COMPETITIVE ADVANTAGES THROUGH CHANNEL MANAGEMENT

Submitted by: Group-2

EXECUTIVE SUMMARY:
This case provides a synopsis of three companiesDell, Inc., IKEA, and Seven-Eleven (Japan)-that has developed a competitive advantage through channel management. Each case highlights the company's focus on customer relationships and how the channel is designed to maximize customer service. They also illustrate how closely these companies work with their suppliers in order to coordinate activities and reduce channel cost.

CASE 1: DELL INC

In 1984, at the age of 19, Michael Dell founded Dell Computer with a simple vision and business conceptthat personal computers could be built to order and sold directly to customers. Michael Dell believed his approach to PC manufacturing had two advantages (1) bypassing distributors and retail dealers eliminated the markups of resellers (2) building to order greatly reduced the costs and risks associated with carrying large stocks of parts, components, and finished goods.

CONT

Company was gaining market share quickly in all of the world's markets.

DELL COMPUTER'S STRATEGY

Extensive data and information sharing with both supply partners and customers. Build-to-order manufacturing

Customer service

Mass customization

Market segmentation

Partnerships with suppliers

5
Direct sales Just-in-time components inventories

BUILD-TO-ORDER MANUFACTURING AND MASS CUSTOMIZATION

Dell built its computers, workstations, and servers to order; none were produced for inventory. Dell customers could order custom-built servers and workstations based on the needs of their applications Dell reorganized its plants in 1997, shifting to "cell manufacturing" techniques whereby a team of workers operating at a group workstation (or cell) assembled an entire PC according to customer specifications The result had been to reduce assembly times by 75 percent and to double productivity per square foot of assembly space. Assembled computers were tested, then loaded with the desired software, shipped, and typically 6 delivered within five to six business days of the initial order.

COMPETITIVE VALUE CHAIN OF PC MANUFACTURER

PARTNERSHIPS WITH SUPPLIERS

Michael Dell believed it made much better sense for Dell Computer to partner with reputable suppliers of PC parts and components rather than to integrate backward and get into parts and components manufacturing on its own. Management believed long-term partnerships with reputable suppliers yielded several advantages. Dell's long-run commitment to its suppliers laid the basis for just-in-time delivery of suppliers' products to Dell's assembly plants in Texas, Ireland, and Malaysia. Dell Was Committed to Just-in-Time Inventory Practices because Dell's just-in-time inventory emphasis yielded major cost advantages and shortened the time it took for Dell to get new generations of its computer models into the 8 marketplace.

DIRECT SALES
Selling

direct to customers gave Dell firsthand intelligence about customer preferences and needs, as well as immediate feedback on design problems and quality glitches With thousands of phone and fax orders daily, $5 million in daily Internet sales, and daily contacts between the field sales force and customers of all types, the company kept its finger on the market pulse, quickly detecting shifts in sales trends and getting prompt feedback on any problems with its products. Dell saw its direct sales approach as a totally customer-driven system that allowed quick transitions to new generations of components and PC models.
9

MARKET SEGMENTATION

10

CUSTOMER SERVICE
Dell contracted with local service providers to handle customer requests for repairs; on-site service was provided on a next-day basis Dell also provided its customers with technical support via a toll-free number, fax, and e-mail. Dell received close to 40,000 e-mail messages monthly requesting service and support and had 25 technicians to process the requests Dell's strategy was to manage the flow of information gleaned from customer service activities both to improve product quality and speed execution. Dell was partnering with Intel, Microsoft, Computer Associates, and other prominent PC technology providers to help customers make more effective use of the Internet 11 and the latest computing technologies.

VIRTUAL INTEGRATION AND INFORMATION-SHARING

Michael

Dell referred to this feature of Dell's strategy as "virtual integration."16 On-line communications technology made it easy for Dell to communicate inventory levels and replenishment needs to vendors daily or even hourly. In addition to using its sales and support mechanisms to stay close to customers, Dell had set up a number of regional forums to stimulate the flow of information back and forth 12 with customers.

CONT..
Dell had developed customized intranet sites (called Premier Pages) for its 3,000 largest global customers; these sites gave customer personnel immediate on-line access to purchasing and technical information about the specific configurations of products The company also gave its large customers access to Dell's own on-line internal technical support tools, allowing them to go to www.dell.com,

13

DEMAND FORECASTING

Management believed that accurate sales forecasts were key to keeping costs down and minimizing inventories, given the complexity and diversity of the company's product line. Because Dell worked diligently to maintain a close relationship with its large corporate and institutional customers, and because it sold direct to small customers via telephone and the Internet.

14

CONT
Having credible real-time information about what customers were actually buying and having firsthand knowledge of large customers' buying intentions gave Dell strong capability to forecast demand. . Sales-account managers were coached on how to lead large customers through a discussion of their future needs for PCs, workstations, servers, and peripheral equipment

15

ADVERTISING

Michael Dell was a strong believer in the power of advertising and frequently espoused its importance in the company's strategy. The company regularly had prominent ads in such leading computer publications as PC Magazine and PC World, as well as in USA Today. . In the spring of 1998, the company debuted a multi-year worldwide TV campaign to strengthen its brand image

16

CASE 2: IKEA
Background of IKEA IKEA is a privately held, international home products company that designs and sells ready-to-assemble furniture such as beds and desks, appliances and home accessories. IKEA has 300 home furnishing superstores in 35 Countries and was visited by some 583 million shoppers. . IKEAs low priced elegantly designed merchandise displayed in large warehouse stores, generated sales of $21.2 billion in 2008, up from 4.4 billion in 1994
17

CONT
Its goal was over time to provide stylish functional design that can be cost effective. Ultimately this led to concept of what IKEA calls democratic design.

18

IKEAS LOW COST CONCEPT KEEPS IT AHEAD OF ITS COMPETITORS.

IKEA is the cost leader in the furniture industry. A living room furnished with IKEA products is as much as 65% less expensive than one furnished with equivalent products from other stores. Its target market are the young married couples, college students, 20 to 30-something singles and middle class families who are basically price sensitive customers. So, if they can get furniture at a much lower price, of course the will opt for that. Thus, this concept gives IKEA its biggest competitive advantage keeping it ahead of its competitors.

19

IKEA HAS SUCCESSFULLY COMBINED LOW COST WITH GOOD QUALITY.

Generally people have an idea that price and quality are directly related as in, higher the price better is the quality and lower the price lower is the quality. However, IKEA has successfully changed this idea related to furniture. Not only is its furniture much lower priced than its competitors, they also have great quality.

20

CONT.
It has productively combined low cost with good quality. Its democratic designs which balances function, quality, design and price gives IKEA the competitive edge

21

A KEY FEATURE OF IKEA FURNITURE IS SELFASSEMBLY.

A key feature of IKEA furniture is self-assembly. This proves to be a very efficient concept for both the parties IKEA as well as its customers. The furniture pieces are taken off and flat packed and then assembled by the customers at their homes. It reduces IKEA transport and warehouse costs as well as saves additional hassles related to transporting a big piece of furniture, and the customers are also willing to take on the task of assembly in return for lower prices.

22

CONT

Due to this, the furniture are always readily available which means the customers do not have to wait 2/3 days after purchase for their furniture. This is a breath of fresh air for the customers.

23

STRONG LONG-TERM RELATIONSHIP WITH ITS

SUPPLIERS GIVES IT A COMPETITIVE EDGE

Long-term agreements give lower prices: Bigger volumes mean lower prices. And the aim is for the already low prices to become even lower still. To make this feasible, IKEA signs long-term contracts with its suppliers. Currently IKEA plans to open 10-20 new stores every year with a goal to double sales within the next five years.

24

CONT..
The IKEA supply chain is mainly make-to-stock (MTS) and only a few products are made to customer orders. Consequently, the entire supply chain is heavily dependent on forecasts The regions and the stores have traditionally had a strong power and a high degree of local freedom in terms of planning and placing replenishment requests. This has led to a fragmented supply chain planning with local optimization and a lot of manual intervention with plans throughout the supply chain.

25

CONT
To overcome the difficult situation, IKEA initiated a program (a group of projects) aiming to taking better control of its supply chain, and enhance performance in terms of delivery service and costs. A new global planning concept was developed and is currently being implemented. Its cornerstones are mutually integrated planning processes, a centralized planning organization, a focus on data quality and use of advanced software support.

26

MATERIALS MANAGEMENT:
Store plan The IKEA stores are large warehouses and the interior is configured almost like a maze that requires customers to pass through each department to get to the checkout. This gets customers to make more impulse purchases as they wander through the IKEA wonderland. The way the flow of departments is set also boosts up sales. IKEA stores also have restaurants and cafes to take a break from shopping without leaving the store.
27

CONT
Effort in implementing JIT systems IKEA contracts out manufacturing for most of its products and a certain portion of goods are made internally by its own manufacturing company, Swedwood. Nearly 10% of its products are produced internally. Swedwood strengthens IKEAs supply base.

28

IKEA HAS THE ABILITY TO ADAPT ITS TACTICS ACCORDING TO THE MARKET.
An example of this can be seen in what it did in the American market. At the time that IKEA launched itself in USA, it noticed a change in American culture. To tap into this shifting culture of America, IKEA redesigned its marketing strategies adjusting it according to what would be appropriate in this cultural shift. The result was double revenues in a four-year period.

29

SEVEN ELEVEN JAPAN

Established in 1973, Seven-Eleven Japan set up its first store in Tokyo, in May 1974 In 2004, it was owned by the Ito-Yokado group, both Ito-Yokado and Seven-Eleven Japan were founded by Mr. Masatoshi Ito. In 1972 opening first Seven-Eleven convenience stores in Japan. Southland agreed in 1973 to a licensing agreement. In exchange for 0.6 percent of total sales, Southland gave Ito exclusive rights throughout Japan.

30

CONT

In May 1974, the first Seven-Eleven convenience store opened in Tokyo by 1984, there were 2,001. Rapid growth continued, resulting in 10,356 stores by 2004.

31

SEVEN-ELEVEN JAPAN FRANCHISE SYSTEM

They developed an extensive franchise network and performed a key role in the daily operations of this network. The Seven-Eleven Japan network included both company-owned stores and thirdparty-owned franchises. Seven-Eleven Japan, in its 1994 annual report, listed the :

32

FOLLOWING SIX ADVANTAGES OF THE MARKETDOMINANCE STRATEGY

Prevented competitors entrance into the dominant area Boosted distribution efficiency

Improved advertising effectiveness

Improved brand awareness

Enhanced efficiency of franchise support services

Increased system efficiency

33

THE RESPONSIBILITIES OF THE TWO PARTIES WERE AS FOLLOWS:

Seven-eleven Japan responsibilities: Develop supply and merchandise Provide the ordering system Pay for the system operation Supply accounting services Provide advertising Install and remodel facilities Pay 80 percent of utility costs.

Franchise owner responsibilities: Operate and manage store Hire and pay staff Order supplies Maintain store appearance Provide customer service

34

STORE INFORMATION AND CONTENTS

Seven-Eleven had 10,303 stores in Japan and Hawaii as of 2003. The standard size of new stores from 125 square meters to 150 square meters. It offered 5,000 SKUs (stock keeping units). Each store carried food items, beverages, magazines, and consumer items such as soaps, detergents, etc.

35

CONT
The food items were classified in four broad categories. chilled items including sandwiches, delicatessen products, and milk. warm items including box lunches, rice balls, and fresh bread frozen items including ice cream, frozen foods, and ice cubes room-temperature items including canned food, instant noodles, and seasonings
36

1.

2.

3.

4.

STORE SERVICES
They added a variety of services like (1987) Electric Power bills, gas bill, insurance premiums, and telephone bill. (1994) accepting installment payments on behalf of credit companies. (1999) include payment for Internet shopping. (2004) ATMs had been installed in about 75 percent of the total store network in Japan.

37

INTEGRATED STORE INFORMATION SYSTEM

Seven-Eleven Japan attributed a significant part of its success to the Total Information System installed in every outlet and linked to headquarters, suppliers, and the Seven-Eleven distribution centers. first company in Japan to introduce a point-of-sales (POS) system in 1982. In 1991 integrated services digital network (ISDN) was installed. The two-way, high-speed online communication capability of ISDN enabled SevenEleven Japan to collect, process, and feed- back POS data quickly.

38

SEVEN-ELEVEN STORE INCLUDED HARDWARE

SYSTEM

Graphic order terminals for placing orders were linked to the store computer. Scanner terminals scanned deliveries from the distribution center. Store computers were linked to the ISDN network . POS registers were linked to the store computer.

39

SEVEN-ELEVENS DISTRIBUTION SYSTEM

The Seven-Eleven distribution centers and the information network played a key role. The major objective was to carefully track sales of items and offer short replenishment cycle times. Seven-Eleven had offered three-times-daily store delivery of all rice dishes, bread and other fresh food were delivered twice a day. The distribution system was flexible enough to alter delivery schedules depending on customer demand.

40

CONT
Store manager used a graphic order terminal to place an order. The supplier received orders from all Seven-Eleven stores and started production to fill the orders. The combined delivery system. At the distribution center, delivery like products from different suppliers (for example, milk and sandwiches) was directed into a single temperature-controlled truck All deliveries were made during off-peak hours and were received using the scanner terminals.

41

CONT
February 2004, Seven-Eleven Japan had a total of 290 dedicated manufacturing plants throughout the country that only produced fast food for SevenEleven stores. These items were distributed through 293 dedicated distribution centers (DCs) that ensured rapid, reliable delivery.

42

QUESTION

Why have these companies been successful in developing competitive advantage? What philosophy and practices do they have in common?

43

SOLN

This case provides an overview of the three companiesDell, Inc, IKEA, and Seven-Eleven (Japan), which has developed a competitive advantage through the management channels.

Each case commonly emphasizes the companys focus on customer relationships, and as a channel designed to maximize customer service. Examples show how these companies to think outside the box in their choice of channel partners in the sequence and purpose of activities related to product design, production and transmission.

44

SOLN

They also show how these companies work closely with their suppliers in order to coordinate activities and reduce the cost of the channel. The end result is a more efficient channel designed to serve customers more effectively.

45

QUESTION
More specifically, how have these companies used their channel relationships to create competitive advantage?

46

SOLN
Dell:

Dell reengineered its processes and relationships with suppliers and logistics providers so that the overall processes of building, customizing, and shipping PCs does not take longer than eight hours. Dell created long-term relationships.

Dell reduced the number of logistics providers and suppliers.

47

SOLN
IKEA: Continuous management and distribution of value across the supply chain of the company

Operationally synchronization Integration of Back-End and Front-End processes.

48

SOLN
SEVEN ELEVEN: Consumer-focused Information Systems.

orientation

based

on

Operational planning and control system expedites inbound and outbound logistics and the sales forecast relies on POS data to reveal changes in consumer preference

Retail Information System (RIS) feature POS, item level sales analysis, automated back office functions such as sales and cash reporting, payroll, gasoline pricing and inventory control.

49

QUESTION

Is this advantage sustainable? Why are more companies able to use their channel relationship to create competitive advantage?

50

SOLN

The achievement of competitive advantage is not always permanent or even long lasting. Once a firm establishes itself in an area of advantage, other firms will follow suit in an effort to capitalize on their similarities. A firm is said to have a "sustainable" competitive advantage when its competitors are unable to duplicate the benefits of the firm's strategy.
51

SOLN
Its generic strategy must be grounded in an attribute that meets four criteria. It must be: Valuableit is of value to consumers. Rareit is not commonplace or easily obtained. Inimitableit cannot be easily imitated or copied by competitors. Non-substitutableconsumers cannot or will not substitute another product or attribute for the one providing the firm with competitive advantage.

52

TEACHINGS
Controlling channel costs so that the right product can be sold profitably at a fair price to consumers, Ensuring that the product is available at the right time (mundane but crucial), Ensuring that customers' shopping experience in the retail environment (store, catalogs, or online) meets their specific needs.

53

54