Channel Fission and Channel Fusion Min Ding Pennsylvania State University

E-Commerce, Min Ding, PSU Motivating Question We are developing an online community with no near-term commerce activity, do you think we could be a member of a marketing channel? If yes, are we replacing (competing against) an existing member, or become a new layer in the channel? 11/14/2019 E-Commerce, Min Ding, PSU

Topics on Channel Fission and Fusion Session 1: Producer Retailer Wholesaler Consumer (no kidding!) Session 2: E-Supply chain management (logistics) 11/14/2019 E-Commerce, Min Ding, PSU

Marketing (distribution) Channel Definition: Sets of interdependent organizations involved in the process of making a product or service available for use or consumption: Merchant, Retailer, Wholesaler (distributor) Broker, Facilitator Manufacturers’ representative, (Sales) Agent, Sales Force 11/14/2019 E-Commerce, Min Ding, PSU

Some hot and not so hot buzzwords Disintermediation (not so hot) Reintermediation (hotter) Channel fission and fusion (less used but I like them better) 11/14/2019 E-Commerce, Min Ding, PSU

Channel Fission and Fusion Fusion: a fusion or melting together Fission: a splitting apart, cleavage. -- Webster’s New World Dictionary Mostly corresponding to disintermediation and reintermediation, used esoterically. 11/14/2019 E-Commerce, Min Ding, PSU

Producers Why do they need intermediaries? Intermediaries is more optimal by the nature of a market Let’s vary the numbers of producers and consumers in a market and see the effect Intermediaries perform better by specialization. They know more about customers They have greater knowledge of local markets They carry a broader product line within a category They carry multiple product categories 11/14/2019 E-Commerce, Min Ding, PSU

How does internet impact these rationales for using intermediaries? Reduce the cost of per contact DRAMATICALLY Consumers are more likely to initiate the contact (search for product) and thus bear the cost Contact made online may generate rich customer database (thus the number of contact no longer becomes a liability, rather, a benefit); Intermediaries’ competitive advantages are eroding 11/14/2019 E-Commerce, Min Ding, PSU

E-Commerce, Min Ding, PSU Channel Strategies Traditional Strategies: Exclusive distribution (often coupled with exclusive dealing) Selective Distribution Intensive Distribution Online channel Which is optimal? Impact on traditional distribution channel 11/14/2019 E-Commerce, Min Ding, PSU

Three Criteria Used in Evaluating Channel Alternatives Economic Criteria Control Criteria Adaptive Criteria Can you see the advantage of e-channel? 11/14/2019 E-Commerce, Min Ding, PSU

E-Commerce, Min Ding, PSU Channel Dynamics Conventional marketing channel Producer, wholesaler(s) and retailer(s) are independent, seeks to maximize its own profits Vertical marketing system (act as a unified system) Corporate VMS (vertical integration), e.g., Sherwin-Williams Administered VMS, through the power and size of one member (Campbell’s soup) Contractual VMS Horizontal Marketing System Supermarket and onsite banking service Multichannel Marketing System Introduce conflict (between different channels) and control problems. 11/14/2019 E-Commerce, Min Ding, PSU

Manage Channel Conflicts Vertical channel conflict Coca-Cola with its bottlers Horizontal channel conflict Offline: Auto dealers compete too aggressively with each other Online: a bigger issue, because an online storefront will compete with ALL other online stores Multichannel conflict GE appliances sold through American Appliances (unique models) Purchasing appliance from netmarket.com vs. from Best Buy (wrap service around) 11/14/2019 E-Commerce, Min Ding, PSU

Where to integrate the e-channel? Shift sales entirely to manufacturer direct (Dell, Cisco) Use (new) online intermediaries Use existing retailers and their web sites (autos, perfume) 11/14/2019 E-Commerce, Min Ding, PSU

What kinds of producers need traditional channels? Those that will eventually rely mainly on online channels Those that will use a balanced traditional and online channels Those that will still rely mainly on traditional channels 11/14/2019 E-Commerce, Min Ding, PSU

E-Commerce, Min Ding, PSU A producer case, Dell http://www.dell.com What does it do? How does it make money? What consumer needs does it satisfy? Why did its model work? Think of another example/industry that this might work. 11/14/2019 E-Commerce, Min Ding, PSU

E-Commerce, Min Ding, PSU Retailing Types Store retailing Specialty stores, department stores, supermarkets, convenience stores, discount stores, off-price retailers (factory outlets, wholesale clubs, independent off-price retailers, superstores, and catalog showrooms) Two dimensions of retailing -- service and assortment breadths Nonstore Retailing Direct selling, direct marketing (including e-shopping), automatic vending, buying services Retail Organizations Let’s examine online storefront’s impact on each of these retailing types. 11/14/2019 E-Commerce, Min Ding, PSU

A retailing case, Peapod http://www.peapod.com What does it do? How does it make money? What consumer needs does it satisfy? Q: Will it survive? Will it prosper? Will it take away a significant market share from grocery stores? 11/14/2019 E-Commerce, Min Ding, PSU

E-Commerce, Min Ding, PSU Wholesaling Types Merchant wholesalers Brokers and agents Manufacturers and retailer's branches and offices Miscellaneous wholesalers (e.g., auction companies that auction to dealers) Let’s examine online storefront’s impact on each of these wholesaling types. 11/14/2019 E-Commerce, Min Ding, PSU

Consumer as a channel member Reverse Channel Firms may not be the only ones making channel decisions; Reverse channel Consumer develops an optimal channel structure for herself Buyer’s agent will be one example, how about group purchasing? Why internet will have an impact on this? What do you see the future will be for reverse channel? 11/14/2019 E-Commerce, Min Ding, PSU

Let’s take it one step further I need a server for our class project, how do I satisfy my need – NOW: FUTURE (following the reverse channel paradigm): 11/14/2019 E-Commerce, Min Ding, PSU

E-Commerce, Min Ding, PSU Allow me … Understand what producers, wholesalers and retailers are and should be doing with their e-channels are important. But most importantly, We should understand the implication of reverse channel (translation, a lot of money may be made there) 11/14/2019 E-Commerce, Min Ding, PSU

Answer to the motivating example Yes, we will be a new layer in the marketing channel. Our purpose could be best served if we could perform the role of a reverse channel member. 11/14/2019 E-Commerce, Min Ding, PSU