make their product available from the manufacturer to the consumer.
1. Should Creston Vineyard use a push or pull strategy in its channels?
A push strategy means that much of the Creston’s promotional activities take place from the
Vineyard downward through the channel of distribution. A pull strategy means that Creston
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2. Describe Creston Vineyard’s distribution intensity strategy.
Creston Vineyard employs a selective distribution strategy. While the Vineyard is able to sell
Supply Chain: How Domino’s Gets Pizza to Plate (4:59 minutes)
Description: Domino’s needs an efficient supply chain in order to profitably serve pizza to its
large customer base. This video explains various aspects of the company’s supply chain
operations and relationships.
1. Most of the ingredients needed for pizza could be acquired from local suppliers located in
close proximity to the Domino’s stores in a given city, eliminating the extensive supply chain
network that Domino’s utilizes with their hub-and-spoke approach. What are the likely
reasons that Domino’s chooses to employ the supply chain strategy described in the video?
Companies set up these extensive supply chain operations with the goals of control and cost
containment, both in support of long term sales growth and profit maximization. By
managing the process, Domino’s supply chain specialists can ensure that the ingredients are
Is Big Box Retailing Right for Your Product? (3:41 minutes)
Description: Vosges Haut-Chocolat, a luxury chocolate brand, introduced a mid-market brand
called Wild Ophelia to appeal to a different customer segment. Unfortunately, dealings with two
large retailers interested in selling the product did not go well. The video explains what went
wrong.
1. What were the key execution problems noted in the video for the new Wild Ophelia brand (at
both WalMart and Walgreen’s?
At WalMart, the product didn’t even make it from the stockroom to the shelves. Walgreens
did not follow through with their promises to invest in specialized store fixtures (display
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also did not take a more targeted approach, choosing specific stores based on demographics
that would be consistent with the brand’s target market demographics.
2. What steps could be taken to ensure that Vosges’ next attempt at distribution for Wild
Ophelia is more successful?
The experience of Vosges shows the value of a well-defined vertical marketing system.
Dealing with two of the world’s largest retailers, the relatively small Vosges had very little