chapter 10 analyzing the value chain: distribution channels

Chapter 10

Analyzing the Value Chain: Distribution Channels

Copyright © Houghton Mifflin Company 10-2

Overview

• Distribution as a competitive strategy

• Distribution channel options

• Creating a distribution strategy


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


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


Distribution Channel Options


What Defines an Effective Channel?

• Inventory

• Ownership

• Negotiation

• Gathering of market information

• Financing and payment

• Risk management

• Member power


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?


Blurring of Distinctions Among Value Chain Members

• CompUSA—build-to-order kiosks

– Not just retailer, but now an assembler

• Intel—entering the computer market?

– Selling complete motherboards

• Hotels in the restaurant business


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


Sal

es

Time

Pre-earlyEarly Adopter

Mass market Mature Market

Direct Sales to OEMS

Distributors to grow base of VARs

Traditional Retailers

Mass Merchants

Evolution of High Tech Channels


Distribution Channel Design(Mohr 2001)

• Channel objectives, constraints, external environment

– Customer needs and buying habits

– Purchase quantity, location, speed

– Competitors

– Product characteristics


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


Factors Affecting Choice

• Costs

• Market coverage

• Control of distribution

• Speed and reliability


Costs

ManufacturerManufacturer

DistributorDistributor

RetailerRetailer

Consumer or End-user

Consumer or End-user

Sells at $6

Sells at $10

Sells at $19.95

Difference = Overhead + Profit

Distribution Strategy:Traditional Channel



CustomerCustomer

Sells at $12.99


Mfg takes on responsibilities of distributor and retailer

Distribution Strategy:Direct Channel



DistributorDistributor

E-tailerE-tailer

CustomerCustomer

Sells at $6

Sells at $10

Sells at $15.95


Distribution Strategy: e-Commerce


What Do Intermediaries Do?

• Aggregate heterogeneous goods into a line of goods

• Break bulk

• Provide customer/market information to the producer/manufacturer


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?


Take-Aways

• List what students took away from the discussion in real time

chapter 10 analyzing the value chain: distribution channels

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