1. Marketing of High-Technology Products and Innovations Distribution Channels in High-Tech Markets

2. Topical Agenda Channel Design and Management Specific Channel Considerations in High- Tech Markets Adding New Channels: The Internet

3. Distribution Channels Comprised of the various firms and players in the flow of product from producer to consumer. –Manufacturers must manage flow of product –Mftr must manage relationships between firms Distribution tasks include; – Logistics and physical distribution functions –Design and management of the channel

4. Distribution Options

5. Some Global Concerns Firms at different stages of the channel: –May have conflicting goals and objectives –Often don ’ t think in terms of joint problem solving

6. Overarching Concerns Goal: Manage all functions to provide value to end customer –Meet customer needs in most effective/efficient mode possible Functions include: – Providing assortments (product amount/variety) –Providing service and facilitating functions –Communicating with end-users

7. Overarching Concerns 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

8. Complexities in Managing High-Tech Channels High value of products –Pressure to minimize inventory in channel Rapid pace of market evolution –Price pressures Need to maintain sales/service support Problems with pirating Complexities with the Internet

9. Channel Design and Management

10. Channel Objectives, Constraints Base channel design on consideration of: –Customer behavior and needs –Competitors ’ channels –Product characteristics

11. Choice of Channel Structure Direct: Manufacturer sells directly to end-users –Own sales force –Internet –Catalogs, 800#, etc. Indirect: Mftr. uses intermediaries to market, sell, deliver product to end-users Hybrid channel: Uses both direct + indirect

12. Considerations in Choice of Channel Structure Hybrid channel invites complexities — –As more firms compete for customers, conflict increases –Indirect channels subject to less control Direct channels may not be cheaper –Eliminate intermediary, but not the functions

13. Choice of Type of Intermediary Resellers: between distributors and end-users –Typically local –May customize for end-users Distributors –Typically national

14. Types of Resellers VARs and VADs –Purchase components from different manufacturers, customize for various vertical markets Systems Integrators –Manage larger projects In-bound (has a store-front for walk-in traffic) versus Out-bound (dealer sales force calls on customers) Traditional intermediaries –Mass merchants, small dealers, franchisees

15. Penetration/Coverage: # of Intermediaries Coverage vs. Intra-brand competition –Price competition may damage mftr. ’ s reputation –Dealers make lower margin, lowering incentive for service and support

16. 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 Legal Issues

17. More on Control and Coordination Mechanisms Authoritative controls via –Ownership –Formal designation of decision making (franchising) –Power Bilateral controls focused on mutual interest –See next slide Legal controls

18. Bilateral Controls Relational norms to work together –Flexibility, mutual sharing of benefits/burdens, information sharing Joint interdependence and commitment Trust

19. Legal Considerations Tying –Sale of popular product linked to second product Ex: Microsoft case partially based on tying of operating system to Internet browser –Found to be anticompetitive –Bundled rebates Exclusive Dealing –Dealer can carry only one mftr. ’ s product –Designed to ensure incentive for service, but antitrust issues if access to competition restricted

20. Evaluation of Performance

21. Channel Considerations in High-Tech Markets

22. Specific High-Tech Channels Issues Blurring of Roles –Distributors/resellers backward integrating into assembling products –Suppliers forward integrating into computer manufacturing

23. Specific High-Tech Channels Issues (Cont.) New strategies to increase value of indirect channels –Channel assembly Customization, speed Based on build-to-order model –Co-location Distributor ’ s employees work from vendor ’ s site Customization –Shift to services

24. Specific High-Tech Channels Issues (Cont.) Evolution of high-tech channels –Shown on next slide

26. Specific High-Tech Channels Issues (Cont.) Gray Markets: diversion of goods to unauthorized distributors, sold at discounted prices –Causes confusion and channel conflict –Loss of service incentive with legitimate members –Intra-brand competition

27. 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 –Producers perform marketing functions may reduce customer ’ s risk in buying from unauthorized distributors Selective Distribution –Lack of intra-brand competition may invited gray marketers Incompatible compensation policies –Volume quotas

28. Solutions to Gray Markets Track source of units and cut off gray market –Signals commitment to legitimate channels –Mitigates price erosion –May be burdensome administratively One-price policy (no volume discounts) Increase coverage in the market Institute consistent performance measures

29. Specific High-Tech Channels Issues (Cont.) Black Markets: Counterfeit goods/piracy –Especially problematic with unit-one cost structures Export Restrictions on “ dual use ” products –Ostensibly to protect U.S. security interests

30. 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 ” –“ Click and Brick ” model

31. 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

32. Contingency Model

33. Matching Tasks to Channels, By Segment

34. Predicting Effects of “ Dis-intermediation ” 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

35. Transition to the Internet: Avoid Conflict? Web site disseminates product info only Web generates leads which are directed to dealers Web site sells limited range of merchandise Web site takes on-line orders from only small customers or remote geographic areas Sell on Web with little fanfare

36. What if a Company Downplays the Web to Avoid Conflict? Invites competition, which threatens long-term survival Inconsistent with “ creative destruction ”

37. Moving Full-Steam to the Internet Assess magnitude of conflict Establish boundaries and guidelines for channels and customers May want to keep Web prices aligned with traditional channels May want to compensate dealers for sales in their territories Improve information between mftr. and resellers

38. Supply Chain Management Minimize inventory as work-in-progress Work on build-to-order model Reduce cycle time Electronic links to customers

39. 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 –Focus on matching what customers want by providing variety of products and responsiveness (speed and flexibility) –Consistent with trends to channel assembly

40. Matching Type of Innovation to Supply Chain Functions