In which of the marketing systems two or more companies join together to grab new market opportunity?

Marketing Channels and Supply Management

Channel Behavior and Organization

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Distribution channels are more than simple collections of firms tied together by various flows. They are complex behavioral systems in which people and companies interact to accomplish individual, company, and channel goals. Some channel systems consist only of informal interactions among loosely organized firms; others consist of formal interactions guided by strong organizational structures. Moreover, channel systems do not stand still—new types of intermediaries emerge and whole new channel systems evolve. Here we look at channel behavior and at how members organize to do the work of the channel.

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Channel Behavior

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A marketing channel consists of firms that have banded together for their common good. Each channel member depends on the others. For example, a Ford dealer depends on Ford to design cars that meet consumer needs. In turn, Ford depends on the dealer to attract consumers, persuade them to buy Ford cars, and service cars after the sale. The Ford dealer also depends on other dealers to provide good sales and service that will uphold the brand's reputation. In fact, the success of individual Ford dealers depends on how well the entire Ford marketing channel competes with the channels of other auto manufacturers.

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Each channel member plays a specialized role in the channel. For example, Sony's role is to produce personal consumer electronics products that consumers will like and to create demand through national advertising. Best Buy's role is to display these Sony products in convenient locations, to answer buyers' questions, and to close sales. The channel will be most effective when each member is assigned the tasks it can do best.

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Ideally, because the success of individual channel members depends on overall channel success, all channel firms should work together smoothly. They should understand and accept their roles, coordinate their activities, and cooperate to attain overall channel goals. However, individual channel members rarely take such a broad view. Cooperating to achieve overall channel goals sometimes means giving up individual company goals. Although channel members depend on one another, they often act alone in their own short-run best interests. They often disagree on who should do what and for what rewards. Such disagreements over goals, roles, and rewards generate channel conflict.

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Horizontal conflict occurs among firms at the same level of the channel. For instance, some Ford dealers in Chicago might complain the other dealers in the city steal sales from them by pricing too low or by selling outside their assigned territories. Or Holiday Inn franchisees might complain about other Holiday Inn operators overcharging guests or giving poor service, hurting the overall Holiday Inn image.

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Vertical conflict, conflicts between different levels of the same channel, is even more common. For example, H&R Block franchisees complained when the parent company began using the Internet to deal directly with customers. Similarly, McDonald's created conflict with some of its California dealers when it placed new stores in areas that took business from existing locations. And office furniture maker Herman Miller created conflict with its dealers when it opened an online store—www.hmstore.com—and began selling its products directly to customers. Although Herman Miller believed that the Web site was reaching only smaller customers who weren't being served by current channels, dealers complained loudly. As a result, the company closed down its online sales operations.3

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Some conflict in the channel takes the form of healthy competition. Such competition can be good for the channel—without it, the channel could become passive and noninnovative. But severe or prolonged conflict can disrupt channel effectiveness and cause lasting harm to channel relationships. Companies should manage channel conflict to keep it from getting out of hand. Here's an example:

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P&G recently moved to manage channel conflict stemming from its change to multichannel distribution for Iams pet products. Traditionally, Iams had been distributed through specialized pet stores and veterinary offices. After studies showed that 70 percent of pet-food buyers never visit pet stores, P&G decided to add 25,000 grocery stores and mass retailers to its channel. To head off conflict with traditional channels, P&G's president wrote to the specialty stores and veterinarians, explaining that the new arrangements would increase brand awareness and not hurt brand equity. Although some pet stores stopped carrying Iams, most continued on, helping Iams boost sales and market share for all of its dealer.4

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Vertical Marketing Systems

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For the channel as a whole to perform well, each channel member's role must be specified and channel conflict must be managed. The channel will perform better if it includes a firm, agency, or mechanism that provides leadership and has the power to assign roles and manage conflict.

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Historically, conventional distribution channels have lacked such leadership and power, often resulting in damaging conflict and poor performance. One of the biggest channel developments over the years has been the emergence of vertical marketing systems that provide channel leadership. Figure 13.3 contrasts the two types of channel arrangements.

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A conventional distribution channel consists of one or more independent producers, wholesalers, and retailers. Each is a separate business seeking to maximize its own profits, even at the expense of the system as a whole. No channel member has much control over the other members, and no formal means exists for assigning roles and resolving channel conflict. In contrast, a vertical marketing system (VMS) consists of producers, wholesalers, and retailers acting as a unified system. One channel member owns the others, has contracts with them, or wields so much power that they must all cooperate. The VMS can be dominated by the producer, wholesaler, or retailer.

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We look now at three major types of VMSs: corporate, contractual, and administered. Each uses a different means for setting up leadership and power in the channel.

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ACTIVE FIGURE 13.3	A conventional marketing channel versus a vertical marketing system

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Corporate VMS

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A corporate VMS integrates successive stages of production and distribution under single ownership. Coordination and conflict management are attained through regular organizational channels. For example, Sears obtains more than 50 percent of its goods from companies that it partly or wholly owns. Giant Food Stores operates an ice-making facility, a soft drink bottling operation, an ice cream plant, and a bakery that supplies Giant stores with everything from bagels to birthday cakes. And little-known Italian eyewear maker Luxottica sells its many famous eyewear brands—including Giorgio, Armani, Yves Saint Laurent, and Ray-Ban—through the world's largest optical chain, LensCrafters, which it also owns.5

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Controlling the entire distribution chain has turned Spanish clothing chain Zara into the world's fastest-growing fashion retailer.

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The secret to Zara's success is its control over almost every aspect of the supply chain, from design and production to its own worldwide distribution network. Zara makes 40 percent of its own fabrics and produces more than half of its own clothes, rather than relying on a hodgepodge of slow-moving suppliers. New styles take shape in Zara's own design centers, supported by real-time sales data. New designs feed into Zara manufacturing centers, which ship finished products directly to 450 Zara stores in 30 countries, saving time, eliminating the need for warehouses, and keeping inventories low. Effective vertical integration makes Zara faster, more flexible, and more efficient than international competitors such as Gap, Benetton, and Sweden's H&M. Zara can make a new line from start to finish in just three weeks, so a look seen on MTV can be in Zara stores within a month, versus an industry average of nine months. And Zara's low costs let it offer midmarket chic at downmarket prices. The company's stylish but affordable offerings have attracted a cult following, and the company's sales have more than doubled to $2.3 billion in the past five years.6

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Contractual VMS

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A contractual VMS consists of independent firms at different levels of production and distribution who join together through contracts to obtain more economies or sales impact than each could achieve alone. Coordination and conflict management are attained through contractual agreements among channel members. The franchise organization is the most common type of contractual relationship—a channel member called a franchiser links several stages in the production-distribution process. An estimated 2,000 franchised U.S. companies with over 320,000 outlets account for some $1 trillion in annual sales. Industry analysts estimate that a new franchise outlet opens somewhere in the United States every eight minutes and that about one out of every 12 retail business establishments outlets is a franchised business.7 Almost every kind of business has been franchised—from motels and fast-food restaurants to dental centers and dating services, from wedding consultants and maid services to funeral homes and fitness centers.

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There are three type of franchises. The first type is the manufacturer-sponsored retailer franchise system—for example, Ford and its network of independent franchised dealers. The second type is the manufacturer-sponsored wholesaler franchise system—Coca-Cola licenses bottlers (wholesalers) in various markets who buy Coca-Cola syrup concentrate and then bottle and sell the finished product to retailers in local markets. The third type is the service-firm-sponsored retailer franchise system—examples are found in the auto-rental business (Hertz, Avis), the fast-food service business (McDonald's, Burger King), and the motel business (Holiday Inn, Ramada Inn).

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The fact that most consumers cannot tell the difference between contractual and corporate VMSs shows how successfully the contractual organizations compete with corporate chains. Chapter 14 presents a fuller discussion of the various contractual VMSs.

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Administered VMS

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In an administered VMS, leadership is assumed not through common ownership or contractual ties but through the size and power of one or a few dominant channel members. Manufacturers of a top brand can obtain strong trade cooperation and support from resellers. For example, General Electric, Procter & Gamble, and Kraft can command unusual cooperation from resellers regarding displays, shelf space, promotions, and price policies. Large retailers such as Wal-Mart, Home Depot, and Barnes & Noble can exert strong influence on the manufacturers that supply the products they sell.

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Horizontal Marketing Systems

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Another channel development is the horizontal marketing system, in which two or more companies at one level join together to follow a new marketing opportunity. By working together, companies can combine their financial, production, or marketing resources to accomplish more than any one company could alone.

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Companies might join forces with competitors or noncompetitors. They might work with each other on a temporary or permanent basis, or they may create a separate company. For example, the Lamar Savings Bank of Texas arranged to locate its savings offices and automated teller machines in Safeway stores. Lamar gained quicker market entry at a low cost, and Safeway was able to offer in-store banking convenience to its customers. Similarly, McDonald's now places "express" versions of its restaurants in Wal-Mart stores. McDonald's benefits from Wal-Mart's considerable store traffic, while Wal-Mart keeps hungry shoppers from having to go elsewhere to eat.

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Such channel arrangements also work well globally. For example, because of its excellent coverage of international markets, Nestl� jointly sells General Mills's cereal brands in markets outside North America. Coca-Cola and Nestl� formed a joint venture to market ready-to-drink coffee and tea worldwide. Coke provides worldwide experience in marketing and distributing beverages, and Nestl� contributes two established brand names—Nescaf� and Nestea. Seiko Watch's distribution partner in Japan, K. Hattori, markets Schick's razors there, giving Schick the leading market share in Japan, despite Gillette's overall strength in many other markets.

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Multichannel Distribution Systems

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In the past, many companies used a single channel to sell to a single market or market segment. Today, with the proliferation of customer segments and channel possibilities, more and more companies have adopted multichannel distribution systems—often called hybrid marketing channels. Such multichannel marketing occurs when a single firm sets up two or more marketing channels to reach one or more customer segments. The use of multichannel systems has increased greatly in recent years.

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Horizontal marketing systems: Nestl� jointly sells General Mills cereal brands in markets outside North America.

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Figure 13.4 shows a hybrid channel. In the figure, the producer sells directly to consumer segment 1 using direct-mail catalogs, telemarketing, and the Internet and reaches consumer segment 2 through retailers. It sells indirectly to business segment 1 through distributors and dealers and to business segment 2 through its own sales force.

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These days, almost every large company and many small ones distribute through multiple channels. Charles Schwab reaches customers through its branch offices, by telephone, and over the Internet. Staples markets through its traditional retail outlets, a direct-response Internet site, virtual malls, and 30,000 links on affiliated sites. And IBM uses multiple channels to serve dozens of segments and niches, ranging from large corporate buyers to small businesses to home office buyers. In addition to selling through its vaunted sales force, IBM also sells through a full network of distributors and value-added resellers, which sell IBM computers, systems, and services to a variety of special business segments. Final consumers can buy IBM personal computers from specialty computer stores or any of several large retailers. IBM uses telemarketing to service the needs of small and medium-size business. And both business and final consumers can buy online from the company's Web site (www.ibm.com).

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FIGURE 13.4	Multichannel distribution system

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Multichannel distribution systems offer many advantages to companies facing large and complex markets. With each new channel, the company expands its sales and market coverage and gains opportunities to tailor its products and services to the specific needs of diverse customer segments. But such multichannel channel systems are harder to control, and they generate conflict as more channels compete for customers and sales. For example, when IBM began selling directly to customers through catalogs, telemarketing, and its own Web site, many of its retail dealers cried "unfair competition" and threatened to drop the IBM line or to give it less emphasis. Many outside salespeople felt that they were being undercut by the new "inside channels."

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Changing Channel Organization

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Changes in technology and the explosive growth of direct and online marketing are having a profound impact on the nature and design of marketing channels. One major trend is toward disintermediation—a big term with a clear message and important consequences. Disintermediation means that more and more, product and service producers are bypassing intermediaries and going directly to final buyers, or that radically new types of channel intermediaries are emerging to displace traditional ones.

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Thus, in many industries, traditional intermediaries are dropping by the wayside. For example, companies such as Dell Computer and American Airlines are selling directly to final buyers, eliminating retailers from their marketing channels. E-commerce is growing rapidly, taking business from traditional brick-and-mortar retailers. Consumers can buy Flowers from 1-800-Flowers.com; books, videos, CDs, toys, consumer electronics, and other goods from Amazon.com; and clothes from landsend.com or gap.com, all without ever visiting a store.

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Disintermediation presents problems and opportunities for both producers and intermediaries. To avoid being swept aside, traditional intermediaries must find new ways to add value in the supply chain. To remain competitive, product and service producers must develop new channel opportunities, such as the Internet and other direct channels. However, developing these new channels often brings them into direct competition with their established channels, resulting in conflict.

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To ease this problem, companies often look for ways to make going direct a plus for both the company and its channel partners. For example, to trim costs and add business, Hewlett-Packard opened three direct-sales Web sites—Shopping Village (for consumers), H-P Commerce Center (for businesses buying from authorized resellers), and Electronic Solutions Now (for existing contract customers). However, to avoid conflicts with its established reseller channels, HP forwards all its Web orders to resellers, who complete the orders, ship the products, and get the commissions. In this way, H-P gains the advantages of direct selling but also boosts business for resellers.

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In which marketing system two or more companies in similar business join together to develop a new marketing opportunity?

When two or more companies at one level join together to follow a new marketing opportunity is known as?

What is horizontal and vertical marketing system?

What is vertical marketing system in marketing?