Distribution strategies are concerned with the channels a firm may employ to make its goods and services available to customers. Channels are organized structures of buyers and sellers that bridge the gap of time and space between the manufacturer and the customer. Marketing is defined as an exchange process. In relation to distribution, exchange poses two problems. First, goods must be moved to a central location from the warehouses of producers who make heterogeneous goods and who are geographically widespread. Second, the goods that are accumulated from diversified sources should represent a desired assortment from the viewpoint of customers. These two problems can be solved by the process of sorting, which combines concentration (i.e., bringing the goods from different sources to a central location) and dispersion (i.e., picking an assortment of goods from different points of concentration). Two basic questions need to be answered here. Who should perform the concentration and dispersion tasks the manufacturer or intermediaries? Which intermediary should the manufacturer select to bring goods close to the customer? These questions are central to distribution strategies. Other strategy-related matters discussed in this article include scope of distribution (i.e., how widespread distribution may be), use of multiple channels to serve different segments, modification of channels to accommodate environmental shifts, resolution of conflict among channels, and use of vertical systems to institute control over channels. Each strategic issue is examined for its relevance in different circumstances. The application of each strategy is illustrated with examples from marketing literature.

CHANNEL-STRUCTURE STRATEGY

The channel-structure strategy refers to the number of intermediaries that may be employed in moving goods from manufacturers to customers. Acompany may undertake to distribute its goods to customers or retailers without involving any intermediary. This strategy constitutes the shortest channel and may be labeled a direct distribution strategy. Alternatively, goods may pass through one or more intermediaries, such as wholesalers or agents. This is an indirect distribution strategy. To a significant extent, channel structure is determined by where inventories should be maintained to offer adequate customer service, fulfill required sorting processes, and still deliver a satisfactory return to channel members. An underlying factor in determining channel-structure strategy is the use of intermediaries. The importance of using intermediaries is illustrated with reference to an example of a primitive economy used by Alderson. In a primitive economy, five producers produce one type of item each: hats, hoes, knives, baskets, or pots. Because each producer needs all the other producers’ products, a total of 10 exchanges are required to accomplish trade. However, with a market (or middlemen), once the economy reaches equilibrium (i.e., each producerconsumer has visited the market once), only five exchanges need to take place to meet everyone’s needs. Let n denote the number of producer-consumers.

Postponement- Speculation Theory Conceptually, the selection of channel structure may be explained with reference to Bucklin’s postponement-speculation framework. The framework is based on risk, uncertainty, and costs involved in facilitating exchanges. Postponement seeks to eliminate risk by matching production/distribution with actual customer demand. Presumably, postponement should produce efficiency in marketing channels. For example, the manufacturer may produce and ship goods only on confirmed orders. Speculation, on the other hand, requires undertaking risk through changes in form and movement of goods within channels. Speculation leads to economies of scale in manufacturing, reduces costs of frequent ordering, and eliminates opportunity cost. The vertical axis shows the average cost of undertaking a function for one unit of any given commodity; the horizontal axis shows the time involved in delivering a confirmed order. Together, the average cost and the delivery time measure the cost of marketing tasks performed in a channel with reference to delivery time.

Additional Consideration in Determining Channel Structure The postponement-speculation theory provides an economic explanation of the way the channels are structured. Examined in this section are a variety of environmental influences on channel-structure strategy formulation. These influences may be technological, social and ethical, governmental, geographical, or cultural. Many aspects of channel structure are affected by technological advances. For example, mass retailing in food has become feasible because of the development of automobiles, highways, refrigerated cars, cash registers, packaging improvements, and mass communications (television). In the coming years, television shopping with household computer terminals should have a far-reaching impact on distribution structures. Technological advances permitted Sony to become dominant in the U.S. market for low-priced CD players. Sony developed prepackaged players that could be sold through mass retailers so that even sales clerks without technical know-how could handle customers. How technology may be used to revamp the operations of a wholesaler, making it worthwhile to adopt indirect channels, is illustrated by the case of Foremost-McKesson, the nation’s largest wholesale distributor. A few years ago, the company found itself in a precarious position. Distribution, though one of the company’s most pervasive business functions, did not pay. Foremost-McKesson merely took manufacturers’ goods and resold them to small retailers through a routine process of warehousing, transportation, and simple marketing that offered thin profits. As a matter of fact, at one time the company came close to selling off drug wholesaling, its biggest business. Instead, however, its new chief executive decided to add sophisticated technology to its operations in order to make the company so efficient at distribution that manufacturers could not possibly do as well on their own. It virtually redefined the function of the intermediary. Having used the computer to make its own operations efficient, it devised ways to make its data processing useful to suppliers and customers, in essence making Foremost part of their marketing teams. Since the company computerized its operations, Foremost has turned around dramatically. Here are the highlights of Foremost’s steps in reshaping its role:

• Acting as middleman between drugstores and insurance offices by processing medical insurance claims.

• Creating a massive “rack jobbing” service by providing crews to set up racks of goods inside retail stores, offering what amounts to a temporary labor force that brings both marketing know-how and Foremost merchandise along with it.

• Taking waste products as well as finished goods from chemical manufacturers, and recycling the wastes through its own plants -its first entry into chemical waste management.

• Designing, as well as supplying, drugstores.

• Researching new uses for products it receives from manufacturers. Foremost found new customers, for example, for a Monsanto Co. food preservative from among its contacts in the cosmetics industry. Another example of the use of technology to overhaul distribution is provided by Britain’s supermarket chain Tesco. The firm’s nine composite (variable temperature) distribution centers use a just-in-time system (known as pick-byline or cross-docking). That means goods amounting to around 40% of total sales go straight out to the stores within hours of arrival. Social taboos and ethical standards may also affect the channel-structure decision. For example, Mallen reports that Viva, a woman’s magazine, had achieved a high circulation in supermarkets and drugstores in Canada. When Viva responded to readers’ insistence and to competition from Playgirl by introducing nude male photos, most supermarkets banned the magazine. Because supermarkets accounted for more than half of Viva’s circulation, Viva dropped the photos so that it could continue to be sold through this channel. The channel-structure strategy can also be influenced by local, state, and federal laws in a variety of ways. For example, door-to-door selling of certain goods may be prohibited by local laws. In many states (e.g., California and Ohio) wine can be sold through supermarkets, but other states (e.g., Connecticut) do not permit this. Geographic size, population patterns, and typology also influence the channel- structure strategy. In urban areas, direct distribution to large retailers may make sense. Rural areas, however, may be covered only by wholesalers. With the inception of large grocery chains, it may often appear that independent grocery stores are dying. The truth is, however, that independent grocery stores as recently as 1992 accounted for 46 percent of all grocery sales in the country over $175 billion. Thus, a manufacturer can ill afford not to deal with independents and to reach them it must go through wholesalers.

Wetterau, for example, is a grocery wholesale firm in Hazelwood, Missouri, which did over $6 billion worth of business serving almost 3,000 retail grocery stores. It does not do any business with chain stores. But because of Wetterau’s determination to offer its customers relatively low prices, a wide selection of brands, service programs carefully designed to make brands more profitable, and a personal interest in their success, its customers are almost fanatically loyal. The company offers its customers small independent retail stores a variety of services, including lease arrangements, store design, financing packages, training, and computerized inventory systems. These services tend to enhance customers’ competitiveness by reducing their operating costs and by simplifying their bookkeeping, which in turn helps Wetterau to earn profits. The Wetterau example shows that to reach smaller retailers, particularly in areas far removed from large metropolises, the indirect distribution strategy is appropriate. The wholesaler provides services to small retailers that a large manufacturer can never match on its own. Finally, cultural traits may require the adoption of a certain channel structure in a setting that otherwise might seem an odd place for it. For example, in many parts of Switzerland, fruits and vegetables are sold in a central marketplace in the morning by small vendors, even though there are modern supermarkets all over. This practice continues because it gives customers a chance to socialize while shopping. Similarly, changing lifestyles among average American consumers and their desire to have more discretionary income for life-fulfillment activities appear to be making warehouse retailing (e.g., Sam’s Club) more popular. This is so because prices at warehouse outlets grocery warehouses, for example are substantially lower than at traditional stores.

Channel Design Model Presented below is a channel design model that can be used to make the direct/indirect distribution decision. The model involves six basic steps.

1. List the factors that could potentially influence the direct/indirect decision. Each factor must be evaluated carefully in terms of the firm’s industry position and competitive strategy.

2. Pick out the factors that will have the most impact on the channel design decision. No factor with a dominant impact should be left out. For example, assume that the following four factors have been identified as having particular significance: market concentration, customer service level, asset specificity, and availability of working capital.

3. Decide how each factor identified is related to the attractiveness of a direct or an indirect channel. For example, market concentration reflects the size distribution of the firm’s customers as well as their geographical dispersion. Therefore, the more concentrated the market, the more desirable the direct channel because of the lower costs of serving that market (high = direct; low = indirect). Customer service level is made up of at least three factors: delivery time, lot size, and product availability. The more customer service required by customers, the less desirable is the direct channel (high = indirect; low = direct). The direct channel is more desirable, at least under conditions of high uncertainty in the environment, with a high level of asset specificity (high = direct; low = indirect). Finally, the greater the availability of working capital, the more likely it is that a manufacturer can afford and consider a direct channel (high = direct; low = indirect). Note that a high level on a factor does not always correspond to a direct channel.

4. Create a matrix based on the key factors to consider the interactions among key factors. If only two factors are being considered, a two-by-two matrix of four cells would result. For three factors, a three-by-three matrix of nine cells would result. For four factors, a four-by-four matrix of sixteen cells would result, and so on. If more than five or six factors are involved, a series of smaller models could be constructed to make this fourth step more manageable.

5. Decide (for each cell in the matrix) whether a direct channel, an indirect channel, or a combination of both a direct and an indirect channel is most appropriate, considering the factors involved. Combination channels are becoming more common in business practice, especially in industrial markets. For some cells in the matrix, deciding which channel design is best is rather easy to do.

6. For each product or service in question, locate the corresponding cell in the box model. The prediction in this cell is the one that should be followed or at least the one that should be most seriously considered by the firm. The accuracy of the model generated by this method depends totally on the expertise and skills of the person who builds and uses it. If carefully constructed, such a model can be invaluable in designing more efficient and effective channels of distribution.