In the uncertain fluctuating market of today, it is essential for a company to hold on and face those uncertainties in order to survive. Consumers can be an aid for a company's survival, thereby it is essential for consumers to get the goods of a company whenever and however they need them. Here is where distribution channels come in and give hand. "Channels of distribution are the different paths that goods passed through in moving from the producer to the consumer", (Meyer et al, 1988). With the help of distribution channels, companies are able to overcome the time, place and possession gaps that separate goods and services from the consumers. As said by Aaker (1984), access to an effective and efficient marketing channel is often a key success factor. However, in this competitive era, an understanding of the alternative distribution channels and the trends in their relative importance can be of strategic importance for any company. For example, the growth and importance can be of a self service retail gasoline stations and the comparison growth in the importance of convenience stores such as the 7/11 chain in gasoline retailing has strategic significance to petroleum companies and distributors as well as to firms in food retailing (example adapted from Aaker, 1984). Additionally, because of competition, gaining distribution in some industries can be extremely difficult and costly. Nowadays, even large, established firms have trouble obtaining space on the supermarkets shelves for products with substantial marketing budgets.
As said by Kotler and Armstrong (2001), members of the marketing or distribution perform several functions such as providing information for the company, promotes their goods and services, have contacts with buyers, matching buyers needs, as well as negotiate prices so that goods can be transferred. Some other functions include physical distribution, financing and risk taking.
There are two types of marketing systems. They are conventional distribution channels and vertical marketing system.
Conventional Distribution Channel
According to Kotler and Armstrong (2001), a conventional distribution channel is a channel consisting of one or more independent producers, wholesalers, and retailers, each a separate business seeking to maximize its own profits even at the expense of profits for the system as a whole. In this case, intermediaries operate independently or enter into some form of arrangements with suppliers and other intermediaries. Moreover, a conventional channel network tends to be fragmented because manufacturers, wholesalers and retailers bargain aggressively with each other over the prices and others.
Since channel members are separated and acts independently, none of them has much control over the other members. For example, in a conventional distribution channel, manufacturers, distributors and retailers act independently so the manufacturers as the producer of the goods, cant decide anything for the other members, lets say, on what price should the distributors and retailers sell, where should they sell, etc. the manufacturers or the other members has no formal authority over each other. Moreover, in a conventional distribution channel, many conflicts may occur since there is the absence of a formal contract and also in most cases, their goals and aims differ. Another weakness of a conventional distribution system is that each and every member tries to reap a lot of profits in order to pursue their own corporate objectives. This may cause drawbacks for the system as each independent firm shows little concern for overall channel performance.
Vertical Marketing System
According to Evangelista, et al (1984), an improvement over the conventional marketing system, is the integrated marketing system which may be vertical or horizontal. "A vertical marketing system is a network of two or more levels of channel members as in the case of arrangement...