Developing distribution channels for viet tinh anh joint stock company to boost the sales of the imported LEGO toys

LIST OF TABLES, FIGURES AND PICTURES Table 2.3 Revenue of direct sales in 2009 and expectation in 2010 Table 2.4 Revenue of direct shops in 2009 and expectation in 2010 Table 2.6 Increa

VIETNAM NATIONAL UNIVERSITY, HANOI

SCHOOL OF BUSINESS

Do Thu Hang

DEVELOPING DISTRIBUTION CHANNELS FOR VIET TINH ANH JOINT STOCK COMPANY TO BOOST THE SALES OF THE

IMPORTED LEGO TOYS

Major: Business Administration

Code: 60 34 05

MASTER OF BUSINESS ADMINISTRATION THESIS

Supervisor: Dr Nguyen Thi Phi Nga

Hanoi – 2011

TABLE OF CONTENTS

ACKNOWLEDGEMENT i

ABSTRACT ii

TÓM TẮT iv

TABLE OF CONTENTS vi

LIST OF ABBREVIATIONS ix

LIST OF TABLES, FIGURES AND PICTURES x

INTRODUCTION 1

1 Significance of the Topic 1

2 Literature Review 1

3 Objectives of the Thesis 3

4 Scope of the Thesis 4

5 Research questions 4

6 Research Methodology 4

7 Expected Results 4

8 Structure of the Study 5

CHAPTER 1: GENERAL THEORETICAL BACKGROUND 6

1.1 Definition of distribution channels and their functions 6

1.1.1 Definition of distribution channels 6

1.1.2 Functions of Distribution Channels 17

1.2 Operating Distribution Channels 19

1.2.1 Definition of operating distribution channels 19

1.2.2 Basic elements of a distribution channel 20

1.2.3 Step of distribution channel‘s management 23

1.2.4 Selecting the optimum distribution channel 23

1.2.5 Intermediaries selection methods in a distribution channel 24

1.2.6 Select distribution approach 27

1.3 Managing distribution channels 28

1.3.1 Definition of managing distribution channels 28

1.3.2 Management in distribution‘s workflows 30

1.3.3 Distribution channels‘ conflicts management 31

1.3.4 Assessing the effectiveness of a distribution channel 33

CHAPTER 2: THE CURRENT SITUATION OF IMPORTED – LEGO – TOY DISTRIBUTION CHANNELS AT VIET TINH ANH JSC 35

2.1 An overview about Viet Tinh Anh JSC and the distribution channels for imported LEGO toys 35

2.1.1 An overview about the company 35

2.2 The current situation of imported LEGO toy distribution channel 42

2.2.1 Designing distribution channel 42

2.2.2 Managing distribution channel 53

2.3 Assessing the effectiveness of the imported LEGO toy distribution channel 57

2.3.1 The effectiveness of the whole channel 57

2.3.2 The effectiveness of each member in the channel 58

2.4 An analysis of the affecting factors to the effectiveness of the LEGO toy distribution channel 59

2.4.1 Objective factors 59

2.4.2 Subjective factors 62

CHAPTER 3: SOLUTIONS TO DEVELOP DISTRIBUTION CHANNELS FOR VIET TINH ANH JSC TO BOOST THE SALES OF THE IMPORTED LEGO TOYS 64

3.1 Business objective and business strategies of Viet Tinh Anh JSC in the coming years 64

3.1.1 Business objectives and business strategies of the company 64

3.2 Suggestions to develop distribution channels for Viet Tinh Anh Joint Stock Company 66

3.2.1 Strategic solutions 66

3.2.2 Specific solutions 69

CONCLUSION 74

REFERENCES 76

APPENDIX 78

LIST OF TABLES, FIGURES AND PICTURES

Table 2.3 Revenue of direct sales in 2009 and expectation in 2010 Table 2.4 Revenue of direct shops in 2009 and expectation in 2010

Table 2.6 Increase of revenue of retailers and consignments, 2009-10

Table 2.8 Indicator to assess performance of retailer and consignment of

Viet Tinh Anh JSC in 2009 Table 2.9 Level of education of human resource in Viet Tinh Anh Table 3.1 Current and expected number of retailers and consignments of

Viet Tinh Anh JSC

Figure 1.3 Typical Channels in Business-to-Business (B2B) Markets Figure 1.4 An example of distribution channel for mobile

telecommunications service Figure 1.5 A Conventional Marketing Channel Versus A Vertical Marketing

System Figure 2.1 Model of distribution channels of Viet Tinh Anh JSC

Picture 2.5 Fashion Contest for Barbie Doll promoted by Phuong Nga

INTRODUCTION

1 Significance of the Topic

Marketing plays an important role in business activities of enterprises, especially in the harshly competitive market Comes to marketing, people refers directly to the 4 Ps or marketing mix which are the typical features of marketing activities Besides, the managing the distribution channels also plays an important role in the success of the company However, the job of managing the distribution channels have not received proper attention of the many company‘s owners

Viet Tinh Anh Joint Stock Company, the exclusive distributor of LEGO – one of the most wanted toys brand – in Vietnam is an example Since being established, the company distributes LEGO toys mainly through two traditional channels: retailing shops and company‘s boutiques in big shopping centers However, to make the company grow and compete successfully with other distributors in the toy market, the company needs to improve the quality

of the existing channels and discover new ones Thus, after an internship in Viet Tinh Anh Joint Stock Company and see the urgent needs of the company

to improve the turnover and fame, I would like to write a Thesis on the topic

of ―Developing distribution channels for Viet Tinh Anh Joint Stock Company

to boost the sales of the imported LEGO toys‖ The thesis is expected to figure out the existing problems in the distribution channel of Viet Tinh Anh Joint Stock Company and then suggest practical solutions to improve the sales for the imported LEGO toys from Denmark

2 Literature Review

In the world history, there have been quite a few books, researches, articles, etc relating to marketing, especially, distribution channels Known as the father of modern marketing, Phillip Kotler has conducted a numerous works on marketing such as Principles of Marketing (13th edition, Jan 7, 2009)

– with co-author Gary Amstrong In this book, Phillip Kotler and Gary Amstrong pointed out some most updated measures in modern marketing in order to make the products most marketable in recent business environments The work also succeeded in revealing the role and relationship between distribution channels with other elements in a marketing strategy

On the website http://www.articlesnatch.com, many articles on distribution channels have referred to many case studies on distribution strategies of big corporations in the world Furthermore, the articles focus on how to reduce channel conflicts, the importance of stock management and distribution fulfillment to run a business efficiently, internet marketing distribution, and multi—channel retail integration

The global outlook series on Distribution Channel Research provides a collection of statistical anecdotes, market briefs, and concise summaries of research findings The report offers a bird‘s eye view of the structure of the distribution channel system, and the changing trends dotting its landscape Discussion on the global market is lined up with concise primers on major distribution channel markets, such as, Agricultural Sector, Retail Banking, Insurance Sector, and Mutual Funds The reader stands to gain an understanding of market fundamentals, and learn the truth behind multi-channeling trends in the developed markets, and the simple math underlying the correlation between product performances, effective product penetration, and gap analysis and locating the customer market, among others The report highlights recent mergers, acquisitions, and other noteworthy corporate developments The retailing/distribution landscape in the US is quantitatively analyzed, and annotated with 46 market data rich tables that portray the prevalent retailing practices and distribution infrastructure scenario in select industries such as Cosmetics (Fragrances, Hair Care, Health & Beauty Aids), Office Products, Consumer Food & Beverage Products, Individual Life Insurance, Lamps, Table Linens, Home Textiles, Wall Décor, Fashion-Licensed Merchandise, and Over-the-Counter Drugs, among others Other

briefly discussed and statistically illustrated regional markets include France, Italy, UK, China, and India Also included is an indexed, easy-to-refer, fact-finder directory listing the addresses, and contact details of 2,281 companies worldwide

In Vietnam, there have been also many researches on marketing as well

as distribution channels because of the developing business atmosphere recently Especially, MA Ngo Quoc Hung finished a master thesis on distribution channel ―The development of distribution channels of gold and silver products in Phu Nhuan JSC‖ However, the thesis was on a very different kind of products – gold and silver products rather than toys for children So far, there has never been any thesis or research on toys products

in Vietnam More importantly, the LEGO toy products are quite different because of its high price, besides, it can help children develop physical and mental health

Therefore, the author believes that the theme of the thesis is worth to be researched Moreover, in the current situation of toy distribution industry in Vietnam which has often delivered Chinese products, the research‘s result may help Viet Tinh Anh JSC to sustain and develop its own distribution channels for high price – high quality LEGO toys, not mention to make a good mirror for other companies to follow

3 Objectives of the Thesis

The Thesis applies academic theories about distribution channels and significant characteristics of toy market to analyse the situation of Viet Tinh Anh JSC in managing its current distribution channels Basing on the analysis

of the strong points and weak points of the existing channels, a comprehensive set of solutions will be suggested to improve the distribution channels of the company in the coming time

4 Scope of the Thesis

The Thesis studies the operation of distribution channels of Viet Tinh Anh JSC in the past two years and the next three coming years, regarding the other competitors in the toy market and the current business setting of Vietnam

Because of the limited time and competence, the Thesis mainly focuses

on studying the distribution channels of Viet Tinh Anh JSC for LEGO toys in the recent years with the limited area of the Northern provinces (mainly in Hanoi and Hai Phong)

5 Research questions

- What is distribution channel and its role in marketing?

- How does Viet Tinh Anh JSC operate its distribution channels?

- How to improve Viet Tinh Anh's distribution channel to increase its profit?

6 Research Methodology

To reach the above objectives, the current thesis use the traditional research methodology which starting with the background of channel distribution and then the situation of the distribution of Viet Tinh Anh case to find the application lessons for the company to improve the effectiveness of this action in the future Most of the analysed documents in this curent reseach were collected through the secondary data

7 Expected Results

- Giving an overview of the main characteristics of high-end toy market

in big cities in Vietnam

- Finding out strong points and weak points of the operating and managing the LEGO toy distribution channels of Viet Tinh Anh JSC

- Suggesting solutions to improve the distribution channels for Viet Tinh Anh SJC to boost the sales of the imported LEGO toys

8 Structure of the Study

INTRODUCTION

CHAPTER 1: GENERAL THEORETICAL BACKGROUND

CHAPTER 2: THE CURRENT SITUATION OF IMPORTED LEGO TOY DISTRIBUTION CHANNELS AT VIET TINH ANH JSC CHAPTER 3: SOLUTIONS TO DEVELOP DISTRIBUTION CHANNELS FOR VIET TINH ANH JSC TO BOOST THE SALES OF THE IMPORTED LEGO TOYS

CONCLUSION

CHAPTER 1: GENERAL THEORETICAL BACKGROUND

1.1 Definition of distribution channels and their functions

1.1.1 Definition of distribution channels

1.1.1.1 Definition of distribution channels

The definition of a distribution channel can be seen as followed:

A path through which goods and services flow in one direction (from vendor to the consumer), and the payments generated by them that flow in the opposite direction (from consumer to the vendor) (BusinessDictionary.com) The chain of businesses or intermediaries through which a good or service passes until it reaches the end consumer A distribution channel can include wholesalers, retailers, distributors and even the internet Channels are broken into direct and indirect forms, with a "direct" channel allowing the consumer to buy the good from the manufacturer and an "indirect" channel allowing the consumer to buy the good from a wholesaler Direct channels are considered "shorter" than "indirect" ones

http://www.gobignetwork.com/information/go-bigdictionary/distribution-Figure 1.1: Ideal types of distribution channels

1.1.1.2 Structure of a distribution channel

In order to organize and manage a distribution channel effectively, it is necessary to understand thoroughly the structures of it Each company builds

up the distribution channel structure suitably with the strength and advantages that the company has In general, the normative distribution channel structure

is defined as ―that set of institutions, which, in the long run, and under

conditions of competition and low barriers to entry, constitutes the channel for some product in a given spatial context It is comprised of a group that could create greater profit or more consumer satisfaction per dollar of product cost.‖ (Coughlan, et al., 1996)

Also according to Coughlan, et al (1996), there are three key members

of a channel: manufacturers, intermediaries (wholesale, retail and specialized), and end-users (business customers or consumers) The presence or absence of

a particular type of channel member is dictated by its ability to perform the necessary channel flows to add value to end –users

Depending on the specific type of product or service, we can see different distribution channel structures The two most common structures are direct and indirect channels It means the manufacturers can choose to carry

on the distribution process themselves or let intermediaries to get involved in the process Many companies choose the direct structure to manage the whole distribution process so that they can control the marketing activities thoroughly and effectively, as well as save more money for the company

On the other hand, other manufacturers may not consider direct structure as a smart idea They may get involved in some phases of the distribution process, but not the whole thing The jobs of the other phases of the process will be assigned to the other members of the channels to ensure expertise

Followings are some distribution channel structures:

Figure 1.2: Distribution channel structures

(Source: Distribution Channel Management; Truong Dinh Chien,

National Economic University Press, Hanoi)

As can be seen from Figure 1.1; (1) refers to the direct structure where the manufacturer do all the jobs of the distribution process to bring the products or service to the consumers Meanwhile, (2), (3) and (4) refer to the indirect structures where agencies, wholesalers and retailers get involved in the distribution process Each of the structures have their own advantages and disadvantages It all depends on the executives to select the best structures for the company

1.1.1.3 Types of distribution channels

According to Coughlan, et al (1996), channel formats may be based in any of the three sections of the traditional pipeline – manufacturer, distributor,

or customer – but they may also have other bases Followings are some main types of distribution channels from the observation of Coughlan, et al

The first step in selecting a marketing channel is determining which type of channel will best meet both the seller‘s objectives and the distribution needs

of customers

Channel Length

Channel length refers to the number of intermediaries between the producer (or manufacturer) and the consumer If the producer sells directly to the consumer, the channel is very short If the producer sells through an import agent, a wholesaler, and a retailer, a long channel exists The choice of

a short or long channel is primarily a strategic decision for the producing firm However, some countries have longer distribution channels than others The most important determinant of channel length is the degree to which the retail system is fragmented Fragmented retail systems tend to promote the growth

of wholesalers to serve retailers, which lengthens channels

The more fragmented the retail system, the more expensive it is for a firm to make contact with each individual retailer Imagine a firm that sells toothpaste in a country where there are 50,000 small retailers To sell directly

to the retailers, the firm would have to build a huge sales force This would be very expensive, particularly since each sales call would yield a very small order But suppose there are 50 wholesalers in the country who supply retailers not only with toothpaste but also with all other personal care and household products Because these wholesalers carry a wide range of products, they get bigger orders with each sales call, making it worthwhile for them to deal directly with the retailers Accordingly, it makes economic sense for the firm to sell to the wholesalers and the wholesalers to deal with the retailers

Because of such factors, countries with fragmented retail systems also tend to have long channels of distribution The classic example is Japan, where there are often two or three layers of wholesalers between the firm and retail outlets In countries such as Great Britain, Germany, and the United States where the retail system is far more concentrated, channels are much

shorter When the retail sector is very concentrated, it makes sense for the firm to deal directly with retailers, cutting out wholesalers A relatively small sales force is required to deal with a concentrated retail sector, and the orders generated from each sales call can be large Such circumstances tend to prevail in the United States, where large food companies sell directly to supermarkets rather than going through wholesale distributors

Distribution channels can be described as being either short or long A short channel involves few intermediaries A long channel, on the other hand, involves many intermediaries working in succession to move goods from producers to consumers In general, business products tend to move through shorter channels than consumer products due to geographical concentrations and comparatively few business purchases Service firms market primarily through short channels because they sell intangible products and need to maintain personal relationships within their channels Not-for-profit institutions also tend to work with short, simple, and direct channels Please note Table 15.1 below that highlights the characteristics of short and long marketing channels

Consumer Channels

The simplest and shortest distribution channel is a direct channel A

direct channel carries goods directly from a producer to the business

purchaser or consumer One of the newest means of selling in a direct channel

is the Internet A direct channel may allow the producer to serve its customers better and at a lower price than is possible using a retailer Sometimes a direct channel is the only way to sell the product because using channel intermediaries may increase the price above what consumers are willing to pay Another reason to use a direct channel is control

Many producers, however, choose to use indirect channels to reach

consumers Customers are familiar with certain retailers or other intermediaries and habitually turn to them when looking for what they need Intermediaries also help producers fulfill the channel functions previously cited By creating utility and transaction efficiencies, channel members make producers‘ lives easier and enhance their ability to reach customers

The producer-retailer-consumer channel is the shortest indirect channel GE

uses this channel when it sells small appliances through large retailers such as

Wal-Mart or Sears The producer-wholesaler-retailer-consumer channel is

another common distribution channel in consumer marketing

Business-to-Business Channels

B2B distribution channels facilitate the flow of goods from a producer

to an organizational customer Generally, B2B channels parallel consumer channels in that they may be direct or indirect The simplest indirect channel

in industrial markets occurs when the single intermediary—a merchant

wholesaler referred to as an industrial distributor rather than a retailer—buys

products from a manufacturer and sells them to business customers Direct channels are more common to business-to-business markets because B2B marketing often means selling high-dollar, high-profit items to a market made

up of only a few customers In such markets, it pays for a company to develop its own sales force and sell directly to customers at a lower cost than if it used intermediaries

Figure 1.3: Typical Channels in Business-to-Business (B2B) Markets

(Source: http://flatworldknowledge.com)

Channels for Services

Because services are intangible, there is no need to worry about storage, transportation, and the other functions of physical distribution In most cases, the service travels directly from the producer to the customer Some services, however, do need an intermediary, often called an agent, who helps the parties complete the transaction Examples include insurance agents, stockbrokers, and travel agents

Note the alternative distribution channels for consumer goods, business goods, and services illustrated in Figure 1.4 below:

Figure 1.4: An example of distribution channel for mobile

telecommunications service

(Source: http://www.moodle2.sbm.itb.ac.id)

Horizontal Marketing Systems

A horizontal marketing system is a channel arrangement in which

two or more companies at one level join together to follow a new marketing opportunity By working together, companies can combine their financial, production, or marketing resources to accomplish more than any one company could alone Companies can join forces with competitors or noncompetitors McDonald‘s places ―express‖ versions of its restaurants in Wal-Mart stores McDonald‘s benefits from Wal-Mart‘s considerable store

traffic, while Wal-Mart keeps hungry shoppers from having to go elsewhere

to eat

Multichannel Distribution Systems

A multichannel distribution system is a distribution system in which

a single firm sets up two or more marketing channels to reach one or more

customer segments This is also called a hybrid marketing channel

Multichannel distribution systems offer many advantages to companies facing large and complex markets With each new channel, the company expands its sales and market coverage and gains opportunities to tailor its products to the specific needs of diverse customers Multichannel distribution systems, however, are harder to control, and they generate conflict as more channels compete for customers and sales

Vertical Marketing Systems

A vertical marketing system (VMS) is a distribution channel structure

in which producers, wholesalers, and retailers act as a unified system One channel member owns the others, has contracts with them, or has so much

power that they all cooperate A conventional distribution channel consists

of one or more independent producers, wholesalers, and retailers A vertical

marketing system, on the other hand, provides a way to resolve the channel conflict that can occur in a conventional distribution channel where channel members are separate businesses seeking to maximize their own profits—even at the expense sometimes of the system as a whole The VMS can be dominated by the producer, wholesaler, or retailer There are three major

types of vertical marketing systems: corporate, contractual, and administered

Figure 1.5: A Conventional Marketing Channel Versus A Vertical Marketing System

(Source: http://gmx.xmu.edu.cn)

A corporate VMS is a vertical marketing system that combines

successive stages of production and distribution under single ownership—channel leadership is established through common ownership A little-known Italian eyewear maker, Luxottica, sells its many famous eyewear brands—including Giorgio, Armani, Yves Saint Laurent, and Ray-Ban—through the world‘s largest optical chain, LensCrafters, which it also owns

A contractual VMS is a vertical marketing system in which

independent firms at different levels of production and distribution join together through contracts to obtain more economies or sales impact than they could achieve alone Coordination and conflict management are attained

through contractual agreements among channel members The franchise

organization is the most common type of contractual relationship There are

three types of franchises: manufacturer-sponsored retailer franchise system (Ford Motor Co.), manufacturer-sponsored wholesaler franchise system (Coca-Cola bottlers), and service-firm-sponsored retailer franchise system

(McDonald‘s) The fact that most consumers cannot tell the difference between contractual and corporate VMSs shows how successfully the contractual organizations compete with corporate chains

An administered VMS is a vertical marketing system that coordinates

successive stages of production and distribution, not through common ownership or contractual ties, but through the size and power of one of the parties Manufacturers of a top brand can obtain strong trade cooperation and support from resellers (P&G) Large retailers such as Wal-Mart can exert strong influence on the manufacturers that supply the products they sell

1.1.2 Functions of Distribution Channels

Functions of Distribution Channels

Distribution channels perform a number of functions that make possible the flow of goods from the producer to the customer These functions must be handled by someone in the channel Though the type of organization that performs the different functions can vary from channel to channel, the functions themselves cannot be eliminated Channels provide time, place, and ownership utility They make products available when, where, and in the sizes and quantities that customers want Distribution channels provide a number of logistics or physical distribution functions that increase the efficiency of the flow of goods from producer to customer Distribution channels create

efficiencies by reducing the number of transactions necessary for goods to

flow from many different manufacturers to large numbers of customers This

occurs in two ways The first is called breaking bulk Wholesalers and

retailers purchase large quantities of goods from manufacturers but sell only one or a few at a time to many different customers Second, channel

intermediaries reduce the number of transactions by creating assortments—

providing a variety of products in one location—so that customers can conveniently buy many different items from one seller at one time Channels

are efficient The transportation and storage of goods is another type of

physical distribution function Retailers and other channel members move the goods from the production site to other locations where they are held until they are wanted by customers Channel intermediaries also perform a number

of facilitating functions, functions that make the purchase process easier for

customers and manufacturers Intermediaries often provide customer services

such as offering credit to buyers and accepting customer returns Customer services are oftentimes more important in B2B markets in which customers purchase larger quantities of higher-priced products

Some wholesalers and retailers assist the manufacturer by providing

repair and maintenance service for products they handle Channel members

also perform a risk-taking function If a retailer buys a product from a

manufacturer and it doesn‘t sell, it is ―stuck‖ with the item and will lose

money Last, channel members perform a variety of communication and

transaction functions Wholesalers buy products to make them available for

retailers and sell products to other channel members Retailers handle transactions with final consumers Channel members can provide two-way communication for manufacturers They may supply the sales force, advertising, and other marketing communications necessary to inform consumers and persuade them to buy And the channel members can be invaluable sources of information on consumer complaints, changing tastes, and new competitors in the market

The Internet in the Distribution Channel

By using the Internet, even small firms with limited resources can enjoy some of the same competitive advantages as their largest competitors in making their products available to customers internationally at low cost E-commerce can result in radical changes in distribution strategies Today most

goods are mass-produced, and in most cases end users do not obtain products directly from manufacturers With the Internet, however, the need for intermediaries and much of what has been assumed about the need and benefits of channels will change In the future, channel intermediaries that physically handle the product may become largely obsolete Many traditional intermediaries are already being eliminated as companies question the value added by layers in the distribution channel This removal of intermediaries is

termed disintermediation, the elimination of some layers of the distribution

channel in order to cut costs and improve the efficiency of the channel

1.2 Operating Distribution Channels

1.2.1 Definition of operating distribution channels

Operating or Tailoring distribution channels in a firm or organization is

an important and complex part relating to the work division in distribution, which aims to create an optimum distribution structure to meet the firm or organization‘s conditions and targets The firm or organization has to make a wise decision on distribution in terms of scope and types of distribution channels with a view to bringing products to end-users as fast and effectively

as possible

Some companies use distribution channels operation to gather information about new channels or examine the current channels further Others consider the distribution channels operation as distribution channels selection In general, operating or tailoring distribution channels relates to all activities that help create new distribution channels in which there was no existing distribution channel before and/or improve existing distribution channels Distribution channels operation is a collection of decisions which identify distribution channels‘ factors including members, supplemental organizations, working relations among the channel‘s system

1.2.2 Basic elements of a distribution channel

In order to tailor distribution channels, a firm has to have an overall analysis on market and marketing environment which helps identify elements affecting mainly to the channel‘s efficiency The elements are foundation on which the firm makes a decision about target market, distribution channel structure, the level of interconnection between members in the channel Besides, managers have to comprehensively understand all about products, current operation of the firm and other rivals, the trend to change of market and customer‘s demands Then they have to understand deeply about the firm‘s resources, business strategies based on conditions with which the firm can run the distribution channels effectively

Firms should have intensive analysis on elements affecting distribution channel‘s structure and relationships among channel‘s members so that they can make right decisions on the structure and level of interconnection among channel‘s members Elements include:

Target market‘s feature

Meeting customer‘s needs are basic principles of distribution channel‘s management When making marketing plans, managers often long to solutions based on customer‘s needs It is the same in distribution channel‘s management Features of target market are core factors

Distribution channel‘s structure has to meet end-users‘ needs and desires including: information, convenience, diversity, and after-sales service

There are 4 features of markets affecting channel‘s structure:

- Geo-market: refers to location of market and distance from

manufacturers to markets The element is foundation to make a distribution channel‘s structure which effectively covers all of market and products flows

to the market

- Market‘s scope: the number of customers makes market size If in the market, there are a great number of customers, it is very necessary to use

intermediaries In contrast, if there is small number of customers, a firm shouldn‘t use intermediaries

- Market density: number of customers per area unit In general, if the number is low, distribution faces more challenges

- Customer‘s manners: refer to who purchase goods, where, when and how customers purchase goods Each manner of customers affects differently channel‘s structure

Products‘ features

-Weight and volume: weighted or cumbersome products cost higher due to transportation and loading/unloading, so distribution channel should be

as short as possible or direct

- Perishability: distribution channels for perishable products should help shorten the time from manufacturers to end-users

- Products‘ value: if the core value is low, distribution channels should

be longer or more intermediaries to be involved

- High/low standard: high-standardized products should be sold through distribution channels that include many intermediaries and vice versa

- High/low-tech: in industrial goods market, high-tech products should

be sold directly

- Novelty: short channels are suitable for market to adapt novel products

Commercial intermediaries‘ features:

Intermediaries play an important role in distribution channels Channel managers should master types of intermediaries as well as their strengths and weaknesses and potential capacity Those below should be taken into consideration:

- Capacity: how intermediaries are ready for distribution

- Distribution cost: on which managers decision how many intermediaries should be involved in the distribution channels

- Services: services offered by the intermediaries are conducted at possibly lowest cost or not

Firm‘ features:

The size of a firm also helps to decide which type of channel it should take Firm‘s resource put an impact what functions of distribution it should involve Meanwhile, it is products that the firm provides will decide directly which kind of distribution channel to be chosen Those below should be taken into consideration:

- Size of firm: the decision on distribution channel‘s structure depends

on the size of a firm

- Financial capacity: if financial capacity is great, the firm less depends

on intermediaries and channel‘s members

- Managerial experience: refers to if a firm should choose another intermediary to manage the channel

- Target and strategy: business target and strategy, marketing strategy affect directly decision on distribution channel‘s operation

Marketing environment‘s features and trends to change:

Marketing environment refers to economic, legal, technology conditions, etc Elements like legal frameworks, competition, social culture, and economy all affect the channel‘s structure Moreover, the effect of environment is one of the main reasons which changes existing distribution channels in the market For example, when the economy is downturn, manufacturers often exclude unnecessary services which help increase product‘s costs Besides, rules and regulations on specific market segment also make obvious effect on distribution channel‘s structure It is because rules and regulations prevent such channels which tend to annul competition and make monopoly

Variable behavior:

Variable behavior refers to level of competitiveness Tailoring distribution channel is affected by rivals‘ distribution channel in the market Manufacturers depend on information about rivals‘ distribution channels to make their own choices

1.2.3 Step of distribution channel’s management

It is very complicated to tailor and manage distribution channel for a company Every single member of the channel has to make decision on distribution channel‘s tailoring and be in charged of the channel‘s efficiency When a business operate distribution channel to sell their products, it can tailor a distribution channel step by step as followed:

(1) Identify why a distribution channel

(2) Identify and coordinate distribution‘s targets

(3) Clarify distribution

(4) Evaluate variables affecting distribution channel‘s structure

(5) Improve can-be-replaced structure

(6) Select optimum structure

(7) Select members to join the channel

Above steps should be taken in turn and carefully

1.2.4 Selecting the optimum distribution channel

In order to make an optimum distribution channel, companies should make clear and appropriate identification and assessment about distribution channels that can be replaced based on three variables: length, width and intermediaries Distribution channels also have to meet some criteria:

Market coverage: The level of market coverage of a distribution channel will change due to products‘ features, marketing environment, needs and expectation of potential customers The level of market coverage will change from intensive distribution to selective distribution and finally exclusive distribution

Level of controllability: When tailoring a distribution channel, a company should make decision on how much controllable they want in a distribution channel The more direct the channel is, the more controllable it is

In other words, with direct channels, manufacturers can control all of its operation much more than the indirect ones In order to control distribution channel‘s operation, manufactures should choose vertical marketing system or their own salesmen

Lowest distribution costs: A distribution channel should be considered

as a unified system inside which there are many smaller interconnected distribution channels The targets of managers are to maximize the efficiency

of the whole system One of the factors that make the system work well is to minimize distribution costs However, managers should take into consideration of after sales services, quantity, profits and other marketing mix tools besides minimizing the distribution cost In other words, price strategies won‘t affect badly to distribution channel‘s operation

Flexibility: In order to adapt business environment, each company has

to assure distribution channels‘ flexibility In some cases, companies should choose a distribution channel in which they can easily change channel‘s members or structure to adapt to environment‘s fluctuation That is why in many cases, distribution contracts duration is not so long

Nowadays, many companies sell their products through many distribution channels to maximize their accesses to markets Parallel channels can help companies cover market quickly or create new channels to tap into new market However, parallel distribution sometimes cause conflicts between channels and be eliminated by legal framework

1.2.5 Intermediaries selection methods in a distribution channel

Distribution channels managers should take care of choosing channel‘s members after selecting an optimum distribution channels Member selection plays the most important role in distribution channel‘s efficiency The

competitiveness and efficiency of channels‘ members will surely enhance the distribution of a company Hence, the selection has to be taken seriously into consideration, not be conducted by chance

Generally, the selection period should be covered by following activities:

(1) Seek for potential members

(2) Create criteria to assess the suitability of members

(3) Make sure the availability of selected members

1.2.5.1 Seek for potential members

Managers can depend on various sources of information to find out qualified members such as:

1.2.5.2 Create criteria to assess the suitability of members

Based on list of potential members, managers should depend on criteria

to assess the suitability of members If companies fail to make complete criteria, they still have to develop some of most important criteria Companies should also revise the criteria according to their priorities so that they can survive in new business conditions

Those followed are important criteria in member selection:

- Creditability and financial conditions

- Sales resource

- Products lines

- Fame

1.2.5.3 Make sure the availability of channel’s members

Distribution channels‘ member selection is a two-way process It is because not only manufacturers make a choice but wholesaler, retailers; especially giant intermediaries also make a choice on whom they will be representatives It does not mean that well-branded companies and manufacturers will wait for big giant intermediaries to be their distribution channels‘ members Almost all of the companies and manufacturers are still

to seek and persuade those intermediaries to join the channels

Distribution channels managers can take some particular activities to persuade potential intermediaries The role of managers is to show to intermediaries how benefit they will get when they join the channels In the beginning, intermediaries should know about how much supportive manufacturers will be to assure their benefits Meanwhile, intermediaries will highly appreciate the assurance of manufacturers towards:

- Product lines that bring so much profits

- Promotion supports

- Managerial supports

- Fair trade policies and friendly relations

After selecting optimum distribution channels, managers will have to choose members of the channels Different companies will make different criteria to select their members They may include: business scale, financial

capacity, market region, business experience, etc of channels‘ members The two-way process of selection will affect both the ones to choose and the ones

to be chosen Therefore, in order to persuade potential members to join the channels, companies should let them know how much benefits they can get from the cooperation Furthermore, in order to make the channels work well, channels‘ managers should create a true business relation between channel‘s members The process of distribution is just completed as soon as all of members really join in sales activities

1.2.6 Select distribution approach

If a company succeeds in distribution channel selection, it will easily cover, access, and exploit markets as much as it can So that, it is needed to decide how many intermediaries will join in each level of distribution in the channel Each different distribution level is a foundation on which a company can reach its target There are 3 levels of distribution that a company can select and apply: intensive distribution, exclusive distribution and selective distribution

An intensive distribution strategy seeks to distribute a product through all available channels in an area Usually, an intensive distribution strategy suits items with wide appeal across broad groups of consumers, such as convenience goods, etc Nowadays, healthcare services are also distributed intensively

In contrast, exclusive distribution is distribution of a product through one wholesaler or retailer in a specific geographical area The automobile industry provides a good example of exclusive distribution Though marketers may sacrifice some market coverage with exclusive distribution, they often develop and maintain an image of quality and prestige for the product In addition, exclusive distribution limits marketing costs since the firm deals with a smaller number of accounts In exclusive distribution, producers and retailers cooperate closely in decisions concerning advertising and promotion,

inventory carried by the retailers, and prices Exclusive distribution is typically used with products that are high priced, that have considerable service requirements, and when there are a limited number of buyers in any single geographic area Exclusive distribution allows wholesalers and retailers

to recoup the costs associated with long selling processes for each customer and, in some cases, extensive after-sale service Specialty goods are usually good candidates for this kind of distribution intensity

Selective distribution sits on the fences Selective distribution is distribution of a product through only a limited number of channels This arrangement helps to control price cutting By limiting the number of retailers, marketers can reduce total marketing costs while establishing strong working relationships within the channel Moreover, selected retailers often agree to comply with the company‘s rules for advertising, pricing, and displaying its products Where service is important, the manufacturer usually provides training and assistance to dealers it chooses Cooperative advertising can also

be utilized for mutual benefit Selective distribution strategies are suitable for shopping products such as clothing, furniture, household appliances, computers, and electronic equipment for which consumers are willing to spend time visiting different retail outlets to compare product alternatives Producers can choose only those wholesalers and retailers that have a good credit rating, provide good market coverage, serve customers well, and cooperate effectively Wholesalers and retailers like selective distribution because it results in higher sales and profits than are possible with intensive distribution where sellers have to compete on price

1.3 Managing distribution channels

1.3.1 Definition of managing distribution channels

Once a distribution channel of a company is set up, it will work as a systematical unity The channel is considered a social system where there is interconnection between members and each member plays a particular role

In order to make the system work smoothly, management is the key factor That is why manager should comprehensively understand how management should be

When selling products, many companies just care for direct sales and

daily distribution management However, they should know that generally

“distribution channel management is all of managerial activities to distribution channel with the aim to assure the cooperation of selected distribution channel’s members, which in turn helps reach manufacturers’ distribution targets” [2, p 236-237] Distribution channel should be

conducted objectively and follow planned targets

First, distribution channel management focuses on existing available channels The channels to be managed here have obvious structure and

selected members Decision on distribution channels‘ operation and management should be taken into serious consideration However, in reality, sometimes the consideration fails lead to clear clarification In other words, in some cases, decision on operation is on management For example, when a decision on discount price is given to sustain cooperative relationship between channels‘ members is inappropriate, it might leads to changes in membership Hence, decision on operation is obviously a decision on management

Second, cooperative relationship assurance Managers should focus on

management activities to assure objective cooperation between channels‘ members because they all aim for profits

Third, aim for particular distribution targets Distribution target is final

destination that all distribution activities heading to, is one of marketing-mix factors that helps fulfill marketing‘s tasks So distribution channels management has to assure distribution target of manufacturers

1.3.2 Management in distribution’s workflows

A distribution channel can be efficient if every single distribution channel‘s workflow runs smoothly In other words, the key point in distribution channel‘s management is completing its workflows

Building up a complete information system inside distribution channels, which helps thorough communication from manufacturers to end-users The

development of information and technologies create more accomplishment in operation, coordination of distribution activities Besides, it helps reduce cost

of marketing workflows Building up a complete information system will help members in connection conveniently with providers and users

Distribution management based on modern information flows, transportations, and warehouses The distribution managers have to cope

with a puzzle of coordination between transportation and storage to eliminate distribution costs as much as possible It is needed to master modern business logistics For example, managers should use modern transportations which create higher productivity with lower costs

Strengthening promotion workflows: because promotion activities plays

key role in promoting distribution operation It is also a competitive tool in market The responsibilities of distribution channels‘ managers are to plan and share both operation costs and accountabilities of promotion activities A firm should do coordination between members and support them to operate distribution activities

Negotiation changes: The development of technologies has helped

eliminate administration works Information and technologies also help strengthen relationships, develop negotiation skills of members It is needed

to have a shift from commercial affairs to repetitive business relations within the system

Complete payment: through create and complete appropriate payment

methods, reduce timeframe for payment, and bad debts Modernization should

be enhanced by applying e-payment and transfer money through banks to reduce risks

Order: creating a purchase order procedure appropriately is very

important for a firm to make distribution activities work It is recommended

to systematize and automate purchase order procedures as well as storage management

Ownership: A firm needs to evaluate members in terms of distribution

efficiency It should exclude intermediaries who just own the products in theory and do not conduct necessary distribution works A firm should comprehend and manage buying and selling activities in the market to avoid unnecessary stages

Promote financial flows: Every member in the channel is responsible

for operation capital The firm playing managing role should give financial supports to members or smaller-scale firms

Risk sharing: Every member should acknowledge their roles in risk

sharing and managing In order to eliminate risks, a firm should anticipate insurance

Package reclaim: appropriate coordination to eliminate transportation

and storage costs

1.3.3 Distribution channels’ conflicts management

Conflicts happen everywhere including distribution activities There are

4 main features about conflicts in distribution channel:

- Conflict is basic nature of distribution channel

- Many reasons leading to conflicts in distribution channel Conflict is a complicated element in distribution channel

- Conflict can affect distribution channel‘s efficiency

- Conflict affect negatively or positively or doesn‘t affect distribution channel‘s efficiency

In order to solve problems relating to conflicts in distribution channel, managers should pay attention to 3 key points:

- Conflict identification: It is normal to identify conflicts when the

conflicts get obvious and serious The approaches to the conflicts in such cases face much more challenges because it may raise potential risks whose solutions sometime are infeasible Therefore, it is advised to create a system which helps foresee conflicts Through frequent examination a firm can identify potential risks with member‘s supports Managers also ask for consultancy from board of counselors or/and a committee of distribution channels‘ members With one way or another, conflict identification really needs big attention and attempts of managers to avoid seriously bad impacts

- Evaluation on feasibly bad impacts of conflicts: Evaluation on impact

of distribution channels‘ conflicts is a tool with which managers can give members good directions Recently, there have been many materials that help managers develop solutions to evaluate impacts of conflicts on distribution channels‘ operation

- Conflicts resolution: If a conflict put a bad impact on distribution

channels‘ management, managers should take immediately appropriate actions They can make reference to the below:

 Distribution channels‘ managers can solve problems by focusing

on the necessity of and promising benefits for members

 Create a special board specialized on information gathering The board will provide members information based on which a cross-checked regime is born with a view to unify every member

 Select a third party playing the arbitrating role

 Board of distribution channels examine all matters relating to conflicts and report to managers to find out solutions

Each method to be applied or applied to a particular extend depends on type of distribution channels and firms‘ conditions

1.3.4 Assessing the effectiveness of a distribution channel

1.3.4.1 Assessing the effectiveness of each distribution channel and the whole system

Assessment on efficiency of each distribution channels and the whole system is a tool to adjust distribution channels in order to meet a firm‘s targets There are some standards based on which a firm can successfully evaluate the efficiency of distribution channels:

Popular standards to evaluate each distribution channels: gross profit

rate (% per revenue), selling rate (% per total selling quantity), capital turnover (number of turn over per year), ROAM, investment and operation maintenance costs, storage maintenance, controlling degree, market coverage degree, etc

Popular standard to evaluate the whole distribution channels system: 2

groups: group to evaluate how much the distribution targets are achieved (revenue, selling quantity, revenue growth rate, quantity growth rate, etc.) and group to evaluate costs such as selling costs, etc

However, the assessment depends on particular features of product lines, firms, and viewpoint of distribution channels‘ managers

1.3.4.2 Assessment on distribution channels’ members

A firm should conduct periodical assessment on operation of distribution channels‘ members following criteria: revenue, average storage/reserve, inventory level, delivery time, solutions to missing or broken purchases, etc

A firm should also set fixed required revenue that distribution channels have to meet after each period They can circulate a list of achieved revenue

by channels‘ members then give out comparison among them

The action to set fixed required revenue for commercial intermediaries will encourage them to operate effectively The result will also help a firm to review distribution system and provide timely intervenes to adjust the system

However, assessment should be based on feasible standards and agreed among members

The process of assessment should be conducted as following steps:

- Create assessment criteria

- Conduct assessment following criteria

- Propose necessary adjustment