Download Supply-Side Gaps

DESIGNING
CHANNEL SYSTEMS
21st February 2008
Channel Strategy Defined
Marketing strategy :
The broad principles by which the business unit
expects to achieve its marketing objectives in a
target market
Marketing Channel Strategy :
The broad principles by which the firm expects to
achieve its distribution objectives for its target
market(s).
Basic Distribution Decisions
1. What role should distribution play in the firm’s
overall objectives and strategies?
2. What role should distribution play in the marketing
mix?
3. How should the channels be designed to achieve
the distribution objectives?
4. What kinds of channel members should be
selected?
5. How can the marketing channel be managed to
implement the firm’s channel design effectively?
6. How can channel member performance be
evaluated?
What role should distribution play
in the firm’s overall objectives
and strategies?
How much priority to place on distribution
is one that can be answered only by the
particular firm involved.
Experts are of the opinion that distribution
warrants the attention of top management.
Marketing Channel Strategy
and the Marketing Mix
A general case for stressing distribution strategy can
be made if any one of certain conditions prevail :
1. Distribution is the most relevant variable for
satisfying target market demands
2. Parity exists among competitors in the other three
variables of the marketing mix
3. A high degree of vulnerability exists because of
competitors neglect of distribution
4. Distribution can enhance the firm by creating
synergy form marketing channels
Relationship between Channel
Strategy and Design
A straightforward relationship :
Channel Strategy should guide Channel Design
so as to help the firm
attain a differential advantage
Also called sustainable competitive advantage
(i.e., the firm’s ability to use its particular strengths to satisfy
customer demands better than its competitors on a long term basis)
Positioning the Channel to
Gain Differential Advantage
Channel position
is the reputation a manufacturer acquires
among distributors
for furnishing products, services, financial
returns, programs and systems that are in
some way superior to those offered by
competing manufacturers.
What is Channel Design?
Channel design refers to those decisions
involving the development of
new marketing channels where none
had existed before,
or
to the modification of existing channel
Channel Design Decision
Seven steps :
1. Recognizing the need for a channel design
decision
2. Setting and coordinating distribution
objectives
3. Specifying the distribution tasks
4. Developing possible alternative channel
structures
5. Evaluating the variables affecting channel
structure
6. Choosing the “best” channel structure
7. Selecting the channel members
Step 1 : Recognizing the need for
a Channel Design Decision
Situations which may indicate the need for a
channel design decision :
1. Developing a new product/product line
2. Aiming an existing product at a new target
market
3. Making a major change in some other
component of the marketing mix
4. Establishing a new firm
5. Adapting to changing intermediary policies
….2
Step 1 : Recognizing the need
for a Channel Design Decision
6. Dealing with changes in availability of
particular kinds of intermediaries
7. Opening up new geographic
marketing areas
8. Major environmental changes
9. Meeting the challenge of conflict
10. Reviewing and evaluating
Step 2 : Setting and Coordinating
Distribution Objectives
To set distribution objectives that are well
coordinated with other marketing and firm
objectives, the channel manager must :
1. Become familiar with objectives and strategies
for the other marketing mix areas
2. Set explicit distribution objectives
3. Check to ensure the distribution objectives set
are congruent with marketing and other
general objectives and strategies of the firm.
Step 3 : Specifying the
Distribution Tasks
In the macro context the distribution
tasks are the “marketing flows”
The job of the channel manager in
outlining distribution functions or tasks
is much more specific.
Step 4 : Developing Possible
Alternative Channel Structure
The alternatives (channel structures)
should be in terms of the following
dimensions :
1. Number of levels
2. Intensity of the various levels
3. Types of intermediaries
4. Number of possible channel
structure alternatives
Step 5 : Evaluating the Variables
Affecting Channel Structure
There are a myriad of variables that influence
channel structures, but six basic
categories are the most important :
1. Market variables
2. Product variables
3. Company variables
4. Intermediary variables
5. Environment variables
6. Behavioral variables
Step 6 : Choosing the
“Best” Channel Structure
In reality, choosing an optimal channel
structure, in the strictest sense of the term,
is not possible. Because :
1. Management is not capable of knowing all
the possible alternatives
2. Precise method do not exist for calculating
the exact payoffs associated with each of
the alternative structures.
Nonetheless, some pioneering attempts at
developing more exact methods do
appear in literature
Aspinwall Approach*
(“Characteristics of Goods and Parallel Systems” Approach)
Places main emphasis on product variables,
arguing that all products may be described
in terms of the following characteristics :
1. Replacement rate
2. Gross margin
3. Adjustment
4. Time of consumption
5. Searching time
*Developed by Leo Aspinwall in 1958
Aspinwall’s Color Classification
Characteristic
Replacement rate
Gross margin
Adjustment
Time of consumption
Searching time
Color Classification
Red
Orange
Yellow
goods
goods
goods
High
Medium
Low
Low
Medium
High
Low
Medium
High
Low
Medium
High
Low
Medium
High
Red goods
: high replacement rates, low on others
Orange goods
: medium values on all five characteristics
Yellow goods
: low on replacement rate, but higher values for the
other characteristics
Relationship between
Product Characteristics and
Length of Marketing Channels
Products
Channels
RED
ORANGE
YELLOW
Financial Approach*
Choosing an appropriate channel structure is
analogous to an investment decision of capital
budgeting.
Involves comparing estimated earnings on capital
resulting from alternative channel structures in the
light of cost of capital.
The use of capital for distribution must also be
compared to the alternative of using the funds in
manufacturing operations.
*Developed by Eugene W Lambert in the 1960s
Financial Approach
Useful as a reminder of the importance of
financial variables in choosing a channel
structure.
This perspective is very appropriate because
channel structure decisions are usually long
term ones compared with the other decision
areas of the marketing mix.
Problems in making the
Financial Approach Operational
Difficult to obtain accurate estimates of future
revenues and costs from alternative channel
structures
Given the number of variables that can affect
channel relationships, especially when
independent intermediaries are involved, can
make the task even more difficult.
Transaction Cost Analysis
Approach* (TCA)
Main focus is the cost of conducting
transactions necessary for a firm to
accomplish its distribution tasks.
Transaction costs are essentially the
costs associated with performing tasks
such as gathering information,
negotiating, ordering, etc….
*Based on the work of Oliver E Williamson in the mid 70s
Transaction Specific Assets
For transactions to take place,
transaction specific assets are needed.
Tangible
Such as store fixtures, special equipment
to service the product
Intangible
Such as special product knowledge or
selling skills to help project the high
quality of the product
Transaction
Specific
Assets
Transaction Specific Assets
and Channel Structure
According to Williamson :
If asset specificity* is high, then the manufacturer would
probably be better off doing everything himself
Reason : people behave opportunistically
i.e., If independent channel members control most or all of
the transaction specific assets, they will know they are
virtually indispensable and will demand terms that are
skewed heavily toward their own self interest, thereby
increasing transaction costs for the manufacturer to
uneconomic levels.
*Asset specificity is high in the sense that these assets would require a high
Investment and have little or no value outside the channel
Judgmental – Heuristic Approaches
These approaches rely heavily on managerial
judgment and heuristics (rule of thumb)
Three common approaches:
1. Straight Qualitative Judgment Approach
2. Weighted Factor Score Approach
3. Distribution Costing Approach
There are variations in the degree of precision of
the various approaches.
Straight Qualitative Judgment Approach
* Crudest, but most commonly used
* The various alternative channel structures are
evaluated in terms of decision factors that
are thought to be important.
These may include such factors as :
Short and long run costs/profits/channel control issues/long term
growth potentials/security of business/etc.
An alternative is chosen that, in the
management’s opinion, best satisfies the
various explicit or implicit decision factors.
Weighted Factor Score Approach*
Consists of four steps ;
1. The decision factors on which the channel
choice will be based must be stated explicitly
2. Weights are assigned to each of the decision
factors in order to reflect their relative
importance
3. Each channel alternative is rated on each of
the decision factors
4. The overall weighted factor score is computed
for each channel alternative
* Suggested by Philip Kotler
Weighted Factor Score Method
applied to Channel Choice : Alternative 1
Factors
Factor
Weight
A
Factor Weight B
1
2
3
4
5
6
7
8
9 10
Rating
(A X B)
Effectiveness in reaching
target market
15%
Amount of profit if alternative
w orks
25%
Experience company w ill gain
in the new market
10%
Amt of investment (high
socre low investment)
30%
Ability of company to cut
short its losses
20%

1.4
100%
TOTAL SCORE
5.7

0.45

1.25

0.2

2.4
Distribution Costing Approach
Under this approach, estimates of costs and
revenues for different channel alternatives are
made, and the figures are compared to see how
each alternative stacks up.
Assume 6,000 potential customers
Each customer requires a personal call every
two weeks.
Each sales person can make 6 calls per day
Estimated Figures
Number of customers per sales person
Number of sales people required to call every two weeks
100 sales people @ Rs 400000
1 field sales manager per
10 salespeople
@ Rs 600000
4 regions
1 reg. sales manger per region @ Rs 800000
Warehouse and office staff, inventory,
interest on inventory, other overhead expenses
Total for direct channel
Assuming an average
30% gross margin on sales,
Sales volume needed to cover costs
99200000
30%
60
100
40000000
6000000
3200000
50000000
99200000
330666667
….2
Estimated Figures
Suppose distributors were used with the following
alternative trade margins offered by manufacturer
at the projected level of sales
If
20% then Rs
330666667 X 20%
66133333
If
15% then Rs
330666668 X 15%
49600000
If
10% then Rs
330666669 X 10%
33066667
….3
Estimated Figures
Direct versus distributor cost comparison :
20% Margin
Assumption
15% Margin
Assumption
10% Margin
Assumption
Direct
99200000
99200000
99200000
Distributor
66133333
49600000
33066667
Savings
33066667
49600000
66133333
GAP ANALYSIS
Gap Analysis Framework
SOURCES
OF GAPS
TYPES
OF GAPS
Environmental
Bounds:
Local legal constraints
Local physical,
retailing
infrastructure
Demand-Side
Gaps:
SOS < SOD
SOS > SOD
Which SO(s) ?
Managerial Bounds:
Constraint due to lack
of knowledge
Constraint due to
optimization at a
higher level
Supply-Side Gaps:
Flow cost is too high
Which flow(s)?
SOS – Service output Supply
CLOSING
GAPS
Demand-Side Gaps:
Offer tiered service levels
Expand/contract provision
of service outputs
Change segment(s) targeted
Supply-Side Gaps:
Change flow responsibilities
of current members
Invest in new low-cost
distribution technologies
Bring in new channel
members
SOD – Service output Demand
Gap Analysis Framework
Sources of Gaps
Environmental
Bounds:
Local legal
constraints
Local physical,
retailing
infrastructure
&
Managerial
Bounds:
Constraint due to
lack of knowledge
Constraint due to
optimization at a
higher level
Gap Analysis Framework
TYPES OF GAPS
Demand-Side
Gaps:
SOS < SOD
SOS > SOD
Which SO(s) ?
The service output is either
less than expected or in
excess of that expected
The Service output does not
match the requirements of
buyers
Supply-Side Gaps:
&
Flow cost is too high
Which flow(s)?
High cost performance of any of
the relevant channel flows
Types of Gaps
COST
No
Demand Side Gap
Demand Side Gap
PERFORMANCE
Demand Side Gap
SOD > SOS
SOD < SOS
LEVEL
SOD = SOS
No
Supply Side Gap
(Efficient
Flow Cost)
Supply Side Gap
(Inefficiently
high flow cost)
Proposition
suitable
for less
demanding
segment
No
Gaps
Proposition
suitable
for a more
demanding
segment
Insufficient SO
High costs,
High costs and
provision, at high but SOs are right :
SOs too high:
costs: price or
value is good,
No extra value
cost too high,
but price is
created, but price
value, too low
too high
or cost is high
Gap Analysis Framework
CLOSING GAPS
Demand-Side Gaps:
Offer tiered service
levels
Expand/contract
provision
of service outputs
Change segment(s)
targeted
&
Supply-Side Gaps:
Change flow
responsibilities
of current
members
Invest in new low-cost
distribution
technologies
Bring in new channel
members
That’s all for today!!!