1. Chapter 10 Analyzing the Value Chain: Distribution Channels

2. Copyright © Houghton Mifflin Company10-2 Overview Distribution as a competitive strategy Distribution channel options Creating a distribution strategy

3. Copyright © Houghton Mifflin Company10-3 Distribution Is Now a Competitive Strategy Mass customization requires a different distribution strategy Rapid pace of markets requires minimizing products held in inventory Low cost distribution (e.g. the internet) is a powerful tool for value creation Disintermediation: reducing the length of the value chain

4. Copyright © Houghton Mifflin Company10-4 Distribution Trends Collapse of the middle –Bundles and value-added solutions Emergence of new customer groups Migration within the value chain Redefinition of the product/service (e.g., Starbucks and coffee) Consolidation of industries

5. Copyright © Houghton Mifflin Company10-5 Distribution Channel Options

6. Copyright © Houghton Mifflin Company10-6 What Defines an Effective Channel? Inventory Ownership Negotiation Gathering of market information Financing and payment Risk management Member power

7. Copyright © Houghton Mifflin Company10-7 Value Chain Is Basis for Business Model What does the value chain look like? What is your role in it? Who else is involved? Who will pay whom and how much? How can we make money? What infrastructure must be in place? What changes will customers have to make?

8. Copyright © Houghton Mifflin Company10-8 Blurring of Distinctions Among Value Chain Members CompUSA—build-to-order kiosks –Not just retailer, but now an assembler Intel—entering the computer market? –Selling complete motherboards Hotels in the restaurant business

9. Copyright © Houghton Mifflin Company10-9 Need for Indirect Channels to Provide Value for Manufacturers Channel assembly –Manufacturers ship semi-finished products to distributors –Build products based on demand Co-location –Distributor’s employees work from vendor manufacturing site to ship completed products to resellers

10. Copyright © Houghton Mifflin Company10-10 Sales Time Pre-early Early Adopter Mass market Mature Market Direct Sales to OEMS Distributors to grow base of VARs Traditional Retailers Mass Merchants Evolution of High Tech Channels

11. Copyright © Houghton Mifflin Company10-11 Distribution Channel Design (Mohr 2001) Channel objectives, constraints, external environment –Customer needs and buying habits –Purchase quantity, location, speed –Competitors –Product characteristics

12. Copyright © Houghton Mifflin Company10-12 Design: Choice of Channel Structure Direct versus indirect –Most companies do both –Hybrid channels have more complex management issues –May eliminate intermediary, but not the function

13. Copyright © Houghton Mifflin Company10-13 Factors Affecting Choice Costs Market coverage Control of distribution Speed and reliability

14. Copyright © Houghton Mifflin Company10-14 Costs Manufacturer Distributor Retailer Consumer or End-user Sells at $6 Sells at $10 Sells at $19.95 Difference = Overhead + Profit Distribution Strategy: Traditional Channel

15. Copyright © Houghton Mifflin Company10-15 Manufacturer Customer Sells at $12.99 Difference = Overhead + Profit Mfg takes on responsibilities of distributor and retailer Distribution Strategy: Direct Channel

16. Copyright © Houghton Mifflin Company10-16 Manufacturer Distributor E-tailer Customer Sells at $6 Sells at $10 Sells at $15.95 Difference = Overhead + Profit Distribution Strategy: e-Commerce

17. Copyright © Houghton Mifflin Company10-17 What Do Intermediaries Do? Aggregate heterogeneous goods into a line of goods Break bulk Provide customer/market information to the producer/manufacturer

18. Copyright © Houghton Mifflin Company10-18 Screening an Intermediary Check current listing of products Does the intermediary handle your competitors? Check sales volume—consistent level of growth Check for sufficient warehouse space and up-to-date communication technology Check the marketing plan Can the intermediary handle servicing?

19. Copyright © Houghton Mifflin Company10-19 Take-Aways List what students took away from the discussion in real time