VALUE CHAIN STRATEGY

A group of vertically aligned organizations that add value to a good or service in

moving from basic supplies to finished products for consumer and organizational end
users is a value chain. We use the term value chain in preference to others that
describe distribution activities from other perspectives (such as that of manufacturing
or operations functions), to underline the central purpose of superior customer value.
Terms such as physical distribution management, logistics, distribution and supply
chain management are all used to identify certain aspects of the value chain and its
management, as well as new organizational units found in many companies. The term
value chain focuses attention on the processes, activities, organizations and structure
that combine to create value for customers as products move from their point of origin
to the end user.

STRATEGIC ROLE OF DISTRIBUTION

 Distribution Functions

The channel of distribution is a network of value chain organizations performing

functions that connect goods and services with end users. The distribution channel
consists of interdependent and interrelated instituions and agencies, functioning as a
system or network, cooperating in their efforts to produce and distribute a product to
end users.

 Channels for Services

The service provider renders the service to the end users rather than its being
produced like a good and moved through marketing intermediaries to the end user.
Because of this the distribution networks for services differ somewhat from those
used for goods.

DIRECT DISTRIBUTION BY MANUFACTURERS

Manufacturers are unique because they may have the option of going directly to
end users through a company sales force or serving end users through marketing
intermediaries. Manufacturing have three distribution alternatives : (1) direct
distribution, (2) use of intermediaries or (3) situations in which both are feasible.
 Buyer Considerations.

Manufacturers look at the amount and frequency of purchases by buyers, as well

as the margins over manufacturing costs that are available to pay for direct selling
costs.

 Competitive Considerations.

Distribution channels may be an important aspect of how a company

differentiates itself and its products from others and this may impel decision makers
toward increased emphasis on direct channels.

 Product Characteristic.

Companies often consider product characteristics in deciding whether to use a

direct or distribution-channel strategy. Complex goods and services often require
close contact between customers and the producer, who may have to provide
application assistance, service and other supporting activities.

 Financial and Control Considerations.

It is necessary to decide if resources are available for direct distribution and if

they are whether selling direct to end users is the best use of the resources.

CHANNEL OF DISTRIBUTION STRATEGY

 Types of Distribution Channels

The major types of channels are conventional channels and vertical marketing
systems (VMS). the conventional channel of distribution is a group of vertically
linked independent organizations, each trying to look out for itself, with limited
concern for the total perfomance of the channel. The relationships between the
conventional channel participants are rather informal and the members are not closely
coordinated. The focus of the channel organizations is on buyer-seller transactions
rather than close collaboration throughout the distribution channel. Three types of
vertical marketing systems may be used : ownership, contratual and administered.
During recent years, a fourth form of VMS has developed in which the channel
organizations form collaborative relationships rather than control by one organization.

DISTRIBUTION INTENSITY
 Choosing the right distribution intensity depends on management’s targeting and
positioning strategies and product and market characteristics. The major issues in
deciding distribution intensity are :

1. Identifying which distribution intensities are feasible, taking into account the size
and characteristics of the market target, the product and the requirements likely to
be imposed by prospective intermediaries.

2. Selecting the alternatives that are compatible with the proposed market target and
marketing program positioning strategy.

3. Choosing the alternative that offers the best strategic fit, meets management’s
financial perfomance expectations and is attractive enough to intermendiaries so
that they will be motivated to perform their assigned functions.

CHANNEL CONFIGURATION

 End User Considerations. It is important to know where the targeted end users
might expect to purchase the products of interest. The intermediaries that are
selected should provide an avenue to the market segments targeted by the
producer.

 Product Characteristics. The complexity of the product, special application

requirements and servicing needs are useful in guiding the choice of
intermediaries. Looking at how competing products are distributed may suggest
possible types of intermediaries, although adopting competitors strategies may
not be the most promising channel configuration.

 Manufacturer’s Capabilities and Resources. Large producers with extensive

capabilities and resources have a lot of flexibility in choosing intermediaries.
These producers also have a great deal of bargaining power with the middlemen
and producer may be able and willing to perform certain distribution functions.

 Required Functions. The functions that need to be performed in moving

products from producer to end user include various channel activities such as
storage, servicing and tranportation.
 Availability and Skills of Intermediaries. Evaluation of the experience,
capabilities and motivation of the intermediaries that are under consideration for
channel membership is also important.

STRATEGIES AT DIFFERENT CHANNEL LEVELS

Channel strategy can be examined from any level in the distribution network. The
major distinction lies in the point of view (retailer, wholesaler, producer) used to
develoop the strategy.

MANAGING THE CHANNEL

Channel management activities include choosing how to assist and support

intermediaries, developing operating policies, providing incentives, selecting
promotional programs and evaluating channel results. These activities consume much
of management’s time, since once established the channel design may be difficult to
modify.

 Channel Leadership. One firm may gain power over other channel
organizationas because of its specific characteristics, experience and
environmental factors and its ability to capitalize on such factors. Gaining this
advantage is more feasible in a VMS than in a conventional channel.

 Management Structure and Systems. The management structure and systems

may vary from informal arrangements to highly structured operating systems.

 Physical Distribution Management. Physical distribution (logistics)

management has received considerable attention from distrbution, marketing,
manufacturing and transportation professionals. The objective is improving the
distribution of supplies, goods in process and finished products. The decision to
intergrate physical distribution with other channel functions or to manage it
seperately is a question that must be resolved by a particular organization.

 Channel Relationships.

1. Degree of Collaboration. Channel relationships are often transactional in a

conventional channels but may become more collaborative in VMS. The
extent of collaboration is influenced by the complexity of the product, the
 potential benefits of collaborations and the willingness of channel members to
work together as partners.

2. Commitment and Trust among Channel Members. The commitment and

trust of channel organizations is likely to be higher in VMS compared to
conventional channels. Highly collaborative relationships among channel call
for a considerable degree of commitment and trust between the partners. The
cooperating organizations provide access to confidential product plans,
market data and other trade secrets.

3. Power and Dependence. This concentration of power does not exist with the
relationship VMS. Power in conventional channels is less concentrated than it
is VMS and channel members are less dependent on each other. Conventional
channel relationships may, nevertheless, result in some channel members
possessing more bargaining power than others.

 Channel Globalization. The globalization of distribution channels is underlined

by the launch of Internet-based online exchanges. With the ability to source and
merchandise globally, efficient supply chains and powerful information
technology, major retailers have more bargaining power than many of their
suppliers.

 Multichanneling. An important trend in distribution is the use of multiple

channels to gain greater access to end user customers. One implication is that
increasingly suppliers face the challenge of managing multiple channels to the
same market. The problem is to define innovative channel combinations that best
meet customer needs.

 Conflict Resolution. Conflict are certain to occur between the channel members
and in multichanneling between channels, because of differences in objectives,
priorities and corporate cultures. Looking at a proposed channel relationship by
each participating organization may identify areas that are likely to lead to major
conflicts.

 Channel Perfomance. The perfomance of the channel is important from two

points of view. First, each member is interested in how well the channel is
meeting the member’s objectives. Second, the organization that is, managing or
 coordinating the channel is concerned with its perfomance and the overall
perfomance of the channel. Tracking perfomance for individual channel members
includes various financial and market measures such as profit contribution,
revenues, costs, market share, customer satisfication and rate of growth.

 Legal and Ethical Considerations. Various legal and ethical considerations may
impact channel relationships. Legal concerns by the federal government include
arrangements between channel members that substantially lessen competition,
restrictive contracts product and or geographical coverage, promotional
allowances and incentives and pricing practices.

INTERNATIONAL CHANNELS

 Examining International Distrbution Patterns. While the basic channel

structure (agents, wholesaler, retailers) is similar across countries, there are many
important differences in distribution patterns among countries.

FACTORS AFFECTING CHANNEL SELECTION

The factors affecting the choice of international channels include cost, capital
requirements, control, coverage, strategic product-market fit and the likehood that the
middlemen will remain in business over a reasonable time horizon.

Supply Chain Management Issues. Many organizations have adopted supply chain
management structures, which have developed out of physical distribution and
operations management. However, the impact of supply chain strategies has extended
beyond issues of transportation, storage and stockholding to influence realtionships
between channel members and customer value.