Marketing of High-Technology Products and Innovations Chapter 8: Distribution Channels and Supply...

Marketing of High-Technology Products and

Innovations

Chapter 8: Distribution Channels and Supply Chain Management

in High-Tech Markets

© Mohr, Sengupta, Slater 2005

Chapter Overview Channel Design and Management Channel Considerations in High-

Tech Markets Adding New Channels: The

Internet From Distribution Channels to

Supply Chains


Distribution Channels Comprised of the various firms and players

in the flow of product from producer to consumer Manufacturers must manage flow of product Manufacturer must manage relationships

between firms Distribution activities

Logistics and physical distribution functions Structure and management of the channel


Distribution Options (Figure 8-1)


Issues in Distribution Firms at different stages of the channel

May have conflicting goals and objectives Often don’t think in terms of joint problem

solving Goal: Manage all functions to provide

value to end customer Meet customer needs in most

effective/efficient mode possible


Effective Channels Identify redundancies that lead to

inefficiency and conflict Develop relationships and alliances Work toward cost efficiency and

customer satisfaction Rely on technology solutions Use channel members as partners


Complexities in Managing High-Tech Channels

High value of products Pressure to minimize inventory in channel

Rapid pace of market evolution Price pressures

Need to maintain sales/service support Problems with piracy Complexities of the Internet as a new

channel


Channel Design and Management (Table 8-1)

1 Consideration of channel objectives, constraints, and external environment.

2 Choice of channel structure: direct versus indirect.

3 Choice of type of intermediary.

4 Penetration/Coverage: Number of intermediaries.

Channel Management.

a Selection and Recruitment of Channel Intermediaries

b Control and Coordination

5

c Consideration of Legal Issues

6 Evaluation of Performance.


Channel Objectives, Constraints, External Environment

Base channel design on consideration of Customer behavior and needs Competitors’ channels Product characteristics


Choice of Channel Structure

Direct: Manufacturer sells directly to end-users Own sales force Company owned stores Internet

Indirect: Manufacturer uses intermediaries to market, sell, deliver product to end-users

Hybrid (“dual”) channel: direct + indirect


Considerations in Choice of Channel Structure

Hybrid channel invites complexities Indirect channels subject to less control As different channels compete for

customers, conflict increases Direct channels may not be cheaper

Eliminate intermediary but not the functions


Choice of Type of Intermediary

Resellers: between distributors and end-users Typically local May customize for end-users

Distributors Typically national Buy from manufacturer, sell to reseller or

retailer


Types of Resellers VARs and VADs

Purchase components from different manufacturers, customize for various vertical markets

Systems Integrators Manage large or complex projects

Inbound versus Outbound Has a store-front for walk-in traffic –or-

dealer sales force calls on customers Traditional intermediaries

Mass merchandisers, Category killers, small mom-and-pop stores, franchises


Penetration/Coverage: Number of Intermediaries

Coverage vs. Intra-brand competition Price competition may damage

manufacturer’s reputation, consumers’ perceived quality

Dealers make lower margin, lowering incentive for service and support

Vertical/territorial restrictions


Channel Management Recruit/select channel members

Rely on trade shows, targeted direct mail, publicity, personal selling

Control and coordination to manage, guide, and monitor reseller activities


More on Control and Coordination Mechanisms

Authoritative controls Ownership Formal centralized decision making

(franchising) Power

Bilateral controls focused on mutual interest (see next slide)

Legal controls


Bilateral Controls Relational norms (shared expectations)

to work together Flexibility Mutual sharing of benefits/burdens Information sharing

Joint interdependence and commitment Trust


Legal Controls Tying

Sale of popular product linked to second product Bundled rebates

Exclusive Dealing Dealer can carry only one manufacturer’s

product Designed to ensure incentive for service Antitrust issues arise if access to competition

restricted


Evaluation of Performance (Table 8-2)

Reseller’s contribution to supplier profits

Reseller’s contribution to supplier sales

Reseller’s contribution to growth

Reseller’s competence

Reseller’s compliance

Reseller’s adaptability

Reseller’s loyalty

Customer satisfaction with reseller


Channel and Supply Considerations in High-Tech Markets

High-Tech Channels

Need for indirect channels to provide value to manufacturer

Blurring of distinctive members in the supply chain

Evolution of high-tech channels

The Internet

Gray markets

Black markets, piracy and export restrictions

Supply chain management

software

Vertical hubs


Blurring of Distinctions

Distributors/resellers backward integrating into assembling products

Suppliers forward integrating into computer manufacturing


Need for Indirect Channels to Provide Value

Channel assembly Customization, speedy turnaround Based on build-to-order model

Co-location Distributor’s employees work from

vendor’s site Customization

Shift into services


Evolution of High-Tech Channels

Distributors (To grow base of VARs)

Direct Sales to CEMs and Integrators SA

LE

S

Early, Early

Market

High Growth/ Critical

Mass

Mature Market/ Technology

Standardized

Time

Early Adopters

Traditional Retailers

Mass Merchant


Evolution of High-Tech Channels (Cont’d.)

To “cross the chasm” Direct sales channel useful, but requires

volume and predictability of revenues May need VARs and Systems Integrators

Retail channel useful for mainstream market rather than crossing the chasm

Does not create demand nor help develop “whole product”


Gray Markets

Diversion of goods to unauthorized distributors, sold at discounted prices Manufacturer loses control over

distribution Legitimate channels lose business Loss of incentive for legitimate channel

members to push sales or provide service Intra-brand competition, channel conflict


Causes of Gray Markets Pricing policies with large volume discounts Differential in international exchange rates

(parallel importing) Cost differences between different types of

resellers Free-riding of discount outlets on full-service

outlets Selective distribution

Lack of intra-brand competition may invited gray marketers


Causes of Gray Markets (Cont.)

Producers perform marketing functions Reduces customer’s risk in buying from

unauthorized distributors Incompatible compensation policies

Utilize plant capacity Meet sales volume quotas


Solutions to Gray Markets Track source of units and cut off supply to

gray market Signals commitment to legitimate channels Mitigates price erosion May be burdensome administratively

One-price policy (no volume discounts) Increase penetration in the market Collect information on extent of the

problem, consistently measure channel member performance


Black Markets, Piracy, and Restricted Exports

Black Markets Counterfeit goods Piracy Especially problematic with unit-one cost

structures Export Restrictions on sales of “dual

use” products to some countries Ostensibly to protect U.S. security

interests


Adding New Channels: The Internet

Hybrid channels Conflicts between manufacturer and its dealers

pursuing same customers “Co-opetition”

Options Avoid the Web (and conflict) Go to the Web (invite conflict and even mutiny) Disintermediate Bricks-and-clicks model


Adding an Internet Channel

Does the Web channel add a new value proposition for end-users? Reach new customers Less likely to cannibalize existing

channels Does the Web merely create

distribution efficiencies? Cannibalizes existing sales


Flowchart for Adding Internet Channel

What is the focus of the Internet channel?

Can the company be more profitable (realize cost savings in service) or generate incremental revenue by offering the new Internet channel?

Can the company generate incremental revenue by offering the new Internet channel?

Don’t introduce new Internet channel

Don’t introduce new Internet channel

Yes Yes

No

Attract New Customers

Service Existing Customers

No


Flowchart for Adding Internet Channel (Continued)

How is the relationship between the company and existing channel members?

Work out details of distribution strategy


Yes Yes

Adversarial Collaborative

Negotiate incentives to co-opt existing channel members



Avoiding Conflict with Existing Channel Use website to disseminate only product

information Use website only to generate leads;

direct buyers to dealers Sell limited merchandise offerings

through website Take online orders from small

customers; direct larger customers to dealers

Launch website without publicity


Managing Conflict with Existing Channel Keep website prices aligned with

existing channels Give a cut of each Internet sale to

existing channels Improve flow of information with channel

members


Managing Hybrid Channels Objectives:

Increase coverage while lowering costs Steps:

Identify customer target segments Delineate tasks/functions needed by

segments Allocate most effective/efficiency

channel to the tasks on a by-segment basis


Contingency Model

CHANNEL PERFORMANCE

CHANNELS

TASKS

TARGETS


Matching Tasks to Channels, By Segment

Lea

d

Gen

erat

ion

Qu

alif

y S

ales

Pre

sale

s

Clo

se S

ales

Pos

t S

ales

S

ervi

ce

Acc

t. M

gmt.

National Acct. Mgmt.

Big

Direct Sales

Telemarketing Medium

Small Direct Mail

Retail Sales

Distributors

Dealers/ VARs

Tasks

Channels


Supply Chain Management Match inflow of supplies with the

demand at every stage of the value chain based on the actual demand from end-users

Reduce inventory as work-in-progress Reduce cycle time Electronic links to customers


Matching Type of Innovation to Supply Chain Functions

Type of Innovation Supply Chain

Functions Incremental Breakthrough

Physical Function

- 0 -

Market Mediation Functions

- 0 -

= Appropriate match of type of product to supply chain functions -0- = Inappropriate match


Implications of Contingency Model for Supply Chain Management

For incremental innovations: Customer needs are known Focus on managing physical functions and close

coordination to gain cost efficiencies

For breakthrough innovations Must read uncertain market signals, knowing

what inventory is required where Focus on responsiveness (speed and flexibility) Consistent with trends to channel assembly


Trends in Supply Chain Management

Vertical electronic markets on the Internet Hubs used to connect suppliers to their

manufacturing customers Often owned by cybermediaries

Supply chain management software Bring data from manufacturing, inventory, and

suppliers to integrate decision making Outsourcing

Reduces cost but increases supply chain vulnerability

Political backlash from unions and legislatures

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