Lecture
“Evaluation of Distribution
Channels with Portfolio Analysis”
- Prof. Dr. Michael Schugk -
1
Definition of “distribution management”
“Distribution management covers the design of
distribution channels, the logistics of distribution
channel management, managing the behaviour of
distribution channel constituents, managing the
retail effort,
effort and international distribution
distrib tion channel
management.”
Source: Panda; Sahadev (2005), p.vi
2
Management process for the distribution policy
1. Analysis of the distribution situation
2. Determination of distribution objectives
4. Determination of the distribution budget
5. Realization of distribution measures
 Designing of the distribution system
 Insert of the sales organization
 Designing of the logistics system
6. Distribution control
Source: according to Bruhn (2007), p.248
In
ntegration into the m
marketing mix
3. Development of distribution strategy(ies)
3
Strategic decisions in the field of distribution policy
• Design of distribution systems
– Design of vertical and horizontal distribution channel structure
• Vertical distribution channel structure (direct vs. indirect distribution)
• Horizontal distribution channel structure (Number and kind of
intermediaries per level)
• Engagement of intermediaries
– Selection
– Steering
– Motivation
Source: Bruhn (2007), p.246 ff
4
Definition “distribution channel” and
“multichannel distribution system”
A distribution
di t ib ti channel
h
l is
i
“… the route that the product follows from the manufacturer to the endendconsumer.. The distribution channel includes the manufacturer or
consumer
producer, wholesaler, retailers, logistics agents and consumers;”
A multichannel distribution system is
“… often called hybrid marketing channels.
channels. Such multichannel
marketing occurs when a single firm sets up two or more marketing
channels to reach one or more customer segments. The use of
multichannel systems has increased greatly in recent years.
years ”
Source: Grové (2005), p.270; Kotler (2008), p.343
5
Constitutive
C
i i distributive
i i i tasks within
i i the
distributive value chain of the distribution channel
Communication, presentation of goods
& consulting
Negotiating
Logistics &
enterprise
resource
planning
Financing
and payment
transactions
After-sales
services
O i i i off every single
Optimization
i l di
distribution
ib i task
k as well
ll as optimal
i l
integration of all distribution tasks into the total context of the
distributive value chain;
Source: according to Tomczak: (1999), p. 289.
6
Design of the distribution channel structure
Distribution channel structure
Vertical structure
(Number of sales levels)
Direct
distribution
Zero-level
via sales representatives, e-commerce,
e commerce,
catalog selling, sales
outlets etc.
One-level
Manufacturer
Indirect
distribution
Two-level
Manufacturer
Horizontal structure
(Breadth and depth)
Multi-level
Manufacturer
Special
wholesaler
Wholesaler
Breadth:
Number of intermediaries per level
(universal distribution,
selective distribution
distribution,
exclusive distribution,
sole distribution)
General
wholesaler
Depth:
Retailer
Retailer
End-customer
Source: according to Bruhn (2007), p.250
Retailer
Type of intermediaries
per level
(Types, e.g.
speciality shop,
7
discounter etc.)
Basic p
principle
p of direct distribution
and indirect distribution (channel)
Direct distribution
Manufacturer--owned
Manufacturer
intermediaries
Distribution
of a manumanuf t
facturer
Indirect distribution
Source: Kuhlmann (2001), p.50
End
customer
Manufacturer-external
Manufacturerintermediaries
8
Options for the design of direct and
i di t distribution
indirect
di t ib ti channels
h
l
Intermediaries
Manufacturer--owned intermediaries
Manufacturer
Manufacturer--external intermediaries
Manufacturer
• Board of management
g
• Sales representatives / sales department
• Online distribution (E
(E-commerce)
commerce)
• Manufacturer
Manufacturer--owned sales outlets
(e.g. factory outlet)
• Manufacturer
Manufacturer--owned call center
• etc.
• Types
yp of the wholesale
wholesale,, e.g.
g
- cash
cash--andand-carry wholesaler (e.g. Metro)
- etc.
• Types of the retail
retail,, e.g.
- Specialty shop
- Department store / mall
- Catalog company
- Supermarket / discounter
- Specialty market
- Filling station shops etc.
Source: according to Bruhn (2007), p.250 ff
9
Definition of e-commerce and e-business
e-business:
supplier
ee-commerce:
commerce:
e-business is the utilization of electronic systems / information and
communication technologies (e.g. internet, intranet etc.) in support of all
the activities / processes of business;
manufacturer
customer
e-commerce consists of the buying
y g and sellingg of products
p
or
services (i.e. exchange of goods) over electronic systems such
as the internet, EDI and other computer networks;
10
Multichannel Distribution system
of a motor vehicle manufacturer
Board of
management;
Sales representatives
Sales department
Segment of
end-end
consumers
Manufacturer
Sales outlets
Authorized dealers
Wholesaler
Source: Kuhlmann (2001), p.57
11
Design of the distribution channel structure
Distribution channel structure
Vertical structure
(Number of sales levels)
Direct
distribution
Zero-level
channel
via sales representatives, e-commerce,
e commerce,
catalog selling, sales
outlets etc.
One-level
channel
Manufacturer
Horizontal structure
(Breadth and depth)
Indirect
distribution
Two-level channel Multi-level channel
Manufacturer
Manufacturer
Special
wholesaler
Wholesaler
Breadth:
Number of intermediaries per level
(universal distribution,
selective distribution
distribution,
exclusive distribution,
sole distribution)
General
wholesaler
Depth:
Retailer
Retailer
End-customer
Source: according to Bruhn (2007), p.250
Retailer
Type of intermediaries
per level
(Types, e.g.
speciality shop,
12
discounter etc.)
Determination of the horizontal distribution
channel structure according to the number of
intermediaries per level (1)
• Universal distribution
–
–
–
–
Acceptance of all distribution intermediaries through the manufacturer
Objecti e of high distrib
Objective
distribution
tion quota,
q ota i.e.
ie
Objective of all over availability of the products
Example: cigarettes
• Selective distribution
– Acceptance of distribution intermediaries through manufacturer only
in case of fulfillment of qualitative selection criteria,
criteria e.g.
eg
•
•
•
•
•
Consulting / service quality
Price policy
A
Assortment
width
id h / assortment depth
d h
Size of store / location of store
Willingness for co-operation etc.
– Examples: household appliances, watches, musical instruments
13
Source: Bruhn (2007), p.259 f
Determination of the horizontal distribution
channel structure according to the number of
intermediaries per level (2)
• Exclusive distribution
– Acceptance of distribution intermediaries through
manufacturer
f t
only
l in
i case off fulfillment
f lfill
t off qualitative
lit ti
selection criteria and
– qquantitative restrictions within selection of distribution
intermediaries
– Sole distribution as extreme case of exclusive distribution
• Sole
S l di
distribution
t ib ti
– One single distribution intermediary usually for a certain
distribution / sales area, i.e.
– authorization for sole distribution
– Examples: furnitures, juwelry, textiles
Source: Bruhn (2007), p.260
14
Strategic decisions in the field of distribution policy
• Design of distribution systems
– Design of vertical and horizontal distribution channel structure
• Vertical distribution channel structure (direct vs. indirect distribution)
• Horizontal distribution channel structure (Number and kind of
intermediaries per level)
• Engagement of intermediaries
– Selection
– Steering
– Motivation
Source: Bruhn (2007), p.246 ff
15
Definition “channel design”
“Channel design refers to the decisions that are
taken
k bby the
h organization
i i to form
f
a new
distribution channel or secondly the decisions
taken to change an existing distribution channel.
channel ”
Source: Strydom (2005), p.142
16
The steps
p in the design
g of a new distribution channel
from the viewpoint of the manufacturer (1)
• Determination of the distribution (channel) objectives
• Specification of the distribution activities
– Determination of distributive tasks within the distributive
value chain in order to achieve the distribution objectives
j
• Development of the possible distribution channel
alternatives
– Normally quite a number of alternative distribution
channels available
• Number of sales levels
• Number of intermediaries per level
• Types of intermediaries per level
17
Source: Strydom (2005), p.142 ff
The steps
p in the design
g of a new distribution channel
from the viewpoint of the manufacturer (2)
• Evaluation of the factors that may affect the selection of the
distribution channel
– External factors of success for the distribution
– Organizational
g
/ internal factors of success for the distribution
• Selection of the best distribution channel
(e.g. with portfolio analysis)
• Selection
l i off the
h specific
ifi intermediaries,
i
di i i.e.
i
– appointment of the specific intermediaries based on a list of criteria, e.g.
• financial position of the intermediary
• sales capacity
• reputation etc.
18
Source: Strydom (2005), p.148 ff
Basic structure of portfolio analysis for the evaluation
and selection of different distribution channels
Framework conditions (e.g. products /
services,
services customer segments)
External factors
of success
Internal
factors of
success
Variables of success
(e.g. distribution
distribution-channel--specific
channel
contribution margin,
distribution quota,
duration of customer
relationship etc.)
Object
bj off success (here:
((hhere:
h
distribution
d
b
channel
channel)
h
l)
l)
Distribution-channel
Distributionchannel--specific contribution margin = distribution channelchannel-related turnover for the
manufacturer – distribution channelchannel-related costs for manufacturer
19
Source: Kuhlmann (2001), p.59
External
e
factors
c o s of
o success for
o thee distribution
d s bu o
External factors of success as expression
p
for the relationshipp between different
objects of success (here:
(here: distribution channels / intermediaries);
Attractiveness of the distribution channels / intermediaries
(“How attractive is a certain distribution channel
(“How
compared
d to other
h distribution
di ib i channels?”)
channels
h
l ?”)
Determination of the extent of attractiveness of distribution channels through
external factors of success, that are wellwell-founded through
• strategic resources of the distribution channels and
• the compliance of customer requirements concerning distribution
Source: Kuhlmann (2001), p.59 ff
20
Internal factors of success for the distribution
Internal factors of success as expression for the relationship between the manufacturer
and the object of success (here:
(here: distribution channel / intermediaries) and the influence
on the success of the manufacturer as a result of this relationship;
relative competitive position of a manufacturer in regard
to the distribution via a certain distribution channel
(“How
(“
How good is the manufacturer in dealing with a certain distribution
channel compared to the main competitor dealing with the same
distribution channel?
channel?”)
”))
Source: Kuhlmann (2001), p.59 ff
21
Model
ode for
o thee de
determination
e
o oof factors
c o s oof success
Internal factors
of success
External factors
of success
DC 1
M
EC
DC 2
((PM)
((P))
DC 3
M = Manufacturer
DC = Distribution channel
PM = Product(s) of the manufacturer EC = End
End--customer
Source: Kuhlmann (2001), p.63
P = Product
22
Multidimensional point evaluation model
(multidimensional scoring model) – checklist for
dimension “attractiveness” of the distribution channel
Di ib i channel
Distribution
h
l … (A,
(A B
B, …))
C l
Column
1
C l
Column
2
C l
Column
3
Criteria for „attractiveness“ of the
distribution channel …
Weighting
((0 to 2))
Assessment
((1 to 10))
Value data
(0 = very unimportant;
2 = very important)
(1 = very negative;
10 = very positive)
Market share
Efficiency
Cost structure / turnover structure
G
Growth
th potential
t ti l
Financial resources
Distribution quota
q
…
Coordinate =
Total score
Sum of weights
=…
…
Sum of
weights
…
Total score
23
Comparison of attractiveness of two
different distribution channels
Weighting
Value Data
Channel A
Value Data
Channel B
1) Market share
1.3
10.4
1.3
2) Efficiency
1.0
3.0
7.0
3) Cost / turnover structure
0.5
3.0
1.5
4) Growth potential
1.5
3.0
13.5
5) Financial resources
0.5
2.5
2.5
6) Distribution quota
1.0
4.0
9.0
Cooperation
ability of the
distribution
channel
7) Management capacity
0.7
2.8
4.9
8) Motivation
1.3
7.8
3.9
9) Information systems
1.5
4.5
12.0
10) Logistics
0.8
5.6
3.2
Customer
orientation of
th distributhe
distribu
di t ib tion channel
11) Image
1.2
7.2
6.0
12) Assortment
0.7
2.8
2.8
13) Flexibility
1.0
5.0
4.0
14) Customer relationships
1.0
10.0
3.0
Sum
14.0
71.6
74.6
51
5.1
53
5.3
External factors
of success
Source: Kuhlm
mann (2001), p.677
Competitive
pposition of
the distibu
distibu-tion channel
C di t
Coordinate
Assessment
1 2 3 4 5
6
7 8 9 10
Distribution channel A:
A: manufacturer
manufacturer--owned sales force (travelers), consignment / transport fleet, service department;
24
Distribution channel B:
B: Internet with integrated call center, manufacturer
manufacturer--external forwarder and service department;
Comparison of relative competitive position
for two different distribution channels
Weighting
Value Data
Channel A
Value Data
Channel B
1) Share of turnover
1.5
12.0
3.0
2) Share of sales
1.0
7.0
3.0
3) Share of distribution costs
1.5
3.0
13.5
4) Structure of orders
0.8
6.4
3.2
5) Payment security
0.8
5.6
4.0
6) Offered assortment
1.0
6.0
6.0
7) Additional services
1.0
8.0
3.0
8) Product know-how
1.0
9.0
3.0
9) Information logistics
1.5
9.0
12.0
10) Goods logistics
1.0
6.0
8.0
11) Accurateness etc.
0.7
4.2
4.2
12) Cooperation capability
0.7
6.3
3.5
13) Solution of conflicts
0.5
4.5
2.0
14) Confidence
1.0
9.0
3.0
Sum
14.0
96
71.4
68
6.8
51
5.1
Internal factors
of success
Relative
economical
position
Source: Kuhlm
mann (2001), p.700
Relative perperformance
position
Relative
position of
customer
relationships
C di t
Coordinate
Assessment
1 2 3 4 5
6
7 8 9 10
Distribution channel A:
A: manufacturer
manufacturer--owned sales force (travelers), consignment / transport fleet, service department;
25
Distribution channel B:
B: Internet with integrated call center, manufacturer
manufacturer--external forwarder and service department;
Channel B:
5.3 / 5.1
0
Source: Kuhlmann (2001), p.71
Channel A:
5.1 / 6.8
Actu
ual state
Attraactivenesss of the cchannel
(exteernal facttors of su
uccess)
Targett state
Portfolio for two different distribution channels
10
Relative competitive position of the channel
(internal factors of success)
26
Portfolio analysis for the evaluation of
di t ib ti channels
distribution
h
l / types
t
off intermediaries
i t
di i
Attracttiveness of the ch
hannel
(extern
nal facto
ors of succcess)
100
IInvestment
Investmentt
t- andd
growth strategies
high
Selective strategies
67
Absorption and dis
dis-investment strategies
middle
33
low
0
low
33
middle
67
high 100
Relative competitive position of the channel
(internal factors of success)
Source: Berndt; Fantapié Altobelli; Sander (1997), p.362
27
Cited literature in lecture “Sales, services,
and product disposal
Berndt, Ralph; Fantapié Altobelli, Claudia; Sander, Matthias: Internationale MarketingMarketing-Politik. Berlin, Heidelberg, New York: Sp
Springer
ringer
Verlag, 1997
Bruhn, Manfred: Marketing. Grundlagen für Studium und Praxis. 8., überarbeitete Auflage. Wiesbaden: Betriebswirtschaftlicher Verlag
Verlag
Dr. Th. Gabler, 2007
Kuhlmann Eberhard: Industrielles Vertriebsmanagement
Kuhlmann,
Vertriebsmanagement. München: Verlag Franz Vahlen
Vahlen, 2001
Strydom, Johan: Channel design and the selection of channel members. In: Strydom, Johan (Editor): Distribution Management. The
The
place Decision. Second edition. Varemont: New Africa Books, 2005, p.141 – 164
Strydom, Johan (Editor): Distribution Management. The place Decision. Second edition. Varemont: New Africa Books, 2005
Panda, Tapan K.; Sahadev, Sunil: Sales and Distribution Management. New Delhi: Oxford University Press, 2005
Tomczak, Torsten: Alternative Vertriebswege. St. Gallen: Verlag Thexis, 1999
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