Unit 6 - Organization of Trade 1
Unit 6 - Organization of Trade 1
Unit 6 - Organization of Trade 1
of
Trade
Channels Of Distribution
A channel of distribution or trade channel is the path or route along which
goods move from producers to ultimate consumers.
It is a distribution network through which a producer puts his products in the
hands of actual users.
A trade or marketing channel consists of the producer, consumers or users and
the various middlemen who intervene between the two. The channel serves as
a connecting link between the producer and consumers.
By bridging the gap between the point of production and the point of
consumption, a channel creates time, place and possession utilities. A channel
of distribution represents three types of flows:
a. Goods flow from producer to consumers;
b. Cash flow from consumers to producer as payment for goods; and
c. Marketing information flows in both directions, from producers to consumers
in the form of information on new products, new uses of existing products,
etc. The flow of information from consumers to producers is the feedback of
the wants, suggestions, complaints, etc.
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Functions of Channels of Distribution
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Types of Channels of Distribution
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Direct Channel
In this channel, producers sell their goods and services directly to the
consumers.
There is no middleman present between the producers and consumers. The
producers may sell directly to consumers through door-to-door salesmen and
through their own retail stores.
For example, Bata India Ltd, Liberty Shoes Limited has their own retail shops
to sell their products to consumers. For certain service organizations consumers
avail the service directly.
Banks, consultancy firms, telephone companies, passenger and freight transport
services, etc. are examples of direct channel of distribution of service.
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Indirect Channel
When a producer sells good to consumers through middlemen ,it is called
Indirect Channel
If the producer is producing goods on a large scale, it may not be possible for
him to sell goods directly to consumers. As such, he sells goods through
middlemen.
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Types of Indirect Channels of Distribution
Under this channel, the producers sell to one or more retailers who in turn sell
to the ultimate consumers. This channel is used under the following conditions
–
(i) When the goods cater to a local market, for example, breads, biscuits, patties,
etc.
(ii) When the retailers are big and buy in bulk but sell in smaller units, directly
to the consumers.
Departmental stores and super bazars are examples of this channel.
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Importance of Channels of distribution
Cost Savings in Specialization - Members of the distribution channel are
specialists in what they do and can often perform tasks better and at lower cost
than companies who do not have distribution experience. ·
Reduce Exchange Time - Not only are channel members able to reduce
distribution costs by being experienced at what they do, they often perform
their job more rapidly resulting in faster product delivery.
Customers Want to Conveniently Shop for Variety - Marketers have to
understand what customers want in their shopping experience .Resellers within
the channel of distribution serve two very important needs:
1) they give customers the products they want by purchasing from many
suppliers, and
2) they make it convenient to purchase by making products available in single
location.
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Resellers Sell Smaller Quantities -They allow customers to purchase in quantities
that work for them. Suppliers though like to ship products they produce in large
quantities since this is more cost effective
Create Sales - Resellers are at the front line when it comes to creating demand for
the marketer's product. In some cases resellers perform an active selling role using
persuasive techniques to encourage customers to purchase a marketer's product. In
other cases they encourage sales of the product through their own advertising
efforts and using other promotional means such as special product displays.
Offer Financial Support - Resellers often provide programs that enable customers
to more easily purchase products by offering financial programs that ease payment
requirements. These programs include allowing customers to: purchase on credit;
purchase using a payment plan;; and allowing exchange options.
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Factors or considerations affecting the choice of a distribution channel
Type of product
For Perishable products (eggs ,milk ,butter etc) -Short channels which facilitate
quick movement from factory to consumers
For heavy & bulky (steel ,cement)-Limited channels
For light weight & small size items (Soap,Matchsticks,tooothpastes,hairoils etc)-
Long Channels for intensive distribution
Nature & extent of Market
If number of customer is large –Long & multiple channels for intensive distribution
If no of customer I small-Short & direct channels
Buying Habits of the customer
If customers purchase small quantities –Long & Multiple channels
If Customers purchase large quantities –Short & direct Channels
No of suppliers of the product
No Of suppliers Large in different regions –Long & Multiple channels
No Of suppliers small-Short & Direct Channels
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Internal Trade
Internal Trade or Home trade refers to buying & selling of goods & services
within a country .
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Classification of Internal Trade
Whole sale Trade :refers to buying & selling of goods in bulk from
manufacture or their agents & selling them to retailers & industrial users in
small quantity .Those who are engaged in wholesale trade are called
wholesalers
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Characteristics of Wholesalers
(i) Wholesalers buy goods directly from producers or manufacturers.
(ii) Wholesalers buy goods in large quantities and sells in relatively smaller
quantities.
(iii) They sell different varieties of a particular line of product. For example, a
wholesaler who deals with paper is expected to keep all varieties of paper,
cardboard, card, etc.
(iv) They may employ a number of agents or workers for distribution of
products.
(v) Wholesalers need large amount of capital to be invested in his business.
(vi) They generally provides credit facility to retailers.
(vii) He also provides financial assistance to the producers or manufacturers.
(viii) In a city or town they are normally seen to be located in one particular area
of the market.
For example, you can find cloth merchants in one area, book publishers and sellers
in one area; furniture dealers in one area etc.
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Types of wholesalers
Manufacture Wholesaler –Are those who manufacture goods as well as sell
the goods to retailers. They generally do not deal in goods of other
manufactures .they are able to reduce the distribution & warehousing cost &
increase their margin to that extent
Retailer Wholesaler-- are those wholesalers who sell goods to retailers but
also to ultimate consumers & they are able to get prompt & first hand
information relating to the product directly from ultimate consumers. They are
also able to reduce the distribution cost & increase their margin to that extent
.
Pure whole sellers- are those who buy good is bulk from manufacture s of
goods & sells the goods only to retailers relatively in small quantities. They
neither produce the goods nor sell the goods directly to the ultimate consumers.
They are able to serve the manufactures & Retailers
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Functions of Wholesalers
(a) Collection of goods: A wholesaler collects goods from manufacturers or producers in large
quantities.
(b) Storage of goods: A wholesaler collects the goods and stores them safely in warehouses
,till they are sold out. Perishable goods like fruits, vegetables, etc. are stored in cold storage.
(c) Distribution: A wholesaler sells goods to different retailers. In this way, he also performs
the function of distribution.
(d) Financing: The wholesaler provides financial support to producers and manufacturers by
sending money in advance to them. He also sells goods to the retailer on credit. Thus, at
both ends the wholesaler acts as a financier.
(e) Risk taking: The wholesaler buys finished goods from the producer and keeps them in the
warehouses till they are sold. Therefore, he assumes the risks arising out of changes in
demand, rise in price, spoilage or destruction of goods.
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Characteristics of Retailers
Retailers are the traders who buy goods from wholesalers or sometimes directly
from producers and sell them to the consumers. They usually operate through a
retail shop and sell goods in small quantities. They keep a variety of items of
daily use. The following are the characteristics of retailers:
(i) Retailers have a direct contact with consumers. They know the requirements
of the consumers and keep goods accordingly in their shops.
(ii) Retailers sell goods not for resale, but for ultimate use by consumers. For
example, you buy fruits, clothes, pen, pencil etc. for your use, not for sale.
(iii) Retailers buy and sell goods in small quantities. So customers can fulfil
their requirement without storing much for the future.
(iv) Retailers require less capital to start and run the business as compared to
wholesalers.
(v) Retailers generally deal with different varieties of products and they give a
wide choice to the consumers to buy the goods.
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Types of Retailers
Itinerant Retailers –Are those who keep on moving from place to place to sell their goods
.They do not have any fixed place of business. They deal in Low priced consumer goods of
regular use like –toys, bangles ,Household utensils .
Hawkers & peddlers –Ice-cream, bangles, Fruits ,vegetable
Market Traders-Stalls at a Mela or Fairs , Or fixed Bazaars on certain fixed days
Street Traders/Pavement Traders-Newspapers, Footwear ,Stationery
Fixed shop Retailers
1)Small Scale retailers :are those fixed shop retailers who carry on their business on a small
scale & sell the good sin small quantities They hold stock & carry on their business in
fixed shops located in residential area or market place General Stores-They deal in
different kinds of consumer goods
Single Line stores –Deal in particular line of product(Ready made Garments-children
,Men ,ladies)
Specialty stores –Specializes in single type of product (Children Garments only
,Educational Books only )
Street shops/Street Stalls –Low priced articles- Pens, Magazines etc
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2)Large Scale Retailers –Are those fixed shops retailers who carry on their
business on a large scale & sell the goods in small quantities. They hold large
stocks of variety of goods
Departmental Stores-Retail store in which wide variety of products are sold
through separate departments under one roof
Multiple Shops or Chain stores-retail shops owned & controlled by a single
organization & located in different parts of the city which deals in similar
product at uniform
Mail order Business-in this business transactions are made through postal
communication & delivery of goods by parcel
Consumer Cooperatives-retail stores run by cooperative societies
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Functions of Retailers
All retailers deal with the customers of varying tastes and temperaments.
Therefore, they should be active and efficient in order to satisfy their
customers and also to induce them to buy more. Let us see what the
retailers do in distribution of goods.
(i) Buying and Assembling of goods: Retailers buy and assemble varieties
of goods from different wholesalers and manufacturers. They keep
goods of those brands and variety which are liked by the customers and
the quantity in which these are in demand.
(ii) Storage of goods: To ensure ready supply of goods to the customer
retailers keep their goods in stores. Goods can be taken out of these store
and sold to the customers as and when required. This saves consumers
from botheration of buying goods in bulk and storing them.
(iii) Credit facility: Although retailers mostly sell goods for cash, they
also supply goods on credit to their regular customers. Credit facility is
also provided to those customers who buy goods in large quantity.
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iv) Personal services: Retailers render personal services to the customers by
providing expert advice regarding quality, features and usefulness of the items.
They give suggestions considering the likes and dislikes of the customers. They
also provide free home delivery service to customers. Thus, they create place
utility by making the goods available when they are demanded.
(v) Risk bearing: The retailer has to bear many risks, such as risk of:
(a) fire or theft of goods
(b) deterioration in the quality of goods as long as they are not sold out.
(c) change in fashion and taste of consumers.
(vi) Display of goods: Retailers display different types of goods in a very
systematic and attractive manner. It helps to attract the attention of the customers
and also facilitates quick delivery of goods.
(vii) Supply of information: Retailers provide all information about the behavior,
tastes, fashions and demands of the customers to the producers through
wholesalers. They become a very useful source of information for marketing
research
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External Trade
External Trade refers to buying & selling of goods & services between the
nationals of different countries or trade between agencies of the government of
different countries .It is also known as foreign trade or international Trade .It
consist of Export trade & Import trade and entreport trade
Export Trade :It involves the selling of goods & services to other countries
.For example when M/s PP Jewelers ,an Indian firm ,Exports gold plain
jewellery to USA ,they are said to be involved in export trade
Import Trade :It Involves the purchasing of goods & services from other
countries .For example ,when M/s Ratna Sagar ,An Indian publisher ,imports
books from Frankfurt <they are said to be involved in import Trade .
Entreport Trade :It involves importing of goods from one or more countries
with the purpose of exporting them to some other country or countries .
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Difference Between External Trade & Internal
Trade
Basis Home Trade Foreign Trade
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(e) It contributes to growth of large scale industries by
facilitating the inflow of materials and outflow of finished
goods.
(f) International competition is encouraged with the
improved transport system. This makes global markets
accessible to sellers and buyers of different countries.
Insurance
(a) Protection Against Risk: Insurance provides protection against
various risks involved in business. The protection is in the form of a
provision to compensate for the loss suffered by the insured.
(b) Pooling of Risk: Insurance helps in sharing of risk. In practice, a
large number of people seek insurance by paying the premium which
results in the formation of insurance fund. This fund is used for
compensating a few among them who may suffer a loss. Thus, in
effect the loss is spread over a large number of people.
(c) Helps in Securing Loans: Banks and financial institutions usually
insist on the insurance of goods and properties before loans can be
sanctioned on their security. So insurance makes it convenient to
secure loans and advances from the financial institutions.
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Insurance
(d) Protection Against Liabilities under various Labour Laws:
Insurance gives protection to businessmen in the event of compensation
payable to employees for accidents leading to fatal injury, partial injury,
disablement, as well as sickness and maternity.
(e) Contribute to Economic Development: Funds with the insurance
companies are invested in various types of securities and projects,
which contribute to economic development of the country.
(f) Generation of Employment: Insurance companies provide
employment to a large number of people on regular basis. A number of
people earn their livelihood working as insurance agents.
(g) Social Security: Life insurance provides security against risks of
old age and premature death of people. Besides, social security is
provided to workers through the Employees State Insurance scheme
whereby accidental risks are covered. 28
WAREHOUSING
warehousing bridges the time gap between production of goods and
their consumption, and thus, serves useful purpose particularly for
large-scale business operations. Based on its uses, its importance can
be briefly described as follows.
(a) Storage of Raw Materials: To maintain continuity in production, a
good quantity of raw materials is to be kept in stock. Not only that,
some raw materials are only available in specific period of the year
(cotton, oilseeds etc.) while these are used for production throughout
the year. So, these have to be kept in stock for use as and when
required.
(b) Storage in Anticipation of Rise in Price: In case the manufacturer
anticipates a rise in prices of raw materials in future he/she likes to
purchase it in advance and stock it. It equally applies to traders of
goods if they expect price rise.
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.
(c) Storage of Finished Goods: Since goods are generally produced in
anticipation of demand, these need to be stored till sales take place. Not only
that, some goods are produced round the year but purchased/used during a
specified part of the year e.g. electric fans, woollen clothes. Similarly, some
goods may be produced during a part of the year but used throughout the
year like sugar.
(d) Storage of Goods by the Wholesalers: Wholesalers buy goods in bulk and
maintain stock of goods in warehouses for sale in small quantities to retailers
from time to time.
(e) Use for Importers: Warehouses (known as bonded warehouse) are used for
storage of imported goods till the importer is able to pay the customs duty
and take delivery.
Based on the above uses of warehousing, it can be concluded that it is an
important link in the chain of marketing and adds to the time and place value
of goods. It also smoothens out fluctuations in their supply and demand. So,
wherever there is trade and commerce , there is need for warehousing.
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Banking
(a) Capital Formation: Deposits accepted by banks are channelized as loans
and advances for industrial and trading activities to business organizations.
Thus, banking indirectly converts savings into investment leading to capital
formation and development of economy.
(b) Services to Business: Banking helps business through a variety of
services such as providing long-term and short-term finance, arranging
remittance of money, collection of cheques and bills etc., assisting in
raising of capital by acting as underwriters and merchant bankers and so on.
(c) Reduces Use of Currency: Banks enable depositors to make payment by
cheque, which is transferable by endorsement and delivery. Besides,
travellers can carry travellers’ cheques, credit cards etc. issued by banks
instead of liquid money. Thus , use of currency is considerably reduced.
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(d) Mobilisation of Savings: Banks allow savings to be deposited in
different types of accounts such as Current Account, Savings Bank
Account, Fixed Deposit Account,etc. The facilities of withdrawal as and
when desired, and payment of interest on deposits encourage people to
save money and put it in the banks.
(e) Benefits to Rural Economy: Rural branches of banks play a useful role
in mobilising savings in rural areas and provide loans to farmers and
artisans at concessional rates and on priority basis. This helps the rural
economy in a big way.
(f) Balanced Development of Economy: Banks identify areas that need
special assistance for industrial development and provide them the
necessary help. Similarly they also identify backward regions and help in
their economic development by providing them adequate funds at
reasonable rates. Banks thus, help backward areasin industry and balanced
regional development.
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Franchise businesses
A franchise business is a business in which the owners, or franchisers,
sell the rights to their business logo and model to third parties, called
franchisees
Franchising is a way for small business owners to benefit from the
economies of scale of the big corporation (franchiser).
McDonald's restaurants, Subway etc are examples of a franchise.
The small business owner can leverage a strong brand name and
purchasing power of the larger company while keeping their own
investment affordable.
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Investing in a Franchise Business
To invest in a franchise, the franchisee must first pay an initial fee for the
rights to the business, training, and the equipment required by that
particular franchise.
Thereafter, the franchisee will generally pay the franchise business owner
an ongoing royalty payment, either on a monthly or quarterly basis. This
payment is usually calculated as a percentage of the franchise operation’s
gross sales.
After the contract has been signed, the franchisee will open a replica of
the franchise business, under the direction of the franchiser. The
franchisee will not have as much control over the business as he or she
would over their own, but may benefit from investing in an already-
established brand.
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Benefits in Franchise Business to Franchisee
The franchisee is given support by the franchiser in respect of marketing
&staff training
The franchisee may benefit from national advertising and being part of a
well-known organization with an established name ,format & product
A franchise allows people to start & run their own business with less risk
.thee chance of failure among new franchises is minimal as their product
is a proven success and has a secure place in market
The franchisees usually need less capital than they would if they were
setting up a business independently because the franchisor ,through
their pilot operations and buying power ,would have eliminated
unnecessary expenses
The franchisee has the benefit of the franchisor's continuous research
and development programmes ,which are designed to improve the
business and keeps in up-to date and competitive 35
Disadvantages in Franchise Business to Franchisee
The franchisee has less independence than a sole trader .He may
feel more like a manger than an owner
He is required to make payments of royalties
He may not be able to sell the business without the franchisor’s
approval
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Business Process Outsourcing
BPO is the process of hiring another company to handle business
activities for you.
Outsourced services include manufacturing, software development, web
development, finance, accounting, human resources and customer
service, among others
Now it is common for organizations to outsource financial and
administration (F&A) processes, human resources (HR) functions, call
center and customer service activities and accounting and payroll.
Many of these BPO efforts involve offshoring -- hiring a company based
in another country to do the work. India is a popular location for BPO
activities.
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Business Process Outsourcing-Benefits
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Cater to changing customer demands- It is another great
advantage of out sourcing the business processes. Many BPOs
provide the management with flexible and scalable services to meet
the customers' changing requirements, and to support company
acquisitions, consolidations, and joint ventures.
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Multinationals Companies –Meaning
A multinational company is a huge industrial organization which-
Operates in more than one country
Carries out production ,marketing & research activities on international
scale in those countries
Attempts to maximize profits world over
a multi-national company is one which is registered as a company in one
country but carries on business in a number of other countries by setting
up factories, branches or subsidiary units.
Such a company may produce goods or arrange services in one or more
countries and sell these in the same or other countries
Multinational Companies (MNCs) running business in India-Philips,
Siemens, Hyundai, Coca Cola, Nestle, Sony, McDonald’s, Citi Bank,
etc.
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Features of Multinational Companies
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Advantages of Multinational Companies
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Business Combinations
A business combination is an assembly of two or more groups of firms ,or
concerns engaged in the production and distribution of commodities in the
national or international markets with two main objects :
Elimination of unhealthy competition
Avoidance of wasteful expenditure in production & distribution or
marketing policies .
Business combinations are transactions in which one entity gains control,
or at least controlling interest, in another entity.
Agglomeration of the assets of two or more firms for their consolidation
as one entity under single ownership
Forms of Business Combinations
Mergers-
Amalgamation
Acquisitions
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Merger
Itis a situation where 2 or more existing firms
combine to form new entity. Either a new firm is
formed or a smaller firm is formed is merged into a
bigger firm.
The combination of two firms into a new legal entity
1. Horizontal Merger
2. Vertical Merger
3. Conglomerate Merger
4. Concentric Merger
Types of Merger
Horizontalmergers are those mergers where the
companies manufacturing similar kinds of
commodities or running similar type of businesses
merge with each other.
Horizontal Merger
A merger between two companies producing
different goods or services.
Vertical Merger
A merger between firms that are involved in totally
unrelated business activities.
Conglomerate Merger
A merger of firms which are into similar
type of business.
Concentric Merger
Acquisition & Takeover
ACQUISITION
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A corporate action where an acquiring company
makes a bid for an acquiree. If the target company is
publicly traded, the acquiring company will make an
offer for the outstanding shares.
Takeovers
Hostile Takeover
A takeover attempt that is
strongly resisted by the
target firm Friendly Takeover
Target company's
management and board of
directors agree to a merger or
acquisition by another
company.
Takeover might be :
To gain opportunities of market growth more quickly
than through internal means
To seek to gain benefits from economies of scale
To seek to gain a more dominant position in a national or
global market
To acquire the skills or strengths of another firm to
complement the existing business
To acquire a speedy access to revenue streams that it
would be difficult to build through normal internal
growth
To diversify its product or service range to protect itself
against downturns in its core markets