Channels

The Most Exciting Topic in Business EVER!

Agenda
A Marketing Moment The Need for Channels Historical Approaches to the Market The Competitive Thrusts of Channels
Cost control Differentiation New Markets in a Financially Viable Manner

Agenda- Continued
Building a Channel Coverage Issues Building Value in Later Stages

Marketing Overview
3 Cs
Customer Competitor Company
Market Research

(Segment)

(Target)

(Position)

Product

Price

4 Ps

Place

Promotion

Memaska Steel
Manufacturer

Distributors

Outfitters

Customer

Historical Market Strategies What is the Marketing Focus?

1950s: Production Orientation 1960s: Product Orientation 1970s: Market Orientation 1990s: Zero Sum/Channel Orientation 2000s: Integrated financially viable platforms for value delivery

Marketing Mix Strategies Marketing Channels

1960s: Suppliers/Distributors as Adversaries 1980s: Suppliers as Cost Centers/ Distributors as Customers 1990s: Suppliers/Distributors as Partners
2000s: Integrated financially viable platforms for value delivery

2000s
Covering new markets, in a financially viable manner using the resources of our partner firms to exceed customer expectations Competition at the level of business system versus business system---NOT product versus product Channels have become cooperative systems that are extremely market focused!

Why Have Channel Strategies had To Be Market Focused? NO CHOICE!

Mature markets Demographic trends Parity products coming out with new products Rising customer expectations Proximity of worldwide competition Increasing market fragmentation

Market Focus (continued)

Decreased effectiveness of mass media Increase in specialization Rapidly changing technologies Shorter product lifecycles Changing distribution patterns

Competitive Thrust of Channels

Cost control Market differentiation Market expansion

Cost Control

Cost Control
Reduced system inventory
Enhanced turns Reduced Capital expenditures Increased GMROI---ROOA

Reduced cost of similar good

Reduce redundancy Apply core understanding

Finance Questions
How much does it cost? When will I get it back? How much risk is there? How much variability do I expect?

Why do Intermediaries Exist? Financial Control- Leverage

GMROI
Avg. Gross Margins X Turns

ROOA
Return on Operating Assets Inventory + Receivables minus Payables

Market Differentiation- The Second Thrust

Building Points of Differentiation

Value added services Customer support Channel differentiation

VAR= Value Added?

Treat you channel partner as someone you divide labor with These distribution partners are the caretaker of your brands Think in terms of the support you need and that you can provide them How do we translate our differentiation through this channel and ensure that this effort is recognized!

New Channels?- Why?

New Customers New Efficiencies New Technology New Financial models

Channels- Justification

Why Do Intermediaries Exist? Cost Justification:

Improve the efficiency of the exchange process Adjust for discrepancies in assortment Provide for the routinization of transactions Facilitate the search process

Decentralized Exchange Closed Economy

1

Centralizing Exchange Closed Economy

REDUCE NO OF INTERMEDIARY

Intermediary

Separation of Supply and Demand Selling Directly

Manufacturers

Retailers (10 Contact Lines)

Separation of Supply and Demand Selling Through One Wholesaler

Manufacturers
Wholesaler

Retailers (7 Contact Lines)

Why Do Intermediaries Exist? Cost Justification:

Improve the efficiency of the exchange process Adjust for discrepancies in assortment Provide for the routinization of transactions Facilitate the search process

Cost Justification: Discrepancies of Assortment

Sorting Build bulk Break bulk Develop assortments

Why Do Intermediaries Exist? Cost Justification:

Improve the efficiency of the exchange process Adjust for discrepancies in assortment Provide for the routinization of transactions Facilitate the search process

 Each transaction requires

Cost Justification Routinization of Transactions

-Valuation, payment, services, transfer of possession and title ...

Must routinize
- lot size, payment, frequency of delivery, communication...

Note: Bargaining reduces efficiency. Lose efficiency

Why Do Intermediaries Exist? Cost Justification:

Improve the efficiency of the exchange process Adjust for discrepancies in assortment Provide for the routinization of transactions Facilitate the search process

Cost Justification Aiding the Search Process

Buyer and seller are engaged in search simultaneously. By organizing on line of trade it facilitates the search process

Producers

Physical Possession Ownership Promotion

Negotiation

Marketing Flows and Channels

Wholesalers Retailers Consumers (Industrial and Household)

Financing Risking of Ordering Payment

Commercial Channel Subsystem

= Source: R.S. Vallie, appearing in Stern, Louis and Adel El-Ansary, Marketing Channels, 4th ed., Prentice Hall, Englewood Cliffs NJ. pp. 12.

To Facilitate Transactions Channels Must be Constructed to Deliver:

Lot Size Assortment Waiting Time Market Decentralization

Dupont

Manufacturer

Customer

Building a Channel?

Picking Channel Actors: Things to Remember

Competence of actors personnel Actors orientation toward compliance The ability to influence the actor Actors ability to adapt Actors growth prospects Scope of services offered by the Actor Actors alternatives Actors efficiency

How Do We Get Things Done? A Thought About POWER Relationships...

The ability of A to get B to do what B otherwise would not have done

A Thought About Relationships (Getting Things Done)

5 Relevant Bases of Power: Coercion Reward Expertise Reference Legitimacy

Market Coverage Strategies

1960s: Random Market Coverage 1980s: Maximum Market Coverage 1990s: Selective Market Coverage

Pitfalls of Intensive Distribution

Dealer Profits Decline

Confidence in Manufacturer Erodes

Dealer Discounts Product

Dealer Support to End-User Declines

Customer Satisfaction Erodes

Marketing Channels, 4th ed., Prentice Hall, Englewood Cliffs NJ. pp. 231. Source: Richard E Koon, appearing in Stern, Louis and Adel El-Ansary,

Manufacturers Goals (Nokia)

Volume! Volume! Volume! Profits which comes from more VOLUME! Stable Volume! Timely Volume! Preferably homogeneous Volume!

Cellular Carriers
Started with Volume Profits Amount of profits Timeliness of profits Risk of profits Summary: Lots of customers who are heavy users of the service, from day 1 and pay their bills on time.

Retail Locations
Margins Turns Traffic Risk Reductions Local Competitive Weapon Summary: Products that customers come in the store requesting, having better than average margins, turns, and reduced risk.

Pricing Over The Product Life Cycle

Increasing buyer knowledge Increasing price sensitivity Increasing competitive intensity Decreasing returns from technical enhancements Introduction Growth
Cost / Price Leadership or Differentiation

Maturity
Product Line Pricing

Decline

Next Gen.?

Sales Price Cost

Bundle

Skimming vs. Penetration Temp. Price Reductions

Unbundle

New Product Trials

Distribution Over The Product Life Cycle

Increasing buyer knowledge and price sensitivity Increasing competitive intensity Increasing competitive intensity Decreasing returns from technical enhancements Introduction Growth Maturity Decline

More outlets Less specialized Competitive Brand promotion Intensive selling High Mfg involvement Tight relations

Sales Next Gen.?

Price Cost
Order takers Broad lines Store promotion Low Brand-Add

New Product Trials

Temp. Price Reductions

Unbundle

Introduction Stage
Direct Selling Intensive Selling Customer Assurance High Information Content Specialized Professional Resellers Summary High Value Added Resellers

Mature Stages
Third Party Resellers Order Takers Self Service/Cash and Carry Low Provision of Information Broad Assortment Resellers Summary: Reduced value added by the channel-- especially to brands

Channel Evolution With Time Comes:

Declining Margins Reduced Information Needs Changing Economies of Scale Multiple Points of Differential Advantage

Disparate Sources of Revenue

How Can the Manufacturer Add Value in Later Stages?

Become Irreplaceable (Integration?) Provide a Compelling Business Case (P&G) Differentiation for Competitive Advantage (Reebok v. Nike) By Understanding the Concurrent Evolution of Customer and Consumer Needs.

The Basis of Competition (Simplified)

Competition Manufacturer A Manufacturer B

Competition
Retailer AA Retailer Retailer B

Product Movement

What Do Inefficient Channels Mean?

Marketing Manufacturing Finance Strategic Planning

Suggested Readings

Levitt, Theodore (1974), Innovations in Marketing: New Perspectives, Free Press, NY. Hkansson, Hkan (1990), Introduction, Hkan Hkansson ed., Industrial Technological Development: A Network Approach, Croom Helmn London pp. 3-25. Anderson, James C. and James A. Narus (1990), "A Model of Distributor Firm and Manufacturer Firm Working Partnerships," Journal of Marketing, 54 (January), Mitchell, Russell (1994), Virtual Worker: Any Place I Hang My Modem is Home Business Week , October 17, 1994 pp. 96-97. Shervani, Tasadduq and Philip Zerrillo The Albatross of New Product Innovations, Business Horizons, January 1997. Stern, Louis, Adel El-Ansary and Anne Coughlan, Marketing Channels, 5th ed., Prentice Hall, Englewood Cliff NJ 1997. Zerrillo, Philip and Dawn Iacobucci, Trade Promotions: a Call for a Rational Approach, Business Horizons, July 1996.

The Channel-Follow-Up
Why do we need channels? What are the factors driving the channel? What sort of things do you need to keep in mind when you pick channel partners? Why do we brand Products? How can the channel help you build a brand? How can channel decisions hurt your ability to build a brand

Channels Follow-Up
What are the potential problems of intensive or saturated distribution? Over the product life cycle do you expect more or less information to be available at the point of sale?