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Chapter Ten Value Chain Strategy
McGraw-Hill/Irwin
2006 The McGraw-Hill Companies, Inc., All Rights Reserved.
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Value Chain Strategy
Strategic role of distribution Channel of distribution
strategy Managing the channel International channels Supply chain management issues
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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
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Illustrative Example: Internet Impact on Distribution
The Impact of Technology on Value Chains In India
E-Government Computer Kiosks Agricultural e-commerce
Tele-medicine
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The Marketing System
Manufacturers and producers
Marketing intermediaries Agriculture and raw materials suppliers Retailers Agents-brokers Wholesalers-distributors
Facilitating organizations
Financial Transportation Advertising Other
End users Consumer Industrial-institutional
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Marketing Channels
Manufacturers/producers
Agents/brokers
Wholesalers/ distributors
Retailers
Retailers
Consumers and organizational end users
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Illustrative Example: Samsung
Goal of moving from cheap imitative electronics products to a cool brand Feature-packed products Products removed from shelves of WalMart 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 lowprice products Strategy is implemented in part through supply chain and distribution choices
Distribution by Manufacturers
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Manufacturers have three
distribution alternatives:
Direct distribution is necessary
Use of intermediaries is necessary
Both direct and intermediary contact are feasible
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Factors Favoring Distribution by Manufacturer
Opportunity for Profit margins competitive adequate to support advantage distribution Rapidly changing organization market environment
Complete line of products
Distribution by the manufacturer
Purchases are large and infrequent
Early stages of product life cycle
Complex product application
Extensive Small number of purchasing geographically Supporting process concentrated services are buyers required
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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
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Channel of Distribution Strategy
Types of distribution channel
Distribution intensity
Selecting the channel strategy
Strategies at different channel levels
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Steps in Channel Strategy Selection
(1) Type of channel arrangement
Conventional
Vertically coordinated
Ownership
Contractual
Administ ered
(2) Desired intensity of distribution
Intensive
Selective
Exclusiv e
(3) Selection of a channel configuration
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Distribution Intensity Illustrations
Trading Area A B C ++ +++ + ++++ + ++++ ++ ++++ ++ +++ Intensive distribution
+ + + + +
Exclusive distribution
Selective distribution
Illustrations Cadillac automobiles Ethan Allen furniture Revlon cosmetics Caterpillar equipment Este Lauder cosmetics Timex watches
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Selecting the Channel Strategy
Design stages Decision criteria
Identification of channel alternatives
Intensity of distribution Access to end users Prevailing distribution practices Necessary activities and functions
Evaluation and selection of channel(s) to be used
Revenue-cost analysis Time horizon for development Control considerations Legal constraints Channel availability Select the channel
Selection of channel participants
Market coverage Capabilities Intermediarys needs Functions provided Availability
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Illustrative Channel Strategy Evaluation
Evaluation Criteria Market access
Manufacturers Representatives Rapid
Company Salesforce 1 to 3 year development $20 million Medium to low $2.4 million** 12% Fair Good
Sales forecast (2 years) Forecast accuracy Estimated costs Selling Expense (cost/sales) Flexibility Control *
$10 million High $1 million* 10% Good Limited
Includes 8% commission plus management time for recruiting and training representatives.
** Includes $100,000 for 10 salespeople, plus management time.
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Managing the Channel
Channel leadership Management structure and systems
Physical distribution management
Channel relationships Conflict resolution Channel performance Legal and ethical considerations
International Channel of Distribution Alternatives
Home country Foreign country
The foreign marketer or producer sells to or through
Exporter Importer
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Domestic producer or marketer sells to or through
Open distribution via domestic wholesale middlemen
Foreign agent or merchant wholesalers
Foreign retailer
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.
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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
Efficient Consumer Response
Traditional channel problems
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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 crossdocking Electronic data interchange New performance measures New organizational processes and structures Internet-based network for supplierbuyer trading
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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