CHAPTER 7 BUSINESS MARKETING CHANNEL PARTICIPANTS Important Topics

CHAPTER 7 BUSINESS MARKETING CHANNEL PARTICIPANTS

Important Topics of this Chapter n n n n Business Marketing Channel Members. Business Channel Strategy. Differences Between Business and Consumer Channels. Roles and Functions of Channel Intermediaries. Direct and Indirect Channels. Channel Cooperation. Channel Conflict. Channel Width.

Business Marketing Distribution Channel Members n n n Channel members: A set of independent companies that form cooperative buyer-seller relationships involving transactions (such as raw material, components, process materials, and finished goods for resale), all leading to getting a particular product line to the final user. It is important that each channel member see its competition not as the other companies that make its particular materials, but as the alternative channels that can supply equivalent finished products to the final user. Cooperation, coordination, and strategically acting in the best interests of the channel are key. If the channel loses business to a competitive source of supply, then all channel members lose.

Business Marketing Distribution Channel Members (cont. ) n Where a producer has alternative channels of distribution available, the marketer’s challenge is to: n n n Select the channel (or combination of channels) that provides best coverage, provides best service to target segments, and meets revenue objectives of the organization. Remember that title-taking intermediaries (i. e. , distributors) are customers of the producer, not just providers of a distribution service. The study of distribution channels involves relationships between channel member companies. Don’t confuse this with physical distribution, which involves the actual flow of materials. (continued)

Business Channel Strategy n Channel Strategy Segmentation and targeting according to product’s specifications n Develop channel strategy to match the product with the segment n n Channel Objectives Low cost channel operations n Control of channel n Closer relationships-partnering n

Business Channel Strategy (Cont. ) Sales effort n Service and technical assistance n Market feedback n Company image n n Channel Options Direct channel n Indirect channel n n Selecting Appropriate Channels

Business Channel Strategy (Cont. ) n Selecting Intermediaries n n n Industrial distributors Manufacturers’ representatives Establishing Channel Arrangement • • • n n Sales territory. Provisions about returns. Discounts. Advertising arrangements. FOB. Termination procedures. Implementation Control and Evaluation (MIS)

Differences Between Business and Consumer Channels n Short and direct: n n Dominated by manufacturers: n n n Partnering relationships are common Two major intermediaries: n n 70 -75% direct sales Industrial distributor. Manufacturer representatives. Selection of intermediaries is rational Inventory requirement is extensive Personal selling and major accounts are very common

Functions of the Channel Intermediary n n Buying: An intermediary buys products for resale to other intermediaries or to final business users. Selling: An intermediary with a capable sales force supported by established warehouse distribution centers, which is already serving other product needs of a wide user customer base, would be a valuable channel addition. Storing: An inventory commitment is composed of products to satisfy customer purchase requirements in a timely manner. Transporting: A vast array of transportation alternatives are available for intermediaries to use to manage the physical flow of the product to the business user. (continued)

Functions of the Channel Intermediary n n Sorting: Most intermediaries buy in large quantities and then sort (breaking of bulk) shipments into smaller lots (often in combinations) for resale to business users. Financing: Intermediaries may invest in inventory, sell and deliver merchandise to business user, and provide credit terms, then finance the exchange process. Risk taking: Because of obsolescence and deterioration, risk is inherent in the ownership of inventory; additional risk comes from uncollectable customer accounts. Providing market information: Importance of continuous and accurate flow of market information concerning final user needs, pricing conditions, competitive conditions, and user satisfaction is critical to the success of the channel.

Business Channel Systems n Direct Channel: • Field salespeople: • Regional sales office. • Inside salespeople: • Use for straight re-buy customers. • Telemarketing: • Direct marketing. • Catalogs: • No personal contacts. • National or major accounts: • Important customers. n Indirect Channels: n Industrial distributors-independently owned and owned title • Specialists: • Specialize in one product 50% or more. • Generalists: • Industrial supermarkets. • The combination house.

Direct Distribution Channel n Example: As a first-tier component supplier to automotive OEMs, Rockwell Automation Inc. may contract to supply BMW USA’s annual usage of wheel bearings. The requirement may include several sizes, each in 50, 000 to 100, 000 quantities. This Rockwell would sell direct. A Rockwell salesperson would call on BMW to review its requirements, coordinate Images courtesy of Rockwelland Automation purchase transactions, maintain the relationship.

Indirect Distribution Channels n Example: Rockwell also produces similar wheel bearings that are used in automotive repair shops and to repair industrial material handling equipment. Individually these quantities are too small to be attractive but in total the quantities are quite high. In this case, Rockwell sells through a distributor, such as W. R. Grainger.

BMW Indirect distribution Direct distribution Rockwell Automation Inc. (car image courtesy of BMW USA) (continued)

BMW Both BMW and Grainger would be important customers of Rockwell, probably purchasing millions of dollars worth of bearings each year. Rockwell Automation Inc.

Internet Direct Distribution Channel n n At some point, Rockwell may decide that software technology exists to allow it to sell to small users directly over the Internet. Rockwell may then stop using the distributor, or alternatively use it for additional intensive distribution. It is not unusual for industrial Internet buyers to be required to use company credit cards (such as American Express). That removes the necessity for a company like Rockwell to assess credit and set up an account for a small dollar purchase. Still, a company like Grainger has an advantage in direct Internet sales that Rockwell does not. What is it?

Grainger’s advantage is one-stop shopping, which means convenience for the customer. • • • Grainger is the nation's leading business-to-business distributor of maintenance, repair, and operating (MRO) supplies and related information. Its customers have access to over 560, 000 products available to them through on-line ordering, phone ordering, and stopping by branch locations. Rockwell Automation Inc. may agree that Grainger will be its exclusive distributor in the state of South Carolina. That is, of course, except for BMW’s South Carolina assembly plant, which Rockwell will supply directly.

Business Channel Intermediaries n Industrial distributors: • 15 -20% of sales to farm supplies, construction and mining, professional equipment, lumber and plywood, plumbing and heating, and industrial machinery and equipment. • • Product is standardized. Gross margin is low. Unit value is low. Frequent purchases. Order size is small. Decentralized market. Short lead time. Low purchasing effort.

Business Channel Intermediaries (cont. ) n How industrial distributor serves: • • • n Establish sales force Locally owned and operated Stock goods in their warehouses Extend credit Good source for feedback Lower costs to customers: • delivery/inventory service. Limitations: • • • Difficult to control. Bad management. Handle competitors products. Low inventory level. Major accounts create problems. Inadequate service.

Business Channel Intermediaries (cont. ) n Distributors’ Trend: • Will be more specialized and larger • Merger and acquisition will take place: small ones will merge with larger ones to be competitive • Closer relationship(partnership) with manufacturers n Manufacturers’ Representative: • Do not own title • independent sales person • They can be seen in consumer market

Business Channel Intermediaries (Cont. ) n Sales through manufacturers’ representatives: • Electronic parts and equipment, coal, plumbing and heating, industrial machinery and equipment: • market is not big enough for a full-time sales person • Gross margin is not large enough • Manufacturers want quick entry in a new market • Product is a part of package of other products • Manufacturer is new in the market and can not support full time sales people

Business Channel Intermediaries (Cont. ) n Service of manufactures’ representative: • they have contacts provide immediate entry to the market. • represent more than one manufacturers and wide group of products. • they serve better for seasonal products because they work on commission. • provides full representation if manufacturers can not support full time sales person. • if company is not financially strong, they are the most qualified technical people. • provides more stable sales presence.

Business Channel Intermediaries (Cont. ) n Limitations of manufacturer’s representatives: • • n lack of specialized care of products. difficult to get feedback and service. they do not carry any inventory. poor representatives have little value. Manufacturer’s representatives trends: • they will be larger and more important if manufacturers are willing to reduce cost of selling.

Channel Transaction Facilitators Do not take title or carry inventory, but rather provide services such as storage, transportation, or arranging of sales. n Independent warehouses, carriers, and manufacturer’s representatives fall into this category. n Can be very important to the success of the channel. n

Partnering Relationships Dependence and influence to each other. n Conflict of interest: n n Intensity, duration and frequency. Coordination and communication. n Trust and cooperation. n Satisfaction. n

Channel Cooperation It is what the channel members expect from each other in the long run. n Missionary sales person. n Participating in the planning function n Promotional aid. n Acting as a management consultant.

Channel Conflict Channel conflict may result when channel members have mutually exclusive values, interests, or goals. Manufacturers may want control of distribution channels for better execution of their marketing strategies, whereas intermediaries may not see the manufacturer-determined strategies as in their best interest.

Problem Areas in Manufacturer Intermediary Relationship n n n n Service and technical assistance House accounts Inventory levels Marketing information and feedback Training and support services Other product lines carried Other manufacturer-supplied channels competing with intermediary Prices and discounts

Channel Conflict Revisited n Whether between channel members or between channel members and channel transaction facilitators, potential conflict is reduced by: Relationship building and team management n Team-building efforts n Clear and complete contracts n

Conflict Resolution (A) n As the senior (manufacturer’s) marketer involved, resolve the following: n n The manufacturer’s rep who sells your products to IBM has been so successful that her commissions (7. 5% of gross sales) now exceed your company president’s compensation. It is not clear in the contract whether commissions would end if the relationship ends.

Conflict Resolution (B) n As the senior (manufacturer’s) marketer involved, resolve the following: n n n Your company is a $200 million (annual) manufacturer of electric motors. You have an exclusive distribution agreement with a multibillion dollar distributor with many distribution centers and sales branches throughout the U. S. and Canada. Your distributor is in the process of dictating to you the prices it will pay, the inventory it will carry, and the service it will provide to customers.

Types of Channel Width Intensive distribution: Gain access to as many resellers as possible within a particular geographic area. n Selective distribution: Distribute product to limited number of resellers in a particular geographic region; highly chosen based on distinctive capabilities and highquality service. n Exclusive distribution: Only one n

International Distribution Channels n Domestic agents-do not take title • domestic middlemen who sell to foreign buyers n Domestic merchants-take title, but not necessarily possession • He does not have power, but work foreign manufacturer