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

Chapter 9: Distribution Channels and Supply Chain

Management in High-Tech Markets

©2010 Pearson Education, Inc. publishing as Prentice Hall

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?


Comprised of the various players in the

flow of product: producer consumer

Distribution channels are used to establish

brand identity and preference


Distribution activities

◦ Logistics and physical distribution functions

◦ Structure and management of the channel

Manufacturers must manage:

◦ flow of product

◦ relationships between firms


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


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


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


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


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


Channel Design◦What determines customer channel selection?

ease-of-use price search effort service

information quality aesthetic appeal convenience assortment enjoyment


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


Type Characteristics UsefulNeeds to Change

“Undefined”- Independent

Lack of knowledge about what other is doing

Small company, Marketing supports Sales

Regular conflicts, inefficient

“Defined”- Clear Roles

Clear processes, boundaries, & responsibilities

Simple products, traditional roles

Demand for customization, accelerating technology

“Aligned”- Cooperate

Joint planningSimple sales process, short sales cycle

Common process can generate more revenue

“Integrated”- Collaboration

Shared structure, systems and metrics

See Table 9-2

Four Types of Relationships Between Sales and Marketing


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


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


Offline retail stores, online retail stores, catalogs, kiosks

IntermediariesWhich type?

◦Distributors: Buy from manufacturer, sell to other resellers Typically national

◦Resellers: Provide products/services to match end user needs Typically local


VAR/VADSystems

IntegratorsInbound vs. Outbound

Traditional Intermediari

es

Add value through own

expertiseSpecialized

Store-front for walk-ins

Mass merchandisers

, Category killers,

Customize for vertical

markets

Manage large or complex projects

Calls on customers

Mom-and-pop stores,

franchises

Types of Resellers


IntermediariesHow 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


High-Tech Channels

Need for indirect channels to provide value to

manufacturer

Blurring of distinctive members in the supply chain

Evolution of high-tech channels

The Internet

Gray markets

Black markets, piracy and export restrictions

Supply chain management

software

Vertical hubs


Distributors (To grow base of VARs)

Direct Sales to CEMs and Integrators S

AL

ES

Early, Early

Market

High Growth/ Critical

Mass

Mature Market/ Technology

Standardized

Time

Early Adopters

Traditional Retailers

Mass Merchant


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


Governance Mechanisms

◦Authoritative (unilateral) control Ownership Formal centralized decision making (franchising) Power



◦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



◦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 claim2. Provide evidence3. Exhort the channel member to act



◦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


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

Assessing both quantitative and qualitative

performance indicators is pertinent.


Objectives:

◦ Increase coverage

◦ Maintain cost efficiency

◦ Minimize conflict

Steps (see following slides)

1.Gather market data

2.Harmonize following the contingency theory


Assess:◦ Market opportunity◦ Coverage models◦ Channel-specific benefit/cost analysis◦ Magnitude of conflict

Degree of cannibalization

Effectively communicate justification for distribution strategies◦ Logic

◦ Quantification


CHANNEL PERFORMANCE

CHANNELS

TASKS

TARGETS

Contingency Approach to Developing Hybrid Channels

The type of channel used must match particular “contingent” factors to optimize outcomes


Effective Implementation of the Contingency Theory:

a) Identify customer target segments

b)Delineate the tasks to sell to those segments

c) Allocate the most efficient/effective channels to those tasks


Allocating Tasks to Channels

Lea

d G

ener

atio

n

Qua

lify

Sale

s

Pres

ales

Clo

se

Sale

s

Post

Sal

es

Serv

ice

Acc

t. M

gmt.

National Acct. Mgmt.

Big

Direct Sales

Telemarketing Medium

Direct Mail

Small

Retail Sales

Distributors

Dealers/ VARs

Tasks

Channels


The tenor of the relationshipo Relational vs. adversarial

CRM◦ Effectively track customers◦ SOA: Service-oriented

Compensation & Communication


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?


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


Causes Solutions

Volume discount price policiesEliminate sales to the source of

the gray marketDifferentials in int’l exchange

ratesEliminate the arbitrage

problem: one-price policyDifferent resellers’ cost

structuresIncrease market penetration

Highly selective distributionGather information on gray

market problem

Producers performing many marketing functions

Institute consistent performance measures internally

Inconsistent internal policies

(Table 9-4)


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


Considerations:

◦Affordability and experiential learning

◦Physical distribution and product promotion

◦Alternative energy sources

◦Direct channels or training new channel members


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


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


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


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


Supply Chain

Functions

Type of Innovation

Incremental Breakthrough

Physical Function

Market Mediation Functions

= Appropriate Match, = Inappropriate Match

Match of type of product to supply chain functions


Efficient supply chains◦ Economies of scale◦Reduce non-value-added activities◦Share accurate/timely information with suppliers

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


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


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


Reverse Auctions

Method of e-procurement 1.The seller bids for the rights to supply the buyer’s

purchasing needs2.The lowest price bid wins

Buyers: save on procurement costs for buyers Suppliers: engage in destructive price competition


Supply Chain Management (SCM) Software

1. Includes more than procurement: manufacturing and distribution planning systems, forecasting, management modules, and more

2. Installed on local computers rather than on the Web.

More expensive than Web-based e-procurement


Outsourcing Traditionally: production

Now: knowledge services

◦ fueled by the need to lower costs in a competitive, slow global economy

Offshoring

RFID (see Chapter 6)


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.


Opening Vignette: Cisco Systems

Technology Expert: Cisco Systems

Technology Solution: Big Boda World Bikes

End-of-Book Case: TiVo, Xerox, Selco


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