Chapter 10

Value Chain
Strategy

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
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* Value Chain Strategy

* Strategic role of value chain

* Channel strategy
* Managing the channel
* International channels

1-2
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* Dell’s dilemma
* Business built around powerful direct
business model
* Direct model poor fit with customer
preferences in new target markets and weak
on service
* Dell is braodening business model
* Targeting computer re-sellers
* Global retail strategy (including Wal-Mart, Dell-
branded stores, kiosks in malls)
* Redesigning value chain is critical strategic
move

1-3
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* Strategic role of value chain (1)
Distribution functions
* Buying and selling
* Assembly
* Transportation
* Financing
* Processing and storage
* Advertising and sales promotion
* Pricing
* Reduction of risk
* Personal selling
* Communications
* Servicing and repairs

1-4
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* Value chain structures - consumer products
Consumer Products

Producers

Supply Chains

Sales
Agents

Direct Wholesalers Wholesalers

Channel

Retailers Retailers Retailers

Consumers

1-5
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* Value chain structures - organizational products
Organizational Products

Producers

Supply Chains

Sales Sales
Agents Agents

Direct Distributors Distributors Distributors

Channel

Re-sellers

Organizational Customers

1-6
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* Strategic role of value chain (2)
* Channels for services
* Direct distribution by manufacturers
* Buyer considerations
* Competitive considerations
* Product characteristics
* Financial and control considerations

1-7
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* Factors Favoring Distribution by Manufacturer
Profit margins Opportunity for
adequate to support competitive
Rapidly changing
distribution advantage
market environment
organization
Complete line Early stages of
of products Distribution product life cycle
by the
manufacturer
Purchases are Complex product
large and application
infrequent
Extensive
Small number of
purchasing
geographically Supporting
process
concentrated services are
buyers required
1-8
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* Branded manufacturers enter retail
* Nespresso (Nestle) “coffee boutiques” to
establish lifestyle brand
* Heineken branded beer bars in airports and
retail
* Strategic logic is to avoid control of third-
party retailers over brand
* Move from selling “A product in a box” to
offering a superior service experience for
the brand

1-9
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* Channel strategy (1)
* Types of channel
* Conventional channel
* Vertical marketing systems
* Ownership VMS
* Contractual VMS
* Administered VMS
* Relationship VMS
* Horizontal marketing systems
* Digital channels
* Product digitization
* Channel digitization

1-10
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* Channel strategy selection

1. Type of distribution channel

Conventional Vertical marketing system Horizontal

marketing system
Administered/
Ownership Contractual Relationship

2. Intensity of distribution

Intensive Selective Exclusive

3. Channel configuration

1-11
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* Channel strategy (2)
* Distribution intensity
* Intensive
* Exclusive
* Selective
* Channel configuration
* End-user considerations
* Product characteristics
* Manufacturer's capabilities and resources
* Required functions
* Availability and skills of intermediaries

1-12
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* Channel strategy (3)
* Channel maps
* Selecting the channel strategy
* Market access
* Value-added competencies
* Financial considerations
* Flexibility and control considerations
* Channel strategy evaluation

1-13
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* Illustrative channel map for heating units

Production = Consumption =
100,000 units Direct sales = 10,000 units
100,000 units
Commercial
Construction Construction
84,000 units Independent 42,000 units 75,000 units Companies
Distributors Sub-
Contractors (85,000 units)
42,000 units 7,000
Production Small 40,000 units
Of Central Hardware units
Heating Retailers 2,000
Boilers units
Large
5,000 units 5,000 units
Hardware Domestic
Retailers Customers
Direct sales = 1,000 units (15,000 units)

1-14
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* Channel strategy (4)
* Changing channel strategy
* Channel strategy modification
* Channel migration
* Channel audit

1-15
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* Illustrative Channel Strategy Evaluation
Evaluation Manufacturer’s Company
Criteria Representatives Salesforce

Market access Rapid 1 to 3 year

development

Value-added competencies Medium High

Sales forecast (2 years) $20 million $30 million

Forecast accuracy High Medium to low

Estimated costs $2 million* $3.6 million**

Selling Expense (cost/sales) 10% 12%

Flexibility Good Limited

Control Limited Good

* Includes 8% commission plus management time for recruiting and training

representatives.

** Includes $150,000 for 10 salespeople, plus management time.

1-16
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* Managing the Channel (1)
* Channel leadership
* Management structure and systems
* Physical distribution management
* Supply chain strategy
* The impact of supply chain management
on marketing
* E-procurement

1-17
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* Efficient Consumer Response
 Traditional channel problems
* Forward buying and diverting
* Excessive inventories
* Damages and unsaleable goods
* Complex deals and deductions
* Too many promotions and coupons
* Too many new products
 Efficient Consumer Response
* Category management
* “Value” pricing replaces promotions
* Continuous replenishment and cross-docking
* Electronic data interchange
* New performance measures
* New organizational processes and structures
* Internet-based network for supplier-buyer trading

1-18
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* Lean Supply Chain Elements
1. Definition of Value

2. Identification of Value Streams and

Removal of Muda (Waste)

3. Organizing Around Flow, Instead

of “Batch and Queue”

4. Responding to Pull Through

the Supply Chain

5. The Pursuit of Perfection

1-19
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* Marketing/supply chain relationship
* Focus on real drivers of customer
value not just technical
* Do not create inflexibility and inability
to respond to change
* Protect brands and competitive
strength over short-term cost savings
* Do not confuse supply chain strategy
with competitive advantage

1-20
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* Managing the channel (2)
* Channel relationships
* Degree of collaboration
* Commitment and trust among channel members
* Power and dependence
* Channel globalization
* Multichanneling
* Conflict resolution
* Channel performance
* Legal and ethical considerations

1-21
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* Channel metrics
Performance Possible Measures Applicable Product and
Objective Channel Level

PRODUCT AVAILABILITY

Coverage of relevant Percent of effective Consumer products at

retailers distribution retail level

In-store positioning Percent of shelf Consumer products at

facings or display retail level
space gained
by product,
weighted by store
importance

Coverage of Frequency of sales Industrial products;

geographic markets calls by customer consumer goods at
type; average wholesale level
delivery time

1-22
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* Channel metrics
Performance Possible Measures Applicable Product and
Objective Channel Level

PROMOTIONAL EFFORT

Effective point-of- Percent of stores Consumer products

purchase (POP) using special at retail level
promotion displays and POP
materials, weighted
by importance of store

Effective personal Percent of Industrial products;

selling support salespeople’s time consumer durables at all
devoted to product; channel levels; consumer
number of salespeople convenience goods at
receiving training on wholesale level
product’s characteristics
and applications

1-23
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* Channel metrics
Performance Possible Measures Applicable Product and
Objective Channel Level

CUSTOMER SERVICE

Installation, Number of service Industrial products,

training and technicians receiving particularly those involving
repair technical training; high technology; consumer
monitoring of durables at retail level
customer complaints

MARKET INFORM,ATION

Monitoring sales Quality and All levels of

trends, inventory timeliness of distribution
levels, competitors’ information
actions obtained

COST-EFFECTIVENESS

Cost of channel Middleman margins All levels of

Functions relative and marketing costs distrbution
To sales volume as percent of sales
1-24
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* Value chain ethics
* Retailers’ Global Social Compliance
Program
* Growing “green consumer” pressure
* B2B suppliers increasingly mandated
to meet customer’s values in
employment practices, environmental
standards, ethical behavior

1-25
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* International channels
* Examining international distribution
patterns
* Factors affecting global channel
selection
* Global issues regarding multichannel
strategies

1-26
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* International Channel of Distribution Alternatives
Home country Foreign country
The foreign marketer or
producer sells to or through

Domestic Open Exporter Importer Foreign Foreign Foreign

producer or distribution agent or retailer consumer
marketer sells via domestic merchant
to or through wholesale wholesalers
middlemen

Export management company

or company
sales force

Source: Philip R. Cateora, International Marketing, 7th ed., Homewood, Ill.: Richard D. Irwin, Inc., 1990, 572. 1-27