HARAMBEE UNIVERSITY

UNIT EIGHT
DISTRIBUTION /PLACE /
8.1. Introduction
Marketing channel decisions are among the most important facing marketing managers. A
company’s channel decisions are linked with every other marketing decision. Companies often
pay too little attention to their distribution channels. This can be very damaging. Distribution
channel decisions often involve long-term commitments to other firms.
There are four major issues or questions that concern distribution channels:
1. What is the nature of distribution channels?
2. How do channel firms interact and organize to do the work of the channel?
3. What problems do companies face in designing and managing their channels?
4. What role does physical distribution play in attracting and satisfying customers?
 Marketing Channel
A set of interdependent organizations involved in the process of making a product or service
available for use or consumption by the consumer or business user. Marketing system that
consists of customer, producers that are having something valuable for making transactions.
These transactions are made in exchange process and creation availability of products for
customers. This availability is created by using networks of distribution channels.
Channel structure has three basic dimensions:
a. the length of the channel,
b. the intensity at various levels, and
c. The types of intermediaries involved.
Channel intensity ranges from intensive to selective to exclusive. Intensive means that there are
many intermediaries. Selective means that there are a smaller number of intermediaries.
Exclusive refers to only one.

8.2. Why Are Marketing Intermediaries Used?

Why do producers give some of the selling job to intermediaries? After all, doing so means
giving up some control over how and to whom the products are sold. The use of intermediaries
results from their greater efficiency in making goods available to target markets. Through their
contacts, experience, specialization, and scale of operation, intermediaries usually offer the firm
more than it can achieve on its own.
From the economic system's point of view, the role of marketing intermediaries is to transform
the assortments of products made by producers into the assortments wanted by consumers.
Producers make narrow assortments of products in large quantities, but consumers want broad
assortments of products in small quantities. In the distribution channels, intermediaries buy large
quantities from many producers and break them down into the smaller quantities and broader

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assortments wanted by consumers. Thus, intermediaries play an important role in matching

supply and demand.
The concept of distribution channels is not limited to the distribution of tangible products.
Producers of services and ideas also face the problem of making their output available to target
markets. In the private sector, retail stores, hotels, banks, and other service providers take great
care to make their services conveniently available to target customers. In the public sector,
service organizations and agencies develop "educational distribution systems" and "health care
delivery systems" for reaching sometimes widely dispersed populations. Hospitals must be
located to serve various patient populations, and schools must be located close to the children
who need to be taught. Communities must locate their fire stations to provide rapid response to
fires and polling stations must be placed where people can vote conveniently.

8.3. Distribution Channel Functions

The distribution channel moves goods and services from producers to consumers. It overcomes
the major time, place, and possession gaps that separate goods and services from those who
would use them.
Members of the marketing channel perform many key functions:
 Information: gathering and distributing marketing research and intelligence information
about actors and forces in the marketing environment needed for planning and aiding
exchange.
 Promotion: developing and spreading persuasive communications about an offer.
 Contact: finding and communicating with prospective buyers.
 Matching: shaping and fitting the offer to the buyer's needs, including activities such as
manufacturing, grading, assembling, and packaging.
 Negotiation: reaching an agreement on price and other terms of the offer so that
ownership or possession can be transferred.
Others help to fulfill the completed transactions:
 Physical distribution: transporting and storing goods.
 Financing: acquiring and using funds to cover the costs of the channel work.
 Risk taking: assuming the risks of carrying out the channel work.
The question is not whether these functions need to be performed they must be but rather who
will perform them. To the extent that the manufacturer performs these functions, its costs go up
and its prices have to be higher. At the same time, when some of these functions are shifted to
intermediaries, the producer's costs and prices may be lower, but the intermediaries must charge
more to cover the costs of their work. In dividing the work of the channel, the various functions
should be assigned to the channel members who can perform them most efficiently and
effectively to provide satisfactory assortments of goods to target consumers.

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8.4. Number of Channel Levels

Distribution channels can be described by the number of channel levels involved. Each layer of
marketing intermediaries that performs some work in bringing the product and its ownership
closer to the final buyer is a channel level.
Because the producer and the final consumer both perform some work, they are part of every
channel. We use the number of intermediary levels to indicate the length of a channel.
Channel 1: called a direct marketing channel, has no intermediary levels. It consists of a
company selling directly to consumers.
Channel 2: contains one intermediary level. In consumer markets, this level is typically a
retailer. For example, the makers of televisions, cameras, tires, furniture, major appliances, and
many other products sell their goods directly to large retailers which then sell the goods to final
consumers.
Channel 3: contains two intermediary levels, a wholesaler and a retailer. This channel is
often used by small manufacturers of food, drugs, hardware, and other products.
Channel 4: contains three intermediary levels. In the meatpacking industry, for example,
jobbers buy from wholesalers and sell to smaller retailers who generally are not served by larger
wholesalers. Distribution channels with even more levels are sometimes found, but less often.
From the producer's point of view, a greater number of levels mean less control and greater
channel complexity.
The business marketer can use its own sales force to sell directly to business customers. It can
also sell to industrial distributors, who in turn sell to business customers. It can sell through
manufacturer's representatives or its own sales branches to business customers, or it can use
these representatives and branches to sell through industrial distributors. Thus, business markets
commonly include multilevel distribution channels.
All of the institutions in the channel are connected by several types of flows. These include:-
 the physical flow of products
 the flow of ownership
 the payment flow, the information flow and
 the promotion flow.
These flows can make even channels with only one or a few levels very complex

8.5. Channel Behavior and Organization

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

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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.
Channel Behavior
A distribution channel consists of firms that have banded together for their common good. Each
channel member is dependent on the others. Each channel member plays a role in the channel
and specializes in performing one or more functions. The channel will be most effective when
each member is assigned the tasks it can do best.
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 goals and activities, and cooperate to attain overall channel goals. By
cooperating, they can more effectively sense, serve, and satisfy the target market.
However, individual channel members rarely take such a broad view. They are usually more
concerned with their own short-run goals and their dealings with those firms closest to them in
the channel. Cooperating to achieve overall channel goals sometimes means giving up individual
company goals. Although channel members are dependent on one another, they often act alone
in their own short-run best interests. They often disagree on the roles each should play on who
should do what and for what rewards. Such disagreements over goals and roles generate channel
conflict.
Horizontal conflict occurs among firms at the same level of the channel. Vertical conflict,
conflicts between different levels of the same channel, is even more common. 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 non innovative. But sometimes conflict can
damage the channel. For the channel as a whole to perform well, each channel member's role
must be specified and channel conflict must be managed. Cooperation, role assignment, and
conflict management in the channel are attained through strong channel leadership. The channel
will perform better if it includes a firm, agency, or mechanism that has the power to assign roles
and manage conflict.

8.6. Vertical Marketing Systems

Historically, distribution channels have been loose collections of independent companies, each
showing little concern for overall channel performance. These conventional distribution channels
have lacked strong leadership and have been troubled by damaging conflict and poor
performance.
One of the biggest recent channel developments has been the vertical marketing systems that
have emerged to challenge conventional marketing channels. 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 profits for the

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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. Vertical
marketing systems came into being to control channel behavior and manage channel conflict.
Types of VMS
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. We now take a closer look
at each type of VMS.
a. Corporate VMS
A corporate VMS combines successive stages of production and distribution under single
ownership. Coordination and conflict management are attained through regular organizational
channels.
b. Contractual VMS
A contractual VMS consists of independent firms at different levels of production and
distribution who joins 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. There are three types of contractual VMSs:
wholesaler-sponsored voluntary chains, retailer cooperatives, and franchise organizations.
In wholesaler-sponsored voluntary chains, wholesalers organize voluntary chains of independent
retailers to help them compete with large chain organizations. The wholesaler develops a
program in which independent retailers standardize their selling practices and achieve buying
economies that let the group compete effectively with chain organizations.
In retailer cooperatives, retailers organize a new, jointly owned business to carry on wholesaling
and possibly production. Members buy most of their goods through the retailer co-op and plan
their advertising jointly. Profits are passed back to members in proportion to their purchases. In
franchise organizations, a channel member called a franchiser links several stages in the
production-distribution process. There are three forms of franchises. The first form is the
manufacturer-sponsored retailer franchise system, as found in the automobile industry. The
second type of franchise is the manufacturer-sponsored wholesaler franchise system, as found in
the soft drink industry.. The third franchise form is the service-firm-sponsored retailer franchise
system, in which a service firm licenses a system of retailers to bring its service to consumers.
The fact that most consumers cannot tell the difference between contractual and corporate VMSs
shows how successfully the contractual organizations compete with corporate chains.
c. Administered VMS
An administered VMS coordinates successive stages of production and distribution, not through
common ownership or contractual ties but through the size and power of one of the parties. In an
administered VMS, leadership is assumed by one or a few dominant channel members.
Manufacturers of a top brand can obtain strong trade cooperation and support from resellers.

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