VERTICAL MARKETING SYSTEMS
Verticalmarketing is a unique approach in marketing that seeks to integrateand consolidate all business processes of the distribution channelincluding manufacturing, distribution and marketing to work as singleunit. This way, marketing moves from addressing customer-facingissues such as advertising, discounts and promotions to a wholesomeapproach that considers logistics, cost cutting, manufacturingprocesses, management decisions among other issues. There are threemain approaches in vertical marketing namely corporate system,contractual system, and administered system (Kotler & Armstrong2014). This paper expounds on each of these systems and offers reallife examples.
Inthe corporate vertical marketing system, an entity seeks to own thevarious processes in the conventional distribution channel. Theownership of these processes can happen from any point in the chain.This means that a distribution firm can choose to acquire or buy aretailer or wholesaler or even a manufacturer. Alternatively,manufacturer can choose to acquire distribution and retailingbusinesses to have better control of the entire process. Therefore,it is clear that regardless of the point of occurrence, a businessentity requires massive resources to institute a corporate verticalsystem. Some firms using this system include Apple, Firestone, IKEAand others. For Apple, the plans to open a manufacturing plant in theUS. The firm also owns several research and development centers thatdesign its products for manufacturing before distributing themthrough company-operated retail stores (VM works 2015).
Thecontractual vertical marketing system involves different businessunits operating as independent entities but bound by contractualobligations to one another. These businesses willingly choose toenter into a contract with obligations and benefits to individualentities clearly defined in advance. This allows participants tocapitalize on their strengths and specialize. This marketing systemhas many variations largely based on the number of participants,their point of operation in the conventional distribution channel andeven the areas covered by agreement (Yang, Su & Fam, 2012). Forinstance, a wholesaler may enter into a contractual agreement to havebranded merchandise manufactured by a supplier (Mangan, Lalwani &Butcher, 2008). Several western companies have capitalized on thisapproach together with contractual manufacturers in China who haveaccess to low cost labor. A good example is the case of Hon HaiPrecision Industry Co popularly known as Foxconn, which is contractedby Apple, Sony and Microsoft among others to manufacture variouscomponents. Exclusive contractual agreement may deny such contractorsfrom handling products from competing players in the market which isexpounded in the contract agreement. Similar contractual verticalmarketing system exists in form of Franchises such as by McDonald andBurger King with their franchisees (Kotler & Armstrong 2014).
Administeredvertical marketing system does not rely on any formal contract oragreement but rather a relationship guided by market forces. In thiscase, one entity who wields huge power in the distribution channelcapitalizes on this power to exert influence on other players andcontrol their activities (Kotler & Armstrong 2014). Formanufacturers, owning a patent or a scarce resource implies they haveimmense control on other players in the distribution channel.Distributors and retailers can also posses such power and exertinfluence on other entities in the distribution channel. Forinstance, huge chain stores such as Wal-Mart have a huge influence onsuppliers especially fresh farm products suppliers. In exercisingthis power, Wal-Mart demands huge discounts from suppliers in orderto attain low pricing targets, which is one of the key competingstrategies for the firm (Mangan, Lalwani & Butcher, 2008).
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