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Chapter 3
THE ENVIRONMENT OF MARKETING CHANNELS
Teaching Notes
This chapter focuses on the economic, competitive, sociocultural, technological and legal
environments that channel managers must continuously examine and understand in the
making of channel decisions. Key terms and the concepts of the chapter involve
Chapter Objectives
This chapter defines the different and various elements of a channel manager’s external
environment: the economic, competitive, sociocultural, technological and legal
constraints imposed upon channel members and channel decisions. In addition, the
chapter covers in depth specific cultural differences that affect channel distribution across
countries and the major federal laws involved in channel decisions.
Learning objectives
1) Understand the impact of environment in a marketing channel context.
2) Awareness of the major economic forces affecting marketing channels.
3) Recognize that even “normal” economic conditions require marketing channel
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Chapter Topics
1) The Marketing Channel and the Environment
Chapter Outline
The Marketing Channel and the Environment
Key term and definition
▪ Environment: The environment consists of all the external uncontrollable factors
within which marketing channels exist.
The five environments outlined in this chapter are:
1. Economic environment
Each of these segments will be discussed in depth throughout the chapter. Note that this
listing does not attempt to rank or imply any order of importance.
The Economic Environment
The economy is the most obvious and persuasive category of environmental variable
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A) Recession
This occurs when there are two consecutive quarters of a decline in the Gross Domestic
Product (GDP).
B) Inflation
Table 3.1 shows the inflation rate in the United States from 1990 to present.
Students should be familiar with the concept of inflation from economic or financial
courses.
C) Deflation
Deflation, static prices, or even a very low rate of price increase can create serious
channel management difficulties. It becomes anything but easy to increase prices when
D) Other Economic Issues
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The Federal Budget Deficit, National Debt, Trade Deficit and the relationship of the U.S.
The Competitive Environment
A) Types of Competition
There are four types of competition and we will examine each.
1. Horizontal competition
1. Horizontal Competition
Horizontal competition is defined as competition between firms of the same type.
2. Intertype Competition
This is competition between different types of firms at the same channel level.
3. Vertical Competition
This refers to competition between channel members at different levels in the channel
4. Channel System Competition
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This refers to complete channels competing with other complete channels. In order for
channels to compete as complete units, they must be organized as cohesive organizations.
Such channels have been referred to as vertical marketing systems and are classified into
three types:
a) In corporate system competition, production and marketing facilities are owned by
b) In contractual channel competition, independent channel members – producers or
c) Administered channel systems result from strong domination by one of the channel
members (usually a manufacturer) over others. This dominant position is a function
Competitive Structure and Channel Management
In designing the marketing channel, the channel manager needs to determine which kinds
of distributors and/or dealers can provide the most efficient and effective distribution of
the firm’s products.
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The Sociocultural Environment
Marketing patterns are influenced by the sociocultural environment within which they
exist. Indeed, some channel analysts argue that this is a major force affecting channel
structure.
A) Globalization
This term is used to describe the interconnectedness and interdependencies of countries
B) Consumer Mobility and Connectedness
This concept refers to the degree of mobility that people experience for business and
personal pursuits while remaining in touch with colleagues, friends, and family. Indeed,
C) Social Networking
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The term, “social networking” refers to interaction in networks comprised of individuals
or organizations that are linked together based on some type of common interest, such as
friendship, beliefs, or professional pursuits. Though social networks and social
D) The Green Movement
This is a term that has often been used to refer to a focus on preserving the environment
The Technological Environment
Technology is the most continuously and rapidly changing aspect of the environment.
The Internet and Electronic Marketing Channels
The Internet provides a highly efficient means for gaining access to, organizing, and
sharing virtually unlimited amounts of information.
A) Electronic Data Interchange
Key Term and Definition
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▪ Electronic data interchange (EDI): Refers to the linking together of channel member
B) Scanners, Computerized Inventory Management and Portable Computers
Electronic scanners can be used to replenish inventory electronically without having to
rely on manually produced purchase orders.
C) The Digital Revolution and Smartphones
Digital revolution is the term commonly used to describe the rapid expansion of the
influence of digital devices. This huge transformation, that has taken place over the past
D) RFID
This acronym stands for radio frequency identification. This technology uses a device
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E) Cloud Computing
Cloud computing is an Internet-based technology that enables businesses and
The Legal Environment
A) Legislation Affecting Marketing Channels
Five pieces of legislation underlie most of the major channel management legal issues.
These are:
1. Sherman Antitrust Act
B) Legal Issues in Channel Management
What should be kept in our minds as we proceed through the discussion of legal issues is
1. Dual Distribution
Key Term and Definition
▪ Dual distribution: Refers to the practice whereby a producer or manufacturer uses two
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2. Exclusive Dealing
Key Term and Definition
▪ Exclusive dealing: Occurs when a supplier requires its channel members to sell only
its products or at least to refrain from selling products from directly competitive
suppliers.
The substantiality test is based upon three conditions:
a. Whether the exclusive arrangement excludes competitive products from a
substantial share of the market
3. Full-Line Forcing
Key Term and Definition
▪ Full-line forcing: Occurs when a supplier requires channel members to carry a broad
4. Price Discrimination
Key Term and Definition
▪ Price discrimination: Refers to the practice whereby a supplier, either directly or
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5. Price Maintenance
Key Term and Definition
▪ Price maintenance: Refers to a supplier’s attempt to control the prices charged by its
channel members for the supplier’s products.
6. Refusal to Deal
Key Term and Definition
▪ Refusal to deal: Suppliers may select whomever they want as channel members and
7. Resale Restriction
Key Term and Definition
▪ Resale restrictions: Refer to a manufacturer’s attempt to stipulate to whom channel
members may resell the manufacturer’s products and in what specific geographical
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8. Tying Agreements
Key Term and Definition
▪ Tying agreements: Agreements whereby a supplier sells a product to a channel
9. Vertical Integration
Key Term and Definition
▪ Vertical integration: Occurs when a firm owns and operates organizations at other
levels of the distribution channel (for example, a manufacturer owning and operating
Answers to Review Questions
1. In the case of the channels variable, the channel manager must be concerned not only
with environmental impacts on his/her own firm and target markets but on his/her
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3. During recessionary periods, consumer spending, especially for discretionary items,
slows. Consequently, as derived demand diminishes, industrial buying also will slow.
With decreased spending in these two markets, intermediaries may experience
substantial reductions in sales volume and profitability. Intermediaries become
increasingly concerned about inventory levels, recognizing that poor inventory
turnover can be disastrous. Manufacturers should develop contingency plans that
stand ready for implementation at the onset of an economic slowdown. Those plans
In a deflationary period, prices actually decline across a broad spectrum of products
and services. From a channel management standpoint, the problem becomes one of
trying to pass cost induced price increases through the channel. Even in a deflationary
period, manufacturers, wholesalers, and retailers may still face built in cost pressures
such as from previously negotiated labor contracts. In the face of deflation, it
becomes practically impossible to pass such price increases through the channel.
Hence, channel members must “eat” the increased costs themselves.
4. The economy, especially looking on a global level, is so dynamic that it is impossible
to define what “normal” economic conditions might be. Nonetheless, there are
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5. Horizontal competition is between channel members of the same type and at the same
level in the marketing channel. General Mills and Kellogg are two manufacturers in
horizontal competition. Walmart and Kmart are retailers in horizontal competition.
6. Marketing channels are governed by who buys, what they buy and how they buy it.
Simply, product must move through the channel in such a way that final customers
can buy as they want. To do this, marketing channels must be designed and managed
with the customers’ buying practices in mind. Different countries have markedly
7. The environment of external, uncontrollable factors that we characterize as,
environmental forces, consists of economic, competitive, sociocultural, technological,
and legal influences. While these five categories remain constant, the manifestation of
each can change at any time, requiring business and channel managers to regularly
8. Some technological changes may be slow and evolutionary, while others may be
sudden and dramatic. To increase the odds of being in a position to take advantage of
9. Electronic scanners, high tech point of sale systems, computerized inventory
management systems, EDI, robotics, and ultra-wideband wireless technology deliver
the power of information to channel members. Real time market transactions can
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10. The Sherman Act is based on the philosophy that competition promotes public
11. The Sherman Act Prohibits contracts or combinations that restrain interstate or
foreign commerce.
The Clayton Act strengthens the Sherman Act by specifically forbidding such
practices as price discrimination, tying clauses, exclusive dealing, intercorporate
12. Exclusive dealing, full-line forcing, and tying agreements all work to tie the buyer
more closely to the seller engaging in one or more of these practices. This could make
13. In general, attempts by the seller to exercise control over the buyer through price
maintenance, refusal to deal, or resale restrictions cannot be based on threats or
14. In dual distribution, if the manufacturer’s own outlets are given preferential treatment
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Commentaries on Issues for Discussion
1. The essential idea here is to illustrate and promote discussion on how environmental
impacts can be perceived differently by the manufacturer and its channel members.
James Johnson, the V.P of marketing for the home insulation manufacturer, sees the
run-up in energy prices as offering a great opportunity to increase home insulation
sales to the DIY market. The typical home center retailer, however, is likely to see
2. As a recessionary period unfolds, consumer spending for such durable goods usually
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Supply Chain for Your Product,” Marshall Fisher argues that one means of addressing
stock outs and overstocks is to acknowledge the uncertainty then manage it.
However, much depends on the nature of the product being sold and whether
3. This issue is designed to elicit a response both in terms of the channel member’s
participation in the marketing mix, and the economic factors, as well as the legal
challenges new forms of distribution face in the future. A point to make here is that
behavioral constraints may limit the impact of high technology on marketing
channels.
Here students must fully be able to understand these terms and relate them to this
concept.
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4. The point to stress with the students answering this question is haw Hhgregg is
positioned in the market to compete with the likes of Best Buy or Walmart. Hhgregg
has the reputation of attacking the market with superior customer service and
competitive pricing. As a specialty retailer of consumer electronics and home
5. From a marketing channels perspective, social networking has empowered consumers
to make much more informed decisions about the products they buy, the services they
use and the firms they deal with through virtually limitless information sharing.
However, it has also enabled them to make better channel choices and made them
more demanding about the channels they utilize.
6. This question usually brings out various opinions as to the viability of e-readers for
multiple uses. While many students will hesitate to predict the complete demise of
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7. A version of price maintenance is a key legal issue here. “Babies R Us” appears to be
using its enormous power in the marketing channel to conspire with five toy
manufactures to fix prices. They probably did so for a variety of reasons, such as to