Marketing of High-Technology
Products and Innovations
Chapter 8:
Distribution Channels and
Supply Chain Management
in High-Tech Markets
Chapter Overview
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Channel Design and Management
Channel Considerations in High-Tech
Markets
Adding New Channels: The Internet
From Distribution Channels to Supply
Chains
© Mohr, Sengupta, Slater 2005
Distribution Channels
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Comprised of the various firms and players in the
flow of product from producer to consumer
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Manufacturers must manage flow of product
Manufacturer must manage relationships between
firms
Distribution activities
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Logistics and physical distribution functions
Structure and management of the channel
© Mohr, Sengupta, Slater 2005
Distribution Options (Figure 8-1)
Suppliers
Agent/Broker/Distributor
Manufacturers/OEMs
Distributor/Broker
Resellers
Resellers
End Customers
© Mohr, Sengupta, Slater 2005
Issues in Distribution
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Firms at different stages of the channel
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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
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Meet customer needs in most effective/efficient mode
possible
© Mohr, Sengupta, Slater 2005
Effective Channels
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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
© Mohr, Sengupta, Slater 2005
Complexities in Managing
High-Tech Channels
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High value of products
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Rapid pace of market evolution
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Pressure to minimize inventory in channel
Price pressures
Need to maintain sales/service support
Problems with piracy
Complexities of the Internet as a new
channel
© Mohr, Sengupta, Slater 2005
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.
5
Channel Management.
6
a
Selection and Recruitment of Channel Intermediaries
b
Control and Coordination
c
Consideration of Legal Issues
Evaluation of Performance.
© Mohr, Sengupta, Slater 2005
Channel Objectives, Constraints,
External Environment
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Base channel design on consideration of
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Customer behavior and needs
Competitors’ channels
Product characteristics
© Mohr, Sengupta, Slater 2005
Choice of Channel Structure
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Direct: Manufacturer sells directly to end-users
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Own sales force
Company owned stores
Internet
Indirect: Manufacturer uses intermediaries to
market, sell, deliver product to end-users
Hybrid (“dual”) channel: direct + indirect
© Mohr, Sengupta, Slater 2005
Considerations in
Choice of Channel Structure
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Hybrid channel invites complexities
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Indirect channels subject to less control
As different channels compete for customers,
conflict increases
Direct channels may not be cheaper
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Eliminate intermediary but not the functions
© Mohr, Sengupta, Slater 2005
Choice of Type of Intermediary
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Resellers: between distributors and end-users
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Typically local
May customize for end-users
Distributors
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Typically national
Buy from manufacturer, sell to reseller or retailer
© Mohr, Sengupta, Slater 2005
Types of Resellers
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VARs and VADs
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Systems Integrators
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Manage large or complex projects
Inbound versus Outbound
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Purchase components from different manufacturers,
customize for various vertical markets
Has a store-front for walk-in traffic –ordealer sales force calls on customers
Traditional intermediaries
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Mass merchandisers, Category killers, small mom-andpop stores, franchises
© Mohr, Sengupta, Slater 2005
Penetration/Coverage:
Number of Intermediaries
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Coverage vs. Intra-brand competition
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Price competition may damage manufacturer’s
reputation, consumers’ perceived quality
Dealers make lower margin, lowering incentive
for service and support
Vertical/territorial restrictions
© Mohr, Sengupta, Slater 2005
Channel Management
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Recruit/select channel members
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Rely on trade shows, targeted direct mail,
publicity, personal selling
Control and coordination to manage, guide,
and monitor reseller activities
© Mohr, Sengupta, Slater 2005
More on Control and
Coordination Mechanisms
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Authoritative controls
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Ownership
Formal centralized decision making
(franchising)
Power
Bilateral controls focused on mutual
interest (see next slide)
Legal controls
© Mohr, Sengupta, Slater 2005
Bilateral Controls
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Relational norms (shared expectations) to
work together
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Flexibility
Mutual sharing of benefits/burdens
Information sharing
Joint interdependence and commitment
Trust
© Mohr, Sengupta, Slater 2005
Legal Controls
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Tying
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Sale of popular product linked to second product
Bundled rebates
Exclusive Dealing
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Dealer can carry only one manufacturer’s product
Designed to ensure incentive for service
Antitrust issues arise if access to competition
restricted
© Mohr, Sengupta, Slater 2005
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
© Mohr, Sengupta, Slater 2005
Channel and Supply Considerations
in High-Tech Markets
Blurring of distinctive
members in the supply chain
Need for indirect channels to
provide value to manufacturer
Supply chain
management
software
Evolution of high-tech
channels
High-Tech
Channels
Vertical hubs
Gray markets
The Internet
Black markets, piracy
and export restrictions
© Mohr, Sengupta, Slater 2005
Blurring of Distinctions
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Distributors/resellers backward
integrating into assembling products
Suppliers forward integrating into
computer manufacturing
© Mohr, Sengupta, Slater 2005
Need for Indirect Channels to
Provide Value
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Channel assembly
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Co-location
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Customization, speedy turnaround
Based on build-to-order model
Distributor’s employees work from vendor’s site
Customization
Shift into services
© Mohr, Sengupta, Slater 2005
Evolution of High-Tech Channels
Time
Mass Merchant
Traditional
Retailers
SALES
Distributors
(To grow base of VARs)
Direct Sales
to CEMs and
Integrators
Early,
Early
Market
Early
Adopters
High
Growth/
Critical
Mass
Mature Market/
Technology
Standardized
© Mohr, Sengupta, Slater 2005
Evolution of High-Tech Channels
(Cont’d.)
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To “cross the chasm”
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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”
© Mohr, Sengupta, Slater 2005
Gray Markets
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Diversion of goods to unauthorized
distributors, sold at discounted prices
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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
© Mohr, Sengupta, Slater 2005
Causes of Gray Markets
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Pricing policies with large volume discounts
Differential in international exchange rates (parallel
importing)
Cost differences between different types of
resellers
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Free-riding of discount outlets on full-service outlets
Selective distribution
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Lack of intra-brand competition may invited gray
marketers
© Mohr, Sengupta, Slater 2005
Causes of Gray Markets
(Cont.)
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Producers perform marketing functions
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Reduces customer’s risk in buying from
unauthorized distributors
Incompatible compensation policies
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Utilize plant capacity
Meet sales volume quotas
© Mohr, Sengupta, Slater 2005
Solutions to Gray Markets
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Track source of units and cut off supply to gray
market
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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
© Mohr, Sengupta, Slater 2005
Black Markets, Piracy, and
Restricted Exports
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Black Markets
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Counterfeit goods
Piracy
Especially problematic with unit-one cost
structures
Export Restrictions on sales of “dual use”
products to some countries
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Ostensibly to protect U.S. security interests
© Mohr, Sengupta, Slater 2005
Adding New Channels:
The Internet
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Hybrid channels
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Conflicts between manufacturer and its dealers
pursuing same customers
“Co-opetition”
Options
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Avoid the Web (and conflict)
Go to the Web (invite conflict and even mutiny)
Disintermediate
Bricks-and-clicks model
© Mohr, Sengupta, Slater 2005
Adding an Internet Channel
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Does the Web channel add a new value
proposition for end-users?
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Reach new customers
Less likely to cannibalize existing channels
Does the Web merely create distribution
efficiencies?
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Cannibalizes existing sales
© Mohr, Sengupta, Slater 2005
Flowchart for Adding Internet
Channel
What is the focus of
the Internet
channel?
Service Existing
Customers
No
Don’t introduce
new Internet
channel
Attract New
Customers
Can the company be more
profitable (realize cost savings in
service) or generate incremental
revenue by offering the new
Internet channel?
Yes
No
Can the company
generate incremental
revenue by offering the
new Internet channel?
Yes
© Mohr, Sengupta, Slater 2005
Don’t introduce
new Internet
channel
Flowchart for Adding Internet
Channel (Continued)
Yes
Yes
How is the relationship
between the company
and existing channel
members?
Collaborative
Work out details of
distribution strategy
Work out details of
distribution strategy
Adversarial
Negotiate incentives
to co-opt existing
channel members
Work out details of
distribution strategy
© Mohr, Sengupta, Slater 2005
Avoiding Conflict with Existing
Channel
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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
© Mohr, Sengupta, Slater 2005
Managing Conflict with
Existing Channel
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Keep website prices aligned with existing
channels
Give a cut of each Internet sale to existing
channels
Improve flow of information with channel
members
© Mohr, Sengupta, Slater 2005
Managing Hybrid Channels
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Objectives:
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Increase coverage while lowering costs
Steps:
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Identify customer target segments
Delineate tasks/functions needed by
segments
Allocate most effective/efficiency channel
to the tasks on a by-segment basis
© Mohr, Sengupta, Slater 2005
Contingency Model
CHANNEL
PERFORMANCE
CHANNELS
TASKS
TARGETS
© Mohr, Sengupta, Slater 2005
National Acct.
Mgmt.
Acct. Mgmt.
Post Sales
Service
Presales
Close Sales
Channels
Qualify Sales
Task
s
Lead
Generation
Matching Tasks to Channels,
By Segment
Big
Direct Sales
Medium
Telemarketing
Small
Direct Mail
Retail Sales
Distributors
Dealers/ VARs
© Mohr, Sengupta, Slater 2005
Supply Chain Management
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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
© Mohr, Sengupta, Slater 2005
Matching Type of Innovation
to Supply Chain Functions
Type of Innovation
Supply Chain
Functions
Incremental
Breakthrough
Physical
Function
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-0-
Market
Mediation
Functions
-0-
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= Appropriate match of type of product to supply chain functions
-0- = Inappropriate match
© Mohr, Sengupta, Slater 2005
Implications of Contingency Model
for Supply Chain Management
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For incremental innovations:
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Customer needs are known
Focus on managing physical functions and close
coordination to gain cost efficiencies
For breakthrough innovations
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Must read uncertain market signals, knowing what
inventory is required where
Focus on responsiveness (speed and flexibility)
Consistent with trends to channel assembly
© Mohr, Sengupta, Slater 2005
Trends in Supply Chain
Management
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Vertical electronic markets on the Internet
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Supply chain management software
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Hubs used to connect suppliers to their manufacturing
customers
Often owned by cybermediaries
Bring data from manufacturing, inventory, and suppliers
to integrate decision making
Outsourcing
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Reduces cost but increases supply chain vulnerability
Political backlash from unions and legislatures
© Mohr, Sengupta, Slater 2005