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Chapter 15: Designing and Managing Value Networks and ChannelsDESIGNING AND MANAGING VALUE NETWORKS AND CHANNELS15C H A P T E R LEARNING OBJECTIVESAfter reading this chapter, students should:q Know what is a marketing channel system and a value networkq Know what work marketing channels performq Know how channels should be designedq Know what decisions companies face in managing their channelsq Know how companies should integrate channels and manage channel conflictq Know what is the future for e-commerceCHAPTER SUMMARY Most producers do not sell their goods directly to final users. Between producers and final users stands one or more marketing channels, a host of marketing intermediaries performing a variety of functions. Marketing-channel decisions are among the most critical decisions facing management. The companys chosen channel(s) profoundly affect all other marketing decisions. 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 doing so. The most important functions performed by intermediaries are information, promotion, negotiation, ordering, financing, risk taking, physical possession, payment, and title. 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 for analyzing customer needs, establishing channel objectives, and identifying and evaluating the major alternatives, including the types and numbers of intermediaries involved in the channel. Effective channel management calls for selecting intermediaries, training, and motivating them. The goal is to build a long-term partnership that will be profitable for all channel members. Marketing channels are characterized by continuous and sometimes dramatic change. Three of the most important trends are the growth of vertical marketing systems, horizontal marketing systems, and multi-channel marketing systems. All marketing channels have the potential for conflict and competition resulting from such sources as goal incompatibility, poorly defined roles and rights, perceptual differences, and interdependent relationships. Companies can manage conflict by striving for superordinate goals, exchanging people among two or more channel levels, co-opting the support of leaders in different parts of the channel, and encouraging joint membership in and between trade associations. Channel arrangements are up to the company, but there are certain legal and ethical issues to be considered with regard to practices such as exclusive dealing or territories, tying agreements, and dealers rights.E-commerce has grown in importance as companies have adopted “brick-and-click” channel systems. Channel integration must recognize the distinctive strengths of online and off-line selling and maximize their joint contributions. 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. Second, because marketing channel decisions are mostly hidden from the final consumer, the instructor should make every effort to diagram the decision-making process for each level of channel distribution. Starting with the retail price of the product, then subtracting each distribution level margins or markups shows the effects of distribution to or for the product. 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. The students will probably be most interested in, or knowledgeable about, e-commerce and see e-commerce as the future of business. The instructor should caution the students about assuming that all business transactions (or a great majority of them) will flow to e-commerce by describing to the students the various consumer demographic groups, buying habits, and comfortableness with technology. An in-class discussion on the merits and demerits of e-commerce should provide for a lively cross-section of opinions. TEACHING STRATEGY AND CLASS ORGANIZATIONPROJECTS1. At this point in the semester-long project, students should present their channel decisions for getting their product or service to the consumer. In evaluating this section, the instructor should evaluate the completeness of the projects to the material contained in this chapter. 2. Progressive companies have begun developing a value network system to get products in the hands of consumers. A value network includes a firms suppliers, its suppliers suppliers, its immediate customers, and their end customers. Students should identify a company that has successfully set up a value network, then compare and contrast the components of the value system to a competitor that does not have one. Students should be able to identify the components of the value network that produced the augmented offering. 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 product, title, payment, information, and promotion) for Sonic 1000? How many levels would be appropriate for the consumer and business markets you are targeting for Sonic 1000? Should you plan for exclusive, selective, or intensive distribution? What decisions must Sonic make to develop the five service outputs (lot size, waiting time, spatial convenience, product variety, and service back up) for Sonic 1000?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.ASSIGNMENTSSmall Group Assignments1. The opening vignette of this chapter talks about Kmarts decline into bankruptcy in January of 2002. The causes cited, in part, for the bankruptcy were poor locations, unfavorable image, and a poor replenishment system. In an out-of-class assignment, students should visit local Kmart stores, to see if their impressions confirm that the firm is overcoming these difficulties or if problems remain. Student answers should be specific. Such as X item was advertised but was not in stock at the time of the store visit, store Ys parking lot was not lighted well enough to convey a feeling of safety, etc. 2. The chapter refers to the firm SeaYu Enterprises Inc. as one firm taking a slow and steady approach to channel development for its pioneering product. Students should do research and find two or three other examples of start-up firms, entrepreneurs, and others engaged in a one-channel distribution approach for its products. After completing the research, students should comment on what they see as disadvantages or advantages such an approach offers the firms. Does such a strategy increase the “buzz” for the product (exclusivity) or does such a strategy ultimately frustrate consumers who try to find the product in their local retailers and cannot? Individual Assignments1. Today, some of the countries more successful companies are using a hybrid channel system to increase its effectiveness of reaching the consumer. The text uses the examples of IBM, Charles Schwab, and others and notes that channel integration and its features are what the consumer prefers. Students should choose or find one additional example of a firm using the hybrid system, and comment on how they see this system delivering value to the consumer. Student answers should be directed toward the three features of channel integration found in the textbook. 2. In the Marketing Insight article entitled, M-Commerce Opens up New Opportunities For Marketers, the author, Douglas Lamont, talks about a new field called m-commerce. Comment upon the stated advantages and disadvantages of m-commerce or location-based services for marketers. Specifically, knowing what you now know about consumer buying decision-making, will e-commerce have to change consumer-buying habits to be successful? Alternatively, will this field have to wait until todays younger consumers grow older to become another channel alternative for marketers? Think-Pair-Share1. Read the Marketing Insight entitled, Burst of the Dot-Com Bubble, the author suggests that the “dot-coms” failed for a variety of reasons. Comment on how this channel of distribution (the Internet) has been affected by these well publicized failures. Specifically, are consumers more adapt to shop online or “once burned,” are consumers turning to the more traditional channels of distribution for their shopping? Students should include in their answers data from the most recent holiday season to analyze consumer-buying trends. 2. Channel members add value to the consumers purchase of certain products and services. Table 15.1 details key channel member functions. Yet some firms have abandoned channel partners and tried to reach the consumer on a one-to-one basis. Selecting a product or firm that (a) is maintaining it channel members, and (b) a firm that has decided to sell directly to the consumer thus bypassing channel intermediaries. Comment on these two systems in terms of the information contained in the chapter. MARKETING TODAYCLASS DISCUSSION TOPICSIn late 2003early 2004, Levi Strauss and Company introduced a line of jeans specifically for the mass-merchant stores, called Levi Strauss Signature. In addition, Levi Strauss and Company introduced a new line of jeans called Type 1 to be sold in mid- and high-tier department and chain stores. Considering the advantages and disadvantages of channel partnerships, the importance of the marketing channel system, discuss the implications that this decision is to have on Levis more traditional (high-end department stores) channel partners. Specifically, is Levis decision to move from selective distribution to an intensive distribution network, likely to produce increased channel conflict for Levi? If the answer is yes, what can Levi Strauss do to minimize such conflict? Speculate on why you think that Levi Strauss made such a decision? END-OF-CHAPTER SUPPORT MARKETING DEBATEDoes It Matter Where You Are Sold? Some marketers feel that the image of the particular channel in which they sell their products does not matterall that matters is that the right customers shop there and the product is displayed in the right way. Others maintain that channel imagessuch as a retail storecan 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. Pro: Buyers buy products or use services to meet a particular need or want. In the marketing-decision making process, a consumer has a preformed image of the product or service based upon the companys reputation or marketing messages. Therefore, where the consumer finally purchases the product is immaterial to the consumer, as long as, the product performs to expectations and that the process of purchasing the product is as simplified as possible. Strongly advertised products, or those products, with strong brand names will have consumers seeking out their products regardless of which channel of distribution the company uses. Some marketers benefit from extensive distribution channels, as their products are impulse items, last minute decision items, or cater to consumer habits. For marketers of these items, it is important for them to be available when the consumers desires strike. Con: The consumer buying process, the consumer “value proposition,” changes and reflects shifting priorities based on the individual needs and wants of the consumer at the time of purchase. For key products or services, consumers require, and even demand, different levels of service, attention, or “exclusivity” in the purchase. These consumers needs can and are met by different channels of distribution and are influenced by what channel or channels of distribution the producer uses; how well trained and motivated the channel is; and how the channel services the customer. There is no “correct” or “optimum” channel of distribution for all products. As products flow through a life cycle, older channels will evaporate and newer ones will develop. As consumer attitudes, positions, and usages of the products change, the consumers will navigate to differing channels. A product sold at one time through exclusive dealerships, at the beginning of its life cycle, may now be sold through mass-merchants or discounters at the end of its product life cycle. MARKETING DISCUSSIONThink 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? Student answers will differ depending upon their favorite retailers. However, all answers should include the definition of channel integration:Customers expect channel integration, characterized by the following features:1. The ability to order a product online and pick it up at a convenient retail location.2. The ability to return an online ordered product to a nearby store of the retailer.3. The right to receive discounts based on total online and off-line purchasesMARKETING SPOTLIGHTAmazonDiscussion Questions:1)What have been the key success factors for Amazon?a. They have a strategic conceptvastly broader selection of titles than could be found in most local bookstores.b. Marketing channels must not just serve markets, they must also make markets.c. Replicated the features of a physical bookstore in its online channel.d. Offered personalized recommendation service.e. Offered a built-in ranking system.f. Offered peeks into the book. 2)Where is Amazon vulnerable?a. Competitors duplicating or improving upon Amazons presence.b. Discounters. c. Changes in technology and the use of technology by consumers.3)What should Amazon watch out for?a. Technological changes, difficulties, and emerging technologies.b. Changes in consumer buying patterns and interests in reading. 4)What recommendations would you make to senior marketing executives going forward?a. Do not rest on past successescontinue your strategic direction.b. Monitor changes in your target markets definition of “service” and adapt to those changes. c. Resist opportunities to expand your market (width and breath) so that you begin to “lose” your “identity” with the consumer as to what your company means to them. 5)What should the company be sure to do with their marketing? a.Emphasize your strengths in variety, selection, service, price, and convenience.DETAILED CHAPTER OUTLINE Successful value creation needs successful value delivery. Holistic marketers are increasingly taking a value network view of their businesses. Instead of limiting their focus to their immediate suppliers, distributors, and customers, they are examining the whole supply chain that links raw materials, components, and manufactured goods and shows how they move toward the final consumers. Companies are looking at the suppliers suppliers upstream and at the distributors customers downstream. Each are looking at customer segments and how company resources can best be organized to meet needs. Companies today must build and manage a continuously evolving value network. MARKETING CHANNELS AND VALUE NETWORKS Most producers do not sell their goods directly to the final users; between them stands a set of intermediaries performing a variety of functions. A) These intermediaries constitute a marketing channel (also called a trade channel or distribution channel). B) Marketing channels are sets of interdependent organizations involved in the process of making a product or service available for use or consumption. C) Some intermediaries buy, take title to, and resell the merchandise, they care called merchants.D) Others search for customers and may negotiate on the producers behalf but do not take title to the goods, they are called agents. E) Still others assist in the distribution process but neither takes title to goods nor negotiates purchases or sales, they are called facilitators. The Importance of Channels A marketing channel system is the particular set of marketing channels employed by a firm. A) Decisions about the marketing channel system are among the most critical facing management.B) In the United States, channel members collectively earn margins that account for 30 to 50 percent of the ultimate selling price. C) Marketing channels also represent a substantial opportunity cost.1) Converting potential buyers into profitable orders is one of the chief roles of marketing channels. 2) Marketing channels must not