FROM DISTRIBUTION TO GROWING DISTRIBUTION

CHANNELSLet’s keep the cannibals in the family

ByGroup 2

Marketing LMN

AGENDA• The chapter deals with situations where the new distribution

channels have emerged and the companies face the dilemma whether or not to change their distribution channels. If yes, then to what extent.

• The chapters explains each situation with suitable examples like Dell, Compaq, Ryan Air and the Music industry.

• The chapter also gives steps in the channel migration strategy.

WHEN A NEW DISTRIBUTION CHANNEL EMERGES WE NEED TO ASK THE FOLLOWING QUESTIONS

• To what extent does the new channel complement or replace existing industry distribution channels?

• To what extent does the new channel enhance or devalue existing capabilities and value network?

The answers to the above questions will help arrive at a migration strategy, the level of internal resistance and the external channel conflict that one should

anticipate as well as provide insight to the migration process

PenetrateKeep Existing channels

Add New ChannelReinforce Current

CapabilitiesLow internal Resistance

Low Channel Conflict

DevelopKeep Existing Channels

Add New ChannelDevelop New Capabilities

Medium Internal ResistanceMedium Channel Conflict

SwitchExit Existing Channels

Add New ChannelReinforce Current

CapabilitiesMedium internal Resistance

High Channel Conflict

ReinventExit Existing Channels

Add New ChannelDevelop New CapabilitiesHigh Internal Resistance

High Channel Conflict

ExternalImpact

Internal ImpactEnhances Existing Capabilities Requires New Capabilities

Complimentary

Replacement

Replacement vs Complementary

Replacement• Cannibalism, Channel conflicts,

and resistance to change occur more in this situation

Complimentary• Compel companies to move

certain types of transactions and customers to new channel distribution.

The nature of channel migration determined by whether a distribution channel compliments or displaces existing distribution channels.

Core Capabilities Core Rigidities • With the advent of new type of distribution channels, companies tend

to take advantage of the same without hindering their traditional way of approach.

• The problem is generated when they try to sail on two boats at once which makes them jack of all trades and master of none.

Instances of Channel Migration in PC Industry

• To take leverage from DELL’s success of direct distribution channel, HP copied the same but kept its traditional channels alive which created a state of confusion in the customer’s mind and the attempt at replication of the former was an utter failure.• Taking a leaf out of Compaq’s success story of sales with 3rd party

re-sellers, DELL decided to expand its distribution to the same channel but the decision did not bear fruits and for the first time DELL reported a net loss of $ 36 Million in 1993.

Irrespective of the fact whether another channel dislodges existing distribution channel at an industry level, it will probably influence the core competences and distribution network resources of existing players. New channels may help a few organizations influence their core competences and distribution resources, it hinders other organizations

inside of the same industry.

The Reinvention of Music Distribution Business Models

• The most difficult channel migration strategy is to reinvent distribution channels• Necessary in the face of both replacement efforts and the need to develop new capabilities.• Currently such a situation can be seen in online distribution of digital products like movies, music, games, books and software.• The music industry cost structure has two significant crises- the cost of distribution and logistics and the absolute costs of handling the returns of not so hit CDs• The emergence of Internet brought with it the opportunity to sell directly to consumers • The music manufacturer selling online has benefits of not having to pay, the retailer’s margin, greater customer knowledge and positive working capital.

The search for a digital distribution model

• Broadband Internet has opened up an entirely new digital form of music distribution.• Music executives and artists launched lawsuits against online music

swapping• Apple Computer launched iTunes to give access to consumers to download

unlimited music at a reasonable price giving way to a new a viable new business model.• This business model would transform the music business from a packaged

goods industry to an electronic distribution industry.

The Channel Migration Process

• A company should assess the performance of its existing channels• New Channels do not mean the solution to problems of existing channels’

problem• Example: In an FMCG company managers complaint about price pressure

large retailers were exerting• However, audit proved them to be most profitable

• Why? How?• The difference lies in manufacturer’s cost to serve the channels.

Step 1: Conduct a Distribution Strategy Audit of Existing Channels

Step 2: Articulate the strategic logic for channel migration

Following questions about the new channel help evaluating opportunity presented by new channel:• Attractiveness of value proposition to target customers?• Is the target audience attracted to new channel, large enough?• Is there a differentiated value proposition or cost advantage?• Is our cost structure and value network optimized for new network?• What can and will competition do with new channel?• How will new channel affect customers’ channel preference and

existing channels’ strategies?

Step 2 (Contd)

• To articulate new channel of distribution, plot the value curve• It would reveal that no channel is best. Each has its own strengths &

weakness• Priceline.com was successful for flight tickets but online grocery business

failed

• Reason?• The target segment and value proposition were too small.

Exploit online channels when network effects exist:

• Internet’s most important attribute is reduction of transaction cost or cost of connecting people

• That is why ebay, MMPG and Sony’s EverQuest is successful

Consider Cost And Competitive Moves:

• Developing strategy towards the new distribution channel

• Optimal approaches are what major competitor do with online sales and what is our level of online sales

• Key questions are

• First mover in the industry will workout all political and technological kinks

Step 2 (Contd)

Step 3: Mobilize support For Channel Migration

• A strong strategic logic is necessary for channel migration• New channels threaten both sales volumes in existing channel• Managers in the organization responsible for that• Implementation plan should answer the five channel migration

questions• Company sales should migrate across various channels, and managers

should have frame work of milestone

• Channel conflicts will occur because of distribution channel to be chasing the same customers with same brand

• Channel members call conflict is a healthy competition

• Main objective of conflict management is not to eliminate rather manage it so

Step 4: Actively Manage Channel Conflict

Expanding Channels

• Having multiple channels should be built on a clear end user segmentation strategy.• Wal-Mart and convenience stores serve two different segments.• Channel conflict can be managed by dedicating parts of the product line to

different distribution channels, though it’s often unsustainable.• Dedicating different brands to different channels is known as channel brands.• To reduce channel conflict, some manufacturers agree to let offthe existing

channel to increase sales in new channel.

Step 4 (Contd)

Over distribution

• More number of distributors dilutes the support.

• Thus the products requiring high level of support should not be over distributed.

• Channel conflict arises due to different prices offered to different channel members.

Step 4 (Contd)

Conclusion

• To conclude, Nirmalya Kumar says that new distribution channels rarely fit the industry approach to the market.• The tricky part is to cannibalize their own profitable business for

questionable returns from emerging channels.• If one company does not then its competitor will.• So he suggests that it is always better to have cannibals in the family and

the rate at which channel migration should be done is very critical.