4 CHANNEL STRATEGY DEVELOPMENT AND

CHANNEL DESIGN

INTENDED LEARNING OUTCOMES

By the end of the learning experience, students must be able to:

1. Understand the meaning of marketing channel strategy.
2. Emphasize the importance of strategy in developing marketing mix.
3. Appreciate the role of channel strategy in creating a differential advantage through channel
design.
4. Categorize the seven phases of Channel Design Decision Paradigm.

Having discussed basic marketing channel concepts and systems, the participants in marketing
channels, the environment within which marketing channels operate, and behavioral processes
in marketing channels in Part 1, we now turn our attention to the strategy side of marketing
channels. This chapter presents a strategic framework for dealing with the key managerial
decisions involved in marketing channels. Subsequent chapters in this part and later parts of
the text are all related to the underlying strategic framework developed in this chapter. Hence
this chapter is very important for getting the most out of the remainder of the text because it
provides a strategic backdrop for most of the distribution channel management decisions
discussed in later chapters.

A. MARKETING CHANNEL STRATEGY AND DISTRIBUTION ROLE

Kotler defines marketing strategy as “the broad principles by which the business unit expects to
achieve its marketing objectives in a target market.” Marketing channel strategy can be viewed
as a special case of the more general marketing strategy. Hence we can define marketing
channel strategy as:

The broad principles by which the firm expects to achieve its distribution objectives for its target
market(s).

This definition, though parallel to Kotler’s definition of marketing strategy, is narrower because
it focuses on the principles as guidelines for achieving the firm’s distribution objectives rather
than on general marketing objectives (which include product, price, and promotional
objectives). Thus, marketing channel strategy is concerned with the place aspect of marketing
strategy, while the other three Ps of the marketing mix address product, price, and promotional
strategies. As we shall see shortly, channel strategy, though relatively narrow in focus, may be
of equal or more importance than the other strategic variables of the marketing mix, as well as
of vital importance in the firm’s overall objectives and strategies.

To achieve its objectives a firm will have to address six basic distribution decisions:
1. What role should distribution play in the firm’s overall objectives and strategies?
2. What role should distribution play in the marketing mix?
3. How should the firm’s marketing channels be designed to achieve its distribution
objectives?
4. What kinds of channel members should be selected to meet the firm’s distribution
objectives?
5. How can the marketing channel be managed to implement the firm’s channel design
effectively and efficiently on a continuing basis?
6. How can channel member performance be evaluated?

A sounder approach to dealing with distribution decisions is to formulate marketing channel

strategy to provide the guiding principles for dealing with distribution decisions on a proactive
rather than a reactive basis.

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Marketing Channel Strategy and the Role of Distribution in Corporate Objectives and Strategy:
The most fundamental distribution decision for any firm or organization to consider is the role
that distribution is expected to play in a company’s long-term overall objectives and strategies.
The role of distribution should be considered by the highest management levels of the
organization.

When this three-cycle planning process is undertaken in a large and diversified firm, all three
levels (corporate, business, and program and functional departments) will become involved in
the strategic planning process.

Determining the Priority Given to Distribution:

The most famous and widely acclaimed management guru in the last one hundred years, Peter
Drucker, had this to say about the importance of distribution:

Changes in distributive channels may not matter much to GNP and macroeconomics. But they
should be a major concern to every business and industry …

Everyone knows how fast technology is changing. Everyone knows about markets becoming global
and about shifts in the work force and in demographics. But few people pay attention to changing
distribution channels.

Tom Peters, another famous management guru, makes a similar point about the importance of
distribution in the firm:

Most firms make the mistake of paying too little attention to the somewhat attenuated members
of their marketing team [marketing channel]. The [relatively few] companies that mind their
distribution reap tangible rewards.

The question of how much priority to place on distribution is one that can be answered only by
the particular firm involved. While there are no general guidelines and no body of empirical
research to indicate when distribution should be viewed as a critical factor in a firm’s long-term
strategic objectives, there is however, a growing belief among top management experts that
distribution does warrant the attention of top management, because competition has made the
issue too important to ignore.

What is fair to say, however, is that to automatically dismiss distribution as a decision area for
top management concern in formulating corporate objectives and strategies limits the firm’s
ability to compete effectively in today’s global markets.

B. MARKETING CHANNEL STRATEGY AND THE MARKETING MIX

The role of distribution must be considered in the marketing mix along with price,
promotion, and product. How much emphasis to be placed on place has no general
answer. Each firm or marketing manager must make that determination for his or her self.
What we do know is that a general case of stressing distribution strategy can be made if any
one of certain conditions prevails:
1) Distribution is the most relevant variable for satisfying target market demands.
2) Parity exists among competitors in the other three variables of the marketing mix.
3) A high degree of vulnerability exists because of competitors’ neglect of distribution.
4) Distribution can enhance the firm by creating synergy from marketing channels.

1) Distribution Relevance to Target Market Demand

As firms have become more orientated to target markets over the past two decades by
listening more closely to their customers, the relevance of distribution has become apparent to
an increasing number of companies because it plays such a key role in providing customer
service.

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Why are marketing channels so closely linked to customer need satisfaction? Because it is
through distribution that the firm can provide the kinds of levels of service that make for
satisfied customers.
2) Competitive Parity in Other Marketing Mix Variables
It is increasingly more difficult for a company to differentiate its marketing mix from that of the
competition. Price, product, and promotional strategies can easily and quickly be copied.
Distribution (place), the fourth variable of the marketing mix, can offer a more favorable basis
for developing a competitive edge because the advantages achieved in distribution are not as
easily copied by competitors as the other three. Why is this the case? Distribution advantages,
if manifest in a superior marketing channel (rather than just the logistical aspects of
distribution), are based on a combination of superior strategy, organization, and human
capabilities. This is a combination not easily or quickly imitated by competitors.
3) Distribution Neglect and Competitive Vulnerability
Neglect of distribution strategy by competitors provides an excellent opportunity for those
companies who are willing to make the effort to develop distribution as a key strategic variable
in the marketing mix. But to pursue this approach, the channel manager has to make a
conscious effort to analyze target markets to determine if distribution has been neglected by
competitors and whether vulnerabilities exist that can be exploited.
4) Distribution and Synergy for the Channel
By “hooking up” with the right kind of channel members, the marketing mix can be
substantially strengthened to a degree not easily duplicated with other variables.
The most obvious example of this is when a channel member’s reputation or prestige is stronger
than the manufacturer’s. By securing distribution of its products through such channel
members at the wholesale or retail levels, the manufacturer immediately upgrades its own
credibility. In effect, the manufacturer’s products handled by the famous retailers or well-
established wholesalers become “anointed” as superior products to a degree beyond what the
manufacturer could have accomplished on its own.
Synergy through distribution goes well beyond the enhancement of the manufacturer’s image.
Strong and close working relationships between the manufacturer and channel members –
which in recent years have been referred to increasingly as distribution partnerships, partnering,
strategic alliances or networks – can provide a substantial strategic advantage.

C. CHANNEL STRATEGY DEVELOPMENT (DESIGN, SELECTION, MANAGEMENT

AND EVALUATION)

1. Channel Strategy and Designing Marketing Channels

The purpose in introducing the topic of channel design in this chapter is limited to showing the
relationship between channel strategy and channel design. This relationship is a
straightforward one: Channel strategy should guide channel design so as to help the firm attain
a differential advantage.

Differential Advantage and Channel Design:

Differential advantage, also called sustainable competitive advantage in more recent years,
refers to a firm’s attainment of an advantageous position in the market relative to competitors
—a place that enables it to use its particular strengths to satisfy customer demands better than
its competitors on a long-term (sustainable) basis. The entire range of resources available to the
firm and all of its major functional activities can contribute to the attempt to create a
differential advantage. The level of capital, the quality of management and employees, and its
overall production, financial, and marketing strategies all play a part.

Channel design, though just one component of this attempt to gain a differential advantage,
can be a very important part. Given that distribution is one of the major controllable variables
of the marketing mix, it is no less important for the firm to seek a differential advantage in its
channel design than in its product, pricing, and promotional strategies. Indeed, a differential

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advantage based on the design of a superior marketing channel can yield a formidable and
long-term advantage because competitors cannot copy it easily

Positioning the Channel to Gain Differential Advantage:

In the channel manager’s attempt to foster differential advantage through channel design, the
concept of channel position can serve as a helpful guide. Narus and Anderson define a channel
position as:
… the reputation a manufacturer acquires among distributors [channel members] for furnishing
products, services, financial returns, programs, and systems that are in some way superior to those
offered by competing manufacturers.

Channel positioning is what the firm does with its channel planning and decision making to
attain the channel position. The key ingredient, according to Narus and Anderson, is to view the
relationship with channel members as a partnership or strategic alliance that offers
recognizable benefits to the manufacturer and channel members on a long-term basis.

2. Channel Strategy and the Selection of Channel Members

The purpose in introducing the subject of channel member selection in this chapter is to show
that this aspect of channel design also has a strategic dimension. In particular, the approach
taken to channel member selection and the particular types of intermediaries chosen to
become channel members should reflect the channel strategies the firm has developed to
achieve its distribution objectives. Moreover, the selection of channel members should be
consistent with the firm’s broader marketing objectives and strategies and may also need to
reflect the objectives and strategies of the organization as a whole. This follows because
channel members, though independent businesses, are from the customers’ perspective an
extension of the manufacturer’s own organization. Thus the types of middlemen selling the
manufacturer’s products ultimately reflect on the manufacturer.

3. Channel Strategy and Managing the Marketing

Channel management from the manufacturer’s perspective involves all of the plans and actions
taken by the manufacturer aimed at securing the cooperation of the channel members in
achieving the manufacturer’s distribution objectives. The purpose in introducing the topic of
channel management here is limited to showing its relationship to channel strategy.

The channel manager attempting to plan and implement a program to gain the cooperation of
channel members is faced with three strategic questions:
1. How close a relationship should be developed with the channel members?
2. How should the channel members be motivated to cooperate in achieving the
manufacturer’s distribution objectives?
3. How should the marketing mix be used to enhance channel member cooperation?

Motivation of Channel Members:

When motivating channel members, the strategic challenge is to find the means to secure
strong channel member cooperation in achieving distribution objectives. Channel strategy in
this context involves whatever ideas and plans the channel manager can devise to help achieve
that result. More specifically, it means putting together the right mix of tactics to motivate
channel members.

The portfolio concept has been borrowed by a number of other business areas including
marketing. In product management, for example, the mix of products offered by a
manufacturer can be portrayed as its product portfolio. Consistent with the analogy to the
financial portfolio, product management involves changing the mix of products and strategies
to achieve marketing objectives usually specified in terms of sales, market share, and profits.
The portfolio concept has also been applied in the context of marketing channels and is
referred to as distribution portfolio analysis (DPA).

4. Channel Strategy and the Evaluation of Channel Member Performance

The adage “the proof is in the pudding” is most apt when it comes to the evaluation of channel
member performance because it is through this process that the channel manager should be

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able to obtain concrete evidence of how well the channel has been designed and managed. The
distinction between day-to-day monitoring of channel member performance versus a longer-
term approach of comprehensive performance evaluation are discussed which also involves use
of a variety of criteria and in some cases formal methods to gather and analyze the data needed
to measure channel member performance. At this point, we are concerned only with the
underlying strategic significance of channel member performance evaluation, which in practice
is concerned with one overriding question: Have provisions been made in the design and
management of the channel to assure that channel member performance will be evaluated
effectively? This question will direct the channel manager’s attention toward viewing
performance evaluation as an integral part of the development and management of the
marketing channel rather than as an afterthought. This kind of approach to channel member
performance evaluation can apply in virtually any industry, from a maker of luxury products
such as Rolex watches to a producer of heavy earth-moving equipment such as Caterpillar.

D. THE SEVEN PARADIGM OF CHANNEL DESIGN DECISION

Channel design refers to those decisions involving the development of new marketing channels
where none had existed before or to the modification of existing channels. Channel design is a
seven-step process of which six steps are covered in this chapter and the seventh or final step is
covered in Chapter 5.
Channel design: Those decisions involving the development of new marketing channels where
none had existed before, or the modification of existing channels.
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
reengineering the 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, and the term selection means the actual selection of
channel members.
Finally, channel design has a strategic connotation, 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:
1. Developing a new product or product line
2. Aiming an existing product to a new target market
3. Making a major change in some other component of the marketing mix
4. Establishing a new firm

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 5. Adapting to changing intermediary policies
6. Dealing with changes in availability of particular kinds of intermediaries
7. Opening up new geographic marketing areas
8. Facing the occurrence of major environmental changes
9. Meeting the challenge of conflict or other behavioral problems
10. Reviewing and evaluating

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:
1. Become familiar with the objectives and strategies in the other marketing mix areas
and any other relevant objectives and strategies of the firm.
2. Set distribution objectives and state them explicitly.
3. Check to see if the distribution objectives set are congruent with marketing and the
other general objectives and strategies of the firm.

1) Become Familiar with Objectives and Strategies

Whoever is responsible for setting distribution objectives should also make an effort to learn
which existing objectives and strategies in the firm may impinge of the distribution objectives.
In practice, often the same individual(s) who set(s) objectives for other components of the
marketing mix will do so for distribution.
2) Setting Explicit Distribution Objectives
Distribution objectives are essentially statements describing the part that distribution in
expected to play in achieving the firm’s overall marketing objectives.
3) Checking for Congruency
A congruency check verifies that the distribution objectives do not conflict with the other areas
of the marketing mix.

Phase 3: Specifying the Distribution Tasks

The job of the channel manager in outlining distribution functions or tasks is a much more
specific and situationally 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: (1) number of levels
in the channel, (2) intensity at the various levels, (3) type of intermediaries at each level.
1) Number of Levels
The number of levels in a channel can range from two levels – which is the most direct – up to
five levels and occasionally even higher.
2) Intensity at the Various Levels
Intensity refers to the number of intermediaries at each level of the marketing channel.
 Intensive: sometimes called saturation means that as many outlets as possible are used at
each level of the channel.
 Selective: means that not all possible intermediaries are used, but rather those included in
the channel have been carefully chosen.
 Exclusive: a way of referring to a very highly selective pattern of distribution.

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The intensity of distribution dimension is a very important aspect of channel structure because
it is often a key factor in the firm’s basic marketing strategy and will reflect the firm’s overall
corporate objectives and strategies.
3) Types of Intermediaries
The third dimension of channel structure deals with the particular types of intermediaries to be
used (if any) at the various levels of the channel. The channel manager should not overlook new
types of intermediaries that are emerging such as Internet companies.
4) Number of Possible Channel Structure Alternatives
Given that the channel manager should consider all three structural dimensions (level, intensity,
and type of intermediaries) in developing channel structures, there are, in theory, a high
number of possibilities. Fortunately, in practice, the number of feasible alternatives for each
dimension is often limited due to industry or the number of current channel members.
Phase 5: Evaluating the Variables Affecting Channel Structure

Having laid out alternative channel structures, the channel manager should then evaluate a
number of variables to determine how they are likely to influence various channel structures.
These six basic categories are most important:
1. Market variables
2. Product variables
3. Company variables
4. Intermediary variables
5. Environmental variables
6. Behavioral variables

1) Market Variables
Market variables are the most fundamental variables to consider when designing a marketing
channel. Four basic subcategories of market variables are particularly important in influencing
channel structure. They are (A) market geography, (B) market size, (C) market density, and (D)
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. A popular heuristic (rule of thumb) for relating
market geography to channel design is: “The greater the distance between the manufacturer
and its markets, the higher the probability that the use of intermediaries will be less expensive
than direct distribution.”
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. A heuristic about market size relative to channel structure is: “If the
market is large, the use of intermediaries is more likely to be needed because of the high
transaction costs of serving large numbers of individual customers. Conversely, if the market is
small, a firm is more likely to be able to avoid the use of intermediaries.”
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. A heuristic
for market density and channel structure is as follows: “The less dense the market, the more
likely it is that intermediaries will be used. Stated conversely, the greater the density of the
market, the higher the likelihood of eliminating intermediaries.”
D) Market Behavior
Market behavior refers to the following four types of buying behaviors:

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 1) How customers buy 3) Where customers buy
2) When customers buy 4) 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, degree of standardization
(custom-made versus standardized), technical versus nontechnical, and newness affect
alternative channel structures.
A) Bulk and Weight
Heavy and bulky products have very high handling and shipping costs relative to their value.
Therefore, a producer should attempt to minimize these costs by shipping only in large lots to
the fewest possible points. Consequently, the channel structure should be as short as possible
usually from producer to user.
B) Perishability
Products subject to rapid physical deterioration and those of rapid fashion obsolescence
require rapid movement from production to consumption.
The following heuristic is appropriate in these situations: “When products are highly perishable,
channel structures should be designed to provide for rapid delivery from producers to
consumers.”
C) Unit Value
The lower the unit value of the product, the longer the channel should be. This is because low
unit value leaves a small margin for distribution costs. When the unit value is high relative to its
size and weight, direct distribution is feasible because the handling and transportation costs
are low relative to the product’s value.
D) Degree of Standardization
Custom-made products should go from producer to consumer while more standardized
products allow opportunity to lengthen the channel.
E) Technical versus Nontechnical
In the industrial market, a highly technical product will generally be distributed through a direct
channel. This is because the manufacturer may need sales and service people capable of
communicating the product’s technical features to the user. In the consumer market, relatively
technical products are usually distributed through short channels for the same reasons.
F) Newness
New products, both industrial and consumer, require extensive and aggressive promotion in
the introductory stage to build demand. Usually, the longer the channel of distribution the
more difficult it is to achieve this kind of promotional effort from all channel members.
Therefore, a shorter channel is generally viewed as an advantage for new products as a
carefully selected group of intermediaries is more likely to provide aggressive promotion.
3) Company Variables
The most important company variables affecting channel design are (A) size, (B) financial
capacity, (C) managerial expertise, and (D) 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.

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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 (A) availability, (B) costs, and
(C) 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, sociocultural, competitive, technological, and legal environmental forces can have a
significant impact on channel structure.
6) Behavioral Variables
The channel manager should review the behavioral variables discussed in Chapter 3. Moreover,
by keeping in mind the power bases available, the channel manager ensures a realistic basis for
influencing the channel members.
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 was 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 3. Adjustment 5. Searching time
2. Gross margin 4. Time of
consumption

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

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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 manufacturer 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.

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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

nonfinancial criteria into channel choices. Such nonfinancial criteria as goodwill or the degree
of control over the channel members may be of real importance to a firm.

SUMMARY

Channel strategy refers to the broad principles by which the firm expects to achieve its
distribution objectives for its target markets. As such, it focuses on the place variable of the
four Ps of the marketing mix. Even though the focus of channel strategy is relatively narrow, it
can have a major impact on, and be of great importance to, the firm’s general marketing
strategy as well as overall (corporate) objectives and strategies.

Channel strategy is relevant to all six of the basic distribution decisions faced by firms:
1. The role of distribution in the firm’s overall objectives and strategies
2. The role of distribution in the marketing mix
3. The design of marketing channels
4. Selection of channel members
5. Management of the channel
6. Evaluation of channel member performance

If the role of distribution is considered vital to the firm’s long-run success, then distribution
strategy should be considered at the highest management levels in the organization and
included in the strategic planning process.

With regard to the role of distribution in the marketing mix, a strong case for emphasizing
distribution can be made if any of the following four conditions exist: (1) distribution is the
most relevant variable in the marketing mix for satisfying target market demand; (2)
competitive parity exists for the other marketing mix variables; (3) there is a high degree of
competitive vulnerability because of neglect of distribution; or (4) distribution can create
synergy.

In terms of the design of marketing channels, channel strategy should guide the design process
in an attempt to gain a differential advantage for the firm through superior channel design. The
channel manager should use the concept of channel positioning to position the channel so as to
elicit the efforts of channel members as “cheerleaders” to attain a differential advantage for
the manufacturer with final customers.

The selection of channel members should reflect the manufacturer’s overall objectives and
strategies as well as its marketing strategies in an effort to “hook up” only with channel
members who are congruent with corporate objectives and are capable of implementing the
strategies effectively and efficiently.

Managing the marketing channel calls for the channel manager to answer three strategic
questions: How close a relationship should be developed with channel members? How should
channel members be motivated? How should the marketing mix be used to enhance channel
member cooperation?

Likewise, when dealing with the sixth basic distribution decision—the evaluation of channel
member performance—the channel manager must make sure that provisions have been made
in the design and management of the channel to assure that channel member performance will
be evaluated effectively.

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In terms of channel design, it is very important aspect of the firm’s overall marketing strategy
because it can be a key factor in helping the firm to gain a differential advantage (sustainable
competitive advantage).

Channel design can be viewed as a seven-phase process, referred to as the channel design
paradigm. The 1st 6 phases were discussed in this chapter and the 7 th phase is covered in the
next chapter (Chapter 5).

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