Download Ch 4

Chapter 4:
4: E-Business Distribution
Systems
For use with Strategic Electronic Marketing:
Managing E-Business
Copyright 2000 South-Western College Publishing
Chapter 4 Slide: 1
LEARNING OBJECTIVES (1)
• Explain why distribution systems change.
• Describe the nature of distribution systems.
• Compare and contrast traditional
distribution systems and e-business based
distribution systems.
• Outline how channel relationships are
changing.
For use with Strategic Electronic Marketing:
Managing E-Business
Copyright 2000 South-Western College Publishing
Chapter 4 Slide: 2
LEARNING OBJECTIVES (2)
• Describe how each distribution function is
handled in an e-business based distribution
system.
• Discuss how power is shifting in
distribution channels.
• Explain how middlemen’s roles are
changing in the distribution channel.
For use with Strategic Electronic Marketing:
Managing E-Business
Copyright 2000 South-Western College Publishing
Chapter 4 Slide: 3
Vignette: The Car Buying Game (1)
• Thinking Strategically
– Decide how important a test drive is before
someone chooses a car model to purchase.
– Evaluate if the test car has to be the same car the
buyer would take home, or if a standard test-drive
model work.
– There is a belief among car sales people that if
someone comes into a dealership, they have to be
sold to before they leave or the sale is lost.
GM BuyPower site (www.gmbuypower.com)
For use with Strategic Electronic Marketing:
Managing E-Business
Copyright 2000 South-Western College Publishing
Chapter 4 Slide: 4
Vignette: The Car Buying Game (2)
• Thinking Strategically
– Investigate how people make decisions about
purchasing a car.
– Determine when they start thinking about the
model to purchase.
– Investigate the type of information they gather
before they buy.
– Speculate on how the Web could help in their
decision process.
Carpoint (www.carpoint.msn.com) Ford (www.ford vechicles.com)
For use with Strategic Electronic Marketing:
Managing E-Business
Copyright 2000 South-Western College Publishing
Chapter 4 Slide: 5
Distribution System
• Channels of distribution provide a standard of living
for customers by moving products from producers to
users in the most cost efficient manner possible.
• In traditional markets this has included producers and
intermediaries such as wholesalers and/or retailers.
• Marketing systems are constantly looking to lower the
overall cost of distribution channels while striving to
improve relationships between channel members.
– This requires that the system evolve in response to changes
in the environment
For use with Strategic Electronic Marketing:
Managing E-Business
Copyright 2000 South-Western College Publishing
Chapter 4 Slide: 6
New E-business
Based Distribution Systems
• Characterized by:
–
–
–
–
–
A greater reliance on cybermediaries and facilitators.
A reduction in the number of traditional middlemen.
Reduced inventory and shorter inventory cycles
Tighter relationships between trade sellers and buyers.
Power shifts from producers and retailers to the
customer.
– Lower prices and greater variety for the consumer.
– Greater responsiveness to the customer.
For use with Strategic Electronic Marketing:
Managing E-Business
Copyright 2000 South-Western College Publishing
Chapter 4 Slide: 7
Distribution Channels Evolution (1)
• Channels of distribution evolve as new infrastructures
and consumer shopping patterns develop.
– In the 1800's Sears took advantage of newly developed
rail systems to build a retail empire by using catalogues
to offer customers products that were not available
locally.
– Sears' purchasing power allowed for a greater variety of
products, increasing their negotiation power and forcing
down the prices of the products offered to customers.
– In the second half of the 1900's customers took
advantage of improved highway systems to move to
suburbs, K-Mart followed and built a discount empire.
For use with Strategic Electronic Marketing:
Managing E-Business
Copyright 2000 South-Western College Publishing
Chapter 4 Slide: 8
Distribution Channels Evolution (2)
• Channels of distribution evolve as new infrastructures
and consumer shopping patterns develop.
– The growth of suburbs led to retail concentrations in
malls, which, in turn, fostered a shift in consumer
purchasing patterns.
– The growth of national franchises and malls helped lead
to the decline in retail sales in central business districts.
– Consumer acceptance of credit card use and 800
number phone numbers have allowed a multitude of
catalogue companies to offer niche products to
customers and sell directly to the home.
For use with Strategic Electronic Marketing:
Managing E-Business
Copyright 2000 South-Western College Publishing
Chapter 4 Slide: 9
What Is Distribution
• Intermediaries, such as wholesalers and
retailers, split large production runs into
small amounts (breaking bulk) and create an
assortment of products to offer a customer.
• Facilitators facilitate or help the flow of the
transaction by physically moving the
product, information, or funds through the
distribution channel.
For use with Strategic Electronic Marketing:
Managing E-Business
Copyright 2000 South-Western College Publishing
Chapter 4 Slide: 10
Figure 4.1: Distribution System
Intermediaries
Warehouse
Producer
Wholesalers
Agents
Retailers or
Other
Producers
Facilitators
Shipping, Information Flows,
Fund Flows, etc.
For use with Strategic Electronic Marketing:
Managing E-Business
Copyright 2000 South-Western College Publishing
Consumer
Chapter 4 Slide: 11
Figure 4.2: Bulk Breaking and
Assortment Creating
Producer
A
B
(facilitator aids the transaction)
Wholesaler
C
A
(facilitator aids the transaction)
Retailer
A (Large)
B (Small)
(customer and retailer
transaction)
Customers
Location 1
A
B
C
Unserved Market
D
E
For use with Strategic Electronic Marketing:
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Copyright 2000 South-Western College Publishing
Location 2
F
G
H
Chapter 4 Slide: 12
Channel Functions (1)
• Physical possession: transferring the good or
service to the customer.
– This includes the warehousing process and the physical
movement of the product from the producer to the
customer.
• Title or ownership flow: when the customer
purchases the product or when they receive the
product.
• Promotion: allows for communication between
the channel members.
For use with Strategic Electronic Marketing:
Managing E-Business
Copyright 2000 South-Western College Publishing
Chapter 4 Slide: 13
Channel Functions (2)
• Ordering system: ordering system could be
through paper and pencil systems, or through
electronically controlled data interchanges.
• Payment flows: A customer may pay cash, or they
may use credit from other channel members by
postponing payments (i.e. due in thirty to sixty
days).
– The customer may also finance their purchase.
For use with Strategic Electronic Marketing:
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Copyright 2000 South-Western College Publishing
Chapter 4 Slide: 14
Figure 4.3: Traditional Channel
Intermediary Flows
Physical Possession
Title/Ownership
PRODUCT
SOURCE
Promotion
Financing
Risking
CUSTOMER
Ordering
Payment
For use with Strategic Electronic Marketing:
Managing E-Business
Copyright 2000 South-Western College Publishing
Chapter 4 Slide: 15
Figure 4.4: Alternate Electronic
Channels of Distribution
Producer
A
E-Commerce
Retailer
Customers
B
(Extranets and cybermediaries
aid the transaction)
C
A
A
Electronic intermediary
Internet and cybermediaries aid the transaction
B
C
D
E
F
G
H
Direct From Manufacturer
For use with Strategic Electronic Marketing:
Managing E-Business
Copyright 2000 South-Western College Publishing
Chapter 4 Slide: 16
Cybermediaries
• Cybermediaries operate in electronic
markets to facilitate the exchange process.
– Facilitators help move the physical product:
• Trucking companies and overnight shippers.
– Facilitators help payment flows:
• Credit card companies and banking institutions.
– Facilitators help communication:
• Advertising companies or host ISPs.
For use with Strategic Electronic Marketing:
Managing E-Business
Copyright 2000 South-Western College Publishing
Chapter 4 Slide: 17
Figure 4.5: E-Business
Distribution System
Physical
Possession
Shipper
Promotion
PRODUCT
SOURCE
Ordering
Financing
Risking
Payment
E-Business
CUSTOMER
Credit
Card
Based on: Brad Kleindl, “Virtual Marketing,” Southern Business and Economic Review,
Spring 1996, pp.. 10-15.
For use with Strategic Electronic Marketing:
Managing E-Business
Copyright 2000 South-Western College Publishing
Chapter 4 Slide: 18
E-business Distribution
Development
• Electronic Channel Captain
– A channel captain is an intermediary that
organizes and controls the channel.
– Any company that can gain this position can
obtain the power over other members allowing
them to take a higher percentage of the overall
transaction costs.
For use with Strategic Electronic Marketing:
Managing E-Business
Copyright 2000 South-Western College Publishing
Chapter 4 Slide: 19
Physical Possession
• Physical possession requires physically moving
products from one location to another.
Federal Express Corporation (www.FedEx.com)
United Parcel Service (www.ups.com)
• Information intermediaries provide efficiency to
the channel by allowing shipping price
comparison.
TanData Corporation (www.tandata.com)
FreighQuote.com (www.FreighQuote.com)
For use with Strategic Electronic Marketing:
Managing E-Business
Copyright 2000 South-Western College Publishing
Chapter 4 Slide: 20
Communication Linkages
• Communication between the firm and the
customer can be facilitated over the Internet
through the design of Web pages.
• Extranets are used to link businesses
together enabling communication between
companies and allowing for transactions.
For use with Strategic Electronic Marketing:
Managing E-Business
Copyright 2000 South-Western College Publishing
Chapter 4 Slide: 21
Payment Flows, Financing,
and Risk Taking
• Four parties at risk in electronic transfers.
–
–
–
–
The customer (end user)
The seller (business-to-business or retailer)
The producer
The transfer agent (credit card companies or
banking institutions).
For use with Strategic Electronic Marketing:
Managing E-Business
Copyright 2000 South-Western College Publishing
Chapter 4 Slide: 22
Figure 4.6: Transfer of Electronic
Payments (E-Payments)
Customer's
Browser
Sends encrypted payment request
(Credit card #, B-B voucher)
Vendor's Server
Information flow
Statement
(credit card
or purchase
statement)
Authorized
online
payment
system
Customer's Bank
(credit card issuer or
account holder)
Payment
Approval
Authorization
Query
Verification of
Credit
Check for
authenticity and
funds for credit
card or bank
funds.
Payment processor
(credit card or bank)
For use with Strategic Electronic Marketing:
Managing E-Business
Copyright 2000 South-Western College Publishing
Chapter 4 Slide: 23
Electronic Credit (1)
• Secure Electronic Transaction (SET)
– Allows for the encryption of all transaction data.
Merchants never see the credit card number so it can
not be stolen from them and they can not fraudulently
use the number.
• Micropayments
– Allows for paying small Web transactions.
– A software wallet requires that a buyer sets up an
online account. This allows an amount of money to be
added to a Web browser’s wallet.
For use with Strategic Electronic Marketing:
Managing E-Business
Copyright 2000 South-Western College Publishing
Chapter 4 Slide: 24
Electronic Credit (2)
• Smart cards or E-cash (electronic cash)
– Allow individuals to purchase without paper money.
– Smart cards use a micro-controller chip embedded in a
card. A number of devices such as parking meters,
newsstands, vending machines, pay phones, etc can
read the cards and be used for payment.
– Information on individual purchases can be captured
from the cards for the marketer's databases.
– Smart cards have been in use in much of the world
except for the United States where magnetic strip cards
have dominated.
For use with Strategic Electronic Marketing:
Managing E-Business
Copyright 2000 South-Western College Publishing
Chapter 4 Slide: 25
Electronic Billing
• Electronic billing, or the sending of bills
and the allowing of making payments over
the Internet.
– Reduces costs for companies from up to $1.75
per bill to around 25 to 30 cents per bill.
– Online billing consolidation companies
consolidate an individual’s bills allowing them
to make one payment online.
CheckFree (www.checkfree.com) Transpoint (www.transpoint.com)
For use with Strategic Electronic Marketing:
Managing E-Business
Copyright 2000 South-Western College Publishing
Chapter 4 Slide: 26
Relationship Development
• The search for channel members is a time
consuming and expensive.
– Once these relationships are established, firms
have an incentive to attempt to maintain the
best relationship possible.
– A firm must take into consideration the
behavioral aspects of channel relationships.
• Including: dependence, cooperation, conflict, power
and power bases, satisfaction, and relational
development.
For use with Strategic Electronic Marketing:
Managing E-Business
Copyright 2000 South-Western College Publishing
Chapter 4 Slide: 27
Power
• The Internet reduces the power of some channel
members by lowering dependency upon others.
• Transaction costs govern how much effort is used
to evaluate channel members as partners.
– Transaction Cost Analysis is the process of assessing
the overall cost of maintaining and finding new
relationships.
– A firm will stay with a current partner if the cost of
finding a new partner outweighs the benefits that can be
obtained.
For use with Strategic Electronic Marketing:
Managing E-Business
Copyright 2000 South-Western College Publishing
Chapter 4 Slide: 28
Case 4.: Fighting for the Middle Position
• Thinking Strategically
– Consider the position of Ingram Micro.
– Explain why they exist in the channel by looking at the
benefits they provide to the seller and the buyer.
– Determine the long-term viability of Ingram.
– Consider if the manufacturers of software and hardware
could bypass Ingram.
– Consider Ingram’s customers. Recommend to Ingram if
they should or should not start selling directly to the
end user.
For use with Strategic Electronic Marketing:
Managing E-Business
Copyright 2000 South-Western College Publishing
Chapter 4 Slide: 29
Power Shifts to the Consumer
• The Internet increases customer’s power:
– The customer can become aware of a wider
variety of providers increasing the number of
alternative sources of supply.
– Customers are able to voice their opinions on
businesses and products at discussion sites and
business sites.
– Customers can use e-businesses to gain power
and lower prices.
For use with Strategic Electronic Marketing:
Managing E-Business
Copyright 2000 South-Western College Publishing
Chapter 4 Slide: 30
Case 4.2 More Means Less
• Thinking Strategically
– Visit Accompany’s and Mercata’s Web sites.
– Explain how these companies increase customer
power.
– Find a product that you would consider purchasing
and price compare this with other Web sites.
– Decide if these sites give the purchasers a better
price.
– Consider if you would contact friends of yours to
make a similar purchase to lower prices.
For use with Strategic Electronic Marketing:
Managing E-Business
Copyright 2000 South-Western College Publishing
Chapter 4 Slide: 31
Channel conflicts
• A channel conflict exists when a company sells products
to the same market through more than one distribution
system. To avoid these conflicts manufactures have:
– Refused to supply online businesses.
– Set up e-commerce sites that offer different products
online.
– Offer products at the same price as retail outlets and
then adding a shipping fee.
– Offer product lines and services that distributors do not
carry.
– Press ahead with a commerce site.
For use with Strategic Electronic Marketing:
Managing E-Business
Copyright 2000 South-Western College Publishing
Chapter 4 Slide: 32
Case 4.3: Buying the Bug Online
• Thinking Strategically
– Consider the position of the car dealer.
– Determine why it should remain in the channel by
looking at the benefits it offers manufacturers and
customers.
– Recommend to Volkswagen if they should or should not
sell cars online.
– Decide if the dealers should keep receiving credit.
– Speculate on the future and determine the benefits will
the car dealers need to provide in the future.
For use with Strategic Electronic Marketing:
Managing E-Business
Copyright 2000 South-Western College Publishing
Chapter 4 Slide: 33
Death Of The Middleman
• Disintermediation is the process of eliminating
the middleman from the exchange process.
• Those middlemen most likely to be hurt will be:
– Those who do not add value to the exchange but are
only go-betweens, information brokers, or order-takers.
– Middlemen concerned about their careers should be
sure that they are able to offer value to the exchange
process.
For use with Strategic Electronic Marketing:
Managing E-Business
Copyright 2000 South-Western College Publishing
Chapter 4 Slide: 34
ALE #4.1: Lassoing Jeans Online
• Visit each of the sites:
•
•
•
•
Lee Jeans (www.leejeans.com)
Wrangler Jeans (www.wrangler.com)
Arizona Jeans (www.arizonajeans.com)
Bugle Boy Jeans (www.bugleboy.com)
• Levi Strauss (http://store.us.levi.com/store/home.asp)
– Decide why these brands have adopted differing
strategies to using the Web in aiding distribution.
– Consider who owns the brands and how that may make
a difference in the chosen strategy.
– Determine why Levi’s follows its strategy.
For use with Strategic Electronic Marketing:
Managing E-Business
Copyright 2000 South-Western College Publishing
Chapter 4 Slide: 35
Figure 4.5: E-Business
Distribution System
Physical
Possession
Shipper
Promotion
PRODUCT
SOURCE
Ordering
Financing
Risking
Payment
E-Business
CUSTOMER
Credit
Card
Based on: Brad Kleindl, “Virtual Marketing,” Southern Business and Economic Review,
Spring 1996, pp.. 10-15.
For use with Strategic Electronic Marketing:
Managing E-Business
Copyright 2000 South-Western College Publishing
Chapter 4 Slide: 36
ALE #4.2: Outlining a Distribution System (1)
Who
Ships:
Product
Source:
Who
Promotes:
How are
orders
taken
Who
finances
Shipper:
E-Business
Customer:
Payment
procedure
Payment
flow:
For use with Strategic Electronic Marketing:
Managing E-Business
Copyright 2000 South-Western College Publishing
Chapter 4 Slide: 37
ALE #4.2: Outlining a Distribution System (2)
• Describe the role of the e-business in the
distribution model.
• Explain how each function is performed.
• Determine if the cost of the product offered
is different from the cost of the product
available locally.
• Do you see any channel conflicts which
may occur with this system?
For use with Strategic Electronic Marketing:
Managing E-Business
Copyright 2000 South-Western College Publishing
Chapter 4 Slide: 38
ALE #4.3: Searching for
E-Business Help
• Evaluate commerce service providers:
• AT&T (www.ipservices.att.com/products/index.html)
• IBM (www.ibm.com/e-business)
• Microsoft:
(www.microsoft.com/biz/solutions/ecommerce.htm)
• Yahoo (http://store.yahoo.com)
– Determine which would be best at providing commerce
service support.
– Determine how each of the companies facilitates the
distribution function.
For use with Strategic Electronic Marketing:
Managing E-Business
Copyright 2000 South-Western College Publishing
Chapter 4 Slide: 39