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

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
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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
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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

viii


LIST OF ABBREVIATIONS
CEO

Chief Executive Officer

CFO

Chief Executive Official

JSC

Joint Stock Company

HCMC

Ho Chi Minh City

ix


LIST OF TABLES, FIGURES AND PICTURES
TABLE
Table 2.1
Table 2.2

NOTE
Revenue in the last 6 months 2007-8
Revenue in the first 6 months 2008-9

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 2.5

Sales on intermediaries

Table 2.6

Increase of revenue of retailers and consignments, 2009-10

Table 2.7

Number of intermediaries 2007-09

Table 2.8

Indicator to assess performance of retailer and consignment of
Viet Tinh Anh JSC in 2009

Table 2.9
Table 3.1

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

FIGURE

Figure 1.1
Figure 1.2
Figure 1.3
Figure 1.4
Figure 1.5

NOTE
Ideal types of distribution channels
Distribution channel structures
Typical Channels in Business-to-Business (B2B) Markets
An example of distribution channel for mobile
telecommunications service
A Conventional Marketing Channel Versus A Vertical Marketing
System

Figure 2.1

Model of distribution channels of Viet Tinh Anh JSC

PICTURE
Picture 2.1
Picture 2.2

NOTE
Core value of Viet Tinh Anh JSC
Process of providing LEGO toys

Picture 2.3

Children playing LEGO in Smart Garden, Hanoi

Picture 2.4

LEGO Golden Day

Picture 2.5

Fashion Contest for Barbie Doll promoted by Phuong Nga

Picture 3.1

Advertisement of LEGO Club in Viet Nam

Picture 3.2

Management team of Viet Tinh Anh JSC

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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)

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– 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 , 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 multichanneling 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, FashionLicensed Merchandise, and Over-the-Counter Drugs, among others. Other
2


briefly discussed and statistically illustrated regional markets include France,
Italy, UK, China, and India. Also included is an indexed, easy-to-refer, factfinder 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.

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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.

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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

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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.
( />
The mechanism or method by which a business brings its products to
market, or distributes its products to its target customers and generates sales.

A given business may have multiple distribution channels.
( />
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Figure 1.1: Ideal types of distribution channels
(Source: )

From the three definitions above, we can see a general definition for
distribution channel: It is a bridge to connect a company‘s product or ser vice
to the end-users. The distribution channels deliver flows of products or
service from the companies.

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

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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.

8


Followings are some distribution channel structures:

(1) M

C

(2) M

R

C

(3) M

W

R

(4) M

A

W

M: Manufacturer

A: Agency

R: Retailer

C: Consumer

C
R

C

W: Wholesaler

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.
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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

10


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.

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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.

12


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

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.

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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: )

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

14


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.

15


Figure 1.5: A Conventional Marketing Channel
Versus A Vertical Marketing System
(Source: )

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

16


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—
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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. Ecommerce can result in radical changes in distribution strategies. Today most
18


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.

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