Distribution Channels and Value Delivery Networks

C. Placement: Where to Distribute the Product

When a firm produces a narrow assortment of products in large quantities, intermediaries play a crucial role in matching supply and demand. They achieve this by purchasing large quantities from producers and breaking them down into a broader assortment of smaller quantities to meet consumer demand for variety and convenience.

Distribution Channel

A distribution channel is a network of interdependent organizations that collaborate to make a product or service accessible for use or consumption by consumers or businesses.

Functions of Channel Members:

1. Information: Gathering and distributing information about consumers, producers, and market forces to facilitate planning and exchange.
2. Promotion: Developing and disseminating persuasive communication about the product or service offering.
3. Contact: Identifying and engaging with current and potential customers.
4. Matching: Tailoring offers to align with specific buyer needs and preferences.
5. Negotiation: Reaching mutually agreeable terms on price and other factors to enable transactions.
6. Financing, Risk Taking, and Physical Distribution: Providing financial resources, assuming risks associated with distribution, and managing the physical flow of goods.

Value Delivery Network

A value delivery network encompasses all entities within a company's ecosystem that contribute to the creation and delivery of value to the end customer.

Channel Level

Channel level refers to the position of an intermediary within the distribution channel, indicating its role in bringing the product closer to the final buyer.

• Direct Marketing Channel: No intermediaries are involved; the producer sells directly to consumers.
• Indirect Marketing Channel: One or more intermediaries (e.g., wholesalers, retailers) are involved. Generally, a greater number of channels (length) results in reduced control and increased complexity for the producer.

Relationships Between Channels

1. Conflict

Channel conflict arises from disagreements among channel members regarding goals, roles, and rewards.

• Horizontal Conflict: Occurs among firms operating at the same channel level (e.g., competition between two retailers).
• Vertical Conflict: Arises between firms at different channel levels (e.g., disagreements between a manufacturer and a retailer).

2. Cooperation

• Vertical Marketing Systems (VMS): A channel structure where producers, wholesalers, and retailers work together as a unified system.
  1. Corporate VMS: Integrates successive stages of production and distribution under single ownership, offering greater control, minimized conflict, enhanced coordination, and potential cost savings.
  2. Contractual VMS: Independent firms at different levels join forces through contracts, with franchising being the most prevalent example. This approach provides more autonomy than corporate VMS while retaining some control, requiring less initial investment and management effort.
  3. Administered VMS: One dominant party's size and power drive coordination across production and distribution stages. This system allows for independence and requires no initial investment from participating firms.
• Horizontal Marketing System: Two or more companies at the same level collaborate to pursue a new marketing opportunity. Advantages include economies of scale, increased negotiation power, a united front against competition, and facilitated entry into challenging markets.