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Chapter 9:
Distribution Channels and Supply Chain
Management in High-Tech Markets
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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 hightech channels?
Why do companies choose to “green” their
supply chain?
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Comprised of the various players in the flow
of product: producer  consumer
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Distribution channels are used to establish
brand identity and preference
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Distribution activities
◦ Logistics and physical distribution functions
◦ Structure and management of the channel
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Manufacturers must manage:
◦ flow of product
◦ relationships between firms
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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
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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
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Company web site
•
Company owned retail outlets
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B. Indirect Channels: Rely on Intermediaries
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•
•
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
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C. Hybrid, Dual, or Concurrent Channels: combination of
direct and indirect channel structure
Suppliers
Agent/Broker/Distributor
Manufacturers/OEMs
Distributor/Broker
Resellers
Resellers
End Customers
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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
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customers’ needs and buying behavior are stable
across purchasing occasions
 Intrabrand Competition
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Channel Design
◦ What determines customer channel selection?
ease-of-use
price
search effort
service
information quality
aesthetic appeal
convenience
assortment
enjoyment
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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
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Four Types of Relationships Between Sales and Marketing
Type
Characteristics
“Undefined”Independent
Lack of knowledge
about what other is
doing
“Defined”Clear Roles
Useful
Needs to Change
Small company,
Marketing
supports Sales
Regular conflicts,
inefficient
Clear processes,
boundaries, &
responsibilities
Simple products,
traditional roles
Demand for
customization,
accelerating
technology
“Aligned”Cooperate
Joint planning
Simple sales
process, short
sales cycle
Common process
can generate
more revenue
“Integrated”Collaboration
Shared structure,
systems and metrics
See Table 9-2
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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
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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
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Offline retail stores, online retail stores, catalogs, kiosks
Which type?
Intermediaries
◦ Distributors:
 Buy from manufacturer, sell to other resellers
 Typically national
◦ Resellers:
 Provide products/services to match end user needs
 Typically local
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Types of Resellers
VAR/VAD
Systems
Integrators
Inbound vs.
Outbound
Traditional
Intermediaries
Mass
merchandisers,
Category
killers,
Mom-andpop stores,
franchises
Add value
through own
expertise
Specialized
Store-front
for walk-ins
Customize
for vertical
markets
Manage large
or complex
projects
Calls on
customers
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How Many?
Intermediaries
◦ Coverage, Penetration
 Degree of coverage vs. Degree of intrabrand
competition
◦ Interbrand Competition: Different brands = healthy
◦ Intrabrand Competition: Same brand = unhealthy
 Use of territorial restrictions
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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
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Time
Mass Merchant
Traditional
Retailers
SALES
Distributors
(To grow base of VARs)
Direct Sales
to CEMs and
Integrators
Early,
Early
Market
Early
Adopters
High
Growth/
Critical
Mass
Mature Market/
Technology
Standardized
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Retail channel useful for mainstream market
rather than crossing the chasm
 Does not create demand nor help develop “whole
product”
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To “cross the chasm”
◦ Direct sales channel useful, but requires volume and
predictability of revenues
 May need VARs and Systems Integrators
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Governance Mechanisms
◦ Authoritative (unilateral) control
 Ownership
 Formal centralized decision making (franchising)
 Power
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Governance Mechanisms
◦ 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
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Governance Mechanisms
◦ 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 claim
2. Provide evidence
3. Exhort the channel member to act
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Governance Mechanisms
◦ 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
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Assessing both quantitative and qualitative performance
indicators is pertinent.
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
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Objectives:
◦ Increase coverage
◦ Maintain cost efficiency
◦ Minimize conflict
Steps
(see following slides)
1. Gather market data
2. Harmonize following the contingency theory
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Assess:
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Market opportunity
Coverage models
Channel-specific benefit/cost analysis
Magnitude of conflict
 Degree of cannibalization
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Effectively communicate justification for distribution
strategies
◦ Logic
◦ Quantification
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CHANNEL
PERFORMANCE
CHANNELS
TASKS
TARGETS
Contingency Approach to Developing Hybrid Channels
The type of channel used must match particular
“contingent” factors to optimize outcomes
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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
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Acct.
Mgmt.
Post Sales
Service
Close
Sales
Presales
Qualify
Sales
Channels
Lead
Generation
Tasks
National Acct.
Mgmt.
Big
Direct Sales
Medium
Telemarketing
Small
Direct Mail
Retail Sales
Distributors
Dealers/ VARs
Allocating Tasks to Channels
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The tenor of the relationship
o
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Relational vs. adversarial
CRM
◦ Effectively track customers
◦ SOA: Service-oriented
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Compensation & Communication
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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?
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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
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Causes
Solutions
Volume discount price policies
Eliminate sales to the source of the gray
market
Differentials in int’l exchange rates
Eliminate the arbitrage problem: oneprice policy
Different resellers’ cost structures
Increase market penetration
Highly selective distribution
Gather information on gray market
problem
Producers performing many marketing
functions
Institute consistent performance
measures internally
Inconsistent internal policies
(Table 9-4)
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Black Markets
 Counterfeits
 Piracy
◦ Especially problematic with unit-one cost structures
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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
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Considerations:
◦ Affordability and experiential learning
◦ Physical distribution and product promotion
◦ Alternative energy sources
◦ Direct channels or training new channel
members
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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 illequipped to deal with the risks and uncertainties
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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
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Demand Uncertainty
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Difficult to predict end-consumer demand
Bullwhip effect: Market signals get distorted up the
supply chain
LOW for functional products
◦ Familiar to end-consumers
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HIGH for innovative products
◦ End-consumer risk
To reduce demand uncertainty:
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Supply chain members must share information about market
demand
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Supply Uncertainty
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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:
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Early design collaboration
Joint product development with suppliers
Participation in on-line marketplaces for synchronized planning
with suppliers
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= Appropriate Match,
Supply
Chain
Functions
= Inappropriate Match
Type of Innovation
Incremental
Breakthrough
Physical
Function
Market
Mediation
Functions
Match of type of product to supply chain functions
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Efficient supply chains
◦ Economies of scale
◦ Reduce non-value-added activities
◦ Share accurate/timely information with suppliers
 Example: Wal-mart, Costco
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Risk-hedging supply chains
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Pool resources to avoid disruptions
Cultivate second sources
Maintain extra inventory
Manufacturing facilities in alternate locations
 Example: military supply chains
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Responsive supply chains
◦ Flexible in meeting changing needs of customers
◦ Rely on accurate order information/mass customization
 Example: Dell
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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
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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
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E-procurement: a large Web-based marketplace
encompassing many different vertical industries
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Reverse Auctions
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Method of e-procurement
1. The seller bids for the rights to supply the buyer’s
purchasing needs
2. The lowest price bid wins
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Buyers: save on procurement costs for buyers
Suppliers: engage in destructive price competition
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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.
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More expensive than Web-based e-procurement
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Outsourcing
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Traditionally: production
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Now: knowledge services
◦ fueled by the need to lower costs in a competitive,
slow global economy
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Offshoring
RFID
(see Chapter 6)
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The “Greening” of the Supply Chain
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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.
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Opening Vignette: Cisco Systems
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Technology Expert: Cisco Systems
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Technology Solution: Big Boda World Bikes
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End-of-Book Case: TiVo, Xerox, Selco
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