Distribution Channel Example in India
Distribution Channel Example in India
Distribution Channel Example in India
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A Grounded Exploration of Sales and Distribution Channel
Structures in Thirteen Industries in India Leading to a
Classification Scheme
Abstract
Innovation is a fundamental virtue of marketing. In this paper, a case is made
to promote the use of innovative and novel combinations of research
methodologies to derive new insights of business phenomena. This study is
an attempt to understand and explain the sales and distribution channel
structures in thirteen different industries in India. The investigation adopted a
mix of case research and grounded theoretic research methodologies in
exploring the subject under scrutiny. The study offers a classification scheme
for grouping marketing channels into homogenous clusters based on
similarity/dissimilarity using multivariate multidimensional mapping
techniques. This scheme offers to explain the variety found in structures and
suggests alternative channel possibilities. Such a scheme can be used in
formulating marketing strategies and in deciding upon operational issues as
well. While the main setting of the reported findings is Indian, the findings may
prove to be useful beyond the national setting. Usual disclaimers associated
with qualitative research methodology (Gummesson 1988) apply in this case
concerning the generalisability and validity of the findings. This paper’s
contribution is not as much in offering a schema as it is in suggesting an
analytical plan/process that helps in visualising structures and associated
strategies de novo.
Key words:
India
Marketing Channels
Marketing Strategy
Relationship Marketing
Research Methodology
Sales and Distribution
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Introduction
This paper investigates the sales and distribution channel structures in
thirteen different industries in India in an attempt to explore and explain the
similarities and differences found in the varied set of industries. Marketing
textbooks that deal with channels do not offer much guidance in this regard
(Bowersox and Copper 1992, Coughlan et. al. 2002 Pelton et al. 2002
Rosenbloom 2001). These texts discuss functions and flows in very general
terms, and more often than not focus on a single industry/sector. Not only do
we find that the focus is narrow, but the organisation of texts is also an issue
with chapters organised around different sectors. An example would be a
chapter that focuses on retailing, industrial marketing or consumer goods
channels. This treatment in our opinion does not recognise fully the
similarities and differences that one finds across sectors in marketing
channels. A thorough identification and recognition of these commonalties or
lack thereof may prove helpful to businesses in making strategic and
operational decisions concerning leveraging existing channels to their “fullest
potential” by adding or deleting products and services. They may also decide
to modify channels to suit their product and service portfolios. Our study offers
a classification scheme using case research methodology (Oburai and Baker
1999a; Oburai and Baker 1999b), grounded theory approach (Glaser 1998),
and modelling techniques. We employ case and grounded research in a
descriptive way in data collection and organisation, and modelling for
analysing the rich and varied data obtained. Though, the mix of
methodologies employed makes the process rather idiosyncratic, it is hoped
that researchers feel encouraged to adopt hybrid and varied methodologies in
innovative and novel ways in their theory generating attempts.
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preconceived views of the world as captured in theoretical works. Validity of
theoretical frameworks, typologies or explanations arrived at after employing
grounded research is rigorously ensured by comparing and contrasting with
existing theories and frameworks. Literature review phase is not at the
beginning of a research project but forms an integral part of the verification
and validation phase (which is usually one of last few phases) in a grounded
research method. This method is advocated and employed extensively by
many management and other social science scholars. In the marketing field,
the use of this strand of methodologies is growing and has found several
strong advocates (e.g. Professors Gummesson and Lowe). We also take note
of Brownlie and Saren’s (1997) suggestion that methodological pluralism is
essential to understanding marketing as it exists in practice and to be able to
portray an accurate picture of it. They urge marketing researchers to ‘move
beyond naive literal interpretations of interview transcripts as an analytical
strategy (p.158).’
The “pure” grounded theory approach may be an ideal, for all researchers
have some degree of understating of the phenomenon that they choose to
investigate. The current endeavour is not the most rigorous in its adherence to
the principles of grounded theoretic research methodologies; however, we
believe we have taken adequate care to abide by the spirit and approach
intrinsic to the method. Grounded theory method and case research method
are complementary and when employed in combination with the power that
modern modelling techniques and associated software afford can lead to new
insights. Elsewhere, it was argued that the main weakness of qualitative
research methodologies is the ostensibly idiosyncratic and hence perceptibly
subjective nature of the research process phases of data generation, analysis
and interpretation. Bias is supposedly the inherent and all-pervasive infiltrator
of qualitative research attempts, and lack of inter-subjective agreement or
reliability a significant stumbling block. To quote from Oburai and Baker
(1999b):
Qualitative methods yield data that are ‘rich, full, earthy, holistic, “real”; their face validity seems
unimpeachable; they preserve chronological flow where that is important, and suffer minimally from
retrospective distortion… Furthermore their collection requires minimal front-end instrumentation
(Miles 1979 p.590).’ While the attractions are many, Miles also notes that ‘Qualitative data tend to
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overload the researcher badly at almost every point: the sheer range of phenomena to be observed, the
recorded volume of notes, the time required for write-up, coding, and analysis can all be
overwhelming. But the most serious and central difficulty in the use of qualitative data is that methods
of analysis are not well formulated’(Miles 1979 p.590).
The setting of the data for this paper is in India. This study is exploratory and
qualitative. A brief mention of the process adopted may be in order to help
readers in understanding both the paper and the research process employed
in arriving at the reported findings and conclusions. Using both field studies
that involved in depth interviewing of managers and published sources (e.g.
periodicals, annual reports etc.), descriptive case studies were first written up
for 13 firms in different industries. A minimum of two different managers were
interviewed for each of the organisations contacted. Several of the managers
were also contacted subsequently for clarifications and further information
obtained as and when needed. This first phase was guided by a protocol that
established guidelines to ensure uniformity in coverage and depth. These
extensive long accounts were later turned into short précis that contained the
essence and substance of the earlier mentioned case studies. These short
summaries are presented in “Section One” of this paper below. These
accounts still have a lot of contextual detail that is difficult to absorb in a first
read. Readers may want to quickly read through these to get an overall
picture before proceeding to the later sections.
The next section “Section Two” is a summary of the contents of Section One.
This is presented in a tabular form and has ten key variables and our
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assessment of the degree of importance for each of the 10 variables for each
of the 13 chosen industries. These ten variables fall into two broad categories
namely industry related ones and channel member related ones. This table
was subjected to multivariate analysis using multidimensional mapping
analysis (MDS). The resulting two dimensional solution that maps the 13
different industry channels is presented in “Section Three” and is followed by
a discussion of the findings and implications thereof. Finally, we outline
several limitations of the present study and also offer directions for future
research.
1. Passenger Cars:
This sector is characterised by high unit value, high margins and high
competition. Given the high investments that dealers are required to make
upfront and also towards working capital, margins can easily get offset. Sales
are seasonal. Yearend sales are low as car models and year of manufacture
affect resale values. Organisations also tend to make use of depreciation
allowances by purchasing before the end of financial year and also to meet
budgetary provisions and expenditure. Manufacturer-dealer relationships,
given the fact that not many firms need more than 200 dealers to cover the
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nation, have the potential to develop into strong partnerships. Low volumes
cannot sustain a large number of dealers. This channel is a simple chain in
terms of flows and functions. Rural markets may not be able to support
dedicated local dealerships.
2. Household Paints:
The paints business is marked by high seasonality. Festive seasons are the
peak seasons. The number of dealers in a locality is an important parameter
in this business as a high dealer concentration can offset the sales volumes.
Lighter colours are fast moving. Working capital requirements are moderately
high. In a market dominated by ICI, Berger and Asian Paints, it appears that
several innovations have made the logistics component efficient. Some firms
have even outsourced the entire function. This allows scope for retailer to
company interaction and collaboration in a sector so far not known for close
cooperative relations between manufacturers and retailers.
3. Newspaper Industry:
Newspapers are sold in India at prices as low as Rs.2/- (Indian national
Rupees) or US$ 0.05 (1US$ is Rupees 50). Advertising revenue is said to be
the main source of income for businesses in this sector. Margins to
distributors, wholesalers, retailers, and hawkers account for as much as 50%
of sale prices. This business requires “direct-to-consumer’s-door-delivery”.
Timely delivery is essential, and unsold copies have little value. Firms battle
for circulation figures which help in raising advertising revenues. Movement of
goods is a key sales and distribution function. Main cities and towns are easy
to serve when production (local editions) is local. The only precondition is
minimum volumes or circulation levels.
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customers and others through targeted databases are the preferred
strategies. One estimate puts the number of credit card users at seven million.
Credit ownership does not however translate into usage. Owning multiple
cards only makes this market even more problematic. Defaulting on credit
card payments used to be a significant issue, but not any more so. The
increased scrutiny of applications to verify creditworthiness and other factors
appears to have driven the industry to focus on the upper end of the market.
Increasing awareness of credit cards, usage options, special offers, and
retaining and adding to customer base are the focus areas for businesses in
this sector. A number of banks appear to be using credit card products for
cross selling to existing bank customers rather than to operate as credit card
marketing specialists.
5. Tobacco Industry:
The cigarette industry is dominated BAT’s subsidiary in India. This firm
reaches 2 million retailers using factories-depots-branches-wholesalers-
retailers chain. Wholesalers employ own salesmen and supply products to
retailers. The demand and consumption is not seasonal and almost all sales
are made on cash basis. This zero credit policy ensures that the firm has no
collection problems and hence no defaults in payments from the channel
members. High brand equity and products covering a range of price points
and customer segments allow the company a strong to close monopoly
position.
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customised to its network. This makes switching very expensive for customers
and hence is a good proposition for the company. Huge investments in
infrastructure are backed up by the appointment of about 100,000 direct
selling agents for reaching consumers.
7. Footwear Market:
Bata has 60% share of the organised shoe market and sells 60 million pairs a
year. The company has a network of 1600 showrooms (1100 owned and 500
franchised), 500 wholesalers and 30,000 small dealer shops to which it
supplies 1200 product lines. Brand loyalty and reach have been the key
factors in the success of the firm for the 70 years of its existence. To counter
old fashioned image perceptions of the firm is a challenge that the firm is
struggling with at the moment. The entry of several well known foreign brands
has also had its impact although some of the firm’s showrooms stock Reebok,
Nike etc. A large number of new footwear showrooms have come up in the
recent years and many of them are associated with and are dedicated to
brands that compete with Bata. Sports and casual wear market is branded
and differentiated, and this is an area that Bata cannot match the investments
and promotion of multinationals like Nike and others.
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manufacturer with whom they are associated. These multi-brand outlets’
profitability is driven by volumes in a growing market and cross selling
opportunities. Financing and sale of insurance are also other related activities
that a number of dealers carry out.
1
Business India Jan 19-Feb 1 2004, Page 85
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This industry’s fortunes are tied to the monsoon and rainfall among other
climatic parameters. A fertiliser company that we studied manufactures and
distributes 2 million tonnes a year and has revenues of US$ 400 million. This
firm has no more than 10% market share. Fertiliser is a bulky, undifferentiated
commodity product that incurs very high transport costs. Prices are regulated
and margins are low. Farmers buy on credit and collection of debts is a
substantial task in this business. Contrasting this with Cadbury’s business
above, one gets an idea of the volumes involved and the importance of
logistics (2 million tonnes for a single fertiliser firm versus 4500 tonnes for the
whole of the chocolate market). The number of dealers that a firm has is low
and rural markets and small towns are where most of these are situated.
2
The Financial Express, Jan 24, 2004.
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experimenting with a new model and is planning to go in for a fewer number
of stockists handling larger areas of outlets in the future. This could mean
reduced costs for the company.
The next section offers a summary of the above detailed accounts in a tabular
form.
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Table 1: Sales and distribution structures of different industries - A
comparison
The ten variables in Table 1 above may be categorised into two distinct
variable groups. The ten variables fall into two broad categories namely
industry related ones and channel member related ones.
• Industry related variables: Competition, Unit Value, Volume, Unit Margin
and Seasonality.
• Retailer related variables: Number of Retailers, Retailer Capital
investment, Retailer Working Capital requirements, Retailer Sales Value,
and Manufacturer Retailer relationship.
The degree of importance that appears in the table is a subjective
assessment on the part of researchers and appears in the table as High (5),
Medium (3) or Low (1) representing the variables’ nature and strength. This
measurement is relative to the set of the chosen industries. This subjective
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assessment is commonly referred to as judgemental data, and can easily be
the average of multiple data points across a set of managers or even across
several sample strata. As long as we understand that the purpose is the
exercise is theory generation, not verification, one need only to think of both
validity and reliability as suited to the context of theory building. The
conversion of qualitative data into quantitative data is an important step as
this step, in our view, is a key link to making qualitative accounts more
amenable to analysis, interpretation and verification. Elements of rigor and
reliability and by extension validity are introduced into the research process
through this critical act. This, we argue, is a key contribution of the paper in
addressing a lacuna in the analysis and interpretation of qualitative data, and
in increasing reliability and validity of qualitative research process.
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The diagnostics for the above multidimensional solution are presented below:
Diagnostics for Perceptual Map
-------------------------------------------------------------------------------------------------------
Total variance accounted for by the 2 dimensions: .783
Cumulative proportion of variance accounted for by each dimension:
1 2 3 4 5 6 7 8 9 10
.661 .783 .877 .926 .955 .968 .978 .986 .993 1.000
-------------------------------------------------------------------------------------------------------
The following table summarizes the variance explained for each
attribute/object in the 2-dimensional map you requested.
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Findings, Conclusions and Contributions
Based on the above data and output, we may classify marketing channel
structures into several different clusters. An illustration of a five cluster
grouping is presented below:
Cluster 1: Cars and Motorbikes
Cluster 2: Credit Cards, Cell Phones, Footwear
Cluster 3: Tobacco, Chocolate, Ice cream
Cluster 4: Toothpaste, Detergents & Shampoos and Newspapers
Cluster 5: Fertilisers and paints
This is a visual map classification. The clusters and their composition can
change depending upon researcher perspective and/or practitioner aims. For
instance the seasonality variable appears to bring fertilises, ice cream and
paints somewhat close to one another. However, the volume dimension
makes ice cream a part of the cluster made up of chocolate and tobacco.
This classification may prove to be very useful in many strategic and tactical
ways. This classification or typology scheme can influence both the design
and management of marketing channel structures. We feel that this
typology/classification has several applications and offers explanations for
hitherto unexplained phenomena. This schema may also offer empirical
support to strategic management theories that focus on diversification into
related businesses downstream. Diversified firms also may find strategic and
operational rationales for portfolio of product-markets that they may be
operating in or intend to enter into. Yet another key contribution of the paper is
the application a combination of methodologies that yields new insights
concerning a phenomenon which is as old as the practice of marketing itself,
and a subject matter that has been under the lens of marketing academia
since the very early period of the advent of the marketing discipline. A third
contribution is the formulation of a link to quantification and modelling to
enable qualitative researchers to lend analytical rigor in their attempts at
theory generation.
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Section Four: Limitations of the study and further research
avenues
This investigation is exploratory given the qualitative methodology employed
in exploring the subject under scrutiny. This study is focused on one single
nation viz., India and also is limited to 13 different businesses/sectors. It
would be useful to extend the number of industries covered to include others
and test the mapping solution both for stability and comprehension. It may
also be worthwhile to add more variables and constructs in addition to the ten
used in this study. Theoretical extensions and comparing the findings of this
study with existing theories is another possible avenue for future research.
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