Chapter Value-Chain Strategy ‘The group of vertically aligned organizations. et add value to a good oF servigg | ree ee rom basic supplies to finished products for consumer and organizations} y moving fom bas in State choices i vaue-cain options are an impart users the wal we ue the term vale cn n preference to Ihe, hich a market ed tes fom other pertpecives (such as that of manufactur gg a sista ey to underline the ceiral purpose of superior Customer alu ‘ such as physical distribution manazernt logistics, distribution, and supply chai ma se ll ued io ently cts nperis ofthe value chain and ts Managenen agement ar oy ovganiztional writs found i? Many companies, The term value q $s we aliod on the whole astm of processes, activities, organizations and sink focus at bine vo ereate value for customers as products move from ther pig origin to the end-user. ey Fae chain or network) is the configation of distribution channels linking i Cae santpars with endeusers, We cxarnin® the decisions faced by a company nde. | oping a channel of distribution strates 0" els of distribution are a central issueia | managing the value chain. An effec ent distribution channel provides theme, tor organizations with an importa ge over competing channels. Distibtin strategy concerns how a firm reac targets. We also emphasize the nee ie marketing decision makers to ino veir thinking the impact of innovation supply chain strategy and digital cl sportant goal is maintaining the biliyet the market-driven company to real thain, when this is necessary tomeetts changing necds of its customers an Importantly, a strategic logic is arto, sed on factors other than the tradiand economic advantages of tradition cermediaries. These include the efi importance of brands, competitiv gained from enhanced market sesit capabilities and closeness (0 the et pact of escalating consumer povett priorities for effective supply chain 1, and strategic “fit?” These factors om tribute (0 a new strategic logic for Jnvention that is influencing & BO* number of companies. The design ns is linked directly to positioning market segmentation strategigs. A’ tioning against competitors becomes! high priority and as new segmentat -velop, Jong multilevel vale cai Uy too slow and unresponsive to chang ‘ective implementation cof man act je positioning and segmentation initia yy producers, a value-chain priority aChapter 10 Yalue-Choin Strategy 285 facilitate the development of new growth platforms for the future, rather than achieving only efficiencies in distribution. ! ms ‘The strategic importance of value-chain decisions and realignment is illustrated by develop- ‘ments af Dell Inc. in the computer business. Throughout the 1990s and early 2000s, Dell was renowned for the power of the “Dell direct business model.” Leveraging outstanding supply chain efficiency, Dell delivered superior value to (mainly corporate) customers through a flow model, in which customer orders generated the production and assembly of products. The direct business ‘model allowed customers more choices in specifying products to their precise’needs, and reduced stocks held in the value chain to an absolute minimum—Dell ran its global operation on 5 or 6 Gays? stock. The direct business model was a formidable value-chain innovation, promoting out- Standing supplier connectedness, superior leaming, and responsiveness to customer needs. Nonetheless, Dell now faces slowing sales growth, loss of market share to Hewlett-Pack- ard and new competitive imperatives. In key target markets like China, the direct model is not favored by customers who prefer personal service, Low levels of service associated with the direct model have attracted criticism, particularly in the consumer market. Faced with these chal- lenges, Dell is broadening ts business model to target.computer re-sellers—specialty vendors ‘who design and install computer systems for corporate customers. In addition, Dell is develop- inga global retail stratezy that includes selling computers in Best Buy, Carrefour, and Wal-Mart stores and wireless companies like AT&T. Experimental Dell own-branded stores arc expanding, along with the kiosks located inside shopping malls and traveling shows. The company aims to develop from a computer distributor to a broader supplier of technology to businesses. Redesign- g its value-chain strategy is critical fo Dell achieving its strategic goals, particularly in overseas, ‘markets and the technology services business, to rebuild the company's competitive position ? We look at the role of distribution channels in marketing strategy and discuss several chan- nel strategy issues. Next, we examine the process of selecting the type of channel, determin- ing the intensity of distribution, and choosing the channel configuration of organizations. A discussion of w:araging the distribution channel follows. We then look al distributing through miernational channels. Strategic Role of Value Chain A good’distribution nétwork creates a strong competitive advantage for an organization. Value-chain design may be a critical part of how companies compete in the harsh cnvi- ronment characterizing many markets coming out of récession. Importantly, companies can drive competitive differentiation and advantage through the design of value chains which outmaneuver their competitors. The STRATEGY APPLICATION describes the: ‘successful expansion of Forever 21 in the fast fashion bu: ines, positioned against strong, competitors like H&M, Zara, and Gap with an innovative and distinctive value chain. In Chapter 7 we discussed partnering between international airlines to gain market access. However, the airlines example also underlines the impact of the Internet on distribution ‘Nigel F Petey, David W. Cravens, and Nikla Lane, “Peek-a-Boo: Finding and Connecting with your Custer: £15" Marketing Management, Summer 2010, 18-24 Kevin Allison, “Dell To Target Indret Sales Financial Times, May 17, 2007, 27. Kewin Alison and Chie Nutll, "Dell to Sell ts Computers at Wal-Mar;" Financial Times, May 25, 2007, 24. Chit Edkeous cocne Do-Over,”Businestiel, Octobet 26,2008, 37-40: Ben Worlhen, "Deals Offer Dell Many Path tn Grow ae Sireet Journal, Septembec8, 2010, 4Strategy juste. Forever 9) Sa peeheley Its 500 stores; with ambitions to:have)1,000 stores globally: From its aa é-_store base, the “cheap. Channel Innovation : Economic downturn and emerging recovery are leading to strategic realignments in value chains in pursuit of sustainable competitive advantage. One aspect oP strategic renewal ‘occurring in these harsh market conditions is direct value chain amendments for prod- ucts traditionally dominated by conventional channels of distribution involving retailers, Calling," Sunday Times, ansary 18,2006, $3, 5. Nanette Byrnes, “Avon: More Than Cosmetic Changes” BusnesVeck Math 12, 2007, 62-63 Andrew Davidson, "The Aven Lady with Caling Sunday Times, Ocobee 17,2010, 3,9 Kerry Cupell, “Wal-Mart with Wings,” BusinessWeek, November 27, 2006, 44-46. Niemalya Kumar, Morketing as Sioegy: Understonding the CEO' Agenda for Driving Growth and Innoration (Boston: Harvard Busines Sool Pres, 2004) ~ ‘sia "Jonathan Birchall 26, Suzanne Kapnor Claiborne to Cut Brands and Focus on Retail Business", Finonciol Times, July 12,2007, Liz Claiborne’s Extreme Makeover", Faure, December 8, 2008, pp. 69-72.302 Part Four Market-Driven Progam Development wholesalers and other tyPes ©! is likely to be an important P There are some indications, fashion as. companies look t0 distribution. The array of possi ment of digital options i perating in parallel (roultichannel®) ‘channel invasion, where one chann channel system. snd to a full-scale Clearly, these decisions or the intent to achieve are actively exploring opportuni enhanced value-chain control, Su ‘models based on innovative distribu moves are shown in Exhibit 10.6. ss for rein in distribu this control Channel Audit Channel modification and mi discussed earlier (see Exhibit 2 tool for monitoring the amount of customer types, and to include new and new channels provide a trigger channel strategy change needs to m: and implementation must be achieval For example, direct Internet sales igrati chain, One of Dell Inc.'s key advantage business model was that it was very H-P to operate a direct’ business m nels anid were reluctant to coinpete delay before competitors migrated distribution, ~ EXHIBIT 10.6 Yalue-Chain _Reinvention Source Adapted fom Nigel F Pie, David W- Cravens and Nats Lane, "Peck Boo. Finding 1d Conmesting with Managemen Sire 2oi0,te-24 Value chain contr > (egireorome eee Sana Extending digital channel domain "Piercy, Cravens, and Lane, ibid f distributive art of po: for example seek greater control are often driven ties created by perior market sensing capabilities, and new bis ion decisions require careful analysis. The channels 10.4) provides a startin f business going through different channels to diffe intermediary. The reinvented distribut recession marketing strategy for many an hig pat vertical ilepralion sttegies may mean over raw materials, manufacny ting, jon in value chain strategies includes th \d the construction of multiple routes a eve, sibilities extend to more extreme gu participant moves to play an additional Bi Senne! reinvention involving a new business by gaining the al interesting signs that leadin channel digitization, mola me, latforms.'° Examples of valueschain j innovat hain intovatg went nani ). The pos Ci ma 1, There are ation pI g point for evaluation. The map proves channel possibilities in the model. Developing tie for considering channel strategy change. Nonethe : ee conse in the context of overall marketing sale ble even if there are conflicts with existing channel ‘compete with distributors and salespeople inthe yal es in growing the computer business with ils dir ‘difficult for existing market leaders like IBM and ‘odel—they were tied to tradifional distribution char with their own distributors. There was a considerile their own channels to incorporate Internet sales end Value chain options Mutichanelling toreduce dependencies Channel invasion chainsChapter 10. Volue-Chiin Soutegy. 303 Managing the Channel After deciding on the channel design, the channel participants are identified, evaluated, and recruited. Finding competent and motivated intermedfaries is critical to successfully implementing the channel strategy. Channel management activities include choosing how {o assist and support intermediaries, developing operating policies, providing incentives, selecting promotional programs, and evaluating channel results. To gain’ better insight into channel management, we discuss channel leadership, management siructure and systems, physical distribution and supply chain management, channel relationships, conflict resolution, channel performance, and legal and ethical considerations. Channel Leadership Some form of interorganization management is needed to ensure that the channel has satisfactory performance as a competitive entity.” One firm may gain power over other channel organizations because of its specific characteristics (e.g., size), experience, and environmental factors, and its ability to capitalize on such factors. Gaining this advantage more feasible in a VMS than in a conventional channel. Performing the leadership role ‘may also lead to conflicts arising from differences in the objectives and priorities of channel members. Cofficts with retailers created by the channel stratcyy changes are illustrative. The organization with the most power may make decisions that are not considered favorable by other channel members. Management Structure and Systems Channel coordination and management are often the responsibility of the sales organization (See Chapter 13). For example, a manufacturer's salespeople develop buyer-seller relation- ships with wholesalers and/or retailers. The management structure and systems may vary from informal arrangements to highly structured operating systems. Conventional channel ‘management is more informal, whereas the management of VMS is more structured and pro- grammed. The VMS management systems mnay includé operating policies and procedures, information system linkages, various supporting services to channel participants, performance targets. nd setting Physical Distribution Management Physical distribution (logistics) management has received considerable altention from distribution, marketing, manufacturing, and transportation professionals. The objective is improving the distribution of supplies, goods in process, and finished products. Physical distribution is a key channel function and thus an important part of channel strategy and management. Management needs to first select the appropriate channel strategy. Once the strategy is selected, physical distribution management alternatives can be examined for the value-chain network. Many organizations now address physical distribution issucs as part ofa supply chain strategy. Supply Chain Strategy'® : The impact of supply chain strategics has extended beyond issues of transportation, storage and stock-holding issues-to influence relationships between channel members Fora complete discussion of channel management see Anne Coughlin, Erin Andtson, Louis W Stem, and Ade Ll-Ansary, Marketing Channels, 7 el (Linglewood Cliffs, NJ Prentice Hall In, 2006). : "This section of the chapter benefited from the advice and insightful contributions of Niall C. Petey, School of * ~ ‘Management, Univesity of Bath, UK.304 Part Four Market ent Consumer Response (Ec) river Program Devse Effi for example, the PE ad cusome® 26 te een im facturers to reduced jgoods; simpler transaction manage? . ership a cooperative part Sanaa Fock levels; Fewer svings, particularly for refailery doste-_lower stock I es f ard inforation sta resis esenil 10 building the seamless supply ety en ngnitional Bun yin management came fom apts Be! wine lean supply chain.” The basi and the exile Or ane perspective of the ‘ond-custoren et tel ine ine supply chain thal ae needed to place the correc ul nar moncvalue-reating actviies are ‘muda” or waste ann "continuous flow of products in the supply ait \ i,t eliminate ime wasting, storage saul oate supply chain until ordered by the dune ply chai, removing the need for large in supP move demand instability through coi 5 nately to allow customers to order dre sive is an example ofa lean supply chain mai ‘Nonetheless, in response fo the impact of turbulent volatile markets, some engi, neon creating agile savy chats, WINN Sra lengthy and slowan sae panenbut agile and responsive (9 market NONE Supply chain agi using market knowledge and a virtual corporation to respond {0 marketplace 3s opposed to the lean approach that Seeks to remove waste and manage voalliy oug the supply. chain-by leveling, demand. 2 The agile supply chain reserves capacity ot ‘vith unpredictable demand.” While lean supply chains require long-term parte wih suppliers, te agile model mandates uid and market-based relationships to et weponaiveness tothe market and capacity for rapid ‘change.2® Agile supply chain math ‘emphasize customer satisfaction more limited set of values rather than meeting # Based on reduced cast. ~ Harsh trading conditions are in! her aspect product with the customer Pe eliminated, Attention is given otiraditional “batch and queue” APY Products are nat produced upstrean& ectomer, that i, pulled through the 5 seer ustomer waiting time. The Boa! i between suppliers and distributors, 29 the production system." The ECR init fuencing major companies to rethink the relation | is of strategy, driven in pari by the poten between-supplyachains and oth ogreater ‘efficlencies-and in part by awareness of the risks and ‘vulnerabilities in st “chains; for example, the global impact of the tsunami ‘and earthquakes in Japan dist supplies in sectors like automotive and electronics. 4 4 B ‘Supply chain strategies impact on several critical issues for marketing strategy a the value chain: product availability in the market; speed to ‘mariet with innovation range of product choices offered to customers; and procluct ‘deletion decisions, Prices 4 TMtanin ChaRfopH Markeing Logistics, 2 ed. (Oxford: Butterworth ‘mea & Womack and Dorie Jones, om Thinking’ Banish Wise on nee ‘York!"Simon and, Schuster, 1996). eat (Daniel T. Jones, “The Route to the Future,” Manufacturing Engineer. February 2001, 33-30 *Marin Christopher, “The Agile Supply Chay" Indusval Marketing Management. 91) Mt Agile Manufuetur®s Heinemann, 2003) rd Create Health in om 2B gr MM, Nain nD. Ber, Leap: ering he Lean Me Tol Spry Chin” eration oral of Praducton Eros, 62,1999 107-118: Nunn Ciera Ds Til “Sul Chain Mian om L#an Functional poly Chain Management, 54), 2000, 206-221, pa Legis a, Enea 2 i. Ein nN ol Syren A grat iyo Len! ond AB & ember 2000, 26-32. Mark Whitchead, "Flexible: Friend or Foe January 6, 2000, 24-27, exible: Friend o Foss Peter Marsh, “Tsunami Hi - Highlights Dangert Suplies" nancial Times, Apel 13,2011, 28“hain Strategy 305 Chapter 10 Value. competitive positioning. In the market-driven company, a strategic value chain perspective Fequites collaboration and integration between marketing and supply chain management.” E-Procurement ‘The development of Internet-based supply chain management highlights the growing role of e-procurement—where customers search and buy online, accessing a far greater choice of suppliers, The major impact is with business-to-business customers, including retail- ers and purchasers of industrial products. Industry portals and complex e-procurement systems offer very specific supplier search facilities. E-procurement is associated with sup- plier base reduction and the use of devices like online auctions and exchanges, The impact of e-procurement is being felt both in direct and indirect channels, and is an increasingly significant factor in managing channels, Channel Relationships Chapter 7 considered various forms of strategic relationships between organizations, examining the degree of collaboration between companies, the extent of commitment of the participating organizations, and the power and dependence ties between the organiza- tions. We now look at how these issues relate to channel relationships. Degree of Collaboration Channel relationships are often transactional in conventional channels but may become more collaborative in VMSs. The extent of collaboration is influenced by the complex- ity of the product, the potential benefits of collaboration, and the willingness of channel members to work together as partners. Supply chain models encourage collaboration and information-sharing between suppliers and produeers. Commitment and Trust Among Channel Members The commitment and trust of channel organizations is likely to be higher in VMSs com- pared to conventional channels. For example, a contractual arrangement (e.g., franchise agreement) is a commitment to work together. Yet, the strength of the commitment may. vary depending on the contract terms. For example, contracts belween manufacturers and their independent representatives or agents typically allow either party to terminate the relationship with a 30-day notification. * : Highly collaborative relationships among channel members call for a considerable degree of commitment and trust between the partners. The cooperating organizations pro- vide access to confidential product plans, market data, and other trade secrets. Trust nor- ‘mally develops as the partners learn to work with each other and find the relationship to be favorable to each partner's objectives, * Power and Dependence In VMSs, power is concentrated with one organization and the other channel members are dependent on the channel manager. This concentration of power docs not exist with the relationship VMS. Pawer in conventional channels is less concentrated than in VMSs, and channel members are less dependent on each other. Conventional channel relationships may, nevertheless, result in some channel members possessing more bargaining power thiin others. In many sectors, suppliers face unprecedented pressure from powerful channel mem- hers. New merchandizing strategies with this effect inclucle house branding and category S Nigel F Pie, "Marketing Inyplementation:The Lplications of Marketing Paradigm Weakness forthe Sirateyy Execution Process." Journal ofthe Acadeny of Marketing Science, 26(3), 1998, 222-236, ;ee re ‘manufacturers to produce their brands. Category killers are comy control over these channels than in the past. Responses may include suppliers ryq end-users; Channel Globalization Significantly for consumer goods suppliers, many major retail chains have expanded rationally. The globalization of distribution channels is underlined by the launch of ini based online exchanges. With the ability o source and merchandize globally, efficients chains, and powerful information technology, major retailers have more bargaining pa than many of their suppliers. Domestic suppliers face global competition, Agentrics (a merger of the Global Exchange Network GlobalNetXchange Worldwide Retail Exchange), brings together more than 50 of the world’s largest re * fers and over 80,000 suppliers, with a goal of streamlining and automating sour 5 globally, and supporting collaboration between retailers and suppliers. It is esti that Internet-based procurement systems may cut 30 percent off costs.2” In an ine ing number of business-to-business situations, suppliers unable or unwilling to the transition to Web-based commerce are locked out of doing business with ‘gustomers.” 5 E Suppliers face competition at @ global level in what would once have becn sees sts; “Tormestic business. Buyers able to access online exchanges or participate in online auctions have in effect globalized the distribution channel, Multichanneling : Ajvimportant trend in distribution is the use of multiple channels to gain greater access tof uscr customers. Increasingly suppliers face the challenge of managing relationships betwe she multiplc channels used in the same market. The problem is to define innovative char _ combinations that best meet customer needs, However, in many situations the way channels4_ ithe used is defined by customer choice. Customers may “channel surf”—Forrester Res estimates that as many as half of all customers shop for information in one channel, defect from that channel to make the purchasc in another medium, Where customers become more adversarial, buy more strategically, and have the information and techt . ogy to make more informed decisions, it may be risky to assume that discrete chan serving statig:inarket scgments is a sustainable option. Channel decisions must be inform ie ‘by undsian iB Ahe various paths buyers follow as they move through the purcl proves.) i rishings and cookware retailers Williams Sonoma, for instance, has a cr channel selling strategy with sales split 60/40 between tetail outlets andvoniine/cattl sales direct to the consumer. The company continues to find ways of improvingeach nel so it drives results in the others—catalogs do not simply sell products, bycactinl Robert Mechin, "Create, Revise Channels for Customers," Marketing News, October 23,2000, 48 *Jonahan Veiby, "B2B, Or Not to Be?" Sunday Business, March 26, 2000, 79. Wild Royal, “Deal of a Salesman,” wwrwindustryweck.com, May 17, 1999, 59-60. >!Paul F Nunes and Fiank V. Cespedes, “The Customer His Escaped” Harvard Busi 96-105, +ai et Application Channel Hopping. + Channel hopping is where cus t Inte ere cuistomers fit betw ; deliveries of call and cole, or we the convene soe, eee * Research Ley a hae ea pesca ng that Beople use technology at home to find the right products at scginenie ag nest imesefclent way, and then decid how to purchase i missione: mens su r ; want to bé able to use soc media he Pressock ees sonter lpiaeveiaoeales e Si bakin jitter. raat. with retailers. Ire banking isnt oi rca tee rete ele pehaasy airtel aig ve wath ae ‘Contact for some purchases, branch-based ee tee F others, andithe use of third-partyiriermediaries for . e's retail outlet hi : Apples rela eure Smee a “high touch” customer service. Nonetheless, at busy reas gene snoug experts at the in-store Genius Bar to deal with customer ustomers are offered an into, lv interatve Inerne ink to 29 expert sales agent located in another store or all cent . i Motheteats British mother-and-baby retailer, customers use.an in-store computer Ne oid oe eee items not in stock at the store, not available if smaller stores, simply do not want to 'carr = ee he @ oe carry homer(but do want fo see in’the'store before ‘* The multiple channels used by consumers ‘pron Sen : sumers place priory on crostunelonalplannin by companies to ensure that are customer Sei pot ae coordinated, . 4 ‘Sources: Jonathan Birchall, “Are You Being ¢-Served?" Financial Tir 5 Seb ~ chal “Are You Being e-Served?” Financial Ties, anuarf3 2067/8 Lucy kilren Farpenegera tli amln Birchal, “The New Profit Pick-Me-Up,” Financial Times, ne 21, 2006, 15. Soc! Media Means Serious Business (Yankee Group Research, Inc., 2010) i = y in-home advertising they bring the company to the attention of new customers who arc encouraged to use the stores. The goal is a personalized and cohesive customer experience ‘across multiple channels and mulliple brands.* Relatedly, the INTERNET APPLICATION. describes the “ch cessfully responding and building new value offers for consumers Care is required in managing channels which may in part compete with cach other--the website, the salesperson, and the distributor may all share the same target customer, Atten- tion is required to ensure that incentives and rewards are alignéd with the channel strategy: For example, should-salespeople be incentivized to put business onto the direct Imernet channel; should prices be varied across channels to reflect costs or customer expectations; should customer choice of channel option be actively managed? Conflict Resolution : Conflicts may occur between channel members, and in multichanneling Between chan. nels, because of differences in objective, priorities, and corporate cultures: Looking ats proposed channel relationship by each part ipating organization may identify areas (c incompatible objectives) that are likely to Jead to major conflicts. In such situations, man- agement may decide to seck ‘another channel partner. Effective communications before and after establishing channel relationships can also help to eliminate or reduce conflicts. aera theds are used to resolve actual and potential conflicts. One usefil approach 1 ease channel memnpersde ntdecistors that yall Tee! IDE ORANCALT ‘Another Bibi. 307 nne! hopping” behavior of consumers, to which some retailers are suc-AU The World's largest retallers—Wal-Mari best Buy,)Tesco, Carreloul, a International VERRALL OT STOTT LM LLTon ele hain Aa Feats sous ek ind social responsibility os : r 38 ie.to comply affect Yyalye chain panners,, 7 Metron mote than $500 billiof in aggregate annual sales, are working together to deveh . * a {ede of standards’ called the Clobal Sock), Complance Progteme=a- buses ace8 program for the continuous Improvement of working and environmental conc) ‘In global supply chains. The new code covers bath food and nonfood Production ang focuses on the employment and working conditions of suppliers, and labor abuse, Growing green consumer” pressure on supermarkets to feduce environmental impac Veflectéd in mandates to Supplies to reduce packaging ahd the choice of local and regic Suppliers to reduce the “carbon footprint” of transporting food over long distances, Somme of the words largest clothing and footwear manufacturers are collaberatng 4p Geite 2 scherte where apparel sold global is labeled to show how the items produsiey fit usage impact the environment. Participant inthe ecological labeling intative indian Wal-Mart, JC Penney, Levi Strauss, Nike, Marks & Spencer, Adidas, H&M, and Li & Fung. Microsoft drops suppliers who do not meet the software company’s ‘standards on srehsoxee Givers. Supplies have been told thatthe supplier base has to represent Re peoples of the world: male, female, different ethnicities, diferent cultures, difere, backgrounds, Vendors who fal to heed the request aré being reduced or terminateae Gomanies like Azco, one of the world’s biggest chemicals businesses, and TNT and DSM in the Netherlands, have started to roll out executive bonus schemes linked directly. to meeting sustainability targets The incoming CEO of Coke mandated a proactive company approach to social issues, with a goal of making Coke the “recognized global leader in corporate social respon. silty.” The company has undertaken an audit of labor practices throughout fe ‘sup. Pl chain, launched several water conservation projects, embraced industry guidelines Physical creche 2UgaY, inks in schools, and supported initiatives to encourage Physical exercise among children, tions Neverabe er ard Coke Joins the Bate fr the Brand Corporate Responsiliy Fnancol Tey, Tar RE 22, 2006, 10. onathan Birchall and Elzabeth Rigby, Big Retale's Join Foes non Ear es Fight Poko uses Rrancial Taney January 11,2007, 1, Andrew Tal, “Microsot Drops Supper oes Diversity jane, Borer aaa oat 24-25, 2007 5. M, Goodman, “Asko Fresh Bais for Bone Sonar Toe Hime 27,2010, $3, 9, Peer Mars, “Big Names in Clothing Ezo-abel Plan” ancl tines Maree, 2011, 26, Channels Distribution channels available in international markets are not totally different from the channels in a country like the United States. Uniqueness is less a fimetion ot structural alternatives andlimore related"to the vast range of operational and maken Variables that influence’ channel strategy® Several channel of distribution alternatives are shown in Exhibit 10.7. The arrows show the many possible channel networks linking producers, middlemen, and end-users, “Phitip’R. Caleor@ and John Graham, Asin, 2006), Imernaional Murketing, 13" cd: (Burt Ridge. IL: MeGraw HiiChapter 10. Value-Chain Strategy 311 Home country Foreign country Foreign marketer or 5 producer sells to or through Foreign + consumer| : ix Domestic producer |. ‘or marketer sells to or through, Open isiibuion | [Exponer Jimorer] — [Foreion Foreign via domestic egentor retailer wholeseie |» merchant middlemen rT | wholesalers: [Export management _] Sos ie Examining International Distribution Patterns ‘While the basic channel structure (e.g., agents, wholesalers, retailers) is often similar across countries, there are many important differences in distribution patterns among countries. Examining actual distribution patterns indicates the complexity of the international distri- bution task.”” Generalization about distribution practices throughout the world is obviously not possible, Nonetheless, in some cases, competitive advantage may be created by value chain innovation in international markets—consider, for example, Nestlé’s microselling and other initiatives in the Brazil marketplace, described in the GLOBAL APPLICATION. ‘Studying the distribution patterns inthe nation(s) of interest is important in obtaining guide- lines for distribution strategy. Various global trends such as enhanced global communications, globally available news, entertainment and advertising media, the Internet, regional coop- ‘erative arrangements (¢.g., European Union), and transportation networks (¢.g., intermodal services) impact distribution systems in various ways teflecting globalization. Global market turbulence and corporate restructuring create additional influences on distribution strategies and practices. Channel maps for overseas markets can be insightful (see Exhibit 10.4). Global Market Structure Differences Importantly, market structures may be significantly different in global markets. For example, in the food market, notwithstanding the strong position of Wal-Mart and up-market innova- tors like Whole Foods Market and Trader Joe's, many USS. retail chains are.relatively weak and fragmented and lack the scale to bargain with food companies or to produce their own labels. Many have in effect rented out their shelves to food companies such as Heinz. and Kraft. This market structure gives food product manufacturers considerable scope to man- age channels and channel members, for example, in a VMS arrangement. By contrast, in Europe, each country market is relatively small, and retail concentration is extremely high In the United Kingdom, for example, one retailer (Tesco) controls more than 30 percent of 7Catcora and Graham, ib. Z >John Gappen,"Amerien's Time-Warp Supermarkets" Financial Times. June 11,2007, 11.314. Part Four Marker-Driven Program Summary n Development Lights (for around $6) but also runs a business pedaling g ig around $4 a day—more than triple the aver. only sells the it, users get safe, clean lighting at one-tenth entrepreneur not i Small generator that charges the lights (e3rn™ age daily income in rural Rwanda). As @ 80 the cost of kerosene."! Factors Affecting Global Chan The channel strategy analysis and sclecti nnel Selection ‘on process presented in the care can be used al ‘national channel strategy, recognizing that many situa. for developing or cru sons nspecfc counties. The factors affecting he choiee aPtaternational channels include cost, capital requirements, control, coverage, strategic product-market fit, and the likelihood that the middlemen will remain in business over a eersonable time horizon? The political and economic stability of the country is, of Course, ly in the decision to enter the country. Very important, Stability needs to be evaluated earl Taeveasingly. global security considerations have become important factors in choosing the route to market. Global Issues Regarding Multichannel Strategies ent global communications systems highlight the need ‘The impact of the Internet and effici to consider the relationship between domestic channels and global channels. The inter- tational company is automatically multichanneling. Problems may occur when thete are differences between domestic and global channels in prices and product availability: Ifthe ‘cet than overseas, then overseas customers may seck. product is cheaper in the domestic mar! fo access the lower priced product through online sales. Correspondingly, if the product is cheaper through global channels, then domestic buyers may attempt to access the product online from the global channel, or even import the product back into the domestic market if price differences are large enough. It may be very difficult to prevent customers from pursuing these practices. Similar issucs arise if product availability varies between domes- tic and global channels. It is increasingly challenging to differentiate the value offerings between domestic and global channcls, and there may be considerable risks to custemer relationships in maintaining this charinel strategy. “The value chain consists of the organizations, systems, and processes that add to customer value in moving products to end-users. A strategic value-chain perspective aims to align a company’s value chain with changing customer and competitive requirements. The core of the value chain is the channel of distribution. A strong channel network is an important way to gain competitive advantage. The choice between company disttibution to end-users ” and the use of intermediaries is guided by end-user needs and characteristics, product char- acteristics, and financial and control considerations. : Manufacturers select the type of channél to be used, determine distribution intensity, design the channel configuration, and manage various aspects of channel operations. These channels are either conventional or vertical marketing systems (VMSs). The VMS, the dominant channel for consumer products, is increasing in’importance for business and industrial products. Ina VMS, one firm owns all organizations in the channel, a contractual arrangement exists between organizations, one channel member is in charge of channel “Brian Dumalne, “Lighting Up Aftiea,” Fortune, July 5,2010, 14. *cxcore and Gra id Stephen Fides, "Appetite for Risk Drives Industy." Financial Times Special Report: Corporate Secu, June 27, 2007, 1Questions for Review and Discussion Internet Applications Chapter 10. islue-Chuin Strategy 315 administration, or ration, or members develop collaborative ‘i i ce ive relationshi jigital channels are of Sowing importance in Many sectors, Res eciae Channel decisions also include deciding on intensity oF distribution and the channel configuration = = gues the rp oe UMTS Raley aelis when tansaatient decides whcinos to tear ates the channel shee gon 2 Patticipant role, Strategic analysis identifes and evali- target, channel fearnatives. Several factors are evaluated, including access to the market faints, The cneion’s (0 be performed, financial considerations, and legal and control Constraints. The channel strategy adoy a strategies. Channel modi anne, S00Pted establishes guidelines for price and promotion ication or mi tegies mandate view of chanvel Sra migration strategies mandate regular review of chanvel International channels of di hann istribution may be United States and other di : ilar in structure to those found in the the channels of dine eeveloped counties. Nevertheless, important variations exist in Fitton, “ifferent countries because ofthe stage of economic develapment, govert tment influence, and industry practices, The Internet has a dramatic impact on the global- ization of channels of distribution Tehe Inte 1990s several artnes started selling tickets using the Internet. Discuss the implica- tions of this method of distrib ution for travel agencies. 2. Distribution analysts dicate that costs for supermarkets equal about 98 percent of sales. What influence does this high break-even level have on supermarkets’ cliversification into telis, cheese shops, seafood shops, and flowers? 3. Why do some larg, financially strong manufacturers choose nolo own their dealers but instead establish contractual relationships with them? 4. What ars the advantages and limitations of the use of multiple channels of distribution by a manufacturer? 5 Discuss some likely trends inthe distribution of automobile inthe 21 century, including the ShiN away from exclusive dstibution arrangements 6. In the tate 1990s Radio Shack initiated co-branding strategies with Compaq Computer and SPRINT Discuss the logic of this strategy, pointing ost it strengths and shoticomings 7. Identify and discuss some ofthe factors that should inerease the trend towaed collaborative rel tionships in vertical marketing systems. 8. Why might a manufacturer chocse to entera conventional channel of dstibution? 9. Discuss what is meant by channel migraijon and the issues that manufacturer aces in dealing with migration issues. 10. ‘Suppose the management of raw material supplier is interested in performing a financial analy- sis of a distribution channel comprised of manufacturers, distributors, and rel approach for doing the analysis. lers. Outline an 11. Discuss some of the important strategic issues facing a drug manufacturer in deciding whether to distribute veterinary prescriptions and over-the-counter products through veterinarians or distributors, 12. Consider the differences in rotail concentration between the United States anc Europe. How do those differences impact on manufacturers’ channel strategies? 'A: Beamine the Web siles of Aveda (waved. com) and The Body Shop (wrwbodyshop com) Compare and contrast the distribution networks ofthese two retailers, Bi. Gort the site ofthe Agen (wager con) and review,the public pages describing the: Tistory,mactibetship,ard/opets gh OF ti inicmotfonal onlin’ exchange for rouller: Coaete bining the earlier online exchanges the’Global Exchange Neiwork and the Worldwide Retail