LEARNING OBJECTIVES
In this chapter, we will address the following questions:
1. What is a marketing channel system and value network?
2. What work do marketing channels perform?
3. How should channels be designed?
4. What decisions do companies face in managing their channels?
5. How should companies integrate channels?
6. What are the key channel issues in e-commerce?
7. What are the key channel issues in m-commerce?
8. How should companies manage channel conflict?
SUMMARY
1. Most producers do not sell their goods directly to final users. Between producers
2. Marketing channel decisions are among the most critical decisions facing
3. Companies use intermediaries when they lack the financial resources to carry out
direct marketing, when direct marketing is not feasible, and when they can earn more by
4. Manufacturers have many alternatives for reaching a market. They can sell direct
or use one-, two-, or three-level channels. Deciding which type(s) of channel to use calls
5. Effective channel management calls for selecting intermediaries and training and
6. Marketing channels are characterized by continuous and sometimes dramatic
7. E-commerce has become firmly established as more companies have adopted
8. Channel integration must recognize the distinctive strengths of online, offline, and
mobile selling and maximize their joint contributions.
C H A P T E R
17
DESIGNING AND
MANAGING INTEGRATED
MARKETING CHANNELS
9. All marketing channels have the potential for conflict and competition resulting
10. Channel arrangements are up to the company, but certain legal and ethical issues
OPENING THOUGHT
Most students are not familiar with channels of distribution, except, perhaps, from the
retailer in which they have bought products. Therefore, the instructor has to ensure that
they clarify the various channels of distribution during this chapter lecture. Examples of
the various channels for products familiar to the students can help illustrate the
complexity of the process.
Managing channels of distribution will be new to most students, as will the definitions of
channel conflict and channel support. The instructor can best serve the student by fully
diagramming a particular product from a channel of distribution perspective and talking
about channel roles, conflicts, training, and motivation.
TEACHING STRATEGY AND CLASS ORGANIZATION
PROJECTS
1. At this point in the semester-long project, students should present their channel
2. Progressive companies have begun developing a value network system to get
products in the hands of consumers. A value network includes a firm’s suppliers, its
3. Sonic PDA Marketing Plan: Manufacturers need to pay close attention to their
marketing channels. By planning the design, management, evaluation, and
modification of their marketing channels, manufacturers can ensure their products are
available when and where customers want to buy.
At Sonic, you have been asked to develop a channel strategy for Sonic 1000. Based
on the information you previously gathered and the decisions you have already made
about the target market, product, and pricing, answer the following:
• What decisions must Sonic make to develop the five marketing flows (physical
Document your recommendations about marketing channels and strategy in a written
marketing plan or type the recommendations into the Marketing Mix and Channels
sections of Marketing Plan Pro.
ASSIGNMENTS
Top marketing companies are employing both a “push” and a “pull” strategy to deliver
incremental sales. Take the example of the company called Sepracor, Inc. as defined in
the chapter. Its product Lunestra has caused the company’s stock price to soar. Using
Ask the students to comment on the hybrid channel of distribution. The hybrid channel as
defined in the chapter poses an interesting channel for future marketers. As students grow
into consumers will they or won’t they rely on purchasing products exclusively through
the Internet? Or will they demand hybrid distribution choices like free shipment to store
sites (like Walmart) or pick up at the store like Best Buy?
value to the consumer. Student answers should be directed toward the three features of
channel integration found in the textbook.
END–OF–CHAPTER SUPPORT
MARKETING DEBATE—Does It Matter Where You Sell?
Some marketers feel that the image of the particular channel in which they sell their products
does not matter—all that matters is that the right customers shop there and the product is
displayed in the right way. Others maintain that channel images—such as a retail store—can
be critical and must be consistent with the image of the product.
Take a position: Channel images do not really affect the brand images of the products they sell
that much versus channel images must be consistent with the brand image.
MARKETING DISCUSSION
Think of your favorite retailers. How have the retailers integrated channel systems? How
would you like to see channels integrated? Do you use multiple channels from the retailers?
Why?
1. The ability to order a product online and pick it up at a convenient retail location.
3. The right to receive discounts based on total online and off-line purchases
Marketing Excellence: Amazon.com
1. Why has Amazon.com succeeded online when so many other companies have failed?
Suggested Answer: One key to Amazon.com’s success in all these different ventures is
its willingness to invest in the latest Internet technology to make shopping online faster,
2. Will the Kindle revolutionize the book industry? Why or why not?
3. What’s next for Amazon.com? Is cloud computing the right direction for the company?
Where else can it grow?
Suggested Answer: Student answers will be mostly speculative in nature but one area that
Marketing Excellence: Costco
1. What is unique about Costco’s channel management process? What components can other
retailers borrow or implement?
Suggested Answer: Costco buys its merchandise directly from the manufacturer.
Products are shipped directly to Costco warehouses or to a depot, which reallocates the
shipments to Costco warehouses within 24 hours.
2. Where can Costco improve? Should it offer more products or advertise more? Why or
why not?
Suggested Answer: Student answers will vary but students should evaluate the success of
Costco to date in executing their marketing strategy—“to continually provide our
DETAILED CHAPTER OUTLINE
Opening vignette: Successful value creation needs successful value delivery. Instead of
limiting their focus to their immediate suppliers, distributors, and customers, holistic
marketers are examining the whole supply chain as a value network, including their
suppliers’ suppliers upstream and their distributors’ customers downstream. They are also
looking at how technology is changing the way customers shop and retailers sell and
finding new and different means to distribute and service their offerings. L.L.Bean
develops strong customer ties with a well-executed channel strategy
I. Marketing Channels and Value Networks
A. Intermediaries between producers and users constitute a marketing channel
(also called a trade channel or distribution channel).
i. Marketing channels are sets of interdependent organizations
B. The Importance of Channels
i. Marketing channel system is the particular set of marketing channels a
firm employs, and decisions about it are among the most critical ones
management faces.
ii. Marketing channels must not just serve markets, they must also make
them; the channels chosen affect all other marketing decisions
1. Pricing depends on whether it uses online discounters or high-
quality boutiques
iii. A push strategy uses the manufacturer’s sales force, trade promotion
money, or other means to induce intermediaries to carry, promote, and
sell the product to end users.
iv. A pull strategy uses advertising, promotion, and other forms of
communication to persuade consumers to demand the product from
intermediaries, thus inducing the intermediaries to order it.
C. Multichannel Marketing: using two or more marketing channels to reach
customer segments in one market area.
i. Each channel can target a different segment of buyers, or different
need states for one buyer, to deliver the right products in the right
D. Integrating Multichannel Marketing Systems
i. Companies are increasingly employing digital distribution strategies,
selling directly online to customers or through e-merchants who have
2. Lower channel cost
4. New channels typically introduce conflict and problems with
control and cooperation.
5. Companies should use different sales channels for different–
sized business customers—a direct sales force for large
6. Multichannel marketers also need to decide how much of their
product to offer in each of the channels.
II. Value Networks
A. The company should first think of the target market and then design the
supply chain backward from that point = demand chain planning
B. The company can be viewed as at the center of a value network—a system of
partnerships and alliances that a firm creates to source, augment, and deliver
its offerings.
i. The company can estimate whether more money is made upstream or
C. Managing a value network means making increasing investments in
information technology (IT) and software.
D. The Digital Channels Revolution is profoundly transforming distribution
strategies.
i. Traditional brick-and-mortar channel strategies are being modified or
even replaced.
ii. Online retail sales (or e-commerce) have been growing at a double-
digit rate; apparel and accessories, consumer electronics, and computer
III. The Role of Marketing Channels
A. Producers delegate some of the selling job to intermediaries, relinquishing
control over how and to whom its products are sold because through their
i. A marketing channel performs the work of moving goods from
producers to consumers.
ii. It overcomes the time, place, and possession gaps that separate goods
and services from those who need or want them.
iii. They gather information, develop and disseminate communications,
negotiate, place orders, get funds, take on risk, provide storage,
arrange financing, and oversee transfer of ownership
2. Ordering and payment constitute a backward flow from
customers to the company.
1. The question for marketers is not whether various channel
2. All channel functions have three characteristics in common:
a. They use up scarce resources
b. They can often be performed better through
specialization
c. They can be shifted among channel members.
C. Channel Levels
i. The producer and the final customer are part of every channel.
ii. A zero-level channel, also called a direct marketing channel, consists
iii. A one-level channel contains one selling intermediary, such as a
retailer.
iv. A two-level channel contains two intermediaries, typically a
wholesaler and a retailer, and a three-level channel contains three.
v. An industrial-goods manufacturer can use its sales force to sell directly
to industrial customers, or it can sell to industrial distributors who sell
vi. Channels normally describe a forward movement of products from
source to user, but reverse-flow channels are also important (1) to
vii. Reverse-flow intermediaries include manufacturers’ redemption
centers, community groups, trash-collection specialists, recycling
D. Service Sector Channels
IV. Channel-Design Decisions
A. Analyzing Customer Needs and Wants
i. Consumers may choose the channels they prefer based on price,
product assortment, and convenience as well as their own shopping
B. Channels serve five service functions
i. Desired lot size
ii. Waiting and delivery time
iii. Spatial convenience
iv. Product variety
v. Service backup
C. Establishing Objectives and Constraints
i. Channel objectives vary with product characteristics.
D. Identifying Major Channel Alternatives
i. Each channel—from sales forces to agents, distributors, dealers, direct
mail, telemarketing, and the Internet—has unique strengths and
weaknesses.
1. Sales forces can handle complex products and transactions, but
they are expensive.
3. Distributors can create sales, but the company loses direct
contact with customers.
ii. Types of Intermediaries
iii. Number of Intermediaries
1. Exclusive distribution severely limits the number of
intermediaries.
E. Evaluating Major Channel Alternatives
i. Economic Criteria: Every channel member will produce a different
level of sales and costs. Sellers try to replace high-cost channels with
V. Channel Management Decisions
A. After a company has chosen a channel system, it must select, train, motivate,
and evaluate intermediaries for each channel.
i. It must also modify channel design and arrangements over time,
B. Training and Motivating Channel Members
i. Carefully implemented training, market research, and other capability-
building programs can motivate and improve intermediaries’
performance.
C. Channel Power is the ability to alter channel members’ behavior so they take
actions they would not have taken otherwise
i. Coercive power. A manufacturer threatens to withdraw a resource or
terminate a relationship if intermediaries fail to cooperate.
ii. Reward power. The manufacturer offers intermediaries an extra
benefit for performing specific acts or functions.
D. Most producers see gaining intermediaries’ cooperation as a huge challenge.
E. To streamline the supply chain and cut costs, many manufacturers and
retailers have adopted efficient consumer response (ECR) practices to
organize their relationships in three areas:
i. Demand-side management, or collaborative practices to stimulate
F. Evaluating Channel Members: periodic evaluation of intermediaries’
performance
G. Modifying Channel Design and Arrangements: The optimal channel structure
will inevitably change over time.
i. A new firm typically starts as a local operation selling in a fairly
iii. Early buyers might be willing to pay for high-value-added channels,
but later buyers will switch to lower-cost channels. Small office
copiers were first sold by manufacturers’ direct sales forces, later
through office equipment dealers, still later through mass
merchandisers, and now by mail-order firms and Internet marketers. In
H. Channel Modification Decisions
i. The distribution channel may not work as planned, consumer buying
patterns change, the market expands, new competition arises,
innovative distribution channels emerge, and the product moves into
I. Global Channel Considerations
i. International markets pose distinct challenges, including variations in
ii. Developing markets have become a target for many retailers.
1. India’s complex regulations, poor infrastructure, and expensive
real estate also make it a difficult market for retail chains to
VI. Channel Integration and Systems
A. A conventional marketing channel consists of an independent producer,
wholesaler(s), and retailer(s), each wanting to maximize its own profits.
iii. Channel stewardship has two important outcomes.
1. Expands value for the steward’s customers, enlarging the
2. Creates a more tightly woven and yet adaptable channel in
which valuable members are rewarded and the less valuable are
weeded out.
iv. VMSs arose from strong channel members’ attempts to control
channel behavior and eliminate conflict over independent members
pursuing their own objectives.
v. A corporate VMS combines successive stages of production and
distribution under single ownership.
vii. A contractual VMS consists of independent firms at different levels of
production and distribution integrating their programs on a contractual
basis to obtain more economies or sales impact than they could
achieve alone
1. Wholesaler-sponsored voluntary chains
3. Franchise organizations
viii. The New Competition in Retailing
2. The result is a polarization in retailing between large vertical
marketing organizations and independent specialty stores,
which creates a problem for manufacturers.
C. Horizontal Marketing Systems: two or more unrelated companies put together
resources or programs to exploit an emerging marketing opportunity.
i. Each company lacks the capital, know-how, production, or marketing
VII. E-Commerce Marketing Practices
A. E-Commerce uses a Web site to transact or facilitate the sale of products and
services online.
B. Online retailers compete in three key aspects of a transaction: (1) customer
interaction with the Web site, (2) delivery, and (3) ability to address problems
when they occur.
ii. Brick-and-click companies = existing companies that have added an
online site for information or e-commerce.
iii. E-Commerce Success
1. Customer service is critical.
3. To increase customer satisfaction and the entertainment and
information value of online shopping experiences, some firms
4. Ensuring security and privacy online remains important.
iv. Although business-to-consumer (B-to-C) Web sites have attracted
1. Firms are using B-to-B auction sites, spot exchanges, online
2. The largest of the B-to-B market makers is Alibaba,
3. Effect of B-to-B mechanisms is to make prices more
transparent. For undifferentiated products, price pressure will
increase.
VIII. Mobile Marketing Channels
A. Mobile channels and media can keep consumers as connected and interacting
with a brand as they choose.
B. M-commerce is very well established in some parts of the world.
C. In the United States, mobile marketing is becoming more prevalent and taking
all forms.
D. Changes in Customer and Company Behavior:
i. Consumers are fundamentally changing the way they shop in stores,
increasingly using a cell phone to text a friend or relative about a
E. M-commerce Marketing Practices
i. Understanding how consumers want to use their smart phones is
critical to understanding the role of advertising, which should fit in a
small space and avoid intrusions
F. Privacy
i. The fact that a company can pinpoint a customer’s or employee’s
location with GPS technology raises privacy issues.
IX. Conflict, Cooperation and Competition
A. Channel conflict is generated when one channel member’s actions prevent
another channel from achieving its goal.
B. Channel coordination occurs when channel members are brought together to
advance the goals of the channel instead of their own potentially incompatible
goals
C. Types of Conflict and Competition: horizontal (same level), vertical (different
levels), and multichannel (two or more channels that sell to the same market)
conflict
D. Causes of Channel Conflict
i. Goal incompatibility
E. Managing Channel Conflict
i. Strategic justification
ii. Dual compensation
iii. Superordinate goals
F. Dilution and Cannibalization: Marketers must be careful not to dilute their
brands through inappropriate channels
G. Legal and Ethical Issues in Channel Relations: Companies are generally free
to develop whatever channel arrangements suit them.
i. Exclusive arrangements are legal as long as they do not substantially
lessen competition or tend to create a monopoly and as long as both