For use with Strategic Electronic Marketing: Managing E-Business Copyright 2000 South-Western College Publishing Chapter 4 Slide: 1 Chapter 4: 4: E-Business Distribution Systems

For use with Strategic Electronic Marketing: Managing E-Business Copyright 2000 South-Western College Publishing Chapter 4 Slide: 2 LEARNING OBJECTIVES (1) Explain why distribution systems change. Describe the nature of distribution systems. Compare and contrast traditional distribution systems and e-business based distribution systems. Outline how channel relationships are changing.

For use with Strategic Electronic Marketing: Managing E-Business Copyright 2000 South-Western College Publishing Chapter 4 Slide: 3 LEARNING OBJECTIVES (2) Describe how each distribution function is handled in an e-business based distribution system. Discuss how power is shifting in distribution channels. Explain how middlemen’s roles are changing in the distribution channel.

For use with Strategic Electronic Marketing: Managing E-Business Copyright 2000 South-Western College Publishing Chapter 4 Slide: 4 Vignette: The Car Buying Game (1) Thinking Strategically –Decide how important a test drive is before someone chooses a car model to purchase. –Evaluate if the test car has to be the same car the buyer would take home, or if a standard test-drive model work. –There is a belief among car sales people that if someone comes into a dealership, they have to be sold to before they leave or the sale is lost. GM BuyPower site (

For use with Strategic Electronic Marketing: Managing E-Business Copyright 2000 South-Western College Publishing Chapter 4 Slide: 5 Vignette: The Car Buying Game (2) Thinking Strategically –Investigate how people make decisions about purchasing a car. –Determine when they start thinking about the model to purchase. –Investigate the type of information they gather before they buy. –Speculate on how the Web could help in their decision process. Carpoint ( Ford ( vechicles.com) vechicles.com

For use with Strategic Electronic Marketing: Managing E-Business Copyright 2000 South-Western College Publishing Chapter 4 Slide: 6 Distribution System Channels of distribution provide a standard of living for customers by moving products from producers to users in the most cost efficient manner possible. In traditional markets this has included producers and intermediaries such as wholesalers and/or retailers. Marketing systems are constantly looking to lower the overall cost of distribution channels while striving to improve relationships between channel members. –This requires that the system evolve in response to changes in the environment

For use with Strategic Electronic Marketing: Managing E-Business Copyright 2000 South-Western College Publishing Chapter 4 Slide: 7 New E-business Based Distribution Systems Characterized by: –A greater reliance on cybermediaries and facilitators. –A reduction in the number of traditional middlemen. –Reduced inventory and shorter inventory cycles –Tighter relationships between trade sellers and buyers. –Power shifts from producers and retailers to the customer. –Lower prices and greater variety for the consumer. –Greater responsiveness to the customer.

For use with Strategic Electronic Marketing: Managing E-Business Copyright 2000 South-Western College Publishing Chapter 4 Slide: 8 Distribution Channels Evolution (1) Channels of distribution evolve as new infrastructures and consumer shopping patterns develop. –In the 1800's Sears took advantage of newly developed rail systems to build a retail empire by using catalogues to offer customers products that were not available locally. –Sears' purchasing power allowed for a greater variety of products, increasing their negotiation power and forcing down the prices of the products offered to customers. –In the second half of the 1900's customers took advantage of improved highway systems to move to suburbs, K-Mart followed and built a discount empire.

For use with Strategic Electronic Marketing: Managing E-Business Copyright 2000 South-Western College Publishing Chapter 4 Slide: 9 Distribution Channels Evolution (2) Channels of distribution evolve as new infrastructures and consumer shopping patterns develop. –The growth of suburbs led to retail concentrations in malls, which, in turn, fostered a shift in consumer purchasing patterns. –The growth of national franchises and malls helped lead to the decline in retail sales in central business districts. –Consumer acceptance of credit card use and 800 number phone numbers have allowed a multitude of catalogue companies to offer niche products to customers and sell directly to the home.

For use with Strategic Electronic Marketing: Managing E-Business Copyright 2000 South-Western College Publishing Chapter 4 Slide: 10 What Is Distribution Intermediaries, such as wholesalers and retailers, split large production runs into small amounts (breaking bulk) and create an assortment of products to offer a customer. Facilitators facilitate or help the flow of the transaction by physically moving the product, information, or funds through the distribution channel.

For use with Strategic Electronic Marketing: Managing E-Business Copyright 2000 South-Western College Publishing Chapter 4 Slide: 11 Figure 4.1: Distribution System Producer Consumer Facilitators Shipping, Information Flows, Fund Flows, etc. Intermediaries Retailers or Warehouse Wholesalers Other Agents Producers

For use with Strategic Electronic Marketing: Managing E-Business Copyright 2000 South-Western College Publishing Chapter 4 Slide: 12 Producer AB C (facilitator aids the transaction) Wholesaler A (facilitator aids the transaction) Retailer A (Large)B (Small) (customer and retailer transaction) Customers Figure 4.2: Bulk Breaking and Assortment Creating Location 1 A B C Location 2 F G H Unserved Market D E

For use with Strategic Electronic Marketing: Managing E-Business Copyright 2000 South-Western College Publishing Chapter 4 Slide: 13 Channel Functions (1) Physical possession: transferring the good or service to the customer. –This includes the warehousing process and the physical movement of the product from the producer to the customer. Title or ownership flow: when the customer purchases the product or when they receive the product. Promotion: allows for communication between the channel members.

For use with Strategic Electronic Marketing: Managing E-Business Copyright 2000 South-Western College Publishing Chapter 4 Slide: 14 Channel Functions (2) Ordering system: ordering system could be through paper and pencil systems, or through electronically controlled data interchanges. Payment flows: A customer may pay cash, or they may use credit from other channel members by postponing payments (i.e. due in thirty to sixty days). –The customer may also finance their purchase.

For use with Strategic Electronic Marketing: Managing E-Business Copyright 2000 South-Western College Publishing Chapter 4 Slide: 15 Figure 4.3: Traditional Channel Intermediary Flows PRODUCT SOURCE Financing Risking Ordering Payment CUSTOMER Promotion Physical Possession Title/Ownership

For use with Strategic Electronic Marketing: Managing E-Business Copyright 2000 South-Western College Publishing Chapter 4 Slide: 16 Electronic intermediaryDirect From Manufacturer Producer AB C (Extranets and cybermediaries aid the transaction) E-Commerce A Retailer Customers Figure 4.4: Alternate Electronic Channels of Distribution Internet and cybermediaries aid the transaction A B C D E F G H

For use with Strategic Electronic Marketing: Managing E-Business Copyright 2000 South-Western College Publishing Chapter 4 Slide: 17 Cybermediaries Cybermediaries operate in electronic markets to facilitate the exchange process. –Facilitators help move the physical product: Trucking companies and overnight shippers. –Facilitators help payment flows: Credit card companies and banking institutions. –Facilitators help communication: Advertising companies or host ISPs.

For use with Strategic Electronic Marketing: Managing E-Business Copyright 2000 South-Western College Publishing Chapter 4 Slide: 18 Figure 4.5: E-Business Distribution System PRODUCT SOURCE CUSTOMER Promotion Physical Possession Ordering E-Business Shipper Credit Card Financing Risking Payment Based on: Brad Kleindl, “Virtual Marketing,” Southern Business and Economic Review, Spring 1996, pp

For use with Strategic Electronic Marketing: Managing E-Business Copyright 2000 South-Western College Publishing Chapter 4 Slide: 19 E-business Distribution Development Electronic Channel Captain –A channel captain is an intermediary that organizes and controls the channel. –Any company that can gain this position can obtain the power over other members allowing them to take a higher percentage of the overall transaction costs.

For use with Strategic Electronic Marketing: Managing E-Business Copyright 2000 South-Western College Publishing Chapter 4 Slide: 20 Physical Possession Physical possession requires physically moving products from one location to another. Federal Express Corporation ( United Parcel Service ( Information intermediaries provide efficiency to the channel by allowing shipping price comparison. TanData Corporation ( FreighQuote.com ( )

For use with Strategic Electronic Marketing: Managing E-Business Copyright 2000 South-Western College Publishing Chapter 4 Slide: 21 Communication Linkages Communication between the firm and the customer can be facilitated over the Internet through the design of Web pages. Extranets are used to link businesses together enabling communication between companies and allowing for transactions.

For use with Strategic Electronic Marketing: Managing E-Business Copyright 2000 South-Western College Publishing Chapter 4 Slide: 22 Payment Flows, Financing, and Risk Taking Four parties at risk in electronic transfers. –The customer (end user) –The seller (business-to-business or retailer) –The producer –The transfer agent (credit card companies or banking institutions).

For use with Strategic Electronic Marketing: Managing E-Business Copyright 2000 South-Western College Publishing Chapter 4 Slide: 23 Figure 4.6: Transfer of Electronic Payments (E-Payments) Customer's Browser Payment processor (credit card or bank) Customer's Bank (credit card issuer or account holder) Vendor's Server Sends encrypted payment request (Credit card #, B-B voucher) Information flow Check for authenticity and funds for credit card or bank funds. Payment Approval Verification of Credit Authorization Query Statement (credit card or purchase statement) Authorized online payment system

For use with Strategic Electronic Marketing: Managing E-Business Copyright 2000 South-Western College Publishing Chapter 4 Slide: 24 Electronic Credit (1) Secure Electronic Transaction (SET) –Allows for the encryption of all transaction data. Merchants never see the credit card number so it can not be stolen from them and they can not fraudulently use the number. Micropayments –Allows for paying small Web transactions. –A software wallet requires that a buyer sets up an online account. This allows an amount of money to be added to a Web browser’s wallet.

For use with Strategic Electronic Marketing: Managing E-Business Copyright 2000 South-Western College Publishing Chapter 4 Slide: 25 Smart cards or E-cash (electronic cash) –Allow individuals to purchase without paper money. –Smart cards use a micro-controller chip embedded in a card. A number of devices such as parking meters, newsstands, vending machines, pay phones, etc can read the cards and be used for payment. –Information on individual purchases can be captured from the cards for the marketer's databases. –Smart cards have been in use in much of the world except for the United States where magnetic strip cards have dominated. Electronic Credit (2)

For use with Strategic Electronic Marketing: Managing E-Business Copyright 2000 South-Western College Publishing Chapter 4 Slide: 26 Electronic Billing Electronic billing, or the sending of bills and the allowing of making payments over the Internet. –Reduces costs for companies from up to $1.75 per bill to around 25 to 30 cents per bill. –Online billing consolidation companies consolidate an individual’s bills allowing them to make one payment online. CheckFree ( Transpoint (

For use with Strategic Electronic Marketing: Managing E-Business Copyright 2000 South-Western College Publishing Chapter 4 Slide: 27 Relationship Development The search for channel members is a time consuming and expensive. –Once these relationships are established, firms have an incentive to attempt to maintain the best relationship possible. –A firm must take into consideration the behavioral aspects of channel relationships. Including: dependence, cooperation, conflict, power and power bases, satisfaction, and relational development.

For use with Strategic Electronic Marketing: Managing E-Business Copyright 2000 South-Western College Publishing Chapter 4 Slide: 28 Power The Internet reduces the power of some channel members by lowering dependency upon others. Transaction costs govern how much effort is used to evaluate channel members as partners. –Transaction Cost Analysis is the process of assessing the overall cost of maintaining and finding new relationships. –A firm will stay with a current partner if the cost of finding a new partner outweighs the benefits that can be obtained.

For use with Strategic Electronic Marketing: Managing E-Business Copyright 2000 South-Western College Publishing Chapter 4 Slide: 29 Case 4.: Fighting for the Middle Position Thinking Strategically –Consider the position of Ingram Micro. –Explain why they exist in the channel by looking at the benefits they provide to the seller and the buyer. –Determine the long-term viability of Ingram. –Consider if the manufacturers of software and hardware could bypass Ingram. –Consider Ingram’s customers. Recommend to Ingram if they should or should not start selling directly to the end user.

For use with Strategic Electronic Marketing: Managing E-Business Copyright 2000 South-Western College Publishing Chapter 4 Slide: 30 Power Shifts to the Consumer The Internet increases customer’s power: –The customer can become aware of a wider variety of providers increasing the number of alternative sources of supply. –Customers are able to voice their opinions on businesses and products at discussion sites and business sites. –Customers can use e-businesses to gain power and lower prices.

For use with Strategic Electronic Marketing: Managing E-Business Copyright 2000 South-Western College Publishing Chapter 4 Slide: 31 Case 4.2 More Means Less Thinking Strategically –Visit Accompany’s and Mercata’s Web sites. –Explain how these companies increase customer power. –Find a product that you would consider purchasing and price compare this with other Web sites. –Decide if these sites give the purchasers a better price. –Consider if you would contact friends of yours to make a similar purchase to lower prices.

For use with Strategic Electronic Marketing: Managing E-Business Copyright 2000 South-Western College Publishing Chapter 4 Slide: 32 Channel conflicts A channel conflict exists when a company sells products to the same market through more than one distribution system. To avoid these conflicts manufactures have: –Refused to supply online businesses. –Set up e-commerce sites that offer different products online. –Offer products at the same price as retail outlets and then adding a shipping fee. –Offer product lines and services that distributors do not carry. –Press ahead with a commerce site.

For use with Strategic Electronic Marketing: Managing E-Business Copyright 2000 South-Western College Publishing Chapter 4 Slide: 33 Case 4.3: Buying the Bug Online Thinking Strategically –Consider the position of the car dealer. –Determine why it should remain in the channel by looking at the benefits it offers manufacturers and customers. –Recommend to Volkswagen if they should or should not sell cars online. –Decide if the dealers should keep receiving credit. –Speculate on the future and determine the benefits will the car dealers need to provide in the future.

For use with Strategic Electronic Marketing: Managing E-Business Copyright 2000 South-Western College Publishing Chapter 4 Slide: 34 Death Of The Middleman Disintermediation is the process of eliminating the middleman from the exchange process. Those middlemen most likely to be hurt will be: –Those who do not add value to the exchange but are only go-betweens, information brokers, or order-takers. –Middlemen concerned about their careers should be sure that they are able to offer value to the exchange process.

For use with Strategic Electronic Marketing: Managing E-Business Copyright 2000 South-Western College Publishing Chapter 4 Slide: 35 ALE #4.1: Lassoing Jeans Online Visit each of the sites: Lee Jeans ( Wrangler Jeans ( Arizona Jeans ( Bugle Boy Jeans ( Levi Strauss ( –Decide why these brands have adopted differing strategies to using the Web in aiding distribution. –Consider who owns the brands and how that may make a difference in the chosen strategy. –Determine why Levi’s follows its strategy.

For use with Strategic Electronic Marketing: Managing E-Business Copyright 2000 South-Western College Publishing Chapter 4 Slide: 36 Figure 4.5: E-Business Distribution System PRODUCT SOURCE CUSTOMER Promotion Physical Possession Ordering E-Business Shipper Credit Card Financing Risking Payment Based on: Brad Kleindl, “Virtual Marketing,” Southern Business and Economic Review, Spring 1996, pp

For use with Strategic Electronic Marketing: Managing E-Business Copyright 2000 South-Western College Publishing Chapter 4 Slide: 37 ALE #4.2: Outlining a Distribution System (1) Product Source: Customer: Who Promotes: Who Ships: How are orders taken E-Business Shipper: Payment procedure Who finances Payment flow:

For use with Strategic Electronic Marketing: Managing E-Business Copyright 2000 South-Western College Publishing Chapter 4 Slide: 38 ALE #4.2: Outlining a Distribution System (2) Describe the role of the e-business in the distribution model. Explain how each function is performed. Determine if the cost of the product offered is different from the cost of the product available locally. Do you see any channel conflicts which may occur with this system?

For use with Strategic Electronic Marketing: Managing E-Business Copyright 2000 South-Western College Publishing Chapter 4 Slide: 39 ALE #4.3: Searching for E-Business Help Evaluate commerce service providers: AT&T ( IBM ( Microsoft: ( Yahoo ( –Determine which would be best at providing commerce service support. – Determine how each of the companies facilitates the distribution function.