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STRUCTURE OF MARKETING

CHANNELS OF SELECTED MANUFACTURING INDUSTRIES IN KERAI.A

Thesis submitted to

The Cochin University of Science and Technology for the Award of the Degree of

Doctor of Philosophy in Management under the Faculty of Social Sciences

W

G. ANTONY

Under the Supervision of PROF. N. RANGANATHAN

SCHOOL OF MANAGEMENT STUDIES

COCHIN UNIVERSITY OF SCIENCE AND TECHNOLOGY COCHIN - 682 O22

APRIL 1986

(2)

PROF. N. RANGANATHAN

Professor of Marketing & Dean, Faculty of Social Sciences,

School of Management Studies, The Cochin University of

Science and Technology, Cochin - 682 022,

Dated, 29 April, 1986.

CERTIFICATE

Certified that the thesis "STRUCTURE

OF MARKETING CHANNELS OF SELECTED MANUFACTURING

INDUSTRIES IN KERALA“ is the record of bonafide research carried out by Mr.G. ANTONY, under my

guidance. The thesis is worth submitting for

the Degree of Doctor of Philosophy in Management.

, rJ

. RAN NATHX1~'i"

(3)

G. ANTONY

Lecturer

School of Management Studies Cochin University of Science and Technology,

Cochin 682 022

Dated 28 April, 1986

DECLARATION

I declare that the thesis entitled

"STRUCTURE OF MARKETING CHANNELS OF SELECTED MANU­

FACTURING INDUSTRIES IN KERALA" is the record of

bonafide research carried out by me under the super­

vision of Prof. N. Ranganathan, Professor of Marketing and Dean, Faculty of Socical Sciences, Cochin Univer­

sity of Science and Technology. I further declare that this has not previously formed the basis of the award of any degree, diploma, associateship, fellow­

ship or other similar title of recognition.

W;

(4)

ACKNOWLEDGEMENT

This academic pursuit drew inspiration from many sources, besides the masters whose namesappear in the footnotes.

It is a pleasant privilege to place on record my sincere gratitude to the many who inspired and helped me in this

endeavour.

I acknowledge most gratefully my over­

riding indebtedness to my guide Prof.

N. Ranganathan, Professor of Marketing and Dean, Faculty of Social Sciences, Cochin University of Science and Tech­

nology who has been a constant source of encouragement and enlightenment,

and whose cryptic comments at every stage helped to shape the broad frame­

work of the study as well as its details

I am ever grateful to Dr.N.Parameswaran Nair, Director, School of Management Studies, whose vision and perspective have always been a source of inspiration and whose benevolence has enabled me to devote more attention to this work.

(5)

V

I am especially indebted to Prof.(Dr.) K.C. Sankaranarayanan, Professor and Head of the Department of Applied

Economics, Cochin University of Science and Technology for his shrewd counsel on the content and the method, My debts are due to Dr.Jose T. Payyappilly, and Prof. P.N. Rajendra Prasad for their careful scrutiny and criticism of the

manuscript.

I record my deep sense of gratitude to Dr.N.Chandrasekharan Pillai, who has

always been a source of encouragement.

My debts are also due to Dr.K. George Varghese, Dr.P.R, Wilson and Prof.

P.R.Poduval. I should put on record my gratitude to all other members of the faculty and office staff of the School

of Management Studies. Mr.M.S.Mukundan

with his sense of rhythm for the

language has contributed more to this study than the final typing, and knows how grateful I am.

I am ever thankful to the many execut­

ives and gentlemen of the trades whose responses to my inquiries provide the main theme of this study.

G. ANTONY

(6)

vi

LIST OF RESEARCH PAPERS PUBLISHED AS PART OF THIS STUDY

MARKETING As A DEVELOPMENTAL VARIABLE IN ECONOMIC

PLANNING, Indian Manager, Vol.13, No.1 (January­

March 1983) pp.s7-7o.

MARKETING<— MADE INqUSA

1. Paradigms for Economic Development Lost?

2. Paradigms on Optimum Resource Use.

3. Modernisation of Distributive Trade.

- ihe E¢OnOmi¢TimeS s, 9 & 10 March 1984.

DYNAMICS OF DISTRIBUTION CHANNELS IN A DEVELOPING

ECONOMY, Indian Nanagag, Vol.15, No.2 (April-June 19855 pp.1eo-180.

ADAPTIVE BEHAVIOUR OF MARKETING CHANNELS,

Indian Manager, Vol.15, No.4 (October­

December 19s5T pp.331-373.

--oOo-­

(7)

TABLE OF CONTENTS

ACKNOWLEDGEMENT

LIST OF RESEARCH PAPERS LIST OF TABLES

INTRODUCTION CHAPTER

I ADAPTIVE BEHAVIOUR OF

MARKETING CHANNELS

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Dynamics of Distribution Revolution in Distri­

bution - The American Miracle

1.3.0 Evolution of Marketing Channels in Great

Britain

Innovations and Adaptat­

ions in Japanese Distri­

bution System

Trends in Channel Evo­

lution-Model 1.4.0

1.5.0

II PROBLEM DEFINITION AND

RESEARCH DESIGN

2.1.0 Marketing Channels in a

Developing Economy 8 The Problem

7 Analytical Model Research Design

Limitations of the Study

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III MULTIPLE CHANNEL STRUCTURE

3.1.1.2 Need for Multiple

Channels

vii

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12 18 33 50 73 78 79 104 124 127 134 138 140

- XVlll

- 7

- 77

- 137

- 290

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IV CHANNEL LENGTH

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Empirical Evidence 144

Direct versus Indirect Distribution

Channel Deisgn Channel Change

Addition of New Channels Replacement of Channels 221 Channels for New Products230 Complementary and Com­

petitive Multiple

Channels

Channels for Strategy Differentiation

Determinants

A Given Environmental Factor

Strategic Gap

175 193 202 217

241 256 264 266 275 291

Functional Spin-Off and the Emergence of Succes­

sive Levels

The Shortest Route

Paradigm

Hypothesis and Empiri­

cal Testing

Wholesale Structure Additions and Deletions of Intermediaries

Empirical Analysis:

Elimination of Links Addition of Links

Redundant Intermediaries and Cost Reduction

Channel Length and Functional Efficacy Information Gap Speed of Operations Determinants of Channel Length

Customer size and Buying Patterns

Physical and Economic Distance

Market Density

297 300 301 328 341 350 356 362 372 386392 396 396 406 413

- 438

(9)

CHAPTER

V

VI

4.4.4.0 Size and Market Power of the Manufacturer 4.4.5.0 Product Characteristics

as Determinants of Channel Length

INSTITUTIONAL STRUCTURE OF DISTRIBUTION

5.1.1.0 Wholesale Intermed­

iaries and Their Trade Specialisation

5.1.2.0 Relative Significance of the Agencies

5.1.3.0 Types of Retail Outlets and the Extent of

Specialisation

5.2.1.0 Institutional Evolution

in Wholesaling

5.2.2.0 Evolution in the Retail Structure

Functional Adaptations Trade Margins

Cost of Distribution ­

Some Aspects

5.4.1.0 Modernisation of Distri­

butive Trade - Perspe­

ctives and Challenges Resistance to Change Innovations in Whole­

saling

5.4.3.0 Innovations in Retailing

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HORIZONTAL STRUCTURE AND VERTICAL RELATIONSHIPS

6.1.1.0 Number of Intermediaries at each Level

Vertical Relationships Selection of Channel

Members

6.2.1.10 Middleman's Choice of Manufacturers

6.2.1.14 Availability of Inter­

mediaries and the Ext­

tent of Choice

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6.2.2.0 Pre-emption of Inter­

mediaries

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Selection Criteria

Channel Modifications:

Additions and Replace­

ment of Channel Members

6.3.0.1 Legal Environment of Distribution

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Territory Assignment Exlusive Dealing

Tie-up Sales, Full-line Forcing and Quantity

. Specification

6.3.4.0 Price Control and Resale

Price Maintenance

Control of Retail Price

Determinants

Vertical Integration Integrating Manufactur­

ing and Wholesaling Behavioural Dimensions Channel Audit

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VII CONCLUSIONS

ANNEXURE - I ANNEXURE - II BIBLIOGRAPHY

X

E29sé§>

670 674 682 691 693 697 701 709 716 724 726 730 734 766 775 822 842 844

&

821 841 843 855

(11)

L151‘- 9? TAl3LE§

Sl. Table

No. Number Title

1. 0.1

2.

3. 1.2

4. 1.3 5. 1.4 6. 1.5 7. 1.6 a. 1.7 9. 1.8 10. 1.9 11, 1.10

12. 1.11 13. 1.12 14. 1.13

Industries Selected for Study Number of Channels - Frequency Distribution

Frequency Distribution of the

Number of Channels among various Industry Groups

Average Number of Channels in Different Industry Groups

Number of Channels for various Industries

Number of Channels - Company Perception X§. Actual

Direct and Indirect Channels for Consumer versus Industrial Goods Direct Channels in Different Industries

Direct Channels and the Type of

Customers

Percentage share of Sales Through Direct Channels

Direct Sales to Retailers

Channel Design - Executive Response

Channel Change

Channel Change by Addition of

New Channel

Page

130 165 167

169

171 173 183 185 186 188 190 199 216 219220

(12)

S. Table

No. Number

15. 1.14

16. 1.15 17. 1.16 18. 1.17 19. 1.18

20. 1.19

21. 1.20

22. 1.21 23. 1.22

24. 1.23

25. 1.24

26. 1.25 27. 1.26

28. 1.27 29. 1.28

Title

Channel Change by Replacing Channels

Channel Change and Stage in Company's Evolution

Marketing Channels for New Products

Search for Alternative Channels while Introducing a New Product Perception About Improving Distri­

bution System by Channel Change Complementary Vs. Competitive Channels

Complementary and Competitive Multiple Channels

Use of Competitive Channels

Direct Channels and Target Markets Indirect Channels and Strategy Differentiation - Consumer Goods Is There a Distribution Manager?

xii

Page 2229221 226 234 236

237 245 247-248

250 259 261 271

whoe Heads the Distribution Channels? 273 Competition, Demand, and Capacity

Utilization

Who Decides Channel Change?

Participants in Channel Change Decisions

279 283 285

(13)

S Table

No Number

30 2.1

2.2

2.3

2.4 2.5

2.6

2.7 2.8 2.9 2.10

2.11

Title

Number of Levels and Intermediaries in the Dominant Channels - Consumer Nondurables

Number of Levels and Intermediaries in the Longest Channels - Consumer

Nondurables

Number of Levels and Intermediaries ­ Consumer Durables and Semi-industrial Products

Number of Levels and Intermediaries ­ Industrial Goods

Average Number of Levels and Inter­

mediaries in the Channels for Differ­

ent Industry Groups

Frequency Distribution of Number of Levels in the Longest Channels ­ Different Industry Groups

Number of Levels in the Longest Channels - Frequency Distribution Number of Levels in the Dominant Channels - Frequency Distribution Number of Intermediaries - Frequ­

ency Distribution

Wholesale Intermediaries in the

Longest Channels - Frequency Distri­

bution in Industry Groups

Number of Wholesale Intermediaries in the Dominant Channels and the Longest Channels - Consumer Non­

durables

xiii

Page

311

312

315

316 318

320

322 323 325 329

331

(14)

S. Table

xiv

No. Number Title Page

41. 2.12

423 2.13 43‘ 2.14 443 2.15 45_ 2.16 45_ 2.17

4'73

48. 2.19

49, 2.20

59‘ 2.21 51, 2.22 52, 2.23

Number of Wholesale Intermed­

iaries in the Longest Channel ­

Consumer Durables and Semi­

Industrial Goods

Number of Wholesale Levels for Industrial Goods

Wholesale Intermediaries in the Dominant Channels - Frequency Distribution in Industry Groups

Wholesale Levels

Average Number of Wholesale Levels

and Intermediaries in Different Industry Groups

Elimination of Intermediaries Addition of Intermediaries in the Channels

Stage of Growth of the Company and Additions and Deletions of Inter­

mediaries

Elimination of Levels and Cost of Distribution - Executives‘ Response Redundant Intermediaries - Execut­

ives‘ Response

Unnecessary Repetition of Functions ­ Executives‘ Opinion

Elimination of Intermediaries and Functional Absorption

332

334 335

337 339

352 357 361

369 371

383 385

(15)

53.

~54.

S. Table .

No. Number Tltle

2.24 2.25

55, 3.1

56. 3.2 57% 3.3

58. 3.4 59. 3.5 '60. 3.6 61- 3.7 -62. 3.8 63. 3.9

'64. 3.10

Aspinwall‘s Colour Classifi­

cation Scheme

Colour Classification of the Pro­

ducts under Study

Manufacturers‘ Wholesale Organi­

sation

Specialisation at the Wholesale

Level

Wholesale Intermediaries and their Frequency of Appearance in the

Channels

Type of Retail Outlets - General vs.

Specialised Stores for Consumer and Semi-Industrial Products

Shift in the Predominance of whole­

sale Intermediaries and the Structure

of Wholesale Hierarchy Retailers and Credit

Credit to Merchant Wholesalers Retail Selling by Manufacturers on behalf of Wholesale Intermediaries Information Feedback by First Level Intermediaries in the Dominant

Channels - Executives‘ Response Extent of Demand Creation by the First Level Intermediaries in the

Dominant Channels - Executives‘

Response

xv

Page

434 437

452 471 473

481

504

519 520 527 530

533

(16)

S. Table

xvi

No. Number Title Page

65g

66, 3.12 675 3.13 68, 3-14 59, 3.15 70_ 3.16 71_ 3.17 72, 3.18

73¢ 4'01

74. 4.2 75. 4.3 76. 4.4

Functional Adaptations and Per­

formance Efficiency of Intermed­

iaries - Executives‘ Response Average Trade Discount - Consumer Nondurables

Average Trade Discount - Consumer durables and Semi-Industrial Goods Average Trade Discounts - Industrial

Goods

Incentive Discounts

Some Aspects of Distribution Cost ­ Consumer Products

Trade Margins in Relation to Trade Functions - Executives‘ Response Average Annual Turnover for a Whole­

sale Intermediary with respect to

One Manufacturer

Limited Distribution vs. Intensive Distribution At Wholesale and

Retail Levels

Intensity of Distribution - Whole­

sale and Retail Levels

Intensity of Distribution at Whole­

sale and Retail Levels - Consumer

Nondurables

Intensity of Distribution at Whole­

sale and Retail Levels - Consumer Durables and Semi-Industrial Products

535

542 543 545 551 55$­

562 571

623

625 626

628

(17)

S. Table

§2:.-§£“l‘P§£

7T. 4.5

78, 4,6 79. 4.7

BO. 4.8 Q81. 4.9

\82, 4.10

‘B3. 4.11

84. 4.12 85. 4.13 86. 4.14 87. 4.15 88. 4.16 89. 4.17 90. 4.18

Title

Intensity of Distribution ­

Industrial Goods

Channel Classification Based on Vertical Relationship

Exclusive and Selective Distri­

bution Among Industry Groups

Limited Distribution and Selection of Intermediaries

Do the Manufacturers have real choice

in selecting the Intermediaries at

the Next Level?

Do the Leading Firms in the Industry Pre-empty the Most Efficient

Intermediaries?

Selection of Wholesale Intermed­

iaries - Choice Criteria

Division of Existing Territories and the Addition of Intermediaries Factors Leading to the Change of Intermediaries

Territory Assignment to Wholesale Intermediaries - Geographical Basis Firms Following Exclusive Dealing Price Maintenance at the Wholesale Level

Dynamics of Price

Control of Retial Price

xvii

Page 629 640

655 659 667

673

679 685 689 696 700 712 713 717

(18)

S. Table

§9;__§E@P§£

91_ 4.19 92, 4.20 93, 4.21

94, 4.22 95. 4.23

Title

Power Bases of Manufacturers ­ Consumer and Semi-Industrial Products

Indications of Manufacturers‘

Channel Control

Cooperation Extended by Inter­

mediaries - Manufacturers‘ Level of Satisfaction - Executives‘

Response

Channel Conflict - Some Instances Channel Evaluation by Manufact­

urers

xviii

Page 740-741

746 752

762 769

(19)

INTRODUCTION

The structure of distribution is assumed to be a given environmental factor. Manufacturing firms tend to make choices among the various channels

that are in the structure. The structure itself is,

however, taken as an uncontrollable variable. Though marketing channels are generally regarded as a vari­

able aspect of the marketing mix of the manufacturers, they often receive less managerial attention than con­

siderations of product, price and promotion. This is because much of the channel, in the typical case, is

‘outside’ the company, where it is difficult to do any­

thing about it, especially in the short run. The result

is that manufacturers frequently overlook the opportu­

nity to make a break-through by innovations in distri­

bution channels.

It has become apparent that in the developing world, distribution problems have been more obstructive

__-_ ,;‘_ ‘».~­

than many other deterrents to the process of industriali­

sation. An efficient distribution system is a necessary>-'

__~- "

condition for industrial and economic advancement. If\

(20)

effective marketing institutions are not available, or do not develop at the right time, producers may be blocked from evolution to higher and more productive

levels. If many firms in an economy are similarly blocked, the process of development will be severely hampered. Apprehensions have been expressed that manu­

facturers in India find it increasingly difficult to

match mass production with mass distribution and that the inadequacy of the present distribution structure creates bottleneck in the economy.

9Pis2EiYs§_2§_EE2_§E2§z

The prime objective of the study is to analyse the existing structure of marketing channels with a view to ascertain the adequacy of the present distribution system to provide the distribution services most appropriate for the emerging mass production situ­

ation.

Based on the main objective, the study is directed to find out:

1. The ‘channel mix‘ used by specific

industries and individual manufacturing firms--the combination of the different channels used to serve different market segments--so as to see whether distribution

(21)

channels are used by manufacturing firms

for strategy differentiation;

2. The length of the channel--the number of levels of intermediaries between the manufacturer and the consumer--in order to probe whether there are redundant inter­

mediaries in the channels;

3. The institutional and functional chara­

cteristics of the different types of inter­

mediaries used in various industries, with a view to find the emerging trends in insti­

tutional innovations and functional adapt­

ations;

4. The intensity of distribution, so as to

analyse the policies of exclusive and

selective distribution, the availability

and selection of channel members, the extent

of vertical integration, and the level of

channel cooperation and control.

éaelxzisel_%9§§l-_§2é_B2§§§£2E_P2§£22

As the research tradition in marketing

usually treats distribution system as a static mechani­

sm, the dominant approaches to marketing analysis are not adequate for analysing the dynamics of distribution channels in a developing economy. A new conceptual

(22)

model has been developed for the purpose of this study.

Four structural variables of marketing channels, i.e..

number of channels, number of levels in the channels, type of intermediaries, and number of channel members at each level, have been analysed. The study attempts description and analyses the development, dynamics, and determinants of each of these variables. Specific hypo­

theses have been formulated and tested with reference to 16 aspects of the structure of marketing channels.

The study is both descriptive and analytical.

Different methods of research have been employed for

collection and analysis of data. While selecting industries, due representation was given to different

cvnsw m er prvducb,

categories of industries,Lsemi-industrial goods, and industrial products. The fifteen industries covered by the study include soaps, pharmaceuticals, packaged food and soft drinks, agricultural inputs and implements, batteries, lamps, TVs and radios, fans, tyres, paints,

watermeters, transformers, electromechanical components, power cables and chemicals. To represent the various industries, thirty manufacturing firms were selected using statistical judgement for detailed analysis.

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Interviews were held with marketing executives of the selected manufacturing firms. An elaborate schedule was used to collect primary data from these companies.

A second source of information was the trading communi­

ty. As a third source, experienced executives of some leading firms located outside Kerala were interviewed, primarily for clarifications regarding trade practices in different industries. From the last two sources relevant data were obtained through unstructured inter­

views.

§212§‘£‘§ _9.§_E12§ ..§'.°.B§X

For convenience of analysis, the study is divided into seven chapters. Chapter I attempts to

set the study in its right perspective by tracing the

adaptive behaviour of marketing channels in the course of economic evolution. The pattern of evolution in the major structural variables of distribution is ana­

lysed by reviewing the economic histories of the United States, U.K., and Japan. Chapter II defines the rese­

arch problem, develops a conceptual model for analysing channel structure, and discusses the methodology used for collection and analysis of data.

(24)

While the first two chapters give a theore­

tical background, the subsequent four chapters contain empirical analyses of four aspects of the structure of marketing channels. Chapter III deals with the multi­

ple channel structure. Tracing the number of channels

used in different industries, and differentiating the

role of direct and indirect channels, the study proceeds to discussions on channel design, addition and deletion of channels, and the dynamics of channel change. The last part of the chapter is devoted to the discussion on the determinants of strategic adaptations in distri­

bution channels.

Chapter IV begins with a description of the number of levels and intermediaries, and analyses the

additions and deletions of channel levels. As part of the dynamics of channel length, issues such as redundant intermediaries and their impact on cost of distribution, unnecessary repetition of functions, communication bottle­

necks and channel speed are discussed. The search for the determinants of channel length leads to the analysis of the impact of customer buying patterns, physical and economic distance, market density, size and market

power of the manufacturer, and product characteristics.

(25)

Chapter V deals with institutional dyna­

mics in the distribution system. From a description of the extent of trade specialisation among wholesale

and retail intermediaries, the study leads to the ins­

titutional evolution and functional adaptations of mar­

keting intermediaries. Trade margins and cost of distribution are analysed in the context of trade

functions. The last part analyses the factors inhi­

biting institutional innovations and focuses on the

challenge of rationalisation and modernisation of whole­

saling and retailing.

Chapter VI discusses the horizontal stru­

cture of distribution by tracing the policies of inten­

sive, selective and exclusive distribution at various levels, and analyses the vertical relationships among channel participants. The issues analysed include the availability of channel members for relatively smaller firms, the legal environment of distribution, the chan­

nel dominance by manufacturers, and the factors influ­

encing vertical integration as well as formation of centrally coordinated channels. Chapter VII consoli­

dates the major findings of the empirical analyses in this study.

(26)

CHAPTER I

‘ADAPTIVE BEHAVIOUR OF MARKETING CHANNEL§*

1.1.1. Distribution system is indeed rooted in culture and social structure. It

has been postulated that societies become increasingly similar in social and cultural characteristics as they reach higher levels of economic deve­

lopment, and that this convergence occurs in the marketing and distribution systems

as well. If so, greater understanding

of the pattern of evolution in the structure of distribution in advanced societies will provide a broad perspe­

ctive for analysing the structure and dynamics of distribution channels in a developing economy. Briefly reviewing the economic histories of the United States, U.K. and Japan, this chapter attempts a comparative analysis of the adaptive behaviour of the distribution systems in response to socio—economic evolution.

*An earlier version of this chapter has been published

"Adaptive Behaviour of Marketing Channels", Indian Manager, Vol.15, (October-December 1985) pp.331-73.

(27)

1.1.2. Economic histories of some of the developed societies apparently support the postulate that mar­

keting channels respond to the pressures of a dynamic environment by innovations and adaptations. Nothing ever remains static in marketing, not even the most

likely candidate - the distribution structure. Struct­

ure is derived from functions. Functions are closely related to opportunities, and marketing opportunities are in the environment. Changes in the environment entail changes in marketing functions and modifications in functional assignments among institutions. The

resultant strains and tensions lead to structural ada­

ptations in the distribution system. The pace and

direction of change in the channel structure, and their determinants and economic growth implications, provide a rich vein of inquiry that has too long been neglected.

1.1.3. Distribution system is indeed an economic

institution evolved to satisfy certain basic human needs The system, however, encompasses far more than the mech­

anistic flow of goods. It is a basic component of the social system and is deeply embedded in the cultural

milieu. This broad perspective of distribution has

several important implications.

1. Although the distribution system seeks

to satisfy basically the same human needs

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in various societies, the manner in which it performs its task varies widely, and the pattern is determined to a large measure by the socio—cultural environment in which the system operates.

2. The distribution system, in order to remain

an effective socio—economic institution, must maintain its functional viability in terms of the milieu and must be responsive to environmental changes, adapting to meet the new needs posed by environmental changes.

3. While the distribution structure in a

society is shaped by other institutions

in that society, the influence is by no

means one-sided. As a dynamic institution the distribution system is capable of gen­

erating changes on its own, which,in turn, will have significant impact on the entire society.

Thus, in an economy in transition, the distribution system has to reassessits basic mission, evolve new

patterns, design new institutional structures, and assume new functions.

1.1.4. In recent years a number of empirical studies

have been conducted in order to understand the influence

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of the environment on the marketing system, particularly to identify the variables that have a direct bearing on shaping the distribution structure in different coun­

tries. Although specific relationships between envi­

ronmental variables and the distribution system have yet to be established, some insights have been obtained regarding the relationship between the structural dyna­

mics of distribution and the changes in the economy.

1.1.5. Little attention has, however, been given in

research to the process of change in the distribution system. What Yoshino observes about studies on marketing systems is perhaps more relevant to distribution systems.

“Past studies have focused exclusively on the description and analysis of the marketing system in a given society at a particular moment in time and have largely neglected to examine the evolutionary pattern of the marketing

system in response to environmental changes in a given society”1

1.1.6. Investigation of the change process in distri­

bution structure, particularly in relation to changes in

the economy, becomes imperative in development analysis.

1M.Y.Yoshino, Ihe JapaneseMarketingSystem:Adaptations andlnnovations, (Cambridge, Massachusetts,““

The MIT Press, 1971), p.xvi.

(30)

1??

An array of significant issues remainsunprobed; quest­

ions such as: Does the distribution system lead develop­

ment or lag behind it? How is change in the distribution structure initiated? What should be the direction of change as the economy moves through different stages in its economic evolution? What are the factors that ini­

tiate change or influence its direction? 0r alternatively,

do these changes occur automatically? Stated differently, is distribution really a self-adjusting mechanism that ! readily adapts in response to changes in the environment?

Study of these questions is meaningful at any stage of economic development; but it is more pertinent when a society is in transition from a subsistence economy to

a market economy.

1-1-7- Pz2s@i2§_2§_2i§E£iE2Ei29

Goldmanz has postulated two stages in the evolution of distribution in an emerging economy. At the initial stage of development, distribution involves the very basic functions of retailing and wholesaling which seem to be indispensable. The population is lar­

gely agricultural and the standard of living is low.

As the standard of living gradually improves, the whole­

saling tasks of collection and redistribution as well as the retailing activities are further supplemented by more sophisticated and specialised operations.

2Marshall I Goldman, §ovietyMarketing, (London, Collier­

Macmillan Company, 1963) pp.l88.89.

(31)

1.1.8. In the secondary stage of economic evolution,

the importance and the number of middlemen rapidly incr­

ease. Soon there is the problem of calculating and

meeting the demand of consumers who suddenly have a chance to exercise their choice among several varieties of a given product and competing types of products. The changes in consumption pattern lead to a general increase in marketing activity. The goods themselves are new to the economies in question and,therefore, need introduction and explanation. Even when familiar, these kinds of goods require continuing marketing effort in the form of demon­

stration, service, advertising and personal selling; for,

increase in income permiuanot only increase in consumption, but also increase in the variety of goods from which con­

sumption choices are made, and in the convenience with which merchandise is made available to all kinds of final users3. These increases in both variety and convenience involve changes in the distribution structure, starting with innovations in retailing.

1.1.9. The Clark-Fisher hypothesis4 which generated considerable debate two decades ago, identifies three 3Lee.E. Preston, "The Commercial Sector and Economic

Development", Reed Moyer and Stanly C.

Hollander (eds). Markets and.Marketingin

Developing 1 Ecronomies. (_ Homewood, Illinois,

Richard D. frwin Inc. 1968) p.18. - '

4 . .

Allen Fisher, "Marketing Structure and Economic Develop­

ment - Comment", Qparterly Journalof Economics,

(32)

fundamental stages in the course of economic develop­

ment: the primary stage characterised by agricultural and extractive activities, the secondary stage predomi­

nated by manufacturing, and the tertiary stage marked

by service activities, including trade. The Clark­

Fisher formulation postulates an increase in the rela­

tive importance of secondary, and then tertiary activi­

ties, in the course of development, emphasising that

tertiary activities tend to loom larger in the total

economy at its advanced stage of development. The rela­

tive growth of distribution activities in the course of

development is a crucial element in this proposition.

1.1.10. At the primary stage, the essential problem

confronting the economy is the provision for the physio­

logical needs. Marketing activities are likely to be limited to physical distribution and storage, with little

compelling need for a mass communication network. A relative shortage of want - satisfying goods means that

relatively little selling effort is required. A ready

and unsophisticated market exists for whatever is pro­

duced. It follows that distribution efforts are relat­

ively unimportant. During the secondary stage of economic evolution, the fundamental problem confronting the economic

Vol.68, (February 1954) pp.151-54; P.T. Bauer and B.S. Yamey, "Economic Progress and Occu­

pational Distribution", P.T. Bauer and B.S.

Yamey (eds). Markets, Market Control and MarketingReform - Selected Pa ers, (London, Weidenfeld and niaolsan; 1968yPPP.1O-13.

(33)

system lies in discovering the most efficient means of production. Demand, in the aggregate, exceeds supply,

and relative shortages still exist. The emphasis is

on manufacturing, fabrication, and assembly. Although the means of distributing mass produced goods and ser­

vices are not developing, the emphasis is on mass pro­

duction.

1.1.11. The tertiary stage has been described as

the ‘distribution stage‘ of economic development. Pro­

blems in agriculture and manufacturing still exist, but the predominant concern requiring immediate societal attention is an inadequate and inefficient distribution

system. The situation that prevails early in the tertiary

stage of development may be described as an incongruity ­ an incongruity between manufacturing and distribution.

Although manufacturing methods have achieved high degree

of sophistication, distribution continues through rela­

tively archaic means. The crucial problem confronting the economy is the expedient distribution of great quan­

tities of mass produced goods and services. The problem can be viewed as a disparity in capacities; the capacity for production has increased, but the capacity for distri­

bution is something less. The manufacturing capability exceeds the ability of the distribution pipeline to purvey

(34)

goods and services. The early part of tertiary stage thus embodies a serious bottleneck problem.5

1.1.12. The economic histories of nations, both deve­

loped and developing, seem to illustrate that the shift from a deficit to a surplus economy exerts pressures on

the distribution structure to change its institutional

framework and functional assignments. Trade is indeed rooted in tradition and culture. Even when it evolves, it develops in tune with the socio-cultural milieu.

1.1.13. Despite significant variations in social

systems and cultural orientations, the broad pattern of evolution in trade channels in different countries, appears to be surprisingly similar, even though, at a

particular point of time, distribution structure do dif­

fer among societies, largely on account of socio-eco­

nomic factors. There is indeed a widely held view that societies will become increasingly similar, not only in economic,but also in social and cultural characteristics,

as they reach higher levels of industrialisation6. This

5Ronald R.Gist, Marketing and Society, (Hindsdale,

Illinois, The Dryden Press, 1974). pp.59-60.

6Yoshino, Op. cit., p. xv.

16

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convergence, it has been postulated, will take place in the area of marketing and distribution systems as

well. If so, greater understanding of the distribution

systems of the industrialised societies may be of con­

siderable value as guideline for developing nations, as they aspire to achieve higher levels of development.

Therefore, a companative study of the adaptive behaviour of distribution systems in some of the developed econo­

mies would provide a broad perspective for analysing the dynamics of distribution channels in a developing economy

1.1.14. In spite of the limited scope of the present

study in terms of the number of industries and manufact­

uring firms selected for empirical analysis, the study

is set on a broad perspective. Changes in the institu­

tional structure of distribution and shifts in the

relative power position of channel participants have been two familiar themes in marketing literature, al­

though analytical studies have been largely confined to the American distribution system. The present study adds two more dimensions to this traditional analytical perspective. The two aspects that merit emphasis are the multiple channel strategy and the changes in the length of channels. As the present study addresses itself to the four dimensions of channel analysis, the

(36)

rest of this chapter looks for a comparative analysis of the dynamics of distribution channels in the United States, U.K. and Japan, primarily in terms of these four aspects.

1.2.0 Bevolutiongin Distribution - Ihe American

Miracle

1.2.1. Since 'marketing' is an American innovation

of the twentieth century, with all conceptual develop­

ments in marketing triggered by changes in the U.S.

economy, it is but logical to preface this gomparative analysis with the dynamics of distribution structure in the United States. During the days of colonialism,

domestic production in American colonies was suppressed,

in order to enrich the British traders and manufacturers.

The whole theory of the mercantilist economy envisaged the colonies as producers of commodities needed by the home country and, in turn, as purchasers of the latter's manufactured products. This necessitated the development of active commercial relations. To prevent colonial

manufacturing from competing with the home industry, colonial governors were instructed to “discourage all manufacturers"7.

7Harold Underwood Faulkner, American Econgmic History, (New York, Harper and Row, 1964? pp. 75, 110.

(37)

1.2.2. Complete dependence of the colonies on

European manufactured goods gave the colonial importer, called shipping merchant, the commanding position in the domestic economy. Eventually, colonial trading mer­

chants who were often political leaders as well, led the uprising against tax and navigation laws, and set the pace for independence on the American shore. "Political historians suggest that the Revolutionary War was pre­

cipitated and fought partially because the English per­

sisted in interfering with American marketing channels"8.

1.2.3. The shipping merchants (importers) not only sold at wholesale,but also operated retail outlets. A

weak jobber group existed. The products reached the consumer via two different channels. The channel invol­

ving the jobber was obviously a longer channel and it served as the secondary channel in a multiple channel

structure. While a retail structure with speciality

stores developed in the towns, travelling trademen carried the imported items inland to small communities. The

retailer relied almost entirely on the wholesale supplier to determine the kinds and quantity’ of merchandise.

8Martin L. Bell, garketingdonceptsand Strategy, (London, Macmillan, 1966) p.90.

(38)

1.2.4. With the advent of political freedom,

manufacturing began to develop. Although the scale of operation was relatively small, there was the need to

sell to distant consumers and this gave rise to merchant wholesalers. Anticipating competition and recognising the need for a more positive selling function, the Brit­

ish manufacturers began to replace importers by appointing

selling agents. The selling agents sold directly to

retailers at auction, thus eliminating the jobbers. Here

is an instance of a passive intermediary in the multistage wholesale structure being bypassed as competition incre­

ases. The obvious result was the reduction in the length\ of channels.

1.2.5. The shipping merchants who found their pre-war functions taken over by selling agents, now redefined

their role and transformed themselves into merchant whole­

salers for domestic producers. With the movement of people to the West, general stores developed there. As large

population centres emerged, speciality stores were esta­

blished. The itinerant peddler was gone, the general store was restricted to rural areas, and seeds were sown in urban centres for the development of department stores and chain" stores.

1.2.6. The years after the Civil War saw phenomenal

growth in manufacturing. The whole economy was expanding

DDrfl

(39)

rapidly. Large-scale manufacturers began to feel the need for mass distribution. The retail structure was inadequate to meet the task. It was still composed mostly of small, but growing, speciality stores and general stores. The merchant wholesalers, on the other hand, met the needs. Improvement in the general econo­

mic activity had already made possible specialisation in wholesaling, just as it had enabled the growth of

speciality stores at the retail level. Large wholesale

centres already existed in many cities. The wholesale structure consisted of specialised agencies such as importers, exporters, auction companies, brokers, com­

mission merchants and jobbers. Wholesalers received shipments from manufacturers, and delivered, in turn, to the retailers who often visited the wholesale centre.

The distribution system was dominated by the wholesalers.

The type of goods sold, and the way they were sold, were matters that rested largely in the hands of the wholesaler The manufacturer depended on him for distribution and‘

volume. The retailer turned to the wholesaler for merchandise and credit.

1.2.7. The rapid transition from an agricultural

economy at the time of Civil War to an industrial economy at the end of the century, poured into the market such

‘"1

<1

(40)

’\

I\\

$0

quantities of products as to warrant the conclusion that a sellers‘ market was being replaced by a buyers‘

marketg. Both manufacturers and retailers began to grow rapidly. As urban centres grew in size, speciality stores naturally expanded their lines and logically org­

anised along departmental lines, and mail order houses expanded rapidly, much to the alarm of small retailers and their wholesale suppliers. Department stores.and mail order houses grew as a result of and at the expense

of the inefficiencies of the older type of retail esta­

blishments. Chain stores began to take roots.

1~2~8- P2@¥E§EE§_9§_E§§_W§9l§§§l§£

Under conditions of scarcity the wholesaler

dominated the distributive structure and enjoyed a

large measure of control over the economy. It was the wholesalers who were the big businessmen of the early nineteenth century. These wholesalers were able to domi­

nate the puny manufacturing industries of the early indus­

trial revolution. They provided the only means of dis­

posing of the manufacturers‘ output. They had access to greater stores of capital and often were able to finance nascent manufacturers. The wholesaler kept pace with the

changing pattern of trade from rural to urban markets, and from general line to speciality merchandising, as 9Robert Bartels, The bevelopment ofMarketing Thought,

(Homewood, Illinois, Richard D.Irwin, Inc., 1962) p.22.

(41)

long as such changes were slow, and retained their domination in the distribution structure well into the twentieth centurylo.

1.2.9. Manufacturers were gaining dominance through cooperative action among producers themselves, and

through product differentiation, advertising and brand identification. Forward integration as a means of

market control was attempted by forming manufacturers‘

branch wholesale establishments, and manufacturer-owned

retail outlets. Restricted distribution through exclu­

sive agencies, pressure tactics of full-time forcing, and resale price maintenance were all indications of the power of manufacturers, and all these apparently sealed the manufacturer's importance in the consumer marketll.

The growing opportunity for expanding and retaining a large share of the market, and the market assurance nece­

ssary for large scale production and investment, encour­

aged the manufacturers to grasp greater control of the marketing channels. In the nineteenth century itself, manufacturers began to challenge the sole supremacy of the intermediate marketer. The period between 1860 and

1920 witnessed a gradual shift in power, from the whole­

saler to the manufacturer. However, the control of the market was more or less shared by manufacturers and

1OU.S.Temporary National Economic Committee (TNEC), Monograph No.17, (Washington, GPO, 1941)

11Bell, Op.cit., p.93.

PG GO

(42)

PCin

wholesalers. Wholesaler was still the established outlet for greater portion of manufactured goods. By the closing years of the period, the power of the whole­

saler was distinctly on the wane, and the authority of the manufacturer increasing.

1.2.10. As economic and social conditions change, the retail structure and its methods of operation change, and the retailer who effectively adapts himself to the changing conditions is successful. New type of stores

gain at the expense of the traditional retailers. It

was not until the last part of the nineteenth century that the department store was of sufficient importance

to be recognised as a characteristic institution for re­

tailing. Although the chain store came into being during the last half of the nineteenth century it became a leading institution much laterlz. In more recent times, the super­

market has taken business from the old-line grocer and the discount house from the department store. Tradit­

ional retailers always find it necessary to ‘modernise

or die". This has been the story of American retailing.

1-2-11- §£2!ia2_§2ssiel£§§Ei22

Growth of urban population and improvements in transportation had tremendous effect on the American 12Fred M. Jones, Retail Merchandising, Homewood, Illinois,

Richard D. Irwin, 1957) pp.14.1s

(43)

4‘ .

distribution structure. Increased urbanization allowed more specialisation in both wholesaling and retailing, and better transportation has had almost revolutionary effects upon rural buying. Wholesalers came to specialize in single commodities as a result of population increase and geographic concentration. In large cities, areas were given over to wholesaling and retailing of specific commo­

dities. Specialisation in retailing has always been the

normal practice in urban communities where there is enough business to make it possible. Interestingly enough, one persistent trend has been contrary to specialised selling.

This is indicated by the development of the department store, the first of which was established in New York in 1860. The convenience, particularly for suburban buyers, of making all their purchases under one roof was suffici­

ent to make a place for the department store. The business of some of these stores has now become so large that

their various departments could be conducted as effici­

ently, and on as large a scale as the specialised store13.

1-2-12- The_é2E2@2E£ls_§2§_EEs_BsEsil_£222Y§Ei22§

Rural buying at the end of the last century was largely done in the country general store, which like the city's department store carried almost every­

thing that the community needed. The old fashioned l3Faulkner, Op.cit., pp.S32-33.

5’

(44)

2.6

peddler who travelled from door to door still existed, but his significance was declining. Two developments of the 1890's did much to change this picture: the intro­

duction of the rural free delivery and the invention of the automobile. The first made possible the rapid expansion of the mail-order house. To the typical American farmer and the small town American, the mail order purchase became as common as that from the country

store. The automobile extended the farmers'purchasing radius. It became easy for the American peasant to make week-end shopping to the nearest town. The automobile gave another blow to the country store, already forced

to reduce its business to a few necessities. As the

distance between the country and the town was reduced by the automobile, the mail-order house changed its technique.

To catch the farmer's business on his frequent trips to the city, the mail-order house opened retail outlets in many of the small and medium sized urban centres ­ a development which occurred in the 1920's. The develop­

ment of these chain outlets was in line with a develop­

ment which has been going on for years since 185814.

1.2.13. By the turn of the century the retail structure

was changing and gaining importance. The steady growth

~

of large-scale retail institutions in the first two decades

14Ibid., p.533.

(45)

2;’?

was followed in 1920's by the phenomenal growth of chain stores which rose to a dominant position in the retail structure. More people with greater purchasing power and more varied and demanding buying preferences, and an increasingly concentrated urban population expressing expanding propensities to consume, created retailing giants that dwarf the largest wholesale operation of a century ago. At the same time, competition among large­

scale retailers forced them to differentiate their offer ­

the bundle of goods and services. The tendency for dir­

ect dealing between the large—scale producers and the large scale retailers became very strong. These changes in the institution structure had two other impacts on the distribution system, besides the shift in the power position of the channel participants: reduction in the number of levels in the channels and the emergence of an additional channel.

1.2.14. By the 1920's we find a strong American manu­

facturer balancing his power with an increasingly power­

ful retailer. Manufacturers‘ dominance in the channel is indicated by factors such as extensive use of multiple channels, promotion of manufacturers‘ brands, maintenance

of resale price at all levels in the channel, allocation

of territories and selective or exclusive dealing, and a host of other restrictive covenants. Retailer power, on

(46)

8

the other hand, is implied by distributors‘ brands and backward integration of retailers into manufacturing.

However, a large number of small retail establishments still existed and the bulk of the American retailing was still carried on by small retailers. The wholesaler was

not replaced, but he was different. He still serviced

the small retailers and served the small producers.

However, changes did take place in the wholesale stru­

cture, and the wholesaler's functions have been rearran­

ged. The full-service merchant wholesaler yielded place to the manufacturer's sales branch, the chain store ware­

house, or the single-line, limited service, or agent

middlemen.

1'2-15- §2EE§£E_§9£_Pi§E£iPEEi9E

American economy of the 1920's was a ‘mature economy‘. It had solved the production problems of mere survival. However, the Depression ushered in a new pro­

blem. Jones describes how the Americans were forced to shift emphasis from production to distributionlsz The age of ‘industrial capitalism‘ had faced a central eco­

nomic challenge -production; the new age of ‘consumer capitalism‘ had to face a new challenge-demand. Most l5Peter D.A. Jones, The consumer Society, (Middlesex.

Penguin Books, 1965). p.281.

(47)

223

industries had moved into a surplus goods situation in which immediate demand ran behind the industry's

ability to produce. There was a critical need to devise a system of mass distribution. Mass production without mass distribution is unworkable. In 1929 the official

‘Committee on Recent Economic Changes‘ groped towards

reality: ... "it is not sufficient to be able to pro­

duce abundantly; we must also be able to distribute intelligently"16.

1.2.16. The Depression forced innovations in retailing and the 1930's saw the appearance and rapid growth of the supermarket. The discount house registered tremendous growth after World War II. Another innovation was the voluntary chain. The competitive impact of the depart­

ment store and the mail—order house which had originated in the nineteenth century, had subsided by the 1920's.

Subsequent decades have seen immense competition among

the retailing giants.

1.2.17. Some of the important factors responsible for

the present ferment in large-scale retailing are the huge volume of consumer goods, the rise in population, the increase in purchasing power, and the shift in con­

sumption patterns. Upgrading the taste in the mass market since World War II has been nothing short of spectacular.

16Ibid.

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30

As never before, the mass market has, and can afford, the sort of standards the class market uses. The explo­

sion of the suburb and the population movement to the suburbia, aided by the automobile, has been another significant factor contributing to the growth of the mass merchandising institutions17. Yet, side by side with these giants exist a multitude of almost minute retail establishments which account for but a small per­

centage of sales.

1.2.18. The grand total of retail firms includes the

few giant stores serving metropolitan centres, the more numerous moderately large units in large suburbs or

small cities, still more firms of a moderate size serving towns and suburbs, and finally, the thousands of small stores in residential and rural areasla. The economic existence of the small store certainly tends to be "poor,

nasty, brutish, and short". Thus, there lies at the

bottom of the distributive pyramid a broad, marginal, and depressed base.

1.2.19. The wholesaler who had retained his dominant

role in the distribution structure until well into the

present century, lost ground by the middle of the century 17Delbert J.Duncan and Charles P. Philip, getailing,

Principles and Methods, (Homewood, Illinois, Richard D. Irwin Inc., 1959) pp.765-68.

l8Joseph C. Palamountain, Jr., The Politics of Distri­

bution (Cambridge, Massachusetts, Harvard University Press, 1955) p.8.

(49)

31

both to the manufacturer who established his own whole­

sale outlets and to the retailer who purchased directly from manufacturer. Although attacked from both sides, the wholesaler has not been routed ; he still made

around 50 per cent of all sales to retailers by the

middle of the century.19 On the whole, the wholesale

intermediary has been losing ground heavily and his eco­

nomic response has been primarily defensive.

1.2.20. The manufacturer's dominance in the distri­

bution structure is seriously being challenged by a countervailing power in the distribution system. With

the rapid growth of large-scale retail institutions,

there has been an erosion in the uncontested position of the manufacturers.

1.2.21. In summary, marketing channels have followed or, perhaps more accurately, kept pace with the changes in the economy,and there have been changes with respect to all the four dimensions of channel structure analysed

in this study. The institutional structure of distri­

bution has been steadily undergoing changes and adapt­

ations. Distributive institutions such as selling agents

and jobbers had been made redundant. Changes in the socioeconomic conditions have favoured the emergence of

largescale retail establishments. There has been incre­

asing specialisation at the wholesale level and the signi­

lglbid. pp.l9-20.

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