Channel Dynamics 245
Adding or dropping an individual channel member requires an incremental
analysis to determine what the firm’s profits would look like with and without this
intermediary. Sometimes a producer considers dropping all intermediaries whose
sales are below a certain amount. For example, Navistar noted at one time that 5 per-
cent of its dealers sold fewer than three or four trucks a year. It cost the company more
to service these dealers than their sales were worth. But dropping these dealers could
have system-wide repercussions. The unit costs of producing trucks would be higher
because the overhead would be spread over fewer trucks, some employees and equip-
ment would be idled, some business in these markets would go to competitors, and
other dealers might become insecure. All of these factors have to be taken into
account when changing channel arrangements.
The most difficult decision involves revising the overall channel strategy.^13
Distribution channels can become outmoded over time, as a gap arises between the
existing distribution system and the ideal system that would satisfy target customers’
(and producers’) requirements. Examples abound: Avon’s door-to-door system for
selling cosmetics had to be modified as more women entered the workforce, and
IBM’s exclusive reliance on a field sales force had to be modified with the introduction
of low-priced personal computers. Dell Computer started out selling PCs by mail to
consumers and businesses, briefly added retail stores as part of an expansion strategy,
then cut out store distribution in favor of the Internet (www.dell.com), a direct chan-
nel where customers could more easily order customized PCs.^14
CHANNEL DYNAMICS
In the ever-changing marketing environment, distribution channels do not stand still.
New wholesaling and retailing institutions emerge, and new channel systems evolve.
We look next at the recent growth of vertical, horizontal, and multichannel marketing
systems and see how these systems cooperate, conflict, and compete.
Figure 5-4 Channel Value Added and Market Growth Rate