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10.6. Managing Distribution Channel
Channels can be led by any of the channel members, whether they are producers, wholesalers, or retailers, provided the member concerned has channel power.
Channel co-operation is an essential part of the effective functioning of channels. Since each member relies on every other member for the free exchange of goods down the channel, it is in the members’ interests to look after each other to some extent. Channel co-operation can be improved in the following ways:
The channel members can agree on target markets, so that each member can best direct effort towards meeting the common goal.
The tasks each member should carry out can be defined. This avoids duplication of effort, or giving the final consumer conflicting messages.
A further development is co-marketing, which implies a partnership between manufacturers, intermediaries and retailers. This level of co-operation involves pooling of market information and full agreement on strategic issues.
Channel conflict arises because each member wants to maximise its own profits or power. Conflicts also arise because of frustrated expectations: each member expects the other members to act in particular ways, and sometimes these expectations are unfulfilled. For example, a retailer may expect a wholesaler to maintain large enough stocks to cover an unexpected rise in demand for a given product, whereas the wholesaler may expect the manufacturers to be able to increase production rapidly to cover such eventualities.
Channel management can be carried out by co-operation and negotiation (often with one member leading the discussions) or it can be carried out by the most powerful member laying down rules that weaker members have to follow.
Most attempts to control distribution by the use of power are likely to be looked on unfavourably by the courts, but of course the abuse of power would have to be fairly extreme before a channel member would be likely to sue.
Sometimes the simplest way to control a distribution channel is to buy out the channel members. Buying out members across a given level (for example, a wholesaler buying out other wholesalers in order to build a national network) is called horizontal integration; buying out members above or below in the distribution chain (for example a retailer buying out a wholesaler) is vertical integration. An example of extreme vertical integration is the major oil companies, which extract crude oil, refine it, ship it and ultimately sell it retail through petrol stations. At the extremes, this type of integration may attract the attention of government monopoly regulation agencies, since the integration may cause a restriction of competition.
Producers need to ensure that the distributors of their products are of the right type. The image of a retailer can damage (or enhance) the image of the products sold (and vice versa). Producers need not necessarily sell through the most prestigious retailer, and in fact this would be counter-productive for many cheap, everyday items. Likewise a prestigious product should not be sold through a down-market retail outlet.
As the relationship between members of the distribution channel becomes closer power and conflict still remain important, but they are expressed in otherways, and the negotiations for their resolution change in nature.
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