CRAVENS

PIERCY

8/e McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.

10-2

Chapter Ten

Value Chain

Strategy

McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.

10-3

Value Chain

Strategy

Strategic role of distribution

Channel of distribution

strategy

Managing the channel

International channels

Supply chain management

issues

10-4

Strategic Role of

Distribution

Distribution functions

- buying and selling activities

- product assembly

- transportation

- financing

- processing and storage

- advertising and sales promotion

- pricing

- reduction of risk

- personal selling

- communications

- servicing and repairs

Channels for Services

Direct distribution by

manufacturers

10-5

Illustrative Example:

Internet Impact on

Distribution

The Impact of Technology

on Value Chains

In India

E-Government

Computer Kiosks

Agricultural e-commerce

Tele-medicine

10-6

The Marketing

System

Manufacturers and producers

Marketing intermediaries

Retailers

Agents-brokers

Wholesalers-distributors

End users

Consumer

Industrial-institutional

Facilitating

organizations

Financial

Transportation

Advertising

Other

Agriculture and

raw materials

suppliers

10-7

Marketing

Channels

Manufacturers/producers

Consumers and organizational end users

Agents/brokers

Wholesalers/

distributors

Retailers Retailers

10-8

Illustrative Example:

Samsung

Goal of moving from cheap imitative electronics products to a cool brand

Feature-packed products

Products removed from shelves of Wal-Mart and Target and positioned with higher-end chains like Best Buy and Circuit City

Samsung competes through hardware innovation, product customization and speed

Samsung sells only higher-end goods and resists pressures towards marketing low-price products

Strategy is implemented in part through supply chain and distribution choices

10-9

Distribution by

Manufacturers

Manufacturers have three

distribution alternatives:

– Direct distribution is necessary

– Use of intermediaries is

necessary

– Both direct and intermediary

contact are feasible

10-10

Distribution

by the

manufacturer

Opportunity

for

competitive

advantage

Supporting

services are

required

Rapidly changing

market environment

Extensive

purchasing

process

Early stages of

product life cycle

Complex product

application

Profit margins

adequate to support

distribution

organization

Complete line

of products

Purchases

are

large and

infrequent

Small number of

geographically

concentrated

buyers

Factors Favoring Distribution by Manufacturer

10-11

Illustrative Example:

Retail Initiatives by

Manufacturers

Apple Computer

– To educate consumers about computers and

music players

Sony Electronics, palmOne

– Reinforce brands with affluent consumers and

better understand market trends

Driving forces are market access and

market learning

10-12

Channel of

Distribution Strategy

Types of distribution

channel

Distribution intensity

Selecting the

channel strategy

Strategies at

different

channel levels

10-13

Steps in Channel Strategy

Selection

(1) Type of channel arrangement

(3) Selection of a channel configuration

Administ

ered

Intensive Exclusiv

e

Selective

(2) Desired intensity of

distribution

Contractual

Ownership

Conventional Vertically coordinated

10-14

Distribution Intensity

Illustrations Trading Area

A B C

+

+

+

+

+

+ +

+ + +

+

+ + + +

+

+ + + +

+ +

+ + + +

+ +

+ + +

Exclusive

distribution

Selective

distribution Intensive

distribution

Illustrations

Cadillac automobiles

Ethan Allen furniture

Revlon cosmetics

Caterpillar equipment

Estée Lauder cosmetics

Timex watches

10-15

Design stages

Decision criteria

Intensity of distribution

Access to end users

Prevailing distribution

practices

Necessary activities and

functions

Revenue-cost analysis

Time horizon for

development

Control considerations

Legal constraints

Channel availability

Select the channel

Market coverage

Capabilities

Intermediary’s needs

Functions provided

Availability

Identification

of channel

alternatives

Evaluation and

selection of

channel(s) to

be used

Selection

of channel

participants

Selecting the Channel Strategy

10-16

Illustrative Channel Strategy

Evaluation

Evaluation Manufacturer’s Company

Criteria Representatives Salesforce

Market access Rapid 1 to 3 year

development

Sales forecast (2 years) $10 million $20 million

Forecast accuracy High Medium to low

Estimated costs $1 million* $2.4 million**

Selling Expense (cost/sales) 10% 12%

Flexibility Good Fair

Control Limited Good

* Includes 8% commission plus management time for recruiting and training

representatives.

** Includes $100,000 for 10 salespeople, plus management time.

10-17

Managing the Channel

Channel leadership

Management structure and systems

Physical distribution management

Channel relationships

Conflict resolution

Channel performance

Legal and ethical considerations

10-18 International Channel of

Distribution Alternatives

Home country Foreign country

The foreign marketer

or

producer sells to or

through

Domestic

producer or

marketer sells

to or through

Open

distribution

via domestic

wholesale

middlemen

Exporter

Foreign

agent or

merchant

wholesalers

Foreign

retailer

Importer

Foreign

consumer

Export management company

or company

sales force

Source: Philip R. Cateora, International Marketing, 7th ed., Homewood, Ill.: Richard D. Irwin, Inc., 1990, 572.

10-19

Strategic Value Chain

Management

Supply chain management

– Efficient Consumer Response

program

– Lean supply chains

– Agile supply chains

Impact of supply chain strategy on

marketing

E-business models

Retailer and distributor power

Strategic flexibility and change

10-20

Efficient Consumer

Response

Traditional channel problems – Forward buying and diverting

– Excessive inventories

– Damages and unsaleable goods

– Complex deals and deductions

– Too many promotions and coupons

– Too many new products

Efficient Consumer Response – Category management

– “Value” pricing replaces promotions

– Continuous replenishment and cross-docking

– Electronic data interchange

– New performance measures

– New organizational processes and structures

– Internet-based network for supplier-buyer trading

10-21

Lean Supply Chain

Elements

1. Definition of Value

2. Identification of Value Streams and

Removal of Muda (Waste)

3. Organizing Around Flow, Instead

of “Batch and Queue”

4. Responding to Pull Through

the Supply Chain

5. The Pursuit of Perfection