Chapter 10 Analyzing the Value Chain Distribution Channels

Overview • Distribution as a competitive strategy • Distribution channel options • Creating a

Distribution Is Now a Competitive Strategy • Mass customization requires a different distribution strategy • Rapid pace of markets requires minimizing products held in inventory • Low cost distribution (e. g. the internet) is a powerful tool for value creation • Disintermediation: reducing the length of the value chain Copyright © Houghton Mifflin Company 3

Distribution Trends • Collapse of the middle – Bundles and value-added solutions • Emergence of new customer groups • Migration within the value chain • Redefinition of the product/service (e. g. , Starbucks and coffee) • Consolidation of industries Copyright © Houghton Mifflin Company 4

Distribution Channel Options Copyright © Houghton Mifflin Company 5

What Defines an Effective Channel? • Inventory • Ownership • Negotiation • Gathering of market information • Financing and payment • Risk management • Member power Copyright © Houghton Mifflin Company 6

Value Chain Is Basis for Business Model • What does the value chain look like? • What is your role in it? • Who else is involved? • Who will pay whom and how much? • How can we make money? • What infrastructure must be in place? • What changes will customers have to make? Copyright © Houghton Mifflin Company 7

Blurring of Distinctions Among Value Chain Members • Comp. USA—build-to-order kiosks – Not just retailer, but now an assembler • Intel—entering the computer market? – Selling complete motherboards • Hotels in the restaurant business Copyright © Houghton Mifflin Company 8

Need for Indirect Channels to Provide Value for Manufacturers • Channel assembly – Manufacturers ship semi-finished products to distributors – Build products based on demand • Co-location – Distributor’s employees work from vendor manufacturing site to ship completed products to resellers Copyright © Houghton Mifflin Company 9

Evolution of High Tech Channels Time Mass Merchants Sales Traditional Retailers Direct Sales to OEMS Pre-early Distributors to grow base of VARs Early Adopter Copyright © Houghton Mifflin Company Mass market Mature Market 10

Distribution Channel Design (Mohr 2001) • Channel objectives, constraints, external environment – Customer needs and buying habits – Purchase quantity, location, speed – Competitors – Product characteristics Copyright © Houghton Mifflin Company 11

Design: Choice of Channel Structure • Direct versus indirect – Most companies do both – Hybrid channels have more complex management issues – May eliminate intermediary, but not the function Copyright © Houghton Mifflin Company 12

Factors Affecting Choice • Costs • Market coverage • Control of distribution • Speed

Distribution Strategy: Traditional Channel Costs Sells at $6 Sells at $10 Manufacturer Sells at $19. 95 Distributor Retailer Difference = Overhead + Profit Copyright © Houghton Mifflin Company Consumer or End-user 14

Distribution Strategy: Direct Channel Mfg takes on responsibilities of distributor and retailer Manufacturer Sells at $12. 99 Customer Difference = Overhead + Profit Copyright © Houghton Mifflin Company 15

Distribution Strategy: e-Commerce Sells at $6 Sells at $10 Manufacturer Sells at $15. 95

What Do Intermediaries Do? • Aggregate heterogeneous goods into a line of goods •

Screening an Intermediary • Check current listing of products • Does the intermediary handle your competitors? • Check sales volume—consistent level of growth • Check for sufficient warehouse space and up-to-date communication technology • Check the marketing plan • Can the intermediary handle servicing? Copyright © Houghton Mifflin Company 18