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Title: PowerPoint Slides to Accompany Marketing Channels, 7th Edition


1
PowerPoint Slides to AccompanyMarketing
Channels, 7th Edition
  • Anne T. Coughlan, Northwestern University
  • Erin Anderson, INSEAD
  • Louis W. Stern, Northwestern University
  • Adel I. El-Ansary, University of North Florida

2
Chapter 1Marketing Channels Structure and
Functions
3
 FIGURE 1-1 CONTACT COSTS TO REACH THE MARKET
WITH AND WITHOUT INTERMEDIARIES
4
FIGURE 1.2 MARKETING FLOWS
IN CHANNELS           Physical Physical
Physical Possession Possession Possession
Ownership Ownership Ownership   Promotion Pro
motion Promotion   Negotiation Negotiation Ne
gotiation Consumers Producers Wholesalers Retai
lers Industrial Financing Financing Financing
and Household Risking Risking Risking
  Ordering Ordering Ordering   Payment Paym
ent Payment     Commercial
Channel Subsystem
 
5
     FIGURE 1-3 FRAMEWORK FOR CHANNEL DESIGN AND
IMPLEMENTATION  
Channel Design Process SEGMENTATION
Recognize and respond to target customers
service output demands Decisions About Efficient
Channel Response CHANNEL STRUCTURE What kinds
of intermediaries are in my channel? Who are
they? How many of them? SPLITTING THE
WORKLOAD With what responsibilities? DEGREE
OF COMMITMENT Distribution alliance?
Vertical integration/ownership? GAP ANALYSIS
What do I have to change?
Channel Implementation Process
CHANNEL CONFLICT Identify actual and potential
sources
CHANNEL POWER Identify sources for all channel
members
MANAGE/DEFUSE CONFLICT Use power sources
strategically, subject to legal constraints
GOAL Channel Coordination
INSIGHTS FOR SPECIFIC CHANNEL INSTITUTIONS Retail
ing, Wholesaling and Logistics, Franchising
6
TABLE 1-1 SERVICE OUTPUT DEMAND DIFFERENCES (an
example of segmentation in the book-buying market)
7
FIGURE 1-4 ORGANIZATION OF THE TEXT
8
Chapter 2Segmentation for Marketing Channel
Design Service Outputs
9
TABLE 2-1 ESTIMATED NUMBER OF U.S. CONSUMERS
USING ONLINE BILL PAYMENT, VARIOUS YEARS
Notes 1998 in 1998, just 2 of U.S. households
used online bill payment, according to Tower
Group (Bielski 2003). From U.S. Census data, in
1998, there were 100 million households in the
U.S., with an average of 1.7 adults per
household thus, 2 million households or 3.4
million adults were using online bill payment in
1998. 2001 A Forrester Research report said
that nearly 17 million U.S. households will pay
bills online in 2002, up 41 percent from 2001
numbers (Higgins 2002). Thus, in 2001, 12
million U.S. households paid bills online. From
U.S. Census data, there were 108 million
households in the U.S., with an average of 2.58
adults per household thus, there were 20.4
million adults using online bill payment in
2001. 2002 The same Forrester Research report
said that nearly 17 million U.S. households will
pay bills online in 2002 (Higgins 2002), while a
Tower Group report said that 13.7 of U.S.
households did pay bills online in 2002 (Bielski
2003). The table therefore reports the numbers
from Bielski. There were 109 million households
in the U.S. in 2002 thus, 15 million households
paid bills online. Further, there were an
average of 2.58 adults per household in the U.S.
in 2002 (from U.S. Census data), yielding the
estimate of 25.5 million adult online bill payers
in 2002. 2003 and 2004 A Gartner study cites 65
million U.S. consumers paying at least some bills
online, and reports this is almost twice as many
as in 2003 (Park, Elgin et al. 2004). We
therefore estimate that 35 million U.S. consumers
paid bills online in 2003.
10
TABLE 2-2 ONLINE BILL PAYMENT THE CONSUMER
EXPERIENCE

11
TABLE 2-3 BUSINESS-TO-BUSINESS CHANNEL SEGMENTS
FOR A NEW HIGH-TECHNOLOGY PRODUCT
Respondents allocated 100 points among the
following supplier-provided service outputs
according to their importance to their company

Additional Important Attributes
Greatest Discriminating Attributes
Source Reprinted with permission of Rick Wilson,
Chicago Strategy Associates, ?2000.
12
FIGURE 2-1 IDEAL CHANNEL SYSTEM FOR
BUSINESS-TO-BUSINESS SEGMENTS BUYING A NEW
HIGH-TECHNOLOGY PRODUCT
Manufacturer (New High Technology Product)
Associations, Events, Awareness Efforts
Third-Party Supply Out-source
VARs
Pre-Sales
Dealers
TeleSales/ TeleMktg
Sales
Internal Support - Install, Training Service
Group
Post-Sales
Full-Service
Responsive Support
References/ Credentials
Lowest Total Cost
Segment
Source Reprinted with permission of Rick
Wilson, Chicago Strategy Associates, ?2000.
13
TABLE 2-4 SHIPPING CHARGES FOR 150 PURCHASE OF
SHIRTS FROM LANDS END
Source www.landsend.com website.
14
 
FIGURE 2-2 ADVERTISING COPY FOR AN AD FOR BN.COM
Source advertisement for bn.com in Wall Street
Journal, November 20, 2002, p. A11.
15
TABLE 2-5 THE SERVICE OUTPUT DEMANDS (SOD)
TEMPLATE
INSTRUCTIONS If quantitative marketing-research
data are available to enter numerical ratings in
each cell, this should be done. If not, an
intuitive ranking can be imposed by noting for
each segment whether demand for the given service
output is high, medium, or low.
16
Chapter 3Supply Side Channel AnalysisChannel
Flows and Efficiency Analysis
17
FIGURE 3-1 MARKETING FLOWS IN CHANNELS
Physical Physical Physical Posses
sion Possession Possession Ownership Ownershi
p Ownership Promotion Promotion Promotion
Negotiation Negotiation Negotiation Consume
rs Producers Wholesalers Retailers Industrial
Financing Financing Financing and House
hold Risking Risking Risking Ordering Or
dering Ordering Payment Payment Payment
Commercial Channel Subsystem
The arrows above show flows of activity in the
channel (e.g. physical possession flows from
producers to wholesalers to retailers to
consumers). Each flow carries a cost. Some
examples of costs of various flows are given
below

18
TABLE 3-1 CDWS PARTICIPATION IN VARIOUS CHANNEL
FLOWS
19
TABLE 3-2 PRODUCT RETURNS A LARGE-SCALE PROBLEM
Furthermore, returns are very significant in many
industries. In a survey of over 300 reverse
logistics managers in 1998, researchers found the
following ranges for return percentages
TABLE 3-3 PRODUCT RETURNS PERCENTAGE RANGES
20
TABLE 3-4 DIFFERENCES BETWEEN FORWARD AND
REVERSE LOGISTICS
21
FIGURE 3-2 POSSIBLE PATHWAYS FOR RETURNED
PRODUCT
Key solid lines denote product to be salvaged
for subsequent revenue. Dotted lines denote
non-revenue-producing product flows.
22
FIGURE 3-3 THE EFFICIENCY TEMPLATE
Entries in column must add up to 100 points.
Entries across row (sum of proportional flow
performance of channel members 1 through 4) for
each channel member must add up to 100
points. Normative profit share of channel
member i is calculated as (final weight,
physical possession)(channel member i's
proportional flow performance of physical
possession) (final weight,
payment)(channel member i's proportional flow
performance of payment). Entries across row (sum
of normative profit shares for channel members 1
through 4) must add up to 100 points.
23
FIGURE 3-4 THE BULLWHIP EFFECT
Source Based on the lecture notes of Enver
Yücesan at INSEAD.
24
TABLE 3.APP3A-1 BUILDING MATERIALS COMPANY
EFFICIENCY TEMPLATE FOR CHANNEL SERVING END-USERS
THROUGH RETAILIERS UNDISGUISED DATA
25
TABLE 3.APP3A-2 BUILDING MATERIALS COMPANY
EFFICIENCY TEMPLATE FOR CHANNEL SERVING END-USERS
THROUGH RETAILERS RANK-ORDER DATA
26
TABLE 3.APP3A-3 BUILDING MATERIALS COMPANY
EFFICIENCY TEMPLATE FOR CHANNEL SERVING END-USERS
THROUGH RETAILERS TRANSFORMED RANK-ORDER DATA
27
Chapter 4Supply-Side Channel Analysis Channel
Structure and IntensityLearning Objectives
28
FIGURE 4- 1 SAMPLE REPRESENTATIONS OF THE
COVERAGE/MARKET SHARE RELATIONSHIP FOR FAST
MOVING CONSUMER GOODS
Based on Reibstein, David J., and Paul W. Farris
(1995), "Market Share and Distribution A
Generalization, A Speculation, and Some
Implications," Marketing Science, 14 (3),
G190-G202.
29
FIGURE 4- 2 SELECTIVE COVERAGE--THE
MANUFACTURERS CONSIDERATIONS
     
30
FIGURE 4- 3 CATEGORY SELECTIVITY THE DOWNSTREAM
CHANNEL MEMBERS CONSIDERATIONS
 
 
31
Chapter 5Gap Analysis
32
FIGURE 5-1 THE GAP ANALYSIS FRAMEWORK
33
FIGURE 5-2 ONLINE BILLING AND PAYMENT GAP
ANALYSIS
34
FIGURE 5-3 ONLINE BILLING AND PAYMENT A
VIRTUOUS CYCLE
Note the B2B process exhibits a similar path,
with the added inducement to payers of the
development of technologies to integrate bill
payment information with back-office (accounts
payable, inventory management, and ordering)
processes.
35
FIGURE 5-4 APPLYING THE GAP ANALYSIS FRAMEWORK
TO REVERSE LOGISTICS
36
FIGURE 5-5 PATH FOLLOWED BY A COPY OFTHE
PERRICONE PROMISE
37
TABLE 5-1 U.S. RETAIL MUSIC SALES, 1999-2003
38
TABLE 5-2 AVERAGE RETAIL CD PRICES IN THE U.S.
TABLE 5-3 SHARE OF ALBUMS SOLD BY CHANNEL,
2002
Notes 680.9 million albums were sold in total in
2002. Mass merchant channel includes Best Buy,
Kmart, Wal-Mart, Costco, and Target.
39
FIGURE 5-6 TYPES OF GAPS
40
FIGURE 5-7 CHANNEL COSTS AND THE PRINCIPLE OF
POSTPONEMENT-SPECULATION
Source Adapted from Louis P. Bucklin, A Theory
of Distribution Channel Structure (Berkeley, CA
IBER Publications, University of California,
1966), pp. 22-25.
41
FIGURE 5-8 DEMAND-SIDE GAP ANALYSIS TEMPLATE
  • Notes and directions for using this template
  • Enter names and/or descriptions for each segment.
  • Enter whether SOSgtSOD, SOSltSOD, or SOSSOD for
    each service output and each segment. Add
    footnotes to explain entries if necessary. If
    known and relevant, footnote can record any
    supply-side gaps that lead to each demand-side
    gap.
  • Record major channel used by each segment, i.e.,
    how does this segment of buyers choose to buy?

42
FIGURE 5-9 SUPPLY-SIDE GAP ANALYSIS TEMPLATE(to
be used in conjunction with Demand-SideGap
Analysis Template, Figure 5-8)
  • Notes
  • Record routes to market in the channel system.
    List should include all channels recorded in
    Figure 5-4 above. Note the segment or segments
    targeted through each channel.
  • Summarize channel members and key flows they
    perform (ideally, link this to the Efficiency
    Template analysis in Chapter 3).
  • Note any environmental or managerial bounds
    facing this channel.
  • Note all supply-side gaps in this channel, by
    flow or flows affected.
  • If known, record techniques currently in use or
    planned for use to close gaps (or note that no
    action is planned, and why).
  • Analyze whether proposed/actual actions have
    created or will create other gaps.

43
FIGURE 5-10 DEMAND-SIDE GAP ANALYSIS TEMPLATE
CDW EXAMPLE
44
FIGURE 5-11 SUPPLY-SIDE GAP ANALYSIS TEMPLATE
CDW EXAMPLE(to be used in conjunction with
Demand-Side Gap Analysis Template,Figure 5-10)
Note all channel members perform all flows to
some extent. Key channel flows of interest are
promotion, negotiation, and risking.
45
Chapter 6Channel Power Getting It, Using It,
Keeping ItLearning Objectives
46
FIGURE 6-1 THE NATURE AND SOURCES OF CHANNEL
POWER
47
FIGURE 6-2 USING POWER TO EXERT INFLUENCE
48
Chapter 7Managing Conflict to Increase Channel
Coordination
49

FIGURE 7- 1 HOW HIGH LEVELS OF CONFLICT
ERODE CHANNEL RELATIONSHIP
50
FIGURE 7-2 NATURAL SOURCES OF CONFLICT
INHERENT DIFFRENCES IN VIEWPOINTS OF
SUPPLIERSAND RESELLERS
51
FIGURE 7- 3 CONFLICT RESOLUTION STYLES
52
Chapter 8Strategic Alliances in Distribution
53
FIGURE 8-1 SYMPTOMS OF COMMITMENT IN MARKETING
CHANNELS
  • A committed party to a relationship (a
    manufacturer, a distributor, or another channel
    member) views its arrangement as a long-term
    alliance. Some manifestations of this outlook
    show up in statements such as these, made by the
    committed party about its channel partner.
  • We expect to be doing business with them for a
    long time.
  • We defend them when others criticize them.
  • We spend enough time with their people to work
    out problems and misunderstandings.
  • We have a strong sense of loyalty to them.
  • We are willing to grow the relationship.
  • We are patient with their mistakes, even those
    that cause us trouble.
  • We are willing to make long-term investments in
    them, and to wait for the payoff to come.
  • We will dedicate whatever people and resources
    it takes to grow the business we do with them.
  • We are not continually looking for another
    organization as a business partner to replace or
    add to this one.

54
FIGURE 8-2 MOTIVES TO CREATE AND MAINTAIN
STRATEGIC ALLIANCES IN CHANNELS
55
FIGURE 8-3 THE CIRCLE OF COMMITMENT
56
FIGURE 8- 4 PHASES OF RELATIONSHIPS IN MARKETING
CHANNELS
57
Chapter 9Vertical Integration in Distribution
58
FIGURE 9-1 THE CONTINUUM OF DEGREES OF VERTICAL
INTEGRATION
59
FIGURE 9-2 EXAMPLES OF INSTITUTIONS PERFORMING
SOME CHANNEL FUNCTIONS
60
FIGURE 9-3 HOW ENVIRONMENTAL UNCERTAINTY IMPACTS
VERTICAL INTEGRATION
61
FIGURE 9-4 THE EFFECTS OF OUTSOURCING
62
FIGURE 9-5 ROAD MAP TO THE VERTICAL INTEGRATION
DECISION
63
Chapter 10Legal Constraints on Marketing Channel
Policies
64
FIGURE 10-1 PRINCIPAL U.S. FEDERAL LAWS
AFFECTING MARKETING CHANNEL MANAGEMENT
65
FIGURE 10-2 LEGAL RULES USED IN ANTITRUST
ENFORCEMENT
Per se illegality The marketing policy is
automatically unlawful regardless of the
reasons for the practice and without extended
inquiry into its effects. It is only
necessary for the complainant to prove the
occurrence of the conduct and antitrust
injury. Modified rule of reason (also called
"Quick Look") The marketing policy is presumed
to be anticompetitive if evidence of the
existence and use of significant market power
is found, subject to rebuttal by the
defendant. Rule of reason Before a decision is
made about the legality of a marketing policy,
it is necessary to undertake a broad inquiry
into the nature, purpose, and effect of
the policy. This requires an examination of
the facts peculiar to the contested policy,
its history, the reasons why it was
implemented, and its competitive significance.
Per se legality The marketing policy is
presumed legal.
66
Chapter 11Retailing
67
TABLE 11-1 THE WORLDS TOP 100 RETAILERS (2003)
68
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74
Notes Source 2005 Global Powers of
Retailing, Stores, January 2005, available on
http//www.stores.org . (i) Continents are
abbreviated as follows Af. Africa N. Am.
North America C. Am. Central America S. Am.
South America Asia Asia Eur. Europe Pac.
Pacific (Australia, New Zealand). (ii) Target was
part of Dayton-Hudson Corporation in 1998.
Dayton-Hudson itself was ranked 14th in 1998
sales, and if Targets 1998 sales are taken
alone, it would have ranked 25th in sales in 1998
among global retailers. n.l. not listed in
top 100 retailers in 1998.
75
TABLE 11-2 PROFIT PERCENTAGES AT SAKS FIFTH
AVENUES FLAGSHIP STORE (1996)
Source adapted from Jennifer Steinhauer (1997),
"The Money Department," The New York Times,
Magazine Section 6, April 6, pp. 62-64.
76
TABLE 11-3 EXAMPLE OF ASSORTMENT AVAILABLE
ATBOOK BARON (www.bookbaron.com)
Author Sue Grafton, a popular mystery writer
book titles each start with a letter of the
alphabet, beginning with A is for Alibi,
published in 1982. R is for Ricochet was
published in 2004. Some of the Sue Grafton books
available at www.bookbaron.com on July 5, 2005
77
TABLE 11-4 SALES, GENERAL ADMINISTRATIVE
(SGA) COSTS AS A PERCENTAGE OF NET SALES FOR
SELECTED RETAILERS
Source annual reports for 2004/2005 for each
company. Depending on the companys fiscal year
end, 2004 or 2005 figures are used. The actual
fiscal years overlap in all cases.
78
TABLE 11-5 A TAXONOMY OF RETAILER TYPES
79
FIGURE 11-1 U.S. E-COMMERCE SALES, IN MILLION
AND AS A PERCENTAGE OF TOTAL U.S. RETAIL SALES
Source U.S. Census Bureau, Released May 20,
2005, available at http//www.census.gov/mrts/www.
ecomm.html .
80
FIGURE 11-2 PERCENTAGE CHANGE FROM ONE YEAR
AGO, IN TOTAL U.S. RETAIL SALES AND U.S.
E-COMMERCE SALES
Source U.S. Census Bureau, Released May 20,
2005, available at http//www.census.gov/mrts/www.
ecomm.html
81
FIGURE 11-3 PERCENTAGE DISTRIBUTION OF
E-COMMERCE SALES BY MERCHANDISE LINE, 2003 (for
U.S. Electronic Shopping and Mail-Order Houses)
82
FIGURE 11-4 E-COMMERCE AS A PERCENT OF SALES,
2003(for U.S. Electronic Shopping and Mail-Order
Houses)
83
TABLE 11-6 DIRECT SALES BY COUNTRY
84
TABLE 11-6 DIRECT SALES BY COUNTRY (CONTINUED)
85
FIGURE 11-5 A SAMPLE MULTI-LEVEL DIRECT SELLING
ORGANIZATION STRUCTURE AND COMPENSATION
Source Anne T. Coughlan and Kent Grayson
(1998), "Network marketing organizations
Compensation plans, retail network growth, and
profitability," International Journal of Research
in Marketing, Vol. 15, p. 403.
COMMISSION SCHEDULE
86
FIGURE 11-6 DESCRIPTION OF TRADE DEALS FOR
CONSUMER NONDURABLE GOODS
  • Off invoice. The purpose of an off-invoice
    promotion is to discount the product to the
    dealer for a fixed period of time. It consists
    of a temporary price cut, and when the time
    period elapses, the price goes back to its normal
    level. The specific terms of the discount
    usually require performance, and the discount
    lasts for a specified period (e.g., 1 month).
    Sometimes the trade can buy multiple times and
    sometimes only once.
  • Bill-back. Bill-backs are similar to off-invoice
    except that the retailer computes the discount
    per unit for all units bought during the
    promotional period and then bills the
    manufacturer for the units sold and any other
    promotional allowances that are owed after the
    promotional period is complete. The advantage
    from the manufacturer's position is the control
    it gives and guarantees that the retailer
    performs as the contract indicates before payment
    is issued. Generally, retailers do not like
    bill-backs because of the time and effort
    required.
  • Free goods. Usually free goods take the form of
    extra cases at the same price. For example, buy
    3 get 1 free is a free-goods offer.
  • Cooperative advertising allowances. Paying for
    part of the dealers' advertising is called
    cooperative advertising, which is often
    abbreviated as co-op advertising. The
    manufacturer either offers the dealer a fixed
    dollar amount per unit sold or offers to pay a
    percentage of the advertising costs. The
    percentage varies depending on the type of
    advertising run. If the dealer is prominent in
    the advertisement, then the manufacturer often
    pays less, but if the manufacturer is prominent,
    then he pays more.
  • Display allowances. A display allowance is
    similar to cooperative advertising allowances.
    The manufacturer wants the retailer to display a
    given item when a price promotion is being run.
    To induce the retailer to do this and to help
    defray the costs, a display allowance is offered.
    Display allowances are usually a fixed amount
    per case, such as 50 cents per case.

87
FIGURE 11-6 DESCRIPTION OF TRADE DEALS FOR
CONSUMER NONDURABLE GOODS (CONTINUED)
  • Sales drives. For manufacturers selling through
    brokers or wholesalers, it is necessary to offer
    incentives. Sales drives are intended to offer
    the brokers and wholesalers incentives to push
    the trade deal to the retailer. For every unit
    sold during the promotional period, the broker
    and wholesaler receive a percentage or fixed
    payment per case sold to the retailer. It works
    as an additional commission for an independent
    sales organization or additional margin for a
    wholesaler.
  • Terms or inventory financing. The manufacturer
    may not require payment for 90 days, thus
    increasing the profitability to the retailer who
    does not need to borrow to finance inventories.
  • Count-recount. Rather than paying retailers on
    the number of units ordered, the manufacturer
    does it on the number of units sold. This is
    accomplished by determining the number of units
    on hand at the beginning of the promotional
    period (count) and then determining the number of
    units on hand at the end of the period (recount).
    Then, by tracking orders, the manufacturers know
    the quantity sold during the promotional period.
    (This differs from a bill-back because the
    manufacturer verifies the actual sales in
    count-recount.)
  • Slotting allowances. Manufacturers have been
    paying retailers funds known as slotting
    allowances to receive space for new products.
    When a new product is introduced the manufacturer
    pays the retailer X dollars for a "slot" for the
    new product. Slotting allowances offer a fixed
    payment to the retailer for accepting and testing
    a new product.
  • Street money. Manufacturers have begun to pay
    retailers lump sums to run promotions. The lump
    sum, not per case sold, is based on the amount of
    support (feature advertising, price reduction,
    and display space) offered by the retailer. The
    name comes from the manufacturer's need to offer
    independent retailers a fixed fund to promote the
    product because the trade deal goes to the
    wholesaler.
  • Source Robert C. Blattberg and Scott A. Neslin
    (1990), Sales Promotion Concepts, Methods, and
  • Strategies (Englewood Cliffs, NJ
    Prentice-Hall), pp. 318-319.

88
TABLE 11-7 OBJECTIVES OF TRADE DEALS FOR
NONDURABLE GOODS
Objectives Retailer merchandising
activities Loading the retailer. Gaining or
maintaining distribution. Obtain price
reduction. Competitive tool. Retailer
"goodwill." Source Robert C. Blattberg and Scott
A. Neslin (1990), Sales Promotion Concepts,
Methods, and Strategies (Englewood Cliffs, NJ
Prentice-Hall), p. 321.
89
Chapter 12Wholesaling
90
TABLE 12-1 SOME SOURCES OF INFORMATION ABOUT THE
WHOLESALING SECTOR
91
TABLE 12-2 PRINCIPAL SERVICES PROVIDED BY MAJOR
HARDWARE WHOLESALER-SPONSORED VOLUNTARY GROUPS
AND WHOLESALER BUYING GROUPS IN THE U.S.
92
FIGURE 12-1 A REPRESENTATIVE MASTERDISTRIBUTOR
CHANNEL
Based on Narayandas, Das and V. Kasturi Rangan
(2004), "Building and Sustaining Buyer-Seller
Relationships in Mature Industrial Markets,"
Journal of Marketing, 68 (3), 63-77.
93
Chapter 13Franchising
94
TABLE 13-1 SECTORS WITH SUBSTANTIAL FRANCHISE
PRESENCE, U.S. AND FRANCE
Amusementi Automobiles Rental Service Equipm
ent Business Services Building Products and
Services Childrens Products, Including
Clothing Cleaning Services and Equipment Education
al Services Employment Agencies Health and Beauty
(Includes Hair Styling and Cosmetology) Home
Furnishings/Equipment Lodging/Hotels Maintenance M
iscellaneous Retail Miscellaneous Services,
including Training Personal Services and
Equipment Pet Services Photography and
Video Printing Quick Services Real
Estate Restaurants Fast Food Traditional Retail
Food Shipping and Packing Travel
i Categorization adapted from Shane and Foo
(1999), already cited, and the French Federation
of Franchising website www.franchise-fff.com
95
TABLE 13-2 THE FRANCHISE CONTRACT
  • The International Franchise Guide of the
    International Herald Tribune suggests that any
    franchise contract should address these subjects.
  • Definition of terms
  • Organizational structure
  • Term of initial agreement
  • Term of renewal
  • Causes for termination or non-renewal
  • Territorial exclusivity
  • Intellectual property protection
  • Assignment of responsibilities
  • Ability to sub-franchise
  • Mutual agreement of pro forma cash flows
  • Development schedule and associated penalties
  • Fees front end, ongoing
  • Currency and remittance restrictions
  • Remedies in case of disagreementi

i Moulton, Susan L.(ed.) (1996), International
Franchise Guide, Oakland, California Source
Books Publications.
96
TABLE 13-3 WHEN DO FRANCHISORS ENFORCE THE
FRANCHISE CONTRACT?
  • Consider the scenario of a well-established
    franchisor that has built a network of
    franchisees. In theory, such a franchisor should
    be quick to punish transgressions, such as
  • sourcing from a supplier of ones one choice,
    rather than suppliers approved by the franchisor
  • failing to maintain the look and ambiance of the
    premises
  • violating the franchisors standards and
    procedures
  • failing to pay advertising fees--or even the
    franchisors royalty!
  • Such violations happen surprisingly often. When
    do franchisors exercise their legitimate right to
    enforce their contracts by punishing the
    franchisee?
  • Research indicatesi franchisors weigh the costs
    and benefits, taking into account the
    system-investments they need to protect, their
    own power, and the countervailing power of the
    franchisee and the franchise network. In
    particular, in their actions, franchisors appear
    to consider what signals they are sending to
    franchisees, both current and potential, by what
    they tolerate and what they enforce. With this
    in mind, franchisors pick their battles, rather
    than enforcing their contracts every time they
    are violated.
  • When it is particularly costly to enforce,
    franchisors are more likely to overlook a
    violation. This is more likely in the following
    circumstances.
  • The franchisees have a very dense, tightly knit
    network among themselves. Hence, the franchisor
    fears a reaction of solidarity, with other
    franchisees siding with the violator.

i Antia, Kersi D. and Gary L. Frazier (2001),
"The Severity of Contract Enforcement in
Interfirm Channel Relationships," Journal of
Marketing, 65 (4), 67-81.
97
TABLE 13-3 WHEN DO FRANCHISORS ENFORCE THE
FRANCHISE CONTRACT?(CONTINUED)
  • The violator is a central player in the
    franchisees networkwith one exception, to be
    presented below.
  • The franchisor suffers from performance
    ambiguity, meaning its information systems are
    not sensitive enough to be sure what is the
    situation. Such a franchisor cannot monitor
    well, and therefore cannot be sure its case
    against the violator is strong.
  • The franchisor has built strong relational
    governance, in which the system operates on norms
    of solidarity, flexibility, and exchange of
    information. Such a franchisor doesnt want to
    risk ruining these normsand has other ways to
    deal with the violation in any case.
  • These are the costs of enforcing the contract.
    But there are circumstances under which the
    benefits of enforcement outweigh these costs.
    The franchisor is more likely to take punitive
    action to enforce its contract when
  • The violation is a critical one, such as missing
    a large royalty payment or operating a very
    shabby facility in a highly visible location.
  • - This is particularly the case when the
    franchisee is a central player in the network.
    Ordinarily, central players are protected (as
    noted above), as the franchisor fears a system
    backlash. But when a central player violates the
    contract in a critical way, franchisors choose
    to enforce because it sends a strong signal that
    the rules are the rules. Put another way,
    tolerating a major violation by a central player
    would signal other franchisees that the
    contract is just a piece of paper with no real
    weight.

98
TABLE 13-3 WHEN DO FRANCHISORS ENFORCE THE
FRANCHISE CONTRACT?(CONTINUED)
  • When the violator is a master franchisee, that
    is, with multiple units. Here, the risk is that
    the violation propagates across this franchisees
    units and become a large-scale problem if the
    franchisor does not enforce.
  • The franchisor has invested a great deal in the
    franchise system (as opposed to this particular
    franchisee). The franchisor needs to protect its
    investment and the capabilities it has created
    while building the system. This is true even
    when the franchisor does enjoy strong relational
    governance. The franchisor will risk upsetting a
    given relationship to protect its system
    investments.
  • When the franchisor is large
  • When there is high mutual dependence in the
    franchisee-franchisor relationship (so that it
    can withstand the conflict that enforcement will
    create)
  • Or when the franchisor is much more powerful than
    the franchisee (so that the franchisor can coerce
    the franchisee to tolerate enforcement).
  • Taken together, it is clear that the franchisor
    weighs the power of both sides and the impact of
    each act of enforcement on its entire franchise
    system. Franchisees thus have more power than
    would appear to be the case if one examines each
    dyad (franchisor/franchisee) in isolation.

99
FIGURE 13-1 TYPICAL SALES-TO-PROFIT
RELATIONSHIPS FOR FRANCHISORS AND FRANCHISEES
Adapted from Carmen and Klein (1986)
100
Chapter 14Logistics and Supply Chain Management
101
FIGURE 14- 1 TYPES OF GOODS FOR SUPPLY CHAIN
MANAGEMENT
Adapted from Fisher (1997)
102
FIGURE 14-2 TWO KINDS OF SUPPLY CHAINS
Adapted from Fisher (1997)
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