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8/e8/eMcGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.

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Chapter Ten

Value ChainStrategy

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

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Value ChainStrategy

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 bymanufacturers

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Illustrative Example: Internet Impact on

Distribution

The Impact of Technologyon 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

RetailersAgents-brokersWholesalers-distributors

End users

Consumer Industrial-institutional

Facilitatingorganizations

FinancialTransportationAdvertisingOther

Agriculture and raw materials suppliers

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Marketing Channels

Manufacturers/producers

Consumers and organizational end users

Agents/brokers

Wholesalers/distributors

Retailers Retailers

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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 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

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Distribution by Manufacturers

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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Distributionby the

manufacturer

Opportunityforcompetitiveadvantage

Supportingservices arerequired

Rapidly changingmarket environment

Extensivepurchasingprocess

Early stages ofproduct life cycle

Complex productapplication

Profit marginsadequate to supportdistributionorganization

Complete lineof products

Purchases arelarge and infrequent

Small number ofgeographicallyconcentratedbuyers

Factors Favoring Distribution by Manufacturer

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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 distributionchannel

Distribution intensity

Selecting thechannel strategy

Strategies atdifferentchannel levels

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Steps in Channel Strategy Selection

(1) Type of channel arrangement

(3) Selection of a channel configuration

Administered

Intensive Exclusive

Selective

(2) Desired intensity of distribution

Contractual

Ownership

Conventional Vertically coordinated

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Distribution Intensity IllustrationsTrading Area

A B C

+

+

+ ++

+ + + + + + + + + + ++ + + + + + + + + + + + + + + Exclusive

distributionSelective

distributionIntensive

distribution

Illustrations

Cadillac automobiles Ethan Allen furniture

Revlon cosmetics Caterpillar equipment

Estée Lauder cosmetics Timex watches

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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

Identificationof channel

alternatives

Evaluation and selection of channel(s) to

be used

Selectionof channel

participants

Selecting the Channel Strategy

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Illustrative Channel Strategy Evaluation

Evaluation Manufacturer’s CompanyCriteria 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.

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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

10-18International Channel ofDistribution Alternatives

Home country Foreign country

The foreign marketer orproducer sells to or through

Domesticproducer ormarketer sellsto or through

Opendistributionvia domesticwholesalemiddlemen

Exporter Foreignagent ormerchantwholesalers

Foreignretailer

Importer Foreignconsumer

Export management companyor companysales 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

10-20Efficient 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

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Lean Supply Chain Elements

1. Definition of Value

2. Identification of Value Streams andRemoval of Muda (Waste)

3. Organizing Around Flow, Insteadof “Batch and Queue”

4. Responding to Pull Throughthe Supply Chain

5. The Pursuit of Perfection