Selling Costs (dollars)Level of Sal

Selling Costs (dollars)
Level of Sales (dollars)
|Fig. 15.5|
Break-Even Cost
Chart for the Choice
between a Company
Sales Force and
a Manufacturer’s
Sales Agency
428 PART 6 DELIVERING VALUE
Training and Motivating Channel Members
A company needs to view its intermediaries the same way it views its end users. It should determine
their needs and wants and tailor its channel offering to provide them with superior value.
Carefully implemented training, market research, and other capability-building programs can
motivate and improve intermediaries’ performance. The company must constantly communicate
that intermediaries are crucial partners in a joint effort to satisfy end users of the product.Microsoft
requires its third-party service engineers to complete a set of courses and take certification exams.
Those who pass are formally recognized as Microsoft Certified Professionals and can use this designation
to promote their own business. Other firms use customer surveys rather than exams.
CHANNEL POWER Producers vary greatly in their skill in managing distributors.
Channel power is the ability to alter channel members’ behavior so they take actions they
would not have taken otherwise.31 Manufacturers can draw on the following types of power to
elicit cooperation:
• Coercive power. A manufacturer threatens to withdraw a resource or terminate a relationship
if intermediaries fail to cooperate. This power can be effective, but its exercise produces resentment
and can lead the intermediaries to organize countervailing power.
• Reward power. The manufacturer offers intermediaries an extra benefit for performing specific
acts or functions.Reward power typically produces better results than coercive power, but intermediaries
may come to expect a reward every time the manufacturer wants a certain behavior to occur.
• Legitimate power. The manufacturer requests a behavior that is warranted under the contract.As
long as the intermediaries view the manufacturer as a legitimate leader, legitimate power works.
• Expert power. The manufacturer has special knowledge the intermediaries value. Once the
intermediaries acquire this expertise, however, expert power weakens. The manufacturer
must continue to develop new expertise so intermediaries will want to continue cooperating.
• Referent power. The manufacturer is so highly respected that intermediaries are proud to be
associated with it. Companies such as IBM, Caterpillar, and Hewlett-Packard have high
referent power.32
Coercive and reward power are objectively observable; legitimate, expert, and referent power are
more subjective and depend on the ability and willingness of parties to recognize them.
Most producers see gaining intermediaries’ cooperation as a huge challenge. They often use positive
motivators, such as higher margins, special deals, premiums, cooperative advertising allowances,
display allowances, and sales contests. At times they will apply negative sanctions, such as
threatening to reduce margins, slow down delivery, or terminate the relationship. The weakness of
this approach is that the producer is using crude, stimulus-response thinking.
In many cases, retailers hold the power.Manufacturers offer the nation’s supermarkets between 150
and 250 new items each week, of which store buyers reject over 70 percent.Manufacturers need to know
the acceptance criteria buyers, buying committees, and store managers use.ACNielsen interviews found
that store managers were most influenced by (in order of importance) strong evidence of consumer acceptance,
a well-designed advertising and sales promotion plan, and generous financial incentives.
CHANNEL PARTNERSHIPS More sophisticated companies try to forge a long-term
partnership with distributors.33 The manufacturer clearly communicates what it wants from its
distributors in the way of market coverage, inventory levels, marketing development, account
solicitation, technical advice and services, and marketing information and may introduce a
compensation plan for adhering to the policies.
To streamline the supply chain and cut costs, many manufacturers and retailers have adopted
efficient consumer response (ECR) practices to organize their relationships in three areas: (1)
demand side management or collaborative practices to stimulate consumer demand by promoting
joint marketing and sales activities, (2) supply side management or collaborative practices to
optimize supply (with a focus on joint logistics and supply chain activities), and (3) enablers and
integrators, or collaborative information technology and process improvement tools to support
joint activities that reduce operational problems, allow greater standardization, and so on.
Research has shown that although ECR has a positive impact on manufacturers’ economic performance
and capability development, manufacturers may also feel they are inequitably sharing the
burdens of adopting it and not getting as much as they deserve from retailers.34
DESIGNING AND MANAGING INTEGRATED MARKETING CHANNELS | CHAPTER 15 429
Evaluating Channel Members
Producers must periodically evaluate intermediaries’ performance against such standards as salesquota
attainment, average inventory levels, customer delivery time, treatment of damaged and
lost goods, and cooperation in promotional and training programs. A producer will occasionally
discover it is overpaying particular intermediaries for what they are actually doing. One manufacturer
compensating a distributor for holding inventories found the inventories were actually held
in a public warehouse at its own expense. Producers should set up functional discounts in which
they pay specified amounts for the trade channel’s performance of each agreed upon service.
Underperformers need to be counseled, retrained, motivated, or terminated.
Modifying Channel Design and Arrangements
No channel strategy remains effective over the whole product life cycle. In competitive markets
with low entry barriers, the optimal channel structure will inevitably change over time. The change
could mean adding or dropping individual market channels or channel members or developing a
totally new way to sell goods.
CHANNEL EVOLUTION A new firm typically starts as a local operation selling in a fairly
circumscribed market, using a few existing intermediaries. Identifying the best channels might not
be a problem; the problem is often to convince the available intermediaries to handle the firm’s line.
If the firm is successful, it might branch into new markets with different channels. In smaller
markets, the firm might sell directly to retailers; in larger markets, through distributors. In rural
areas, it might work with general-goods merchants; in urban areas, with limited-line merchants. It
might grant exclusive franchises or sell through all willing outlets. In one country, it might use
international sales agents; in another, it might partner with a local firm.
Early buyers might be willing to pay for high-value-added channels, but later buyers will switch
to lower-cost channels. Small office copiers were first sold by manufacturers’ direct sales forces, later
through office equipment dealers, still later through mass merchandisers, and now by mail-order
firms and Internet marketers.
In short, the channel system evolves as a function of local opportunities and conditions, emerging
threats and opportunities, company resources and capabilities, and other factors. Consider some of
the challenges Dell has encountered in recent years.35
Dell Dell revolutionized the personal computer category by selling directly to customers
via the telephone and later the Internet. Customers could custom-design the exact PC they
wanted, and rigorous cost cutting allowed for low everyday prices. Sound like a winning formula?
It was for almost two decades. But by 2006, the company was encountering problems that led to
a steep stock price decline. First, reinvigorated competitors such as HP narrowed the gap in productivity
and price. Always focused more on the business market, Dell struggled to sell effectively to the consumer
market. A shift in consumer preferences to buying in retail stores didn’t help, but self-inflicted damage
from an ultra-efficient supply chain model that squeezed costs—and quality—out of customer service was
perhaps the most painful. Managers evaluated call center employees primarily on how quickly they finished
each call—a recipe for disaster as scores of customers felt their problems were ignored or not properly handled.