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CHAPTER TWO

THE COMPETITIVE BEHAVIOR OF


RETAIL INSTITUTIONS

Learning Objectives
After studying this chapter, you should be able to:
1. Explain how companies use marketing channels and
discuss the functions these channels perform
2. Discuss how channel members interact and how
they organize to perform the work of the channel
3. Identify the major channel alternatives open to a
company
4. Discuss the nature of retail competition

5. The competitive strategies of retailers

Marketing or Distribution Channel


A set of interdependent organizations
involved in the process of making a
product or service available for use or
consumption by the consumer or
business user.
Supply Chain Views
Supply chain
make and sell view includes the firms3

Supply Chains and the Value Delivery Network


Demand chain
sense and respond view suggests that planning starts
with the needs of the target customer and the firm responds
to these needs by organizing a chain of resources and
activities with the goal of creating customer value.

The above two terms take a step-by-step, linear view

of purchase-production-consumption activities
value delivery network
is the firms suppliers, distributors, and ultimately, customers
who partner with each other to improve the performance of
the entire system.

The Nature and Importance of Marketing Channels

How Channel Members Add Value

by bridging the major


time,
place, and
possession gaps that separate
goods and services from those
who would use them.

How Channel Members Add Value


Producers

Cont..

use intermediaries because they create greater


efficiency in making goods available to target
markets.

Intermediaries
offer the firm more than it can achieve on its own
through their contacts, experience, specialization,
and scale of operations.

From an economic view,


intermediaries transform the assortments of
products into assortments wanted by consumers.

Producers narrow assortments of products in large


quantities

Consumers broad assortments of products in small


quantities

How Channel
Information:
Negotiation:
Members
Gathering and Add Value
Reaching an
distributing marketing
research and intelligence

Promotion:

Development and
spreading persuasive
communications about
an offer

Contact:

Finding and
communicating with
prospective buyers

Matching:

Shaping and fitting the


offer to the buyers
needs, including
activities such as
manufacturing, grading,
assembling, and
packaging

Cont..

agreement on price
and other terms of the
offer so that ownership
or possession can be
transferred

Physical distribution:
Transporting and
storing goods

Financing:

Acquiring and using


funds to cover the
costs of carrying out
the channel work

Risk taking:

Assuming the risks of


carrying out the
channel work

How Channel Members


Value
Add
The use
of intermediaries results from
their greater efficiency in making goods
available to target markets.
Offers the firm more than it can achieve
on its own through the intermediaries:
Contacts
Experience
Specialization
Scale of operation
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Do you think that


the more channel member
Results in
the more customer contact ?
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How a Distributor Reduces the Number of Channel


Transactions

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Channel Functions
These functions should be assigned to
the channel member who can add the
most value for the cost
Information
Information

Negotiation
Negotiation

Promotion
Promotion

Physical
Physical Distn
Distn

Contact
Contact

Financing
Financing

Matching
Matching

Risk
Risk Taking
Taking

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Consumer and Business Channels

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Channel Behavior
The channel will be most effective when:
each member is assigned tasks it can do best.
all members cooperate to attain overall channel
goals.

If this does not happen, conflict occurs:


Horizontal Conflict occurs among firms at the same
level of the channel (e.g., retailer to retailer).
Vertical Conflict occurs between different levels of
the same channel (e.g., wholesaler to retailer).

Some conflict can be healthy competition.


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The Nature and Importance Of


Number of Channel
Members
Marketing
Channels
Channel level

refers to each layer of marketing intermediaries


that performs some work in bringing the product
and its ownership closer to the final buyer.

Direct marketing channel


has no intermediary levels; the company sells
directly to consumers.

Indirect marketing channels


contain one or more intermediaries.

From the producers point of view, a greater


number of levels means less control and
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greater channel complexity

Channel Behavior and Organization


Conventional Distribution Systems
Consist of one or more independent
producers, wholesalers, and retailers.
Each seeks to maximize its own profits and
there is little control over the other
members.
No formal means for assigning roles and
resolving conflict.

Vertical Marketing Systems(VMS)


provide channel leadership and consist of
producers, wholesalers, and retailers acting
as a unified system and consist of:
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Channel Behavior and Organization


Corporate vertical marketing system
Integrates successive stages of production and
distribution under single ownership.

Contractual vertical marketing system


Consists of independent firms at different levels
of production and distribution
Join together through contracts to obtain more
economies or sales impact than each could
achieve alone.
Most common form is the franchise
organization

Administered vertical marketing system


Has a few dominant channel members without
common ownership. Leadership comes from size
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and power.

Channel Behavior and Organization


Horizontal Marketing Systems
include two or more companies at one level
that join together to follow a new marketing
opportunity.
Companies combine financial, production, or
marketing resources to accomplish more than
any one company could alone.

Multichannel Distribution Systems


Hybrid marketing channels exist when a
single firm sets up two or more marketing
channels to reach one or more customer
segments.
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Channel Behavior and Organization


A multichannel distribution system

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Hybrid Marketing Channels


Cont. ..
Advantages
Increased sales and market coverage
New opportunities to tailor products and
services to specific needs of diverse customer
segments
Challenges
Hard to control
Create channel conflict
Changing Channel Organization
Disintermediation
Occurs when product or service producers
cut out intermediaries and go directly to
final buyers, or
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when radically new types of channel

Channel Design Decisions


Designing a channel system
requires:
1.Analyzing consumer needs
2.Setting channel objectives
3.Identifying major channel
alternatives
4.Evaluation
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Channel Design Decisions


1. Analyzing
Consumer
Needs
Designing a
marketing
channel starts
with finding out
what target
consumers want
from the channel.

2. Setting Channel
Objectives in terms of:
Targeted levels of customer
service
What segments to serve
Best channels to sue
Minimizing the cost of
meeting customer service
requirements
Objectives are influenced by
Nature of the company
Marketing intermediaries
Competitors
Environment
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3. Identifying Major Alternatives


In terms of
Types of intermediaries
Number of intermediaries
Responsibilities of each channel member
Types of intermediaries
refers to channel members available to carry out channel
work. Examples include
Company sales force
Manufacturers agency
are independent firms whose sales forces handle
related products from many companies in different
regions or industries.
Industrial distributors

Cont..

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Identifying Major Alternatives

Cont..

Number of marketing intermediaries to use at


each level

Intensive distribution
a strategy used by producers of convenience
products and common raw materials
they stock their products in as many outlets as possible.

Exclusive distribution
a strategy in which the producer gives only a
limited number of dealers the exclusive right to
distribute products in territories,
e.g. Luxury automobiles and High-end apparel
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Selective distribution

Cont..

a strategy when a producer uses more than one


but fewer than all of the intermediaries willing to
carry the producers products,
e.g., Televisions and Electrical appliances
Identifying Major Alternatives
Responsibilities of Channel Members
Producers and intermediaries need to agree on

Price policies
Conditions of sale
Territorial rights
Services provided by each party

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Comparing Distribution Types

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Channel Design Decisions


4. Evaluating the Major Alternatives
Each alternative should be evaluated against
Economic criteria
compares the likely sales costs and
profitability of different channel members.
Control criteria
refers to channel members control over
the marketing of the product.
Adaptive criteria
refers to the ability to remain flexible to
adapt to environmental changes.
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Relationship Management Among


Retailers and Suppliers
Disagreements may occur:
control over channel
profit allocation
number of competing retailers
product displays
promotional support
payment terms
operating flexibility
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Interactive Student Assignment


Choose a partner and decide
what type of distribution is used
for washing machines.
What are the advantages for the
manufacturer

and

retailer

in

using this level of distribution


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Retail Strategy
An overall plan for guiding a retail firm
Influences the firms business activities
Influences firms response to market
forces
Six Steps in Strategic Planning
1.
2.
3.
4.
5.
6.

Define the type of business


Set long-run and short-run objectives
Determine the customer market
Devise an overall, long-run plan
Implement an integrated strategy
Evaluate and correct

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Role of competition in retailing


Retailing is more competitive than most other

sectors
Retail competition is multidimensional i.e., 5

levels
1st level product, services,

communication, and physical distribution.


2nd level related to retail organization

and its horizontal competitors.


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3rd level other retail organization and


the vertical competition.
4th

level

dimensions

deals

with

including

geographical

location

and

shopping environment.
5th level nature of the marketplaces
(local, national international) economy,
including economic boom, bust, recession,
inflation prone, hyper inflation etc..

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Dimensions of Change in retail competition


Retail competition has been changing along
spatial, institutional and functional dimensions.
Spatial dimension retailing follows population
trends.
Institutional dimension both large and small
firms are engaged in retail competition.
Functional dimension takes two dimensions
e.g. price competition; and non-price competition.
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Retail concentration/ attention


High concentration of retail competition could
be attributed to ease of entry.
High profit in retailing invites competition and
resulting in high concentration.
Large firms taking over smaller firms leads to
polarization and concentration.
Government policies and regulations favouring
large firms and less favourable to smaller
firms lead to concentration.
Consumers willingness to accept process foods
and innovative products help build retail
concentration.
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Competitive advantage (differentiation)


Retailers need to differentiate themselves from their
competitors
Competitive advantage is achieved through differential
congruence.
Differential congruence is the positive balance
between stores image and the customers selfimage.
Successful retailers must achieve differential
congruence as a means of coping with growing
competition.
Retail management must create a congruence between
the stores perceived image and the customers selfimage to achieve differential advantage.
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Competitive Strategies
Strategies that strongly position the
company against competitor and
give the company strongest possible
strategic advantage.
Competitive Strategies helps in:
1. Building
profitable
customer
relationships
2. Gaining competitive advantage
3. Analyzing their competitors
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Continued.

No company can follow only one strategy.

For example, Johnson & Johnson uses one

marketing strategy for its common product


such as BAND-AID & Johnsons baby products;
and different marketing strategy for its High

Tech health care products such as Vicryl Plus,


antibacterial

surgical

sutures

or

NeuFlex

finger joint implants.


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Basic competitive
strategies
Over cost leadership
Companies try to achieve the lowest
production and distribution cost.
Low costs let its price lower than its
competitors and win a large market
share.
Example: Big bazaar
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Differentiation

Cont..

Company concentrates on creating a highly


differentiated product line and marketing program
so that it comes across as the class leader in the
industry.
Example: IBM - in Information Technology and services &
Samsung - in consumer electronics and household appliances,

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Focus

Cont..

Company focuses its efforts on


serving a few market segments well
rather than going after the whole
market.
Example: Tetra food supply 80% of pet tropical
fish food.
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First value disciplines Operational Excellence


To be a leader in operational excellence,
a company must provide reliable products
or services that can be purchased at:
competitive prices and
with minimal difficulty or inconvenience.

boast highly efficient delivery processes


built around
sophisticated information systems.

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Wal-Mart is recognized over the world for its cost


efficiencies.
If a price war were to break out tomorrow, the giant
retailer could outlast all its competitors.
It can therefore maintain the lowest prices and
attract those customers who base their buying
decision primarily on price.
Likewise, Dell Computer competes successfully with
its higher-profile counterparts, because it has a
substantially lower cost structure
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Second value
While companies that excel at operational excellence
disciplines
Customer
run their businesses as lean,
mean machines and
Intimacy
those pursuing a strategy of customer intimacy

provide superior value by tailoring and shaping products


and services to unique customer needs.
Value-added services, focused marketing, and
responsive/flexible
processes are the
hallmarks of this value discipline.

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Ritz Carlton Hotels


Was identified as a customer intimacy leader.
The Ritz Carlton has built a database on its
customers.
Every time a customer stays at the hotel, that
information is accessed to establish the needs of
that customer.
The hotel responds accordingly,
whether it is by leaving fruit instead of
chocolates in the room,
or placing the telephone on the other side of the
bed for left-handed guests.
It is attentive to customer needs.
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Third value discipline Product


Leadership
Aproduct leader
continually develops new and unique products
and services that have an emotional and
rational surplus value for clients.
do not have the lowest-cost operations because
their customers are not price-sensitive
their priority is getting the hottest new product,
whatever it might cost.
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3M has a policy stating that 25 per cent of its


corporate revenues must come from products
that have been created in the last three years.
Another product leader, Intel, is constantly
reinventing the computer chip, often displacing
its own products in the
market.

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Conclusion
Classifying competitive strategies as value
disciplines defines marketing strategy in
terms of single minded pursuit of
delivering superior value to customers.
Each value discipline defines a specific way
to build lasting customer relationship.
It helps the firms to analyze their
competitors and design effective
competitive marketing strategies to gain
competitive advantage.
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