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STEP FOUR: PLACE/DISTRIBUTION DECISION

19 January, 2016 - 15:18

The last P of the marketing mix management kit-place-has been replaced by the broader concept of distribution, which includes activities such as transportation, storage, order processing, inventory management, packaging, and customer and product service. Some of these activities were dealt with in PRODUCTION / SOURCING STRATEGY as integral parts of production/ sourcing strategy. Others were treated in PARTICIPATION STRATEGY on participation strategy.

In general, there are two main sets of managerial functions and staff activities that must be planned and carried out as part of an effective distribution strategy. 1 Logistics management involves

(1)Carrier selection

(2)Facilities location

(3) Fleet management

(4) Establishment of inventory policy

(5) Establishment of delivery schedules and routes

(6) Order processing

Channel management involves

(1) Sales force management

(2) Establishment of trade margins

(3)Establishment of credit terms

(4) Agent selection and use

(5) Outlet selection

(6) Establishment of channel promotion policy

When cost savings from the application of technology to the production process begin to taper off, management's attention switches to improvements in the distribution system. It is estimated that almost 40% of the cost of doing business falls under the category of information cost, most of which relates to distribution. Thus the distribution function is no longer viewed as something that the truckers are supposed to take care of; rather, it is seen as a bona fide managerial activity.

(Figure 14.4) shows channel configurations for consumer products, industrial products, and services. Choosing the right channel configuration is the most

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Figure 14.4 Channel Configurations 

difficult part of establishing a distribution strategy. Every country has its own distribution systems. In the United States, products are generally handled by a few distributors with a lot of resources. The entire Toyota distribution system in the United States consists of just three importers and 1,248 dealers. In Europe, where Toyota sells far fewer cars, there are nineteen importers and 3,182 dealers. Toyota's own headquarters is notorious for its complicated distribution system, which seems to be the greatest stumbling block to U.S. exporters.

Of the myriad of problems that surround this rather complicated element of the marketing mix, two stand out. The first is the complexity inevitably created by diverse ownership of the channels of distribution, geographic and cultural distances, and different legal systems. 2

The second problem is known as the gray market. Although for the time being the gray market is strictly a U.S. phenomenon, its success is bound to cause it to spread over the globe. The phrases gray market and parallel importation refer to the trade in authentic and legitimately manufactured trademark items that are produced and purchased abroad but imported or diverted into the United States by bypassing designated channels. These goods can be sold for less money than if they had been purchased from U.S. subsidiaries or authorized distributors of the foreign manufacturers because of currency fluctuations and other factors such as the absence of manufacturer's warranty. Gray markets ride on the coattails of the legitimate channel's efforts to build demand. Gray-market products steal market share from their legitimate counterparts simply because they cost less; many 35 mm cameras, for example, can be sold for 10 percent below list price. 3

Exhibit : Gray Markets : Authorized and Unauthorized Channels of Distribution shows how the gray market affects the distribution of the Seiko watches marketed by K Hattori & Co., Ltd.

International marketers are looking into taking legal action against the gray marketers because they drive down prices, steal sales, and damage the image of the product and of legitimate dealers. In addition, marketers have instituted various programs to protect both their distributors and consumers. Some have introduced improved warranties to preserve their sales and the goodwill of customers toward the brand-goodwill that is eroded when the repair of a gray good is not covered by the usual manufacturer's warranty accompanying products purchased from authorized dealers. For example, Hasselblad, the Swedish camera manufacturer, offers rebates to purchasers of legally imported, serial-numbered camera bodies, lenses, and film magazines. 4

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Figure 14.5 Gray Markets : Authorized and Unauthorized Channels of Distribution