Distribution channels are more than simple collections of the company tied together by various flows. They are quite complex behavioral systems in which people and companies interact with each other in order to accomplish company, individual, and channel goals. Some channel systems have only informal interactions among loosely organized companies. Others consist of formal interactions that are guided by strong organizational structures.
A marketing channel consists of organizations that have partnered for their common goal. Each and every channel member depends on the other channel members. For example, a Ford dealer depends on Ford for the design of cars that meet consumer needs. Ford depends on the dealer to attract buyers, persuade them to buy Ford cars, and service the cars after the sale. It also gets depended upon the other dealers to provide good sales and service that will enhance the reputation of the brand . The success of individual Ford dealers depends on how better the whole Ford marketing channel competes with the other auto manufacturer’s channel.
Every channel member plays a significant role in the channel. For example, the main role of consumer electronics maker Samsung is to produce electronics products which will be liked by the consumers and create demand through national advertising. The best Buy’s role is to show these Samsung products in convenient locations, answer customers’ questions, and complete sales. The channel is the most effective when each member assumes that the tasks it can do best. All channel firms should work together smoothly because the success of individual channel members depends on overall channel success. They must understand and accept their roles and responsibilities, coordinate their activities, and cooperate for attaining overall channel goals.
Individual channel members rarely take such a broad view. Cooperating for achieving overall channel goals sometimes means giving up individual company goals. Channel members depend on one another but they often act alone in their own short run best benefits. They usually disagree on who should do what and for what rewards. These such disagreements over goals, roles, and rewards create channel conflict.
Horizontal conflict appears among company at the same level of the channel. For instance, some Ford dealers at Chicago may complain that other dealers in the city steal sales from them by advertising outside their assigned boundaries or pricing too low . Or Holiday Inn franchisees may complain about other Holiday Inn operators overcharging guests or providing poor service, harming the overall Holiday Inn image.
Vertical conflict refers to the conflicts between different levels of the same channel. In recent years, for example, Burger King had a steady stream of conflicts with its franchised dealers over everything from increased ad spending and offensive ads to the charges for cheeseburgers.
Some conflict in the channel will take the form of healthy competition. Such competition will be good for the channel; without it, the channel may become passive as well as non-innovative. For example, Burger King’s conflict with its franchisees may represent normal give-and-take over the respective rights of the channel partners. But severe conflict may disrupt channel effectiveness and cause harm to channel relationships. Burger King should manage the channel conflict carefully in order to keep it from getting out of hand.
Channel Conflict can be resolved through the Vertical Marketing System(VMS), Horizontal Marketing System and Multichannel Distribution System.
For the entire channel to perform well, each and every channel member’s role must be specified, and channel conflict should be managed. The channel will perform better if it is base to include a firm, agency, or mechanism which provides leadership and has the power for assigning roles and managing conflict. Conventional distribution channel shave lacked such power and leadership, usually resulting in damaging conflict and poor performance. One of the biggest channel developments over the years has been the emergence of vertical marketing systems which provide channel leadership. A conventional distribution channel consists of one or more independent producers, wholesalers, and retailers. Each is a separate business seeking for the maximization of its own profits, perhaps even at the expense of the system as a whole. No, any channel member has control over the other members, and no formal means exists while assigning roles and resolving channel conflict.
In contrast, a vertical marketing system (VMS) consists of producers, wholesalers, and retailers which act as a unified system. One channel member owns the other channel members, has contracts with them, or wields so much power that they must all cooperate. The Vertical Marketing System(VMS) could be dominated by the producer, the wholesaler, or the retailer. We will look at three major types of VMS and they are: corporate, contractual, and administered. All types of VMS use a different means for setting up leadership and power in the channel.
A corporate VMS integrates successive phases of production and distribution under single ownership. Coordination and conflict management are attained via regular firm channels. Little-known Italian eyewear maker Luxottica produces many famous eyewear brands—including its own Ray-Ban and Oakley brands and licensed brands such as Burberry, Chanel, Dolce & Gabbana, Polo Ralph Lauren , Donna Karan, Versace, Prada, and Bulgari and also including its own Ray-Ban and Oakley brand. Then after it sells these brands via some of the world’s largest optical chains—Pearle Vision, LensCrafters, and Sunglass Hut—that it also owns.
A contractual VMS consists of independent companies that are at different levels of production and distribution who join together via contracts in order to obtain more economies or sales impact than each could achieve alone. Channel members coordinate their activities and manage conflict via contractual agreements. The franchising firm is the most common type of contractual relationship.
In an administered Vertical Marketing System, leadership is assumed not via common ownership or contractual ties but via the power and size of one or a few dominant channel members. Manufacturers of the top brand could get strong trade cooperation and support from resellers. For example, large retailers such as Walmart, Barnes & Noble and Home Depot can exert a strong influence on the many manufacturers which supply the products they sell.
The horizontal marketing system is another marketing system, in which two or more firms at one level join together to follow a new marketing opportunity. Companies could combine their financial, production, or marketing resources to accomplish more than any one company could alone by working together. Companies may join forces with competitors or noncompetitors. They also may work with each other on a temporary or permanent basis also they can create a separate company. For example, McDonald’s places “express” versions of its restaurants in Walmart stores. McDonald’s benefits from Walmart’s huge store traffic and Walmart keeps hungry shoppers from needing to go to Mc.Donalds to eat.
In the past, many firms used a single channel for selling a single market or market segment. Nowadays, with the proliferation of consumer segments and channel possibilities, more and more firms have adopted multichannel distribution systems. This multichannel marketing occurs when a single firm sets up two or more marketing channels to reach one or more consumer segments. The use of multichannel systems has increased a lot in recent years.
Kotler, P., & Armstrong, G. (2013).Principles of Marketing.Chennai: Pearson India Education Services Pvt Ltd