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Chapter Ten

Value ChainStrategy

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


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Value ChainStrategy

Strategic role of distribution

Channel of distributionstrategy

Managing the channel

International channels

Supply chain managementissues


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Strategic Role of

DistributionDistribution 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 ChainsIn 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

ConsumerIndustrial-institutional

Facilitatingorganizations

FinancialTransportationAdvertisingOther

Agriculture andraw materialssuppliers


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MarketingChannels

Manufacturers/producers

Consumers and organizational end users

Agents/brokers

Wholesalers/

distributors

Retailers Retailers


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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 withhigher-end chains like Best Buy andCircuit City

Samsung competes through hardwareinnovation, product customization andspeed

Samsung sells only higher-end goods andresists pressures towards marketing low-price products

Strategy is implemented in part throughsupply 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 cycl

Complex producapplication

Profit marginsadequate to supportdistributionorganization

Complete lineof products

Purchasesarelarge andinfrequent

Small number ofgeographicallyconcentratedbuyers

Factors Favoring Distribution byManufacturer


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Retail Initiatives byManufacturers

Apple Computer To educate consumers about computers andmusic 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 StrategySelection

(1) Type of channel arrangement

(3) Selection of a channel configuration

Administered

Intensive Exclusiv

eSelective

(2) Desired intensity ofdistribution

ContractualOwnership

Conventional Vertically coordinated


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Distribution IntensityIllustrationsTrading Area

A B C

+

+

+

++

+ ++ + +

+

+ + + +++ + + ++ ++ + + ++ +

+ + +

Exclusivedistribution

Selectivedistribution

Intensivedistribution

Illustrations

Cadillac automobilesEthan Allen furniture

Revlon cosmeticsCaterpillar equipment

Este Lauder cosmeticsTimex watches


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Design stagesDecision criteriaIntensity of distributionAccess to end users

Prevailing distributionpractices

Necessary activities andfunctions

Revenue-cost analysis

Time horizon fordevelopment

Control considerations

Legal constraints

Channel availability

Select the channel

Market coverage

Capabilities

Intermediarys needs

Functions provided

Availability

Identificationof channelalternatives

Evaluation andselection of

channel(s) tobe used

Selectionof channel

participants

Selecting the Channel Strategy


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Illustrative Channel StrategyEvaluation

Evaluation Manufacturers 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 trainingrepresentatives.

** 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


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10-1International Channel ofDistribution Alternatives

Home country Foreign country

The foreign marketerorproducer sells to orthrough

Domesticproducer ormarketer sellsto or through

Opendistributionvia domesticwholesalemiddlemen

Exporter Foreignagent ormerchantwholesalers

Foreignretailer

Importer Foreignconsumer

Export management companyor company

sales force

Source: Philip R. Cateora, International Marketing, 7th ed., Homewood, Ill.: Richard D. Irwin, Inc., 1990, 5


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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 onmarketing

E-business models

Retailer and distributor power

Strategic flexibility and change


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Efficient 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

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