CHAPTERFI

VE

MARKETDI
STRI
BUTI
ONSTRATEGY

I
ntr
oduct
ion

Thi
schapt
eri
sconcer
nedwi
thwhyandhow f
ir
msdev
elopandmanagemar
ket
ing
channeldi
str
ibut
ionr
elat
ionshi
ps.Thest
udyofmar
ket
ingchannel
sembr
acesawi
de
r
angeofdi
ff
erentway
sthatbusi
nessoper
ati
onsar
econduct
ed.Suppl
ychai
nsar
eone
oft
hepopul
armar
ket
ingchannelar
rangement
s.Thef
ir
stsect
ionoft
hischapt
erdeal
s
wi
th ov
eral
lchannelst
ruct
ure and t
he r
ati
onal
eformar
ket
ing channel
sin hi
ghl
y
dev
elopedi
ndust
ri
aleconomi
es.Thesecondsect
iondeal
swi
thmar
ketdi
str
ibut
ion
st
rat
egy
,focusi
ng on st
ruct
ure,channeldesi
gn,and t
ypesofr
elat
ionshi
psamong
channelpar
ti
ci
pant
s.I
nfor
mat
iont
echnol
ogy
,speci
fi
cal
l
yel
ect
roni
ccommer
ce,
hashad
si
gni
fi
canti
mpactonmar
ketdi
str
ibut
ionst
rat
egyandi
sdi
scussedi
nthet
hir
dsect
ion
oft
hechapt
er.Thef
inalsect
ionoft
hechapt
erf
ocusesont
hei
nter
rel
ati
onshi
pof
mar
ket
ingst
rat
egydeci
sionsr
elat
edt
opr
ici
ngandl
ogi
sti
csconsi
der
ati
ons.

1.
1 Mar
ketDi
str
ibut
ioni
ntheSuppl
yChai
n
I
magi
neasoci
etyi
nwhi
chev
eryi
ndi
vi
duali
stot
all
ysel
f-
suf
fi
cient
:eachi
ndi
vi
dual
woul
dpr
oduceandconsumeal
loft
hepr
oduct
sandser
vicesnecessar
yforsur
viv
also
t
her
ewoul
dbenoneedf
oranyeconomi
cact
ivi
tyr
elat
edt
otheexchangeofgoodsand
ser
vices bet
ween i
ndi
vi
dual
s.No such soci
etycan be f
ound t
oday
.Inr
eal
i
ty,as
i
ndi
vi
dual
s begi
nto speci
ali
ze i
nthe pr
oduct
ion ofspeci
fi
c goods orser
vices,a
mechani
sm mustar
isef
ort
heexchangeoft
hosegoodsandser
vicest
osat
isf
ythe
consumpt
ionneedsofi
ndi
vi
dual
s.Todosoef
fi
cient
lyandef
fect
ivel
y,f
ir
msmust
ov
ercome t
hree di
scr
epanci
es:di
scr
epancy i
n space,di
scr
epancy i
nti
me,and
di
scr
epancyi
nquant
it
yandassor
tment
.

Di
scr
epancyi
nspacer
efer
stot
hef
actt
hatt
hel
ocat
ionofpr
oduct
ionact
ivi
ti
esandt
he
l
ocat
ionofconsumpt
ionar
esel
dom t
hesame.Thi
sdi
ff
erencebet
weent
hel
ocat
ionof
pr
oduct
ionandt
hel
ocat
ionofconsumpt
ioni
saf
undament
alpr
obl
em t
hatmustbe
ov
ercomet
oaccompl
i
shexchange.Ov
ercomi
ngt
hisl
ocat
ionaldi
scr
epancypr
ovi
des

1|Page
cust
omer
stheser
viceout
putofspat
ial
conv
eni
ence.

Di
scr
epancy i
nti
me r
efer
stot
he di
ff
erence i
nti
ming bet
ween pr
oduct
ion and
consumpt
ion.Somepr
oduct
s,agr
icul
tur
alcommodi
ti
esf
orexampl
e,ar
epr
oduced
dur
ingshor
tti
meper
iodsbutar
edemandedbycust
omer
scont
inuousl
y.Ont
heot
her
hand,manypr
oduct
sar
emanuf
act
uredi
nant
ici
pat
ionoff
utur
ecust
omerdemand.
Si
ncemanuf
act
uri
ngof
tendoesnotoccuratt
hesamet
imepr
oduct
sar
edemanded,
i
nvent
oryandwar
ehousi
ngar
erequi
red.Thespeci
fi
cmanneri
nwhi
cht
hisdi
scr
epancy
i
sov
ercomesr
esul
tsi
ntheser
viceout
putr
elat
edt
owai
ti
ngt
ime.

Di
scr
epancyi
nquant
it
yandassor
tmentr
efer
stot
hef
actt
hatmanuf
act
uri
ngf
ir
ms
t
ypi
cal
l
yspeci
ali
zei
npr
oduci
ngl
argequant
it
iesofav
ari
etyofi
tems.Cust
omer
s,ont
he
ot
herhand,t
ypi
cal
l
ydemand smal
lquant
it
iesofnumer
ousi
tems.Thi
sdi
ff
erence
bet
weent
hepr
oduct
ionandconsumpt
ionsect
orsoft
heeconomymustsomehow be
r
econci
l
edt
odel
i
vert
hepr
oductv
ari
etyandassor
tmentt
ocust
omer
s.

Thesebasi
cpr
obl
emsofexchangear
eresol
vedbyt
heov
eral
lmar
ketdi
str
ibut
ion
pr
ocess,t
hrought
hemechani
sm t
ypi
cal
l
yref
err
edt
oast
hechannelofdi
str
ibut
ion.A
channelofdi
str
ibut
ioncanbedef
inedasanet
wor
kofor
gani
zat
ionsandi
nst
it
uti
ons
t
hat
,incombi
nat
ion,per
for
m al
lthef
unct
ionsr
equi
redt
oli
nkpr
oducer
swi
thend
cust
omer
sto accompl
ish t
he mar
ket
ing t
ask.An under
standi
ng ofdi
str
ibut
ion
channel
sisessent
ialf
orl
ogi
sti
csmanager
sbecausei
tiswi
thi
nthechannelt
hat
l
ogi
sti
csst
rat
egyi
sact
ual
l
yexecut
edt
oaccommodat
ecust
omerr
equi
rement
s.I
nthi
s
sect
ion,i
mpor
tant el
ement
s of channelt
heor
yrel
ated t
o mar
ket
ing f
unct
ions,
speci
ali
zat
ion,
thesor
ti
ngpr
ocess,
andchannelsepar
ati
onar
erev
iewedt
ohi
ghl
i
ghtt
he
i
nter
act
ionbet
weenmar
ket
ingchannel
requi
rement
sandl
ogi
sti
cal
accommodat
ion.

5.
1.1Mar
ket
ingFunct
ions

Thosewhost
udymar
ket
inghav
elongacknowl
edgedt
hatanumberofspeci
fi
cact
sor
act
ivi
ti
esar
eessent
ialt
othesuccessf
ulcompl
eti
onofexchange.Al
thought
her
ear
e
manyway
sto cl
assi
fyt
hesef
unct
ions,t
het
radi
ti
onall
i
sti
ncl
udessel
l
ing,buy
ing,
t
ranspor
ti
ng,st
ori
ng,f
inanci
ng,st
andar
dizat
ion,mar
ketf
inanci
ng,r
iskbear
ing,and

2|Page
mar
keti
nfor
mat
ion.I
nthet
ypi
calchannelar
rangement
,af
unct
ionmayal
ter
nat
elybe
per
for
med bydi
ff
erentchannelmember
s ori
tmaybe per
for
med and dupl
i
cat
ed
numer
oust
imes.

Theexchangef
unct
ionsr
epr
esentt
heact
ivi
ti
esnecessar
yforowner
shi
ptr
ansf
er.
Sel
l
ingi
snecessar
ytocul
ti
vat
epr
oductdemandt
hroughdev
elopmentofpr
oduct
sthat
sat
isf
y mar
ketneeds and t
hrough t
echni
ques ofdemand st
imul
ati
on,such as
adv
ert
isi
ng and per
sonalsel
l
ing.Buy
ing i
nvol
ves t
he pl
anni
ng and acqui
sit
ion of
assor
tment
ssot
hatpr
operquant
it
iesandqual
i
tiesofpr
oduct
swi
l
lbeav
ail
abl
etomeet
cust
omerr
equi
rement
s.Thel
ogi
sti
csf
unct
ionsconsi
stofget
ti
ngt
her
ightpr
oduct
sto
t
her
ightpl
aceatt
her
ightt
ime.I
ncont
empor
aryl
ogi
sti
cst
hescopeofconcer
nis
si
gni
fi
cant
lybr
oadert
hant
ranspor
tat
ionandst
orage,
encompassi
ngal
lwor
krel
atedt
o
i
nvent
oryposi
ti
oni
ng,whi
chmayi
ncl
udeaspect
sofsat
isf
yingf
orm andpossessi
on
r
equi
rement
saswel
l
.Theot
herf
ourf
unct
ionsar
ecol
l
ect
ivel
yref
err
edt
oasf
aci
l
itat
ion
because t
hei
rper
for
mance i
s necessar
yto compl
etet
he exchange and l
ogi
sti
cs
act
ivi
ti
es.

5.
1.1.
1Speci
ali
zat
ion

The need f
orf
unct
ionalper
for
mance l
eads di
rect
lyt
othe economi
c conceptof
speci
ali
zat
ion. Speci
ali
zat
ion i
s a f
undament
al dr
iver of economi
c ef
fi
ciency
.
Manuf
act
urer
sar
especi
ali
stsi
nthepr
oduct
ionofspeci
fi
cpr
oduct
s.Whol
esal
ersand
r
etai
l
ersar
especi
ali
stsi
nthesenset
hatt
heybuyandsel
lspeci
fi
cassor
tment
stai
l
ored
t
other
equi
rement
soft
het
argetmar
ket
stheyhav
echosent
oser
ve.War
ehousi
ngand
t
ranspor
tat
ionf
ir
msar
especi
ali
stsi
ntheper
for
manceofl
ogi
sti
calf
unct
ions.Thel
ogi
c
ofspeci
ali
zat
ioni
sbasedoneconomi
esofscal
eandscope.Whenaf
ir
m speci
ali
zes,
it
dev
elopsscal
e and scope t
o achi
eve oper
ati
onalef
fi
ciency
.Inf
act
,much oft
he
economi
cjust
if
icat
ion f
orspeci
ali
zed channelpar
ti
cipant
sli
es i
nthei
rabi
l
ityt
o
ef
fi
cient
lyper
for
m anact
ivi
ty.

Theeconomi
cjust
if
icat
ionf
orusi
ngaspeci
ali
sti
schal
l
engedwhenaf
ir
m gener
ates
suf
fi
cientv
olumet
oconsi
derper
for
mingt
heact
ivi
tyi
nter
nal
l
y.Conv
ersel
y,af
ir
m may
chooset
ospi
nof
f,orout
sour
ce,cer
tai
nfunct
ionswheni
tfi
ndst
hati
tdoesnothav
e

3|Page
suf
fi
cienteconomi
esofscal
e,orwheni
tchoosest
ofocusonot
herf
unct
ionsi
tdeems
mor
ecl
osel
yrel
atedt
oit
scor
ecompet
ency
.Thepoi
nti
sthatessent
ialf
unct
ionsmay
beshi
ft
edf
rom onef
ir
mtoanot
her
,absor
bed,
spunof
f,andt
hel
i
ke.
'Regar
dlessofwho
per
for
ms t
he speci
fi
c wor
k,al
lfunct
ions mustbe per
for
med t
o compl
etet
he
di
str
ibut
ionpr
ocess.

5.
1.1.
2Assor
tment

Pr
oductassor
tmenti
sdi
rect
lyr
elat
edt
ospeci
ali
zat
ionandhasr
ecei
vedconsi
der
abl
e
at
tent
ioni
nthebusi
nessl
i
ter
atur
e.Mar
ketaccommodat
ionr
equi
rest
hatdi
str
ibut
ion
channel
spr
ovi
deconsumer
sandenduser
swi
tht
hei
rdesi
redl
evel
sofpr
oductv
ari
ety
andassor
tment
.Inchannelar
rangement
sanumberofi
ndependentbusi
nessesof
ten
cooper
atet
o del
i
vert
he appr
opr
iat
e mi
x ofpr
oduct
s;atst
rat
egi
c posi
ti
ons i
na
di
str
ibut
ion channel
,pr
oduct
sar
econcent
rat
ed,sor
ted,and di
sper
sed t
othenext
l
ocat
ioni
ntheov
eral
lsuppl
ychai
n.Thi
spr
ocesshasf
ourbasi
cst
eps:concent
rat
ion,
al
l
ocat
ion,
cust
omi
zat
ion,
anddi
sper
sion.

 Concent
rat
ion:r
efer
stot
hecol
l
ect
ionofl
argequant
it
iesofapr
oductorof
mul
ti
plepr
oduct
ssot
heycanbesol
dasagr
oup.Amanuf
act
urer
'sconsol
i
dat
ion
war
ehouse,f
orexampl
e,br
ingst
heout
putofsev
eraldi
ff
erentf
act
ori
est
oa
si
ngl
elocat
ion.Al
ter
nat
ivel
y,ani
ndust
ri
aldi
str
ibut
ororwhol
esal
ermaypur
chase
f
rom sev
eral
manuf
act
urer
sandbr
ingt
hei
temst
oasi
ngl
elocat
ion.Onepur
pose
ofconcent
rat
ioni
stor
educet
ranspor
tat
ioncost
.Thecostr
educt
ionr
esul
tsf
rom
mov
ingl
argequant
it
iesofpr
oductt
otheconcent
rat
ionl
ocat
ionr
athert
haneach
suppl
i
eri
ndi
vi
dual
l
yshi
ppi
ngsmal
lquant
it
iesdi
rect
lyt
ocust
omer
s.
 Al
locat
ion:r
efer
sto br
eaki
ngdownahomogeneousgr
oupofpr
oduct
sint
o
smal
l
erandsmal
l
erl
otsi
zest
omor
ecl
osel
ymat
chcust
omerr
equi
rement
s.
Pr
oduct
srecei
vedf
rom suppl
i
ersi
ntr
uckl
oadquant
it
iesmayi
ntur
nbesol
din
casequant
it
ies.Casequant
it
iesmaybebr
okeni
ntoi
ndi
vi
dualpr
oductuni
ts.
Al
l
ocat
ioni
sal
soknownast
hepr
ocessofbr
eaki
ngbul
k.
 Cust
omi
zat
ion:r
efer
stor
egr
oupi
ngt
hepr
oduct
sint
oanassor
tmentofi
temsf
or

4|Page
 r
esal
eto uni
quel
ymeeta speci
fi
ccust
omer
'sr
equi
rement
s.Manuf
act
urer
s,
t
hrought
hei
rconsol
i
dat
ionf
aci
l
iti
es,al
l
ow whol
esal
eandr
etai
lcust
omer
sto
pur
chasef
ullt
ruckl
oadsofmi
xedpr
oduct
s.Si
mil
arl
y,whol
esal
ersbui
l
dmi
xed
assor
tment
s ofpr
oduct
sforr
etai
l
ers and r
etai
l
ers bui
l
d assor
tment
sfor
consumer
s.Forexampl
e,war
ehousest
oressuchasCost
comaydesi
reauni
que
pr
oductpack,suchast
woboxesofcer
ealwr
appedt
oget
her
.Anot
herr
etai
l
er
mayr
equi
respeci
alpr
omot
ionaldi
spl
ays,whi
chmayev
encombi
nepr
oduct
s
f
rom t
wodi
ff
erentmanuf
act
urer
s.I
ncont
empor
arysuppl
ychai
ns,t
heabi
l
ityt
o
cust
omi
zei
svi
tal
.
 Di
sper
sion: i
sthe f
inalst
ep i
n assor
tment
.Itconsi
sts ofshi
ppi
ng t
he
cust
omi
zedassor
tment
stocust
omer
swhenandwher
especi
fi
ed.Ahy
pot
het
ical
exampl
ecani
l
lust
rat
etheov
eral
lpr
ocessofassor
tmentandal
sopr
ovi
dei
nsi
ght
i
ntoacr
it
icaleconomi
cpr
inci
pleofdi
str
ibut
ion:t
hepr
inci
pleofmi
nimum t
otal
t
ransact
ions.The cust
omer
s coul
d be consumer
s ori
ndust
ri
aluser
s.For
si
mpl
i
cit
y,assumet
hecust
omer
sar
eret
ail
erswhoar
eat
tempt
ingt
odev
elopan
assor
tmentf
orr
esal
etot
hei
rconsumermar
ket
s.
Theassor
tmentpr
ocesspr
ovi
desconsi
der
abl
einsi
ghti
ntot
heeconomi
csofmar
ket
di
str
ibut
ion.I
tal
sodemonst
rat
eshowdi
str
ibut
ionchannel
spr
ovi
dedi
ff
erentcust
omer
s
wi
tht
hei
rdesi
redl
evel
sofpr
oductv
ari
etyandl
ot-
sizer
equi
rement
s.

5.
1.1.
3 ChannelSepar
ati
on
Thepr
ecedi
ngdi
scussi
onofspeci
ali
zat
ionoff
unct
ionsandassor
tmentl
eadst
oone
ot
heri
mpor
tantconcepti
nmar
ketdi
str
ibut
ion:channelsepar
ati
on.Separ
ati
onusual
l
y
f
ocusesoni
sol
ati
ngt
hebuy
ingandsel
l
ingf
unct
ionsr
elat
edt
oowner
shi
ptr
ansf
erf
rom
t
hef
unct
ionsr
elat
edt
ophy
sical
dist
ri
but
ionorl
ogi
sti
cs.Al
thoughbot
hset
sofact
ivi
ti
es
ar
enecessar
yandmustbecoor
dinat
ed,
ther
eisnor
equi
rementt
hatt
heybeper
for
med
si
mul
taneousl
yorev
enbyt
hesamebusi
nesses.A pr
oductmaychangeowner
shi
p
wi
thoutphy
sical
l
ymov
ingormaybeshi
ppedandwar
ehousedsev
eralt
imeswi
thout
changi
ngowner
shi
p.Thus,t
heowner
shi
p,ormar
ket
ing,channelconsi
stsofanet
wor
k
off
ir
msengagedi
nbuy
ingandsel
l
ing.I
tconsi
stsofi
nter
medi
ari
essuchasagent
s,
i
ndust
ri
aldi
str
ibut
ors,f
ulland/
orl
i
mit
edf
unct
ionwhol
esal
ers,sal
esr
epr
esent
ati
ves,

5|Page
andr
etai
l
ers,al
lofwhi
char
einv
olv
edi
nnegot
iat
ing,cont
ract
ing,andadmi
nist
eri
ng
sal
esonacont
inui
ngbasi
s.

Thephy
sical
,orl
ogi
sti
cs,channelr
epr
esent
sanet
wor
kofor
gani
zat
ionsi
nvol
vedwi
th
achi
evi
ng i
nvent
ory mov
ement and posi
ti
oni
ng.The wor
k of l
ogi
sti
cs i
nvol
ves
t
ranspor
tat
ion,war
ehousi
ng,st
orage,handl
i
ng,or
derpr
ocessi
ng,andani
ncr
easi
ng
ar
rayofv
alue-
added ser
vices concer
ned wi
th achi
evi
ng t
ime,space,l
ot-
size,and
assor
tmentr
equi
rement
s.

5.
2Mar
ketDi
str
ibut
ionSt
rat
egyDev
elopment

Themar
ket
ingchanneli
soneoft
hel
eastunder
stoodar
easofbusi
nessst
rat
egy
.The
di
ver
sit
yandcompl
exi
tyofchannelar
rangement
smakei
tdi
ff
icul
ttodescr
ibeand
gener
ali
zet
hechal
l
engesmanager
sfacewhendev
elopi
ngasuppl
ychai
nst
rat
egy
.

Mar
ket
ingchannel
sdonothav
euni
for
m di
mensi
onsandof
tendef
ysi
mpl
edescr
ipt
ion.
Some ar
ever
ydi
rect
,li
nki
ng manuf
act
urer
s orgr
ower
s ofa pr
oductdi
rect
lyt
o
consumer
s.Ot
her
scont
ain manyi
nter
medi
atei
nst
it
uti
onswi
th owner
shi
ptr
ansf
er
occur
ri
ngmanyt
imes.Compl
i
cat
ingt
hesubj
ecti
sthef
actt
hatal
mostal
lfi
rmsar
e
engagedi
nmul
ti
plechannelar
rangement
sast
heyseekt
hemostef
fect
ivemeanst
o
penet
rat
e many di
ff
erentmar
ketsegment
s and meett
he r
equi
rement
s oft
hose
segment
stheychooset
oser
ve.

5.
2.1Di
str
ibut
ionSt
ruct
ure

Whi
l
eit
ssi
mpl
i
cit
yismi
sleadi
ng,i
tser
vest
oil
l
ust
rat
ethemaj
ort
ypesofi
nst
it
uti
ons
t
hatmaybei
nvol
vedi
ntheov
eral
lpr
ocess.Manuf
act
urer
sar
epr
imar
il
yinv
olv
edi
n
cr
eat
ing pr
oduct
s.As t
he cr
eat
ors,t
hey wer
etr
adi
ti
onal
l
y consi
der
ed t
o be t
he
or
igi
nat
ors of channelar
rangement
s and became t
he f
ocalpoi
nt f
or channel
di
scussi
ons.Compr
ehensi
ve channelst
udy
,howev
er,musti
ncl
ude mor
ethan t
he
manuf
act
urer
'sper
spect
ive.Todoot
her
wisewoul
dincor
rect
lyposi
ti
onwhol
esal
ersand

6|Page
r
etai
l
ersaspassi
vei
nst
it
uti
ons.

I
nmanychannelsi
tuat
ions,
ret
ail
ersar
epower
fulanddomi
nanti
ndet
ermi
ninghowt
he
ov
eral
ldi
str
ibut
ionpr
ocesswi
l
lbeor
gani
zedandwhatt
hemanagementpr
act
iceswi
l
l
be.Ast
hei
nst
it
uti
oncl
osestt
ofi
nalcust
omer
s,r
etai
l
ershav
eagr
eatdealatst
akei
n
channelper
for
mance.Whol
esal
ersar
elessv
isi
blei
nthepr
ocess,butt
hei
rrol
ein
or
chest
rat
ingandcoor
dinat
ingt
heact
ivi
ti
esofmanymanuf
act
urer
swi
tht
hoseof
r
etai
l
erscannotbei
gnor
ed.Under
standi
ngt
her
olesoft
hemanyt
ypesofchannel
par
ti
cipant
siscr
it
ical
indev
elopi
ngmar
ketdi
str
ibut
ionst
rat
egy
.

5.
2.2ChannelPar
ti
cipant
s

Pr
imar
ychannelpar
ti
cipant
sar
ethosebusi
nessest
hatassumer
iskdur
ingt
hev
alue
addeddi
str
ibut
ionpr
ocess.Bel
ow,
thebasi
cnat
ureofeachbusi
nesst
ypei
srev
iewed.

A.
Manuf
act
urer
s
Thepr
ocessofcombi
ningmat
eri
alsandcomponent
sint
opr
oduct
sist
ypi
cal
l
ycal
l
ed
manuf
act
uri
ng or pr
oduct
ion. Manuf
act
uri
ng f
ir
ms ar
e hi
ghl
yvi
sibl
e channel
par
ti
cipant
sbecauset
heypr
ovi
def
orm ut
il
it
ybycr
eat
ingt
hepr
oduct
sthatbecomet
he
pr
imar
yconcer
noft
heov
eral
ldi
str
ibut
ionpr
ocess.

Manuf
act
urer
stake on si
gni
fi
cantr
isk wi
tht
he cr
eat
ion ofpr
oduct
s.Reput
abl
e
manuf
act
urer
sassumef
ullr
esponsi
bil
i
tyf
ort
hequal
i
tyoft
hei
rpr
oduct
sandt
hei
r
ul
ti
mat
eaccept
ancebycust
omer
s.Themostv
isi
blemanuf
act
urer
sar
ethef
ir
mst
hat
pr
oduceconsumerpr
oduct
ssuchasaut
omobi
l
es,appl
i
ances,f
ood,phar
maceut
ical
s,
cl
othi
ng,et
c.These pr
oduct
s,pr
oduced f
ormassconsumpt
ion,of
ten hav
e hi
ghl
y
adv
ert
isedandpubl
i
cizedbr
andswi
thhi
ghl
evel
sofconsumeri
dent
if
icat
ion.Buti
n
r
eal
i
ty,t
hesef
ir
msr
epr
esentonl
yasmal
lper
cent
ageofal
lcompani
esengagedi
n
manuf
act
uri
ng. The maj
ori
ty of manuf
act
uri
ng f
ir
ms pr
oduce component
s,
subassembl
i
es,ori
ngr
edi
ent
sthatar
esol
dtoot
herbusi
nessf
ir
ms.Suchbusi
ness-
to-

7|Page
busi
ness (
B2B)mar
ket
ing i
s cr
it
icalt
othe ov
eral
lper
for
mance off
inal
-pr
oduct
manuf
act
uri
nganddi
str
ibut
ion.

I
tmustbenot
edt
hatwhi
l
etheext
entofmanuf
act
urer
'sr
iski
ntheov
eral
ldi
str
ibut
ion
pr
ocessi
sconsi
der
abl
e,i
tisl
i
mit
edt
othespeci
fi
cpr
oduct
spr
oduced.Eachspeci
fi
c
manuf
act
urer
'spr
oduct
sty
pical
l
yrepr
esentasmal
lpr
opor
ti
onoft
hosehandl
edbyt
he
ot
herpr
imar
ychannel
par
ti
cipant
s:

 Whol
esal
ersand
 Ret
ail
ers
B.Whol
esal
ers
Per
hapst
hel
eastunder
stoodandl
eastv
isi
blechannelpar
ti
cipanti
sthewhol
esal
er.
Whol
esal
ersar
ebusi
nessest
hatar
epr
imar
il
yengagedi
nbuy
ingmer
chandi
sef
rom
manuf
act
urer
sandr
esel
l
ingt
oret
ail
ers,i
ndust
ri
aluser
s,orbusi
nessuser
s.Theymay
al
soactasagent
sinbuy
ingmer
chandi
sef
ororsel
l
ingmer
chandi
set
ocompani
es.

Thepr
imar
ybusi
nessofwhol
esal
ersi
sthei
rspeci
ali
zat
ioni
nper
for
mingassor
tmenti
n
amannert
hatr
educescost
sandr
iskf
orot
herchannelmember
s.Formanyy
ear
sin
many i
ndust
ri
es i
thas been t
houghtt
hatmer
ger
s,acqui
sit
ions,and cont
inued
concent
rat
ioni
nbot
hthemanuf
act
uri
ngandr
etai
l
ingsect
orsoft
heeconomywoul
d
el
i
minat
etheeconomi
cjust
if
icat
ionofwhol
esal
ers. Theydosobyr
educi
ngr
isk,
dupl
i
cat
ionofef
for
t,andt
henumberoft
ransact
ionsr
equi
redt
osat
isf
ycust
omer
r
equi
rement
s.

C.
Ret
ail
ers
I
nsi
mpl
estt
erms,
ret
ail
ist
hebusi
nessofsel
l
inggoodsandser
vicest
oconsumer
swho
buyf
ort
hei
rownuseandbenef
it
.Theyper
for
mfunct
ionst
hatcombi
net
oof
fert
hei
r
t
argetcust
omer
sther
ightpr
oduct
s,att
her
ightpl
ace,att
her
ightt
ime,i
nther
ight
quant
it
y,andatt
her
ightpr
ice.Thespeci
fi
cst
rat
egi
esempl
oyedbyi
ndi
vi
dualr
etai
l
f
ir
msi
npr
ovi
dingt
heser
ight
stoconsumer
svar
ydr
amat
ical
l
yandr
angef
rom mass
mer
chandi
singt
odi
scount
ing,t
osuperspeci
alt
y,t
ofocusedser
vice,andmanyot
her
s.
Ret
ail
i
ng,i
nfact
,isady
nami
cindust
ryt
hatconst
ant
lychangesasf
ir
msseekway
sto
appeal
toandser
veconsumer
s.

8|Page
Thecomponentofr
etai
lst
rat
egyofmostconcer
ntol
ogi
sti
coper
ati
onsi
smer
chandi
se
assor
tment
.Thei
nvest
menti
nmer
chandi
seandr
esul
ti
ngi
nvent
oryr
iskassumedby
r
etai
l
ersar
esubst
ant
ial
.Thet
ypesandv
ari
eti
esofmer
chandi
set
her
etai
l
ercar
ri
esar
e
def
inedbyt
hespeci
fi
cconsumerneedsandwant
sitat
tempt
stosat
isf
y.Addi
ti
onal
l
y,
r
etai
l
ersmakemer
chandi
sedeci
sionsr
egar
dingt
hedept
hofassor
tmentconcer
ning
di
ff
erentbr
ands,col
ors,si
zes,st
yles,et
c.,t
obeof
fer
edt
oconsumer
s.Al
ongwi
th
deci
si
onsr
egar
dingf
ashi
onandqual
i
tyl
evel
,thesef
act
orscombi
net
oshaper
etai
l
deci
si
onsr
egar
dingsuppl
yandwhi
chdi
str
ibut
ionchannel
seachr
etai
l
erwi
l
lincl
udei
n
t
hei
rsuppl
ychai
nst
rat
egy
.

5.
2.3Di
rectv
ersusI
ndi
rectSt
ruct
ures

Theal
ter
nat
ivesr
angef
rom t
heext
remeont
hel
eftofdi
rectf
rom manuf
act
urert
o
consumerwi
thnoi
nter
medi
aryi
nvol
vement
,tot
heext
remeont
her
ight
,whi
chi
ncl
udes
whol
esal
eagent
s,whol
esal
emer
chant
s,andr
etai
lout
let
s.Shoul
dthechannelbedi
rect
,
i
nvol
vi
ng no orv
eryf
ew i
nter
medi
ari
es,orshoul
ditbe i
ndi
rect
,inv
olv
ing sev
eral
di
ff
erenti
nter
medi
atei
nst
it
uti
ons? Thi
s not
ion ofdi
rectv
ersus i
ndi
rectst
ruct
ure
r
epr
esent
saf
undament
alst
rat
egi
cdeci
sion.

Asagener
alr
ule,asend-
cust
omerr
equi
rement
s,f
ort
heseout
put
sincr
ease,t
hemor
e
l
i
kel
yiti
sthatt
her
equi
reddi
str
ibut
ionst
ruct
urewi
l
lincl
udei
nter
medi
ari
es.

5.
2.4Mar
ketCov
erage

Rel
atedt
othenot
ionofchannelst
ruct
urei
sthedeci
sionconcer
ningmar
ketcov
erage.
Mar
ketcov
eragedeci
si
onsi
nvol
vechoi
cesconcer
ningt
her
elat
ivei
ntensi
tyofout
let
sin
anygi
vengeogr
aphi
car
easot
hatt
heneedsofexi
sti
ngandpot
ent
ialcust
omer
sar
e
adequat
elyaccommodat
ed.Speci
fi
cal
l
y,mar
ketcov
eragei
smostdi
rect
lyr
elat
edt
o
l
ocat
ionalconv
eni
encef
orcust
omer
s.Thr
eebasi
cmar
ketcov
erageal
ter
nat
ivesexi
st:
(
1)i
ntensi
vedi
str
ibut
ion,
(2)sel
ect
ivedi
str
ibut
ion,
and(
3)excl
usi
vedi
str
ibut
ion.

 I
ntensi
ve Di
str
ibut
ion:The pl
acementofa pr
oducti
n as manyout
let
s or
l
ocat
ionsaspossi
blei
sknownasi
ntensi
vedi
str
ibut
ion.I
tisgener
all
yal
ogi
cal
choi
ce f
orpr
oduct
sthatconsumer
s pur
chase f
requent
lyand wi
th mi
nimal

9|Page
 shoppi
ngef
for
t,maki
ngl
ocat
ionalconv
eni
enceakeypur
chaser
equi
rement
.
Suchpr
oduct
sassof
tdr
inks,
candy
,newspaper
s,gasol
i
ne,
andaspi
ri
nrepr
esent
j
ustaf
ewconsumerpr
oduct
sthatar
eint
ensi
vel
ydi
str
ibut
ed.Fori
ndust
ri
alend-
user
sit
emssuchasmai
ntenance,r
epai
r,andoper
ati
ngsuppl
i
es(
MRO)
,of
fi
ce
suppl
i
es,
andot
heri
ndust
ri
ali
temsmaybei
ntensi
vel
ydi
str
ibut
ed.Ont
hesur
face
i
tmayseem t
hati
ntensi
vedi
str
ibut
ioni
sthemostl
ogi
calal
ter
nat
ivef
oral
l
pr
oduct
sandbr
ands.Af
teral
l
,hav
ingapr
oductav
ail
abl
einmanyl
ocat
ions
i
ncr
easesend-
userconv
eni
enceand,
ther
efor
e,pot
ent
ial
sal
es.
 Sel
ect
iveDi
str
ibut
ion:Thepl
acementofapr
oductorbr
andi
namor
eli
mit
ed
number of out
let
s wi
thi
n a speci
fi
c geogr
aphi
c ar
ea i
s cal
l
ed sel
ect
ive
di
str
ibut
ion.Ofcour
se,t
her
ecan bemanydegr
eesofsel
ect
ivi
tyempl
oyed,
r
angi
ngf
rom al
mosti
ntensi
vet
oal
mostexcl
usi
ve.Agai
n,t
hepr
imar
yfact
or
dr
ivi
ng t
hechoi
cei
scust
omerr
equi
rement
sforl
ocat
ionalconv
eni
enceand
cust
omer
s'wi
l
li
ngnesst
ospendt
imeandef
for
ttoobt
aint
hepr
oduct
.
 Excl
usi
veDi
str
ibut
ion:Theexactopposi
teofi
ntensi
vedi
str
ibut
ion,excl
usi
ve
di
str
ibut
ioni
nvol
vespl
acementofabr
andi
nonl
yoneout
leti
neachgeogr
aphi
c
ar
ea.I
tis empl
oyed when consumer
s orend user
s ar
e wi
l
li
ng t
o expend
consi
der
abl
eshoppi
ngef
for
tandl
ocat
ionalconv
eni
encei
sofl
i
ttl
econcer
nto
t
hem.I
tisal
sousedwhenaf
ir
m want
stopr
ojectani
mageofhi
ghqual
i
ty,
such
asRol
exwat
ches,
orwhenv
eryhi
ghl
evel
sofr
esel
l
ersuppor
tar
erequi
red.Thus,
const
ruct
ionandf
arm equi
pment
,somebr
andsofhousehol
dfur
nit
ure,desi
gner
f
ashi
onappar
el,
andsi
mil
arpr
oduct
sar
eexcl
usi
vel
ydi
str
ibut
ed.
Whi
l
ecer
tai
nty
pesofpr
oduct
smayseem t
ofi
tapar
ti
cul
armar
ketcov
erageal
ter
nat
ive,
gener
ali
zat
ionscanbemi
sleadi
ng.I
tmustber
e-emphasi
zedt
hatcompani
eschoose
whi
ch cust
omer
stheywi
l
lat
temptt
o ser
ve and t
hatspeci
fi
c segment
s,orev
en
i
ndi
vi
dualcust
omer
s,di
ff
eri
nthei
rser
vicer
equi
rement
s.Fi
nal
l
y,i
tshoul
dbenot
edt
hat
mar
ketcov
erage and channelst
ruct
ure ar
e cl
osel
yrel
ated.I
ntensi
ve di
str
ibut
ion
gener
all
ynecessi
tat
esi
ndi
rectchannel
sinv
olv
ingmul
ti
plei
nter
medi
ari
es,
wher
eashi
gh
sel
ect
ivi
tyandexcl
usi
vi
tymaybesuppor
tedt
hroughmor
edi
rectchannel
str
uct
ures.

5.
3Mar
ketDi
str
ibut
ionChannelDesi
gnPr
ocess

10|Page
Asst
rat
egyi
sdev
eloped,t
hespeci
fi
cchanneldesi
gnmustbedef
ined.Twot
ool
sof
si
gni
fi
cantassi
stance ar
e channelmappi
ng and a mat
ri
xappr
oach t
othe desi
gn
pr
ocess.Eachi
sexpl
ainedbel
ow.

5.
3.1ChannelMappi
ng

Achannel
mapessent
ial
l
yisaf
lowdi
agr
am oft
hechannel
sut
il
izedbyaspeci
fi
cfi
rm.I
t
i
sdev
elopedt
hroughcar
efulr
esear
chwi
thi
nanor
gani
zat
ionanddi
scussi
onswi
th
numer
ousexecut
ivesr
egar
dinghow t
ogot
omar
ket
.Ashar
dasi
tmaybet
obel
i
eve,
suchr
esear
chi
sani
mpor
tantst
epbecause,i
nmosti
nst
ances,v
eryf
ewpeopl
ehav
ea
compr
ehensi
veunder
standi
ngoft
hedi
str
ibut
ionchannel
sut
il
izedbyt
hei
rfi
rm.The
pur
pose ofmappi
ng i
sto pr
ovi
de i
nsi
ghti
nto cur
rentpr
ocessesand est
abl
i
sh a
bl
uepr
intf
orchange.Bef
orechanneldesi
gncanbechanged,ort
odeci
dewhet
her
changei
sappr
opr
iat
e,af
ullunder
standi
ngoft
hecur
rentpr
ocessi
sneeded.Ev
enwhen
desi
gni
ngf
rom scr
atchf
oranewcompanyoranewpr
oduct
,mappi
ngt
hei
ndust
ryand
keycompet
it
orsi
susef
ul.Dev
elopi
ngachannel
mapshoul
dbegi
nwi
thcl
eardel
i
neat
ion
oft
hemar
ketsegment
sbei
ngser
ved.Thr
eedi
sti
nctmar
ketsegment
sar
eident
if
ied:

1.Consumer
s
2.I
nst
it
uti
onal
user
s,and
3. Mi
l
itar
yinst
all
ati
ons.
Amor
ecompr
ehensi
vemapcoul
dbedr
awnt
oil
l
ust
rat
edi
sti
nctsub-
segment
swi
thi
n
eachoft
hesecat
egor
iesbutwoul
dresul
tinmor
ecompl
exi
tyt
hani
sneededt
oexpl
ain
mappi
ng.Themappi
ng pr
ocesst
hen pr
oceedsbackwar
dfr
om t
hemar
ket
sbei
ng
ser
vedt
oident
if
ythedi
ff
erentt
ypesofchannelpar
ti
cipant
scapabl
eofser
vingt
hei
r
mar
ketdi
str
ibut
ionr
equi
rement
s.Channelmappi
ngdoesnotendwi
thconst
ruct
ionofa
di
agr
am.I
tshoul
dal
soi
ncl
udespeci
fi
cat
ionoft
hev
olumeofact
ivi
tyr
elat
edt
oeach
l
i
nki
nthemap.Eachl
i
nkshoul
dal
sobeexami
nedcl
osel
ytoseewhatar
ethespeci
fi
c
f
unct
ionsandact
ivi
ti
esper
for
medbyt
hechannelpar
ti
cipant
sandwhatt
heeconomi
c
char
act
eri
sti
csoft
het
ransact
ionsar
e.

5.
3.2Mat
ri
xAppr
oach

11|Page
A second t
oolf
or use i
n channeldesi
gn i
s a si
mpl
e,y
et ef
fect
ive,mat
ri
x
appr
oach.
('
Becausemostcompani
esser
vesev
eralsegment
sofconsumer
sandend
user
s,di
ff
erentst
ruct
uresandcombi
nat
ionsofchannelpar
ti
cipant
smaybeneededt
o
ser
veeachoft
hosesegment
sasef
fi
cient
lyandef
fect
ivel
yaspossi
ble.Themat
ri
x
appr
oachi
nvol
vesext
endi
ngt
heconceptofsepar
ati
ondi
scussedear
li
eri
nthi
schapt
er
and pr
ovi
des i
nsi
ght i
ntot
he mostappr
opr
iat
e par
ti
cipant
s and st
ruct
ures t
o
accompl
i
shobj
ect
ives.I
nfact
,themat
ri
xappr
oachi
sbasedont
heconceptofchannel
separ
ati
onandmar
ket
ingf
unct
ions.

 Ext
endi
ngChannelSepar
ati
on:Theear
li
erdi
scussi
onofsepar
ati
ondemonst
rat
ed
t
hatmar
ket
ing and l
ogi
sti
cs channel
s mayhav
e di
ff
erentf
ir
ms and no f
ir
m
necessar
yhast
opar
ti
cipat
einbot
h.Themat
ri
xdesi
gnappr
oachext
endst
his
conceptbysuggest
ingt
hateachf
unct
ioncanbef
urt
hersubdi
vi
dedi
ntospeci
fi
c
i
ndi
vi
dualact
ivi
ti
es.Each act
ivi
tycoul
d pot
ent
ial
l
ybe per
for
med bydi
ff
erent
channel
par
ti
cipant
s.
 Rel
ati
ngAct
ivi
ti
est
oPar
ti
cipant
s:Thear
toft
hemat
ri
xdesi
gnpr
ocesscomesi
n
mostef
fi
ci
ent
lyandef
fect
ivel
yassi
gni
ngact
ivi
ti
est
opar
ti
cipant
sforspeci
fi
c
cust
omersegment
s.A hy
pot
het
icalexampl
eisusedt
oil
l
ust
rat
ethi
spr
ocess.
Supposet
hecompanyhast
arget
edt
womar
ketsegment
stobeser
ved.These
segment
s hav
e been def
ined as cust
omer
s who pur
chase i
nlar
ge l
ot-
size
quant
it
iesandt
hosewhopur
chasei
nsmal
llot
-si
zequant
it
ies.I
nthi
shy
pot
het
ical
exampl
e,i
twoul
dnotbecost
-ef
fi
cientt
ogener
atesal
esl
eadsorqual
i
typr
ospect
s
f
orcust
omer
swhopur
chasei
nsmal
llot
-si
zequant
it
iest
hroughuseofadi
rect
sal
es f
orce.The l
ead gener
ati
on t
askmi
ghtbe assi
gned t
o di
rectmai
land
pr
ospectqual
i
ficat
iont
otel
emar
ket
ing.Not
ethatal
lpot
ent
ialcust
omer
sfal
lint
o
t
heset
wosegment
sfort
heset
wot
asks.Af
tercust
omer
shav
ebeenqual
i
fied,
l
argel
ot-
sizecust
omer
sar
eassi
gnedt
othedi
rectsal
esf
orcef
ornegot
iat
ionand
cl
osi
ngt
hesal
e.Smal
llot
-si
zecust
omer
sar
eassi
gnedt
odi
str
ibut
orsf
ort
hose
t
asks.Postsal
es ser
vice i
s accompl
i
shed f
orcer
tai
n ser
vice act
ivi
ti
es by
t
elemar
ket
ing.Ot
heract
ivi
ti
esmayr
equi
redi
rectsal
esordi
str
ibut
orpar
ti
cipat
ion.
Thef
inaldi
str
ibut
ionchanneldesi
gncomesf
rom consi
der
ati
onofwhi
chact
ivi
ti
escan

12|Page
mostcostef
fect
ivel
ymeetcust
omer
s'r
equi
rement
sforcompl
eti
onofwhi
cht
asks.I
n
oursi
mpl
eexampl
e,t
wocr
it
ical
poi
ntsar
ecl
ear
.Fi
rst
,noonechannel
hast
oper
for
m al
l
oft
heact
ivi
ti
esr
equi
redt
ocompl
eteaf
unct
ion.Not
ethatt
elemar
ket
ingwasusedonl
y
f
orpr
ospectqual
i
ficat
ionand f
orcer
tai
npostsal
esser
viceact
ivi
ti
es.Second,no
act
ivi
tyhast
obecompl
etel
yper
for
medbyanygi
venchannelmemberf
oranymar
ket
segment
.The di
rectsal
es f
orce and t
he di
str
ibut
orchannel
s per
for
m onl
ythose
act
ivi
ti
esr
elat
edt
othei
rspeci
fi
csegment
s.

5.
4ChannelRel
ati
onshi
ps

Thr
oughoutt
his chapt
er,i
thas been st
ressed t
hatchannelst
ruct
ures,based on
speci
ali
zat
ionoff
unct
ionandact
ivi
ti
est
ypi
cal
l
yresul
tinar
rangement
sofi
ndependent
f
ir
ms.Eachf
ir
misdependentupont
heot
her
sforsuccessi
nthemar
ket
place.Assuch,
dependencypr
ovi
desausef
ulf
ramewor
kforunder
standi
ngt
het
ypesofbehav
iour
al
r
elat
ionshi
ps obser
ved i
n di
str
ibut
ion.Thr
ee channelcl
assi
fi
cat
ions ar
eident
if
ied
r
angi
ngf
rom l
eastt
omostopenexpr
essi
onofdependence:

1.si
ngl
e-t
ransact
ionchannel
s,
2.conv
ent
ional
channel
s,and
3. Rel
ati
onal
col
l
abor
ati
vear
rangement
s(RCAs)
.
Tr
uesuppl
ychai
nar
rangement
sar
echar
act
eri
zedassel
ect
edf
ormsofRCAs.Each
f
orm ofchanneli
nvol
vementr
efl
ect
s a di
ff
erentdegr
ee ofcommi
tmentby i
ts
par
ti
cipant
s.Thi
scl
assi
fi
cat
ional
sopr
ovi
desadi
sti
nct
ionbet
weent
ransact
ionand
r
elat
ional st
ruct
ures. I
n t
ransact
ional ar
rangement
sli
tt
le or no acknowl
edged
dependencyexi
sts.Par
ti
cipant
sfeelnor
esponsi
bil
i
tyt
oeachot
her
.Thel
awsand
obl
i
gat
ionst
hatgov
ernbuy
ingandsel
l
ingoper
ateast
hesol
efoundat
ionf
orowner
shi
p
t
ransf
er.

I
nrel
ati
onalchannel
s,par
ti
cipant
srecogni
zedependencyandf
eelcommi
tt
edt
oone
anot
her
.Whi
l
eal
lty
pesofchannel
shav
elogi
sti
calr
equi
rement
s,t
hosecl
assi
fi
edas
r
elat
ionalof
fert
hegr
eat
estoppor
tuni
tyf
ordev
elopi
ngsuppl
ychai
nar
rangement
s.
Managi
ng t
heser
elat
ionshi
pst
oreduceconf
li
ct,av
oid dupl
i
cat
ionand wast
e,and
dev
elopcooper
ati
vesol
uti
onst
ocommonpr
obl
emsi
sthet
rueessenceofsuppl
ychai
n

13|Page
management
.

1.Si
ngl
e-Tr
ansact
ionChannel
s
A gr
eatmanybusi
nesst
ransact
ionsar
e negot
iat
ed wi
tht
he expect
ati
on t
hatt
he
exchangewi
l
lbeaone-
ti
meev
ent
.Exampl
esofsi
ngl
e-t
ransact
ionchannel
sar
ereal
est
ate sal
es,st
ock and bond owner
shi
ptr
ansf
er,and t
he pur
chase ofdur
abl
e
equi
pmentsuchaspr
ocessi
ngpl
ant
sandheav
ymachi
ner
y.

Whi
l
e si
ngl
e-t
ransact
ion channelengagement
s ar
e not i
mpor
tant i
nter
ms of
r
elat
ionshi
pmanagement
,theyar
esi
gni
fi
cantt
othebusi
nessesi
nvol
ved.Requi
rement
s
t
ocompl
etepr
omi
seddel
i
ver
yar
eof
tent
echni
calanddi
ff
icul
ttoaccompl
i
sh.The
mov
ementofov
ersi
zedequi
pment
,suchasapr
int
ingpr
ess,t
ypi
cal
l
yrequi
resspeci
al
per
mit
sandi
sof
tenr
est
ri
ctedt
ospeci
fi
cti
mesoft
hedayory
ear
.Insomesi
tuat
ions,
speci
alt
ranspor
tat
ionandmat
eri
alshandl
i
ngequi
pmentar
erequi
redt
oaccommodat
e
si
ze and wei
ghtoft
he pr
oduct
sinv
olv
ed.I
fa f
ir
m deal
s pr
imar
il
y wi
th si
ngl
e
t
ransact
ions,
logi
sti
csper
for
mancei
scr
it
icalandt
ypi
cal
l
yrepr
esent
sasi
gni
fi
cantcost
ofov
eral
loper
ati
ons.Fai
l
uret
odev
elopr
epet
it
ivepat
ter
nsofbusi
nesswi
thr
epeat
buy
ersmakeseachl
ogi
sti
calassi
gnmentauni
queev
ent
.Ev
eni
fthel
ogi
sti
calact
ivi
ty
pr
oceedswi
thoutagl
i
tchandal
lpar
ti
esar
ehi
ghl
ysat
isf
ied,
thel
i
kel
i
hoodofar
epet
it
ive
t
ransact
ioni
smi
nimal
.

2.Conv
ent
ionalChannel
s
Conv
ent
ionalchannel
sar
ebestv
iewedasl
oosear
rangement
soraf
fi
li
ati
onsoff
ir
ms
t
hatbuyandsel
lpr
oduct
sonanas-
neededbasi
s,wi
thoutconcer
nforf
utur
eorr
epeat
busi
ness.Thepr
imedet
ermi
nantoft
het
imi
ngandext
entoft
ransact
ionsi
ssel
l
ingpr
ice.
Fi
rmsi
nvol
vedi
naconv
ent
ionalchanneldev
elopoper
ati
onalcapabi
l
iti
est
opr
ovi
de
ser
vicesnecessar
ytof
ulf
ilt
hei
rownbasi
cbusi
nessmi
ssi
ons.Theyhav
eli
tt
leorno
l
oyal
tyt
oeachot
herandl
i
ttl
emot
ivat
iont
ocooper
ati
vel
yimpr
ovet
heef
fi
ciencyoft
he
suppl
ychai
n.Act
ivi
tyi
n aconv
ent
ionalchanneli
sconduct
ed on at
ransact
ion-
to-
t
ransact
ionbasi
s.Thet
ypi
calt
ransact
ioni
sadv
ersar
iali
nthatt
henegot
iat
ioni
spr
ice-
domi
nat
ed,
creat
ingan“
us-
agai
nst
-t
hem”post
ure.

14|Page
5.
5E-
Commer
ceI
mpact
sonMar
ketDi
str
ibut
ion

Per
hapsnosi
ngl
esubj
ecthasr
ecei
vedasmuchat
tent
ioni
nrecentl
i
ter
atur
east
he
expl
osi
vegr
owt
hofel
ect
roni
ccommer
cet
hroughoutt
hewor
ld.Al
mostdai
l
y,ar
ti
cles
appeari
nthegener
al,busi
nesst
rade,andacademi
cpr
essconcer
ningt
hev
olumeof
busi
nesst
ransact
edcur
rent
ly,pr
oject
ionsf
ort
hef
utur
e,andt
hef
undament
alchange
bei
ng cr
eat
ed byel
ect
roni
ccommer
ce.Manyar
ti
clesf
ocuson t
heso-
cal
l
ed new
economyandhowt
hef
ir
msi
nvol
vedi
ntheol
deconomyar
ebei
ngchal
l
enged,orev
en
madeobsol
ete,byt
hedy
nami
csoft
heneweconomy
.'Whi
l
eel
ect
roni
ccommer
cehas
manydi
ff
erentf
orms,i
ncl
udi
ngf
axandt
radi
ti
onalED1(
Elect
roni
cDat
aExchange)
,
muchr
ecentdi
scussi
onf
ocusesont
heI
nter
netandi
tsi
mpl
i
cat
ionsf
orhowbusi
nesses
got
omar
ket
.Thepaceofchangemakesi
tver
ydi
ff
icul
ttogener
ali
zepr
eci
sel
ywhatwi
l
l
bet
hel
ong-
ter
mimpact
sonmar
ketdi
str
ibut
ion.

5.
5.1TheEmer
genceofE-
Tai
li
ng

I
tisuncl
eart
odayj
ustwhowast
hef
ir
stso-
cal
l
ede-
tai
l
or.Asear
lyas1992,I
nter
net
Ser
vicePr
ovi
der
s(I
SPs)suchasAmer
icaOnl
i
nebegant
oof
fercust
omer
stheabi
l
ityt
o
ent
erv
irt
ualshoppi
ngmal
l
swher
etheycoul
dbr
owset
hroughmer
chandi
seof
fer
edbya
numberofv
irt
ualst
ores,andsel
ectandor
dermer
chandi
sef
ordel
i
ver
ydi
rectt
othe
house.Theear
li
estef
for
ts,howev
er,metwi
thl
i
mit
edsuccessasconsumer
sini
ti
all
y
r
esi
stedt
heconceptofonl
i
neor
der
ing.Whi
l
ethesev
irt
ualmal
l
srepor
tedr
atherl
arge
number
sofconsumer
sbr
owsi
ng t
hemer
chandi
se,act
ualsal
est
ransact
ionswer
e
l
i
mit
ed.

I
n1995,Jef
fBezosf
oundedAmazon.
com.Whi
l
eper
hapsnott
hef
ir
ste-
tai
l
or,t
he
successofAmazon.
com i
ngener
ati
ngbot
hpubl
i
cit
yandsal
esr
evenuemakesi
ta
pr
imeexampl
eofhow e-
tai
l
ingemer
gedasachannelal
ter
nat
ive.Amazon.
com and
ot
here-
tai
l
orsof
feranal
ter
nat
iveshoppi
ngf
ormat
,whi
chhasbot
hadv
ant
agesand
di
sadv
ant
ages r
elat
ivet
otr
adi
ti
onall
and-
based br
icks and mor
tar st
ores.One

15|Page
si
gni
fi
cantadv
ant
agei
slocat
ionalconv
eni
ence,f
orwhatcanbemor
econv
eni
entt
han
shoppi
ngf
rom y
ourownper
sonalcomput
er?A secondadv
ant
agear
isesf
rom t
he
assor
tmentt
hatcanbeof
fer
edt
oconsumer
sfr
om t
hisf
ormat
.Unconst
rai
nedby
phy
sicall
i
mit
ati
onsofst
orespace,
thee-
tai
l
orcanof
ferf
orsal
eacompl
eteassor
tment
ofpr
oductt
hatcannotbemat
chedbyanybr
icksandmor
tarst
ore.Ev
enbef
orei
t
br
anchedi
ntonumer
ousot
herpr
oductcat
egor
ies,Amazon.
com of
fer
edconsumer
s
ov
eronemi
l
li
on choi
cesofbookt
it
les.A t
hir
d adv
ant
ageof
fer
ed i
sinf
ormat
ion.
Pot
ent
ialbuy
erscanaccessbookr
evi
ewsbybot
hpr
ofessi
onalr
evi
ewer
sandt
hose
wr
it
tenbyot
herconsumer
sandcaneasi
l
yfi
ndbooksr
elat
edt
osubj
ect
sofi
nter
estor
bookswr
it
tenbyf
avour
it
eaut
hor
s.

Themosti
mpor
tantdi
sadv
ant
agesf
ort
heconsumershoppi
ngv
iae-
tai
l
ingar
ewai
ti
ng
t
ime,t
hei
nabi
l
ityt
ophy
sical
l
ybr
owse,handl
e,ort
ryt
hemer
chandi
se,andconcer
ns
r
elat
edt
osecur
it
y.Oncepur
chased,
theconsumermustwai
tatl
east1day
,wi
thwai
ti
ng
t
imes ext
endi
ng t
o weeks i
n many i
nst
ances,dependi
ng upon act
uali
nvent
ory
av
ail
abi
l
ity
.Addi
ti
onal
l
y,consumer
sfr
equent
lywantt
ophy
sical
l
yhandl
emer
chandi
se,
whet
heri
tisski
mmi
ngt
hepagesofabookort
ryi
ngoncl
othi
ngt
oensur
epr
operf
it
.
Fi
nal
l
y,concer
nsaboutsecur
it
yincl
udet
hepot
ent
ialf
orcr
edi
tcar
dfr
audandt
heabi
l
ity
of compani
es t
o amass consi
der
abl
e per
sonal i
nfor
mat
ion about i
ndi
vi
dual
backgr
ounds,t
ast
es,andhabi
ts.Despi
tet
hel
i
mit
ati
ons,i
tiscl
eart
hate-
tai
l
inghas
appeal
toasi
gni
fi
cantnumberofconsumer
s.

Consi
der
abl
especul
ati
onhasdev
elopedt
hatt
heI
nter
netwi
l
lopenanew wor
ldof
r
elat
ionshi
psamongmanuf
act
urer
sandser
vicecompani
esandt
hei
rfi
nalconsumer
s.
TheI
nter
netpot
ent
ial
l
ypr
ovi
desamechani
sm f
orsuppl
i
erst
ogai
ninexpensi
vedi
rect
accesst
ocust
omer
s.Al
ter
nat
ivel
y,i
thasbeensuggest
edt
hatconsumer
sdesi
ret
ogai
n
di
rectaccesst
ofi
rmst
hatmanuf
act
urepr
oduct
s.Regar
dless,t
hespecul
ati
oni
sthat
t
her
eisr
educed need f
orcompl
exmar
ketchannelr
elat
ionshi
psi
nvol
vi
ng agent
s,
whol
esal
ers,orr
etai
lst
ores.Af
teral
l
,ifconsumer
sar
ewi
l
li
ngt
oshopv
iat
heI
nter
net
,
whynotdealdi
rect
lywi
thpr
oduct
/ser
vicemanuf
act
urer
s,by
passexi
sti
ng channel
ar
rangement
s,andbr
inganew er
achar
act
eri
zedbyemer
genceofdi
rectchannel
sas
t
hepr
imar
ymechani
sm f
ort
heneweconomy
?

16|Page
5.
5.2I
ncr
easedChannelCompl
exi
ty

I
ncont
rastt
odi
si
nter
medi
ati
onandchannelsi
mpl
i
ficat
ionr
esul
ti
ngf
rom t
heI
nter
net
st
andst
hepot
ent
ialf
ori
ncr
easedchannelcompl
exi
ty.Asexi
sti
ngbusi
nessesexpand
t
hei
ract
ivi
ti
esi
nel
ect
roni
ccommer
cewi
thconsumer
sande-
tai
l
inggai
nsi
npopul
ari
ty
wi
thconsumer
s,di
str
ibut
ionr
elat
ionshi
psmaypr
oli
fer
ateandgi
ver
iset
oot
herf
orms
ofi
nter
medi
ari
es.Manyoft
hesei
nter
medi
ari
eswer
eunhear
dofj
ustaf
ew y
ear
sago
butcur
rent
lypl
ayani
mpor
tantr
olei
nmar
ketdi
str
ibut
ion.Or
gani
zat
ionswi
thsuch
namesasaf
fi
li
atesi
tes,por
tal
s,andsear
chengi
neshav
ebecomeani
ntegr
alpar
tof
mar
ketdi
str
ibut
ion.Meanwhi
l
e,t
radi
ti
onal
whol
esal
ersandr
etai
l
erscont
inuet
ooper
ate,
somet
imesi
nconj
unct
ionwi
tht
hesenewi
nter
medi
ari
es.

Themostsi
gni
fi
cantchal
l
engeposedbybusi
ness-
to-
consumerel
ect
roni
ccommer
cei
s
nott
hemar
ket
ingandsal
eschal
l
enge;i
nst
ead,t
hemaj
orchal
l
engel
i
esi
nthel
ogi
sti
cs
pr
ocessand ef
fi
ci
entor
derf
ulf
il
lmentt
o sat
isf
yconsumerr
equi
rement
s.Whi
l
ee-
commer
cecansi
gni
fi
cant
lyr
educemar
ket
ingt
ransact
ioncost
srel
atedt
ogener
ati
ng
andpr
ocessi
ngor
der
s,i
tsi
gni
fi
cant
lyi
mpact
stheeconomi
csr
elat
edt
ophy
sical
l
y
pi
cki
ng,packi
ng,and t
ranspor
ti
ng t
hose or
der
s.The busi
ness modelon whi
ch a
manuf
act
urer
'sl
ogi
sti
cspr
ocessr
est
srel
i
esheav
il
yon f
ulf
il
lmentofl
argeor
der
s
shi
ppedt
oar
elat
ivel
ysmal
lnumberofcust
omerl
ocat
ions.Shi
ppi
ngt
ruckl
oadst
o
di
str
ibut
ioncent
ersi
sfardi
ff
erentf
rom shi
ppi
ngsmal
lpar
cel
stoconsumerhomes.E-
di
str
ibut
orsande-
ret
ail
ersar
enoti
mmunet
othel
ogi
sti
calchal
l
engesei
ther
.Pr
epar
ing
shi
pment
sofoneort
woi
tems,
document
ingt
hoseshi
pment
s,t
raci
ng,
andt
ranspor
ti
ng
wi
thi
nav
ery shor
tti
me f
rame r
equi
red meet
ing cust
omer r
equi
rement
s and
accompl
i
shi
ngt
heset
asksi
namannerwhi
chdoesnotr
aiset
otalcost
stoconsumer
s
i
sapr
imar
yconcer
nofal
lInt
ernetbusi
ness-
toconsumeror
gani
zat
ions.

I
nfact
,sev
eralal
ter
nat
ivest
rat
egi
esf
ormanagi
ngandaccompl
i
shi
ngl
ogi
sti
csex
istf
or
busi
ness-
to-
consumere-
commer
ce.
'
'Somef
ir
msmayaccompl
i
shf
ulf
il
lmentt
hrougha
net
wor
kofdel
i
ver
ycent
ersi
nnumer
ousmar
ket
swher
einv
ent
oryi
shel
dinant
ici
pat
ion
ofcust
omeror
der
s.Anal
ter
nat
ivel
ogi
sti
csst
rat
egyr
equi
rescust
omerpi
ckupatcent
ral
l
ocat
ions,r
athert
hanhomedel
i
ver
y.Thi
sappr
oachhasbeencal
l
edt
hebuyher
e/pi
ck

17|Page
upt
hei
rst
rat
egy
.Inei
thercase,suchf
aci
l
iti
escoul
dser
vemul
ti
plesel
l
ers,pr
ovi
ding
someeconomi
esofscal
e.Anot
herst
rat
egymaybet
oout
sour
cet
heent
ir
eful
fi
ll
ment
pr
ocesst
opar
tner
swhoar
especi
ali
stsi
nphy
sicalf
ulf
il
lment
,especi
all
ythi
rd-
par
ty
l
ogi
sti
csf
ir
mst
hatcanconsol
i
dat
eoper
ati
onsf
ormul
ti
plesel
l
ers,pr
ovi
def
lexi
bil
i
tyi
n
accommodat
inggr
owt
h,andmanageamor
eef
fi
cientf
low ofpr
oductf
rom sour
cet
o
consumerdest
inat
ion.

5.
6Pr
ici
ngandLogi
sti
cs

Pr
ici
ngi
sanot
heraspectofmar
ket
ingst
rat
egyt
hatdi
rect
lyi
nter
act
swi
thl
ogi
sti
cal
oper
ati
ons. The t
erms and condi
ti
ons of pr
ici
ng det
ermi
ne whi
ch par
ty has
r
esponsi
bil
i
tyf
orper
for
mingLogi
sti
csact
ivi
ti
es.Amaj
ort
rendi
npr
icest
rat
egyhas
been t
o de-
bundl
ethe pr
ice ofpr
oduct
s and mat
eri
als so t
hatser
vices such as
t
ranspor
tat
ion,
whi
chwer
etr
adi
ti
onal
l
yincl
udedi
npr
ice,
arenowi
dent
if
iedassepar
ate
i
tems.Pr
ici
ngpr
act
iceshav
eadi
recti
mpactont
het
imi
ngandst
abi
l
ityofl
ogi
sti
cal
oper
ati
ons.I
nthi
ssect
ion,
sev
eral
basi
cpr
ici
ngst
ruct
uresar
erev
iewed.

5.
6.1Pr
ici
ngFundament
als

Pr
ici
ngdeci
sionsdi
rect
lydet
ermi
newhi
chpar
tyi
nthet
ransact
ioni
sresponsi
blef
or
per
for
manceofl
ogi
sti
csact
ivi
ti
es,passageoft
it
le,and l
i
abi
l
ity
.F.
O.B.or
igi
n and
del
i
ver
edpr
ici
ngar
ethet
womostcommonmet
hods.

3.F.
O.B.Pr
ici
ng:Thet
erm F.
O.B.t
echni
cal
l
ymeansFr
eeOnBoar
dorFr
eightOn
Boar
d.Anumberofv
ari
ati
onsofF.
O.B.pr
ici
ngar
eusedi
npr
act
ice.F.
O.B.or
igi
nis
t
hesi
mpl
estwayt
oquot
epr
ice.Her
ethesel
l
eri
ndi
cat
est
hepr
iceatpoi
ntofor
igi
n
andagr
eest
otenderashi
pmentf
ort
ranspor
tat
ionl
oadi
ng,
butassumesnof
urt
her
r
esponsi
bil
i
ty.Thebuy
ersel
ect
sthemodeoft
ranspor
tat
ion,
choosesacar
ri
er,
pay
s
t
ranspor
tat
ionchar
ges,andt
akesr
iskofi
n-t
ransi
tlossand/
ordamage.I
nF.
O.B.
dest
inat
ionpr
ici
ng,t
it
ledoesnotpasst
othebuy
erunt
ildel
i
ver
yiscompl
eted.
Undersuchci
rcumst
ances,t
hesel
l
erar
rangesf
ort
ranspor
tat
ionandt
hechar
ges
ar
eaddedt
othesal
esi
nvoi
ce.Rev
iewoft
hev
ari
oussal
est
ermsmakesi
tcl
eart
hat
t
hef
ir
m pay
ing t
hef
rei
ghtbi
l
ldoesnotnecessar
il
yassumer
esponsi
bil
i
tyf
or

18|Page
 owner
shi
pofgoodsi
ntr
ansi
t,f
ort
hef
rei
ghtbur
den,
orf
ort
il
ingoff
rei
ghtcl
aims.
2.Del
iv
eredPr
ici
ng:Thepr
imar
ydi
ff
erencebet
weenF.
O.B.anddel
i
ver
edpr
ici
ngi
s
t
hati
ndel
i
ver
edpr
ici
ng,t
hesel
l
erof
fer
sapr
icet
hati
ncl
udest
ranspor
tat
ionoft
he
pr
oductt
othebuy
er.I
not
herwor
ds,t
het
ranspor
tat
ioncosti
snotspeci
fi
edasa
separ
atei
tem.Ther
ear
esev
eral
var
iat
ionsofdel
i
ver
edpr
ici
ng.
3.Si
ngl
e-ZonePr
ici
ng:Underasi
ngl
e-zonedel
i
ver
edpr
ici
ngsy
stem,buy
erspaya
si
ngl
epr
icer
egar
dlessofwher
etheyar
elocat
ed.Del
i
ver
edpr
icest
ypi
cal
l
yref
lect
t
hesel
l
er'
sav
eraget
ranspor
tat
ioncost
.Inact
ualpr
act
ice,somecust
omer
spay
mor
ethant
hei
rfai
rshar
efort
ranspor
tat
ionwhi
l
eot
her
sar
esubsi
dized.TheUni
ted
St
atesPost
alSer
viceusesasi
ngl
e-zonepr
ici
ngpol
i
cyt
hroughoutt
heUni
tedSt
ates
f
orf
ir
st-
classl
ett
ersandpar
celpost
.Thesamef
eeorpost
ager
atei
schar
gedf
ora
gi
vensi
zeandwei
ghtr
egar
dlessofdi
stancet
rav
ell
edt
othedest
inat
ion.Si
ngl
e-
zonedel
i
ver
edpr
ici
ngi
sty
pical
l
yusedwhent
ranspor
tat
ioncost
sar
ear
elat
ivel
y
smal
lper
cent
ageofsel
l
ingpr
ice.Themai
nadv
ant
aget
othesel
l
eri
sthehi
gh
degr
eeofcont
rolov
erl
ogi
sti
cs.Fort
hebuy
er,despi
tebei
ngbasedonav
erages,
suchpr
ici
ngsy
stemshav
etheadv
ant
ageofsi
mpl
i
cit
y
4.Mul
ti
ple-
ZonePr
ici
ng:Thepr
act
iceofmul
ti
ple-
zonepr
ici
ngest
abl
i
shesdi
ff
erent
pr
icesf
orspeci
fi
cgeogr
aphi
car
eas.Theunder
lyi
ngi
deai
sthatl
ogi
sti
cscost
di
ff
erent
ial
scanbemor
efai
rl
yassi
gnedwhent
woormor
ezones-
typi
cal
l
ybased
ondi
stance-ar
eusedt
oquot
edel
i
ver
edpr
ici
ng.Par
celcar
ri
erssuchasUni
ted
Par
cel
Ser
viceusemul
ti
ple-
zonepr
ici
ng.
5.Base-
Poi
ntPr
ici
ng:Themostcompl
i
cat
edandcont
rov
ersi
alf
orm ofdel
i
ver
ed
pr
ici
ngi
stheuseofabase-
poi
ntsy
stem i
nwhi
cht
hef
inaldel
i
ver
edpr
icei
s
det
ermi
nedbyt
hepr
oduct
'
sli
stpr
icepl
ust
ranspor
tat
ioncostf
rom adesi
gnat
ed
basepoi
nt,usual
l
ythemanuf
act
uri
ngl
ocat
ion.Thi
sdesi
gnat
edpoi
nti
susedf
or
comput
ingt
hedel
i
ver
edpr
icewhet
herornott
heshi
pmentact
ual
l
yor
igi
nat
esf
rom
t
hebasel
ocat
ion.Base-
poi
ntpr
ici
ngsi
mpl
i
fiespr
icequot
ati
onsbutcanhav
ea
negat
ivei
mpact on cust
omer
s.For exampl
e,di
ssat
isf
act
ion may r
esul
tif
cust
omer
sdi
scov
ert
heyar
ebei
ngchar
gedmor
efort
ranspor
tat
iont
hanact
ual
f
rei
ghtcost
s.Suchpr
ici
ngpr
act
icesmayal
sor
esul
tinal
argeamountoff
rei
ght
absor
pti
onf
orsel
l
ers.

19|Page
5.
6.4Pr
ici
ngI
ssues

Pr
ici
ngpr
act
icesar
eal
soi
ntegr
alt
ologi
sti
csoper
ati
onsi
natl
eastf
ourot
herway
s:
pot
ent
ial
discr
imi
nat
ion,
quant
it
ydi
scount
s,pi
ckupal
l
owances,
andpr
omot
ional
pri
cing.

1.Pot
ent
ialDi
scr
imi
nat
ion
The l
egal
i
tyoft
ranspor
tat
ion pr
ici
ng i
s an i
mpor
tantconsi
der
ati
on and mustbe
car
eful
l
yrev
iewedandadmi
nist
eredt
opr
otectagai
nstpot
ent
ialdi
scr
imi
nat
ion.Zone
pr
ici
nghast
hepot
ent
ialt
obedi
scr
imi
nat
orybecausesomebuy
erspaymor
ethan
act
ualt
ranspor
tat
ioncostwhi
l
eot
her
spayl
ess.Zonepr
ici
ngsy
stemsar
eil
l
egalwhen
t
henetr
esul
tist
ochar
gedi
ff
erentdel
i
ver
edpr
icesf
ori
dent
icalpr
oduct
stodi
rect
compet
it
ors.I
nrecenty
ear
s,det
ermi
nat
ionoft
hel
egal
i
tyofdel
i
ver
edzonepr
ici
ng
sy
stemshascent
eredont
hei
ssueofwhet
hera"
sel
l
eract
sindependent
lyandnoti
n
col
l
usi
onwi
thcompet
it
ors.
"