CREATING VALUE:Value thru cost-efficiency, Members’ relationship with brand, Power defined

<< CHANNELS OF DISTRIBUTION:Components of channel performance, Value thru product benefits

CO BRANDING:Bundling, Forms of communications, Advertising and Promotions >>

Brand Management (MKT624)

Lesson 30

CREATING VALUE

Introduction

How to create value through building image and cost-efficiencies is the starting point of

discussion in this lecture. Having known the fundamentals of what lays the foundation for

creating the right channels for the company, we shall take a look at the amount of power that

different members of the channel enjoy. We shall then see how that affects the negotiation

process that goes on among different members to make a channel system function.

Value thru image building

Companies must be very careful in choosing the channel that is compatible with the brand

picture. They must pick up retailers and dealers that are compatible with the associations the

brand evokes and the persona the management wants built.

Expensive luggage, expensive perfumes, race and mountain bikes, expensive watches, top-of-

the-line consumer items like olive oil, or those FMCGs that are extended by selective

ingredients are to be sold through stores that have image compatible with the persona of the

products. Selling these items at stores incompatible in overall appearance, inner décor, and

retail management practices will become difficult. Actually, doing so may damage the brand by

lowering its image.

Value thru cost-efficiency

A company must establish a channel system that assures availability of products at the locations

preferred by customers. This holds true for most of the consumer items requiring an extensive

outreach. A widespread availability reduces cost; the more you sell, the lesser is the cost of

transaction. The more cost-efficient is the system, the more profitable is the business.

It is the responsibility of the business to develop channels that are cost-efficient and at the same

time deliver all possible benefits to customers.

Channel power through brand power

Who controls the channel is a question that attracts everyone's attention among all members of

the channel. Basically, it is the ability of the brand to offer value to customers that drives power

all along the channel. A brand also accumulates power by offering opportunities of growth to

intermediaries. The source of power, mostly, is the brand itself.

Members' relationship with brand

All members of the channel have a certain relationship with the brand. Each one of them

assumes ownership of the brand that dictates warehousing, selling, and recovering the

investment made on procuring the brand.

It is the job of management to identify the value of relationships at various stages of the

channel. It is obvious that we are considering an indirect channel system that has multiple

layers, and it also goes without saying that the more multi-layered is the system the more

diluted would be power. The more direct is the system, the higher is the power for the

manufacturer.

The objective for the company here is to make the right most decisions for brand movement

through different stages of the channel without making glaring mistakes that may compromise

brand value for customers.

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Power defined

"Social scientists define power as the ability to have others do something that otherwise

would not be done. In other words, power is the ability to cause a change1".

Power in the context of distribution channels is the ability of one channel member to influence

or alter the behavior or decision of the other member2. Example: A manufacturer may influence

retailers to acquire the most prime space for its products. Space acquired is power exercised.

Inter-dependence

Because of interdependence among all members, no one member has the absolute power. Some

have more power and some have less of it. For a new manufacturer, distributors and retailers

may pose challenging demands thus exercising their power toward the pricing strategy. It is

important to view the relative degree of power each member has and weigh the advantage it

carries before negotiating strategic moves. Channel power, therefore, is a function of

dependence and a number of concepts and opportunities emerge while we view it.

Sources of power

The sources of power show us how each member influences the behavior of the other toward its

goal attainment. It is done in a few following different ways3.

Rewards

Rewards power is one member's ability to give other something of value.

Example: A retailer offering shelf space and point-of-sale support is of value to a manufacturer.

By offering these rewards, a retailer may influence the manufacturer's support, who in turn,

may promise better pricing, promotional allowances, advertising, extended payment terms etc.

By offering rewards in their respective capacities, the two are able to change each other's

behavior. If promises are fulfilled, the relationships acquire more credibility. Reward power

becomes a positive source of power.

Coercion

The coercive power (compelling by force) is exercised when one member has the ability to

control resources and change behavior of the other. The member being coerced knows that he

has limited choice and therefore accepts change of behavior; whenever, what could have been

rewards are withheld.

Coercive power ultimately leads to channel conflict and therefore should be avoided. It is

perceived as force employed by the one with an advantage. In other words, it is exploitation.

There is a natural tendency to resist that.

Legitimate power

It is based on the belief that one party is entitled to ask for a certain behavior, owing to its

reputation, position, and role in the market. Such beliefs are held about manufacturers of high

reputation who are involved in the development and production of goods that surpass

customers' expectations. Pharmaceutical companies fall into this category. It does not exclude

some of the good consumer items companies and any other that are involved in scientific

developments. This kind of power stems also from the value systems of other channel members

who grant that status to the one of power. It is highly traditional.

Expert power

This power is based on a channel member's superior knowledge and information that he has

about his products. Example: A manufacturer's sales force may impart vital information to

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distributors and retailers on merchandizing, inventory control, promotional techniques, and

latest market trends etc. The company wields power.

In most of the cases power results from a combination of different factors of which high brand

acceptance and store acceptance are on top. This implies that manufacturers and retailers are

generally the ones who wield power in most of the cases.

How do manufacturers and retailers end up having more power in proportion to other members

of the trade is an interesting discussion that gives the answer.

Multi-brand companies' power

Mega brand companies and multi-brand conglomerates are in a much better position to cut

better deals with retailers. The advantages of having different brand portfolios come into play

here and offer the companies the opportunity to deal from a position of strength and, hence,

power. Companies with lesser powerful brands may not exert the kind of influence wielded by

multi-brand companies.

Retailer concentration and power

What really should make businesses prudent and pragmatic is the mutual dependence. This

dependence is highlighted in case of growing power of retailers. The balance of power is

shifting from manufacturers to retailers4. Retail store is the place where final purchasing action

takes place. It has become a dynamic sector which is uplifting itself in appearance, growth,

intensity, and innovation. The emergence of chain stores is making retail stores look more and

more credible. All those factors are changing the landscape of retailing with more power to

retailers.

Because of better management techniques and marketing orientation, retailers can give better

feedback on buying patterns and criteria. They can better measure the sales relationship with

shelf space, location in the store, effect of promotions etc., and provide detailed and minute

data to manufacturers.

Companies working very closely with retailers can benefit from that feedback that provides

insights into customer behavior and, hence, can lead to improvements in the brand-based

customer model.

Convergence of manufacturer and retailer power

Manufacturers, on the other hand, have a better understanding of the whole marketing process

and their product, which is a result of extensive R&D and investments. The perspectives of

both, when converge, provide the brand with better support, which dictate that both work

together as partners, and not powerful opponents.

Reaction to retail power

Due basically to the shift of balance of power in retailers' favor, manufacturers have started

thinking of their own retail outlets. Some are acting upon this thought. By having your own

outlets the channel is not only better controlled, it is owned. In addition to better profitability

and power, the management process becomes conflict-free offering better opportunities for

growth.

Retail brand (store of the name) becomes the product brand and the brand-consumer

relationship acquires a whole new definition.

Take a look at chain stores of clothing (Hang Ten) and shoes (Service and Urban Sole) and you

will notice the whole set-up is created with brand positioning, brand values, and quality

proposition in mind. Strategically, they have a differentiation advantage. They can express their

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core values in everything they do, from décor to display of the products. That is not the case at

other retail stores that sell everybody else's brands.

Reaction to distributor power

Manufacturers, in certain cases, also decide to become their own distributors only to avoid

being subjected to established distributors' power. The process could be a little more

challenging in the beginning owing to high cost of learning. But, soon after you are

comfortably sitting on the learning curve, you may be approached by other manufacturers to

start handling their distribution. Distribution, in itself, becomes a huge business line for such

manufacturers.

If you have a product meant for an exclusive market, getting into your own setup makes more

sense than if you want to introduce a mass consumption product.

Twin focus and pragmatism

However, it is obvious that retailers and distributors play and will continue to play well into the

future important roles. It is important that manufacturers have a twin focus both on their

customers (distributors and retailers) and consumers (ultimate consumers).

The companies have got to be nimble and quick in assessing changes taking place in the market

and then deciding strategic shifts. The objective here is to enhance brand power, and use it to

give the company channel power and sustain it.

Summary - power

Power basically stems from the

value of brand. It is shared by all

Figure 38

members of the trade. The

sharing, however, is not

proportionate. Depending on the

strategic standing of various

members

stemming

from

different reasons, different levels

of power are enjoyed by those

members. What is important is

that all should work as partners

and see to it how the power

wielded by each of them can be

exercised to enhance the value

of the brand.

Channels concluded

A business may have attractive

products and services, but if it

cannot deliver those to the target

market

efficiently

and

effectively, it will not succeed at

the game of marketing.

Customers have preferences for

products and services in view of

benefits along with their

preference for the place of purchase. Businesses have the preference to deliver effectively and

cost efficiently; they also need to build image.

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Brand Management (MKT624)

Unless there is an equilibrium between the requirements of customers and businesses, the

channel system cannot be described as optimal having potential to leverage the brand. This can

be graphically illustrated.

Bibliography:

1. Donald J. Bowersox and Bixby Cooper: "Strategic Marketing Channel Management";

McGraw-Hill International Edition (292)

2. Punam Anand and Louis W. Stern: "A Sociopsychological Explanation for Why

Marketing Channel Members Relinquish Control"; Journal of Marketing Research,

22;4 November 1985 (365-376)

3. Donald J. Bowersox and Bixby Cooper: "Strategic Marketing Channel Management";

McGraw-Hill International Edition (294-297)

4. Geoffrey Randall: "Branding A Practical Guide To Planning Your Strategy"; Kogan

Page (37)

Suggested readings:

1. Scot M. Davis: "Brand Asset Management Driving Profitable Growth through Your

Brands; Jossey-Bass, a Wiley Imprint (181-197)

2. Roger J. Best: "Market-Based Management Strategies for Growing Customer Value

and Profitability"; Prentice Hall (271-294)

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