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Channels of Distribution

Hesselbein, Frances, Goldsmith, Marshall, and Beckhard, sule, and tablet from its point of production at a pharma-
Richard, eds. (1997). The Organization of the Future. San ceutical manufacturer all the way to its point of sale in
Francisco: Jossey-Bass Publishers. retail outlets worldwide.
Johnson, Spencer (1998). Who Moved My Cheese? An A-mazing To appreciate the complexity of marketing channels,
way to deal with change in your work and in your life. New
York: G.P. Putnam’s Sons. exchange should be recognized as a dynamic process.
Exchange relationships themselves continually evolve as
Nixon, Bruce (1998). Making a Difference: Strategies and Tools
for Transforming Your Organization. New York: AMACOM. new markets and technologies redefine the global market-
place. Consider, for example, that the World Wide Web’s
arrival created a new distribution channel now accounting
Cheryl L. Noll for trillions in electronic exchanges. It may come as a sur-
prise that the fastest-growing segment of electronic com-
merce involves not business-to-consumer, (called B2C in
today’s Web language) but business-to-business (B2B)
CHANNELS OF channels.
DISTRIBUTION Whether these exchange processes occur between

The word channel might bring to mind a waterway such manufacturers and their suppliers, retailers and con-
as the English Channel, where ships move people and sumers, or in some other buyer-seller relationship, mar-
cargo. Or it might bring to mind a passageway such as the keting channels offer an important way to build
Chunnel, the railroad and car tunnel under the English competitive advantages in today’s global marketplace.
Channel. Either image implies the presence of paths or This is so for two major reasons:
tracks through which goods, services, or ideas flow. This
• Distribution strategy lies at the core of all successful
imagery offers a good starting point for understanding
market entry and expansion strategies. The globaliza-
channels of distribution.
tion of manufacturing and marketing requires the
The term marketing channel was first used to describe development of exchange relationships to govern the
trade channels that connected producers of goods with movement of goods and services. As one sips one’s
users of goods. Any movement of products or services preferred coffee blend at the neighborhood Star-
requires an exchange. Whenever something tangible (such bucks, consider that consumers in China, Lebanon,
as a computer) or intangible (such as data) is transferred and Singapore may be sipping that same blend.
between individuals or organizations, an exchange has Then consider how the finest coffee beans from
occurred. Marketing channels, therefore, make exchanges Costa Rica or Colombia get to thousands of neigh-
possible. How do they facilitate exchanges? Perhaps the borhood coffee shops, airports, and grocery stores
key part of any distribution channel is the intermediary. around the world.
Channel intermediaries are individuals or organizations
who create value or utility in exchange relationships. • New technologies are creating real-time (parallel)
Intermediaries generate form, place, time, and/or owner- information exchange and reducing cycle times and
ship values between producers and users of goods or serv- inventories. Take as an example Dell Computer,
ices. which produces on-command, customized comput-
ers to satisfy individual customer preferences. At the
Marketing channels were traditionally viewed as a
bridge between producers and users. This traditional view, same time, Dell is able to align its need for material
inputs (such as chips) with customer demand for its
however, fails to fully explain the intricate network of rela-
computers. Dell uses just-in-time production capa-
tionships that underlie marketing flows in the exchanges
bilities. Internet-based organizations compete vigor-
of goods, services, and information. To illustrate, consider ously with traditional suppliers, manufacturers,
a prescription drug purchase. To get authorization to pur- wholesalers, and retailers. Bricks-and-mortars
chase the drug, one must visit a physician to obtain a pre- (organizations having only a physical location) and
scription. Then, one might acquire the drug from one of clicks-and-orders (organizations having only a vir-
several retail sources, including grocery store chains (such tual presence) are in a virtual face-off.
as Kroger), mass discounters (such as Wal-Mart), neigh-
borhood pharmacies, and even virtual pharmacies (such as
Drugstore.com). Each of these prescription drug outlets is DEFINING MARKETING CHANNELS
a marketing channel. Pharmaceutical manufacturers, dis- The Greek philosopher Heraclitus wrote, “Nothing
tributors, and their suppliers are all equally important endures but change.” Marketing channels are enduring
links in these channels of distribution for pharmaceuti- but flexible systems. They have been compared to ecolog-
cals. Sophisticated computer systems track each pill, cap- ical systems. Thinking about distribution channels in this

108 ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION