Chapter 9: Distribution Channels and Supply Chain Management in High-Tech Markets

 How do prices of goods in direct and indirect channels compare?

 What challenges must the sales and marketing departments overcome in working together?

 Which intermediaries are prominent in high tech channels?

 Why do companies choose to “green” their supply chain?

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 Comprised of the various players in the flow of product: producer  consumer  Distribution channels are used to establish brand identity and preference ©2010 Pearson Education, Inc. publishing as Prentice Hall

 Distribution activities ◦ Logistics and physical distribution functions ◦ Structure and management of the channel 

Manufacturers must manage:

◦ flow of product ◦ relationships between firms ©2010 Pearson Education, Inc. publishing as Prentice Hall

 The goals of effective distribution channels: ◦ Eliminate redundancies and inefficiencies in the system ◦ Develop relationships and alliances with key players ◦ Provide value to the end customer effectively and efficiently ◦ Achieve both cost advantages and customer satisfaction ©2010 Pearson Education, Inc. publishing as Prentice Hall

The number of levels and companies involved in the flow of product from producer to end user

A.

Direct Channels: Manufacturer  Customer  Provide full control over the execution of marketing strategy and a performance benchmark for indirect channels • • • Company sales force Company web site Company owned retail outlets ©2010 Pearson Education, Inc. publishing as Prentice Hall

B.

Indirect Channels: Rely on Intermediaries • • • provide amount/variety assortments for customers provide service and other facilitating functions communicate with end users  • Contact efficiencies Cybermediaries  Delegate to core competencies of distribution and logistics ©2010 Pearson Education, Inc. publishing as Prentice Hall

C.

Hybrid, Dual, or Concurrent Channels: combination of direct and indirect channel structure

Suppliers Agent/Broker/Distributor Manufacturers/OEMs Distributor/Broker Resellers Resellers End Customers

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C.

Hybrid, Dual, or Concurrent Channels (cont.) This structure is more prevalent when: • • • • market size and growth are strong the offering is perceived as less standardized customers don’t form buying groups to increase their bargaining power customers’ needs and buying behavior are stable across purchasing occasions  Intrabrand Competition ©2010 Pearson Education, Inc. publishing as Prentice Hall

 Channel Design ◦ What determines customer channel selection?

ease-of-use price search effort service information quality aesthetic appeal convenience assortment enjoyment ©2010 Pearson Education, Inc. publishing as Prentice Hall

 Direct Sales ◦ Gain control of the product message and CRM ◦ Sales force management of interface between:  Direct sales force and indirect channels  Sales Department and the Marketing Department ©2010 Pearson Education, Inc. publishing as Prentice Hall

Four Types of Relationships Between Sales and Marketing Type “Undefined” Independent “Defined” Clear Roles “Aligned” Cooperate “Integrated” Collaboration Characteristics Lack of knowledge about what other is doing Clear processes, boundaries, & responsibilities Joint planning Shared structure, systems and metrics Useful Small company, Marketing supports Sales Simple products, traditional roles Simple sales process, short sales cycle Needs to Change Regular conflicts, inefficient Demand for customization, accelerating technology Common process can generate more revenue See Table 9-2 ©2010 Pearson Education, Inc. publishing as Prentice Hall

 Sales Over Company Website ◦  Brick & Clips Distribution Model: Company-direct Website in addition to traditional offline channels ◦ A variety of factors must be considered before going to this model including:  Backlash from existing channels  Cannibalization  Disintermediation ©2010 Pearson Education, Inc. publishing as Prentice Hall

 Company Owned Retail Outlets ◦ Fully integrate retail sales into marketing strategy ◦  Channel Evolution Theory Consumers are more comfortable going to a single brand store ◦ Can also cause conflict with intermediaries in indirect channels ©2010 Pearson Education, Inc. publishing as Prentice Hall

Offline retail stores, online retail stores, catalogs, kiosks

Intermediaries

Which type?

◦   Distributors: Buy from manufacturer, sell to other resellers Typically national ◦   Resellers: Provide products/services to match end user needs Typically local ©2010 Pearson Education, Inc. publishing as Prentice Hall

Types of Resellers

VAR/VAD Systems Integrators Add value through own expertise Customize for vertical markets Specialized Manage large or complex projects Inbound vs. Outbound Store-front for walk-ins Calls on customers Traditional Intermediaries Mass merchandisers, Category killers, Mom-and pop stores, franchises ©2010 Pearson Education, Inc. publishing as Prentice Hall

Intermediaries

How Many?

◦ Coverage, Penetration  Degree of coverage vs. Degree of intrabrand competition ◦ Interbrand Competition: Different brands = healthy ◦  Intrabrand Competition: Same brand = unhealthy Use of territorial restrictions ©2010 Pearson Education, Inc. publishing as Prentice Hall

Supply chain management software Vertical hubs Blurring of Need for indirect channels to provide value to in the supply chain

High-Tech Channels

manufacturer Evolution of high-tech channels Gray markets The Internet Black markets, piracy and export restrictions ©2010 Pearson Education, Inc. publishing as Prentice Hall

Time Traditional Retailers Distributors (To grow base of VARs) Mass Merchant Direct Sales to CEMs and Integrators Early, Early Market Early Adopters High Growth/ Critical Mass Mature Market/ Technology Standardized

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 Retail channel useful for mainstream market rather than crossing the chasm  Does not create demand nor help develop “whole product”  To “cross the chasm” ◦ Direct sales channel useful, but requires volume and predictability of revenues  May need VARs and Systems Integrators ©2010 Pearson Education, Inc. publishing as Prentice Hall

 Governance Mechanisms ◦  Authoritative (unilateral) control Ownership   Formal centralized decision making (franchising) Power ©2010 Pearson Education, Inc. publishing as Prentice Hall

 Governance Mechanisms ◦   Bilateral controls Mutual interest Flexibility/adaptation    Mutual sharing of benefits/burdens Collaborative communication Relational norms (shared expectations) to work together    Information sharing Joint interdependence and commitment Trust ©2010 Pearson Education, Inc. publishing as Prentice Hall

 Governance Mechanisms ◦   Coercive influence Promises and threats Effective when the channel member is highly dependent on the marketer ◦   Non-coercive influence Information and persuasive arguments Rational argument 1.

Make a claim 2.

Provide evidence 3.

Exhort the channel member to act ©2010 Pearson Education, Inc. publishing as Prentice Hall

 Governance Mechanisms ◦ Legal Issues  Tying   Sale of product linked to second product Bundled rebates  Exclusive Dealing  Restrict dealer to carry only one brand of a product   Designed to ensure incentive for service Antitrust issues arise if access to competition restricted ©2010 Pearson Education, Inc. publishing as Prentice Hall

Assessing both quantitative and qualitative performance indicators is pertinent.

Reseller’s contribution to supplier profits Reseller’s contribution to supplier sales Reseller’s contribution to growth Reseller’s competence Reseller’s compliance Reseller’s adaptability Reseller’s loyalty Customer satisfaction with reseller ©2010 Pearson Education, Inc. publishing as Prentice Hall

 Objectives: ◦ Increase coverage ◦ Maintain cost efficiency ◦ Minimize conflict

Steps

(see following slides) 1.

Gather market data 2.

Harmonize following the contingency theory ©2010 Pearson Education, Inc. publishing as Prentice Hall

 ◦ ◦ ◦ ◦ Assess: Market opportunity Coverage models Channel-specific benefit/cost analysis Magnitude of conflict  Degree of cannibalization  ◦ ◦ Effectively communicate justification for distribution strategies Logic Quantification ©2010 Pearson Education, Inc. publishing as Prentice Hall

CHANNELS CHANNEL PERFORMANCE TASKS TARGETS

Contingency Approach to Developing Hybrid Channels The type of channel used must match particular “contingent” factors to optimize outcomes ©2010 Pearson Education, Inc. publishing as Prentice Hall

Effective Implementation

of the Contingency Theory: a) b) c) Identify customer target segments Delineate the tasks to sell to those segments Allocate the most efficient/effective channels to those tasks ©2010 Pearson Education, Inc. publishing as Prentice Hall

Tasks Channels

National Acct. Mgmt. Direct Sales Telemarketing Direct Mail Retail Sales Distributors Dealers/ VARs

Allocating Tasks to Channels Big Medium Small

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 o The tenor of the relationship Relational vs. adversarial  ◦ ◦ CRM Effectively track customers SOA: Service-oriented  Compensation & Communication ©2010 Pearson Education, Inc. publishing as Prentice Hall

 Long tail strategy: ◦  “Blockbuster” vs. Niche 80/20 rule ◦ Slow-moving 80%  Profitable Number of products in: the “long tail” > the “head”?

Total sales from: “long tail” products > “head” products?

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 Diversion of goods to unauthorized distributors, sold at discounted prices ◦ Intra-brand competition, channel conflict ◦ Legitimate channels lose:  Business  Incentive to push sales/provide service ©2010 Pearson Education, Inc. publishing as Prentice Hall

Causes Volume discount price policies Differentials in int’l exchange rates Different resellers’ cost structures Highly selective distribution Producers performing many marketing functions Inconsistent internal policies Solutions Eliminate sales to the source of the gray market Eliminate the arbitrage problem: one price policy Increase market penetration Gather information on gray market problem Institute consistent performance measures internally (Table 9-4) ©2010 Pearson Education, Inc. publishing as Prentice Hall

 ◦ Black Markets  Counterfeits  Piracy Especially problematic with unit-one cost structures  ◦ Export Restrictions To protect U.S. security interests    Do controls actually undermine the U.S.’ position as a technology leader?

Inevitably transfer: “friendly”  restricted countries Strict restriction drives countries to other suppliers ©2010 Pearson Education, Inc. publishing as Prentice Hall

Considerations:

◦ Affordability and experiential learning ◦ Physical distribution and product promotion ◦ Alternative energy sources ◦ Direct channels or training new channel members ©2010 Pearson Education, Inc. publishing as Prentice Hall

 Logistical management of incoming components in the manufacturing process  Match inflow with market demand ◦ Demand-backward approach Challenges: ◦ Increasingly shorter life cycles of high-tech products ◦ Demand is constantly changing  Standard supply chain management practices are ill equipped to deal with the risks and uncertainties ©2010 Pearson Education, Inc. publishing as Prentice Hall

Goals: ◦ Reduce inventory as work-in-progress ◦ Reduce cycle time ◦ Electronically link customers Requirements: ◦ Accurate forecasts ◦ Flexibility ◦ Focus on the customer ◦ Effective collaboration across both intra- and inter-organizational boundaries ©2010 Pearson Education, Inc. publishing as Prentice Hall

Demand Uncertainty

 Difficult to predict end-consumer demand  Bullwhip effect: Market signals get distorted up the supply chain   LOW ◦ for functional products Familiar to end-consumers HIGH ◦ for innovative products End-consumer risk  To reduce demand uncertainty: Supply chain members must share information about market demand ©2010 Pearson Education, Inc. publishing as Prentice Hall

Supply Uncertainty

 Difficult to predict the necessary quality and quantity of raw materials, components, infrastructure, supplies and services  LOW for a stable supply process, mature technology  HIGH for an evolving supply process, changing technology, unknown supplier base    To reduce supply uncertainty: Early design collaboration Joint product development with suppliers Participation in on-line marketplaces for synchronized planning with suppliers ©2010 Pearson Education, Inc. publishing as Prentice Hall

= Appropriate Match, = Inappropriate Match

Supply Chain Functions

Physical Function

Type of Innovation

Incremental Breakthrough Market Mediation Functions ©2010 Pearson Education, Inc. publishing as Prentice Hall

 ◦  Example: Wal-mart, Costco  ◦ ◦ ◦ ◦ Risk-hedging supply chains Pool resources to avoid disruptions Cultivate second sources Maintain extra inventory Manufacturing facilities in alternate locations  Example: military supply chains ©2010 Pearson Education, Inc. publishing as Prentice Hall

 ◦ ◦ Responsive supply chains Flexible in meeting changing needs of customers Rely on accurate order information/mass customization  Example: Dell  ◦ ◦ ◦ ◦ Agile supply chains Combination of risk hedging and responsive supply chain strategies Work with alternate suppliers on different technologies Share resources with others in the industry Flexible in mass customization  Example: Amazon ©2010 Pearson Education, Inc. publishing as Prentice Hall

Online Platforms ◦ ◦ ◦ ◦ Electronic hubs/exchanges Allow for price-based competition Useful for short-term transactions of commodity products between businesses May undermine the tenor of some relationships  E-procurement: a large Web-based marketplace encompassing many different vertical industries ©2010 Pearson Education, Inc. publishing as Prentice Hall

Reverse Auctions  Method of e-procurement 1.

The seller bids for the rights to supply the buyer’s purchasing needs 2.

The lowest price bid wins   Buyers: save on procurement costs for buyers Suppliers: engage in destructive price competition ©2010 Pearson Education, Inc. publishing as Prentice Hall

Supply Chain Management (SCM) Software 1.

2.

Includes more than procurement: manufacturing and distribution planning systems, forecasting, management modules, and more Installed on local computers rather than on the Web.

 More expensive than Web-based e-procurement ©2010 Pearson Education, Inc. publishing as Prentice Hall

Outsourcing  Traditionally: production  Now: knowledge services ◦ fueled by the need to lower costs in a competitive, slow global economy  Offshoring RFID (see Chapter 6) ©2010 Pearson Education, Inc. publishing as Prentice Hall

The

“Greening”

of the Supply Chain  Cut costs and gain a competitive advantage through environmentally-friendly choices in: ◦ Product design ◦ ◦ Purchasing and materials sourcing Manufacturing processes ◦  managing toxins in production, waste, energy utilization, etc. Delivery ◦  transportation, waste in packaging E-waste and reverse logistics. ©2010 Pearson Education, Inc. publishing as Prentice Hall

 Opening Vignette: Cisco Systems  Technology Expert: Cisco Systems  Technology Solution: Big Boda World Bikes  End-of-Book Case: TiVo, Xerox, Selco ©2010 Pearson Education, Inc. publishing as Prentice Hall

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