Marketing of High-Technology Products and Innovations Chapter 8: Distribution Channels and Supply Chain Management in High-Tech Markets Chapter Overview 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 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 © 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 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 © Mohr, Sengupta, Slater 2005 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 © Mohr, Sengupta, Slater 2005 Complexities in Managing High-Tech Channels High value of products Rapid pace of market evolution 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 Base channel design on consideration of Customer behavior and needs Competitors’ channels Product characteristics © Mohr, Sengupta, Slater 2005 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 © Mohr, Sengupta, Slater 2005 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 © Mohr, Sengupta, Slater 2005 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 © Mohr, Sengupta, Slater 2005 Types of Resellers VARs and VADs Systems Integrators Manage large or complex projects Inbound versus Outbound 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 Mass merchandisers, Category killers, small mom-andpop stores, franchises © Mohr, Sengupta, Slater 2005 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 © Mohr, Sengupta, Slater 2005 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 © Mohr, Sengupta, Slater 2005 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 © Mohr, Sengupta, Slater 2005 Bilateral Controls Relational norms (shared expectations) to work together Flexibility Mutual sharing of benefits/burdens Information sharing Joint interdependence and commitment Trust © Mohr, Sengupta, Slater 2005 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 © 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 Distributors/resellers backward integrating into assembling products Suppliers forward integrating into computer manufacturing © Mohr, Sengupta, Slater 2005 Need for Indirect Channels to Provide Value Channel assembly Co-location 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.) 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” © Mohr, Sengupta, Slater 2005 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 © Mohr, Sengupta, Slater 2005 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 © Mohr, Sengupta, Slater 2005 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 © Mohr, Sengupta, Slater 2005 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 © Mohr, Sengupta, Slater 2005 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 © Mohr, Sengupta, Slater 2005 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 © Mohr, Sengupta, Slater 2005 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 © 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 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 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 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 © 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 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 -0- Market Mediation Functions -0- = 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 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 © Mohr, Sengupta, Slater 2005 Trends in Supply Chain Management Vertical electronic markets on the Internet Supply chain management software 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 Reduces cost but increases supply chain vulnerability Political backlash from unions and legislatures © Mohr, Sengupta, Slater 2005