Marketing of High-Technology Products and Innovations

Distribution Channels in High-Tech Markets

Topical Agenda • Channel Design and Management • Specific Channel Considerations in High Tech Markets • Adding New Channels: The Internet

Distribution Channels • Comprised of the various firms and players in the flow of product from producer to consumer. – Manufacturers must manage flow of product – Mftr must manage relationships between firms • Distribution tasks include; – Logistics and physical distribution functions – Design and management of the channel

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

Some Global Concerns • Firms at different stages of the channel: – May have conflicting goals and objectives – Often don ’ t think in terms of joint problem solving

Overarching Concerns • Goal: Manage all functions to provide value to end customer – Meet customer needs in most effective/efficient mode possible • Functions include: – Providing assortments (product amount/variety) – Providing service and facilitating functions – Communicating with end-users

Overarching Concerns • Effective channels: – Identify redundancies that lead to inefficiency and conflict – Develop relationships and alliances – Work toward cost efficiency and customer satisfaction – Rely on technology solutions – Use channel members as partners

Complexities in Managing High-Tech Channels • High value of products – Pressure to minimize inventory in channel • Rapid pace of market evolution – Price pressures • Need to maintain sales/service support • Problems with pirating • Complexities with the Internet

Channel Design and Management

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Consideration of channel objectives, constraints, and external environment. Choice of channel structure: direct versus indirect. Choice of type of intermediary. Penetration/Coverage: Number of intermediaries. Channel Management.

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Selection and Recruitment of Channel Intermediaries

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Control and Coordination

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Consideration of Legal Issues Evaluation of Performance.

Channel Objectives, Constraints • Base channel design on consideration of: – Customer behavior and needs – Competitors ’ channels – Product characteristics

Choice of Channel Structure • Direct: Manufacturer sells directly to end-users – Own sales force – Internet – Catalogs, 800#, etc. • Indirect: Mftr. uses intermediaries to market, sell, deliver product to end-users • Hybrid channel: Uses both direct + indirect

Considerations in Choice of Channel Structure • Hybrid channel invites complexities — – As more firms compete for customers, conflict increases – Indirect channels subject to less control • Direct channels may not be cheaper – Eliminate intermediary, but not the functions

Choice of Type of Intermediary • Resellers: between distributors and end-users – Typically local – May customize for end-users • Distributors – Typically national

Types of Resellers • VARs and VADs – Purchase components from different manufacturers, customize for various vertical markets • Systems Integrators – Manage larger projects • In-bound (has a store-front for walk-in traffic) versus Out-bound (dealer sales force calls on customers) • Traditional intermediaries – Mass merchants, small dealers, franchisees

Penetration/Coverage: # of Intermediaries • Coverage vs. Intra-brand competition – Price competition may damage mftr.

’ s reputation – Dealers make lower margin, lowering incentive for service and support

Channel Management • Recruit/select channel members – Rely on trade shows, targeted direct mail, publicity, personal selling • Control and Coordination to manage, guide, and monitor reseller activities • Legal Issues

More on Control and Coordination Mechanisms • Authoritative controls via – Ownership – Formal designation of decision making (franchising) – Power • Bilateral controls focused on mutual interest – See next slide • Legal controls

Bilateral Controls • Relational norms to work together – Flexibility, mutual sharing of benefits/burdens, information sharing • Joint interdependence and commitment • Trust

Legal Considerations • Tying – Sale of popular product linked to second product • Ex: Microsoft case partially based on tying of operating system to Internet browser – Found to be anticompetitive – Bundled rebates • Exclusive Dealing – Dealer can carry only one mftr.

’ s product – Designed to ensure incentive for service, but antitrust issues if access to competition restricted

Evaluation of Performance 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

Channel Considerations in High-Tech Markets

Blurring of distinctive members in the supply chain Need for indirect channels to provide value to manufacturer Supply chain management software Evolution of high tech channels High-Tech Channels Gray markets Vertical hubs The Internet Black markets, piracy and export restrictions

Specific High-Tech Channels Issues • Blurring of Roles – Distributors/resellers backward integrating into assembling products – Suppliers forward integrating into computer manufacturing

Specific High-Tech Channels Issues (Cont.) • New strategies to increase value of indirect channels – Channel assembly • Customization, speed • Based on build-to-order model – Co-location • Distributor ’ s employees work from vendor ’ s site • Customization – Shift to services

Specific High-Tech Channels Issues (Cont.) • Evolution of high-tech channels – Shown on next slide

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

Specific High-Tech Channels Issues (Cont.) • Gray Markets: diversion of goods to unauthorized distributors, sold at discounted prices – Causes confusion and channel conflict – Loss of service incentive with legitimate members – Intra-brand competition

Causes of Gray Markets • Pricing policies with large volume discounts • Differential in international exchange rates – “ Parallel importing ” • Cost differences between different types of resellers – Free-riding of discount outlets on full-service outlets – Producers perform marketing functions may reduce customer ’ s risk in buying from unauthorized distributors • Selective Distribution – Lack of intra-brand competition may invited gray marketers • Incompatible compensation policies – Volume quotas

Solutions to Gray Markets • Track source of units and cut off gray market – Signals commitment to legitimate channels – Mitigates price erosion – May be burdensome administratively • One-price policy (no volume discounts) • Increase coverage in the market • Institute consistent performance measures

Specific High-Tech Channels Issues (Cont.) • Black Markets: Counterfeit goods/piracy – Especially problematic with unit-one cost structures • Export Restrictions on “ dual use ” products – Ostensibly to protect U.S. security interests

Adding New Channels: The Internet • Hybrid channels: – Conflicts between manufacturer and its dealers pursuing same customers – “ Co-opetition ” • Options: – Avoid the Web (and conflict) – Go to the Web (invite conflict and even mutiny) • “ disintermediate ” – “ Click and Brick ” model

Managing Hybrid Channels • Objectives: – Increase coverage while lowering costs • Steps: – Identify customer target segments – Delineate tasks/functions needed by segments – Allocate most effective/efficiency channel to the tasks on a by-segment basis

Contingency Model

CHANNELS CHANNEL PERFORMANCE TASKS TARGETS

Matching Tasks to Channels, By Segment

Task s Channels National Acct. Mgmt. Direct Sales Telemarketing Direct Mail Retail Sales Distributors Dealers/ VARs Big Medium Small

Predicting Effects of “ Dis-intermediation ” • Does the Web channel add a new value proposition for end-users? – Reach new customers – Less likely to cannibalize existing channels • Does the Web merely create distribution efficiencies? – Cannibalizes existing sales

Transition to the Internet: Avoid Conflict? • Web site disseminates product info only • Web generates leads which are directed to dealers • Web site sells limited range of merchandise • Web site takes on-line orders from only small customers or remote geographic areas • Sell on Web with little fanfare

What if a Company Downplays the Web to Avoid Conflict?

• Invites competition, which threatens long-term survival • Inconsistent with “ creative destruction ”

Moving Full-Steam to the Internet • Assess magnitude of conflict • Establish boundaries and guidelines for channels and customers • May want to keep Web prices aligned with traditional channels • May want to compensate dealers for sales in their territories • Improve information between mftr. and resellers

Supply Chain Management • Minimize inventory as work-in-progress • Work on build-to-order model • Reduce cycle time • Electronic links to customers

Implications of Contingency Model for Supply Chain Management • For incremental innovations: – Customer needs are known – Focus on managing physical functions and close coordination to gain cost efficiencies • For breakthrough innovations – Must read uncertain market signals, knowing what inventory is required – Focus on matching what customers want by providing variety of products and responsiveness (speed and flexibility) – Consistent with trends to channel assembly

Matching Type of Innovation to Supply Chain Functions

Supply Chain Functions Type of Innovation Incremental Breakthrough Physical Function

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Market Mediation Functions

- 0   = Appropriate match of type of product to supply chain functions -0 = Inappropriate match