Which of the following are the main considerations of creating a channel objective?

Channel design is presented as a decision faced by the marketer, and it includes either setting up channels from scratch or modifying existing channels. This is sometimes referred to as re-engineeringthe channel and in practice is more common than setting up channels from scratch.

The term design implies that the marketer is consciously and actively allocating the distribution tasks to develop an efficient channel. Finally, channel design has a strategic implication, as it will be used as a strategic tool for gaining a differential advantage.

Who Engages in Channel Design?

Producers and manufacturers, wholesalers, and retailers all face channel design decisions. Producers and manufacturers “look down” the channel. Retailers “look up” the channel while wholesaler intermediaries face channel design from both perspectives. In this chapter, we will be concerned only from the perspective of producers and manufacturers.

A Paradigm of the Channel Design Decision

The channel design decision can be broken down into seven phases or steps. These are:

1. Recognizing the need for a channel design decision

2. Setting and coordinating distribution objectives

3. Specifying the distribution tasks

4. Developing possible alternative channel structures

5. Evaluating the variable affecting channel structure

6. Choosing the “best” channel structure

7. Selecting the channel members  

Phase 1: Recognizing the Need for a Channel Design Decision

Many situations can indicate the need for a channel design decision. Among them are: Developing a new product or product line, Aiming an existing product to a new target market, Making a major change in some other component of the marketing mix, Establishing a new firm, Opening up new geographic marketing areas, Facing the occurrence of major environmental changes and Meeting the challenge of conflict or other behavioral problems

Phase 2: Setting and Coordinating Distribution Objectives

In order to set distribution objectives that are well coordinated with other marketing and firm objectives and strategies, the channel manager needs to perform three tasks: Become familiar with the objectives and strategies in the other marketing mix areas and any other relevant objectives and strategies of the firm. Set distribution objectives and state them explicitly. Check to see if the distribution objectives set are consistent with marketing and the other general objectives and strategies of the firm.

Phase 3: Specifying the Distribution Tasks

The job of the channel manager in outlining distribution functions or tasks is a much more specific and situational y dependent one. The kinds of tasks required to meet specific distribution objectives must be precisely stated. In specifying distribution tasks, it is especially important not to underestimate what is involved in making products and services conveniently available to final consumers.

Phase 4: Developing Possible Alternative Channel Structures

The channel manager should consider alternative ways of allocating distribution objectives to achieve their distribution tasks. Often, the channel manager will choose more than one channel structure in order to reach the target markets effectively and efficiently. Whether single or multiple channel structures are chosen, the allocation alternatives (possible channel structures) should be evaluated in terms of the following three dimensions: Number of levels in the channel, Intensity at the various levels: refers to the number of intermediaries at each level of the marketing channel and Type of intermediaries at each level.

Phase 5: Evaluating the Variables Affecting Channel Structure

The channel manager should evaluate a number of variables to determine how they are likely to influence various channel structures.

These Five basic categories are most important: Market variables, Product variables, Company variables and Intermediary variables

1) Market Variables •Market variables are the most fundamental variables to consider when designing a marketing channel. Including: market geography, market size, market density, and market behavior.

A) Market Geography: Market geography refers to the geographical size of the markets and their physical location and distance from the producer and manufacturer.

B) Market Size :The number of customers making up a market (consumer or industrial) determines the market size. From a channel design standpoint, the larger the number of individual customers, the larger the market size.

C) Market Density :The number of buying units per unit of land area determines the density of the market. In general, the less dense the market, the more difficult and expensive is distribution.  

D) Market Behavior: Market behavior refers to the following four types of buying behaviors: Like  How customers buy, When customers buy , Where customers buy  and Who does the buying? Each of these patterns of buying behavior may have a significant effect on channel structure.

2) Product Variables: Product variables such as bulk and weight, perishability, unit value, technical versus nontechnical, and newness affect alternative channel structures.

3) Company Variables: The most important company variables affecting channel design are: size, financial capacity, managerial expertise, and  objectives and strategies.  

A) Size: In general, the range of options for different channel structures is a positive function of a firm’s size. Larger firms have more options available to them than smaller firms do.

B) Financial Capacity: Generally the greater the capital available to a company, the lower its dependence on intermediaries. 

C) Managerial Expertise: For firms lacking in the managerial skills necessary to perform distribution tasks, channel design must of necessity include the services of intermediaries who have this expertise. Over time, as the firm’s management gains experience, it may be feasible to change the structure to reduce the amount of reliance on intermediaries.

D) Objectives and Strategies: The firm’s marketing and general objectives and strategies, such as the desire to exercise a high degree of control over the product, may limit the use of intermediaries. Strategies emphasizing aggressive promotion and rapid reaction to changing markets will constrain the types of channel structures available to those firms employing such strategies.

4) Intermediary Variables: The key intermediary variables related to channel structure are: availability, costs, and the services offered.

A) Availability: The availability (number of and competencies of) adequate intermediaries will influence channel structure.

B) Cost: The cost of using intermediaries is always a consideration in choosing a channel structure. If the cost of using intermediaries is too high for the services performed, then the channel structure is likely to minimize the use of intermediaries.

C) Services: This involves evaluating the services offered by particular intermediaries to see which ones can perform them most effectively at the lowest cost.

5) Environmental Variables: Economic, socio-cultural, competitive, technological, and legal environmental forces can have a significant impact on channel structure.

Phase 6: Choosing the “Best” Channel Structure

In theory, the channel manager should choose an optimal structure that would offer the desired level of effectiveness in performing the distribution tasks at the lowest possible cost. In reality, choosing an optimal structure is not possible.

Why? First, as we pointed out in the section on Phase 4, management is not capable of knowing all of the possible alternatives available to them.

Second, even it were possible to specify all possible channel structures, precise methods do not exist for calculating the exact payoffs associated with each alternative.

Some pioneering attempts at developing methods that are more exacting do appear in literature and we will discuss these in brief.

A) “Characteristics of Goods and Parallel Systems” Approach

First laid out in the 1950s by Aspinwall, the main emphasis for choosing a channel structure should be based upon product variables. Each product characteristic is identified with a particular color on the spectrum. These variables are:

1. Replacement rate

2. Gross margin

3. Adjustment

4. Time of consumption

5. Searching time

1. Using Aspinwall’s Approach

This approach offers the channel manager a neat way of describing and relating a number of heuristics about how product characteristics might affect channel structure.

The major problem with this method is that it puts too much emphasis on product characteristics as the determinant of channel structure.

B) Financial Approach

Lambert offers another approach, which argues that the most important variables for choosing a channel structure are financial. Basically, this decision involves comparing estimated earnings on capital resulting from alternative channel structures in light of the cost of capital to determine the most profitable channel.

Using the Financial Approach

By viewing the channel as a long-term investment that must more than cover the cost of capital invested in it and provide a better return than other alternative uses for capital, the criteria for choosing a channel structure is more rigorous.

The major problem with Lambert’s approach lies in the difficulty of making it operational in a channel decision-making context.  

C) Transaction Cost Analysis (TCA) Approach

Based on the work of Williamson, TCA addresses the choice of marketing channel structure only in the most general case situation of choosing between the manufacturers performing all of the distribution tasks itself through vertical integration versus using independent intermediaries to perform some or most of the distribution tasks. It is based upon opportunistic behaviors of channel members.

The main focus of TCA is on the cost of conducting the transactions necessary for a firm to accomplish its distribution tasks.

In order for transactions to take place, transaction-specific assets are needed. These are the set of unique assets, both tangible and intangible, required to perform the distribution tasks.

Using the TCA approach

TCA has some substantial limitations from the standpoint of managerial usefulness.

First, it deals only with the most general channel structure dichotomy of vertical integration versus use of independent channel members.

Second, the assumption of opportunistic behavior may not be an accurate reflection of behavior in marketing channels.

Third, no real distinction is made between long-term and short-term issues in channel structure relationships.

Fourth, the concept of asset specificity (transaction-specific assets) is very difficult to operationalize.

Finally, TCA is one-dimensional, overly simplistic and neglects other relevant variables in channel choice.

D) Management Science Approaches

It would certainly be desirable if the channel manager could take all possible channel structures, along with all the relevant variables, and “plug” these into a set of equations, which would then yield the optimal channel structure.  The work of Balderston and Hoggatt, Artle and Berglund, Alderson and Green, Baligh, Rangan, Moorthy, Menezes, Maier, and Atwong and Rosenbloom have pioneered some quantitative work in this area.

Using Management Science Approaches

These approaches still need much more development before they are likely to find widespread application to channel choice.  

E) Judgmental-Heuristic Approaches

These approaches rely heavily on managerial judgment and heuristics for decisions. Some attempt to formalize the decision-making process whereas others attempt to incorporate cost and revenue data.

Straight Qualitative Judgment Approach

The qualitative approach is the crudest but, in practice, the most commonly used approach for choosing channel structures. The various alternative channel structures that have been generated are evaluated by management in terms of decision factors that are thought to be important. These factors may include short- and long-run cost and profit considerations, channel control issues, long-term growth potential, and many others.

Weighted Factor Score Approach

A more refined version of the straight qualitative approach to choosing among channel alternatives is the weighted factor approach suggested by Kotler.

This approach forces management to structure and quantify its judgments in choosing a channel alternative and consists of four basic steps:

1. The decision factors must be stated explicitly.

2. Weights are assigned to each of the decision factors to reflect relative importance precisely in percentage terms.

3. Each channel alternative is rated on each decision factor, on a scale of 1 to 10.

4. The overall weighted factor score (total score) is computed for each channel alternative by multiplying the factor weight (A) by the factor score (B).

Distribution Costing Approach

Under this approach, estimates of costs and revenues for different channel alternatives are made, and the figures are compared to see how each alternative compares to another.

Regardless of how elaborate or detailed the analysis, the basic theme of this approach stresses managerial judgment and estimations about what the costs and revenues of various channel structure alternatives are likely to be.

Using Judgmental-Heuristic Approaches

Regardless of which judgmental-heuristic approach is used, large doses of judgment, estimation, and even “guesstimation” are virtually unavoidable.

This is not to say that the so-called judgmental-heuristic approaches are totally subjective. Coupled with good empirical data, highly satisfactory (though not optimal) channel choice decisions may be made using these approaches.

Judgmental-heuristic approaches also enable the channel manager to readily incorporate non-financial criteria into channel choices. Such non-financial criteria as goodwill or the degree of control over the channel members may be of real importance to a firm.

What are the main considerations of creating a channel objective?

What are four considerations for channel alternatives?

What are the 4 key factors to consider in designing the marketing channel?

What are the factors to consider when selecting a channel?