Perreault−McCarthy: Basic
Marketing: A
Global−Managerial
Approach, 14/e- Place and Development
of Channel Systems
Text © The McGraw−Hill
Companies, 2002318 Chapter 11
world. Sherwin-Williams produces paint, but it also operates 2,000 retail outlets. In
England, most of the quaint local pubs are actually owned and operated by the large
beer breweries.
Corporate channel systems are not always started by producers. A retailer might
integrate into wholesaling and perhaps even manufacturing. Mothers Work is a good
example. It started as a mail-order catalog specializing in maternity clothes. Now
it sells more than a third of all maternity clothes in the U.S. Vertical integration
has been a key factor in this growth and its ability to give its customers what they
want when they want it. It has over 700 company-run stores, its own designers,
fabric-cutting operations, warehouses, and information systems to tie them all
together.^17
Vertical integration has potential advantages—stability of operations, assurance
of materials and supplies, better control of distribution, better quality control, larger
research facilities, greater buying power, and lower executive overhead.
Provided that the discrepancies of quantity and assortment are not too great at
each level in a channel—that is, that the firms fit together well—vertical integra-
tion can be efficient and profitable. However, many firms that have tried vertical
integration have found it difficult to achieve these efficiencies. Some managers think
it’s hard to be really good at running manufacturing, wholesaling, and retailing busi-
nesses that are very different from each other. Instead, they try to be more efficient
at what they do best and focus on ways to get cooperation in the channel for the
other activities.Firms can often gain the advantages of vertical integration without building an
expensive corporate channel. A firm can develop administered or contractual chan-
nel systems instead. In administered channel systems,the channel members
informally agree to cooperate with each other. They can agree to routinize ordering,
share inventory and sales information over computer networks, standardize account-
ing, and coordinate promotion efforts. In contractual channel systems,the channel
members agree by contract to cooperate with each other. With both of these sys-
tems, the members achieve some of the advantages of corporate integration while
retaining some of the flexibility of a traditional channel system. In fact, the oppor-
tunities to reduce costs, and provide customers with superior value, are growing in
these systems as new information technologies help channel partners share data to
make products flow more efficiently through the channel.Exhibit 11-3 Characteristics
of Traditional and Vertical
Marketing Systems
Type of Channel
Vertical Marketing Systems
Characteristics Traditional Administered Contractual CorporateAmount of Little or Some to good Fairly good Complete
cooperation none to goodControl None Economic Contracts Ownership
maintained power and by one
by leadership companyExamples Typical General McDonald’s, Florsheim
channel Electric, Holiday Inn, Shoes,
of “inde- Miller Beer, IGA, Ace Sherwin-
pendents” O.M. Scott & Hardware, Williams,
Sons (lawn Super Valu, Mothers
products) Coca-Cola, Work
ChevroletAdministered and
contractual systems
may work well