Chapter Ten

Value Chain Strategy

Contents:
Value chain process /distribution process - Definition
Value chain Model and its impact on Distribution process
Functioning/Strategic Role of Value Chain Members
Coordination among Value Chain Members in a Distribution
Channel – Conventional; Vertical and Horizontal
Distribution Intensity – Intensive, Selective and Exclusive
Value chain process for B2C context
Three Distribution Alternatives for B2C Context – Direct; Indirect
and Both
Popularity of Indirect over Direct Distribution
Value Chain Process for B2B context – Freight Forwarder
Contribution of Freight Forwarder in B2B Context
Managing international Channel - EMC
 1. Defining the Value Chain
The Value Chain is a tool for identifying ways to create more customer value because
every firm is a combination of primary and support activities performed to design,
produce, market, deliver, and support its product.
- To provide superior value to the customers, each value stick should tidily bundled
together:
1. Primary activities
2. Support activities
 Primary activities:
1. Bringing materials into business
2. Converting inputs into outputs
3. Shipping out final products
4. Marketing and Sales
5. Servicing
 Support activities:
1. Procurement
2. Technology Development
3. Human Resource Management
4. Firm Infrastructure ----General Management, Planning, Finance,
Accounting, Legal and Government Affairs
Marketing Channel/ Distribution Network

A Marketing Channel or Distribution

Channel system is the particular set of
interdependent organizations involved in
the process of making a product or service
available for use or consumption for end
users or customers.
 Consumer Marketing Channels
Zero-level Channel (Direct
Marketing Channel)
Channel 1 Manufacture Consu
r mer
Indirect Marketing
Channel
Channel 2 Retail Consu
Manufacturer
er mer

Channel 3 Wholesal Retail Consu

Manufacturer
er er mer

Channel 4 Wholesal Jobbe Retail Consu

Manufacturer
er r er mer
 Marketing Channels

Manufacturers/producers

Agents/brokers

Wholesalers/
distributors

Retailers Retailers

Consumers and organizational end users

 Strategic Role/Functions of Distribution
Distribution functions
- buying and selling activities
- product assembly
- transportation
- financing
- processing and storage
- advertising and sales promotion
- pricing
- reduction of risk
- personal selling
- communications
- servicing and repairs

Channels for Services

Direct distribution by manufacturers
 The Marketing System

Manufacturers and producers

Facilitating
Marketing intermediaries
organizations
Agriculture and
raw materials Retailers
Financial
suppliers Agents-brokers
Transportation
Wholesalers-distributors
Advertising
Other

End users

Consumer
Industrial-institutional
 Distribution by Manufacturers

 Manufacturers have three distribution

alternatives:

– Direct distribution is necessary

– Use of intermediaries is necessary

– Both direct and intermediary contact are feasible

Factors Favoring Direct Distribution by Manufacturer

Opportunity
for
Profit margins competitive
adequate to support advantage
Rapidly changing
distribution
market environment
organization

Complete line Early stages of

of products product life cycle
Distribution
by the
Bulk manufacturer Complex product
Purchase application
Extensive
Small number of
purchasing
geographically
concentrated process
Supporting services are
buyers
required
 2. Channel of Distribution Strategy

Types of distribution
channel

Distribution intensity

Selecting the
channel strategy

Strategies at
different
channel levels
 Steps in Channel Strategy Selection

(1) Type of channel arrangement

Conventional Vertically coordinated

Ownership Contractual Administered

(2) Desired intensity of distribution

Intensive Selective Exclusive

(3) Selection of a channel configuration

Number of Intermediaries/ Distribution Channel
Companies must decide on the number of intermediaries to use at each channel
level. Three strategies are available:
Exclusive Distribution
Selective Distribution
Intensive Distribution

Exclusive Distribution
Companies severely limiting the number of intermediaries. It’s appropriate when the
producer wants to maintain control over the service level and outputs offered by the
resellers, and it often includes exclusive dealing arrangements. By granting
exclusive distribution, the producer hopes to obtain more dedicated and
knowledgeable selling.

Example: BMW, Mercedes Car, Pizza Hut, KFC, etc. having only have few outlets
in Bangladesh serving a very little segment with few outlets.
 Distribution Intensity Illustrations
Trading Area

A B C

++
+++
+
+ ++++
+ +
+ ++++
++
+ ++++
+ ++
+++

Exclusive Selective Intensive

distribution distribution distribution
 Selective Distribution
Companies rely on more than a few but less than all of the intermediaries willing
to carry a particular product. It makes sense for established companies and for
new companies seeking distributors. Home appliances, Lifestyle product or
Furniture manufacturer use that type of distribution by appointing their distributor
in different locations.

Example: Sony, Samsung, Bata, Otobi,

Otobi or Hatil furniture company, etc. can
support moderate market by such indirect distribution system.

Intensive Distribution
The manufacturer places the goods or services in as many outlets as
possible. This strategy is generally used for items especially FMCG
products such as snack foods, soft drinks, news papers, candies,
products the consumer seeks to buy frequently or in a variety of
locations.

Example: Unilever Bangladesh, Square, ACI products and other FMCG

products are mass distributed.
Selecting the Channel Strategy
Design stages
Decision criteria
Identification Intensity of distribution
of channel Access to end users
alternatives
Prevailing distribution practices
Necessary activities and functions

Revenue-cost analysis
Evaluation and Time horizon for development
selection of
Control considerations
channel(s) to
be used Legal constraints
Channel availability
Select the channel

Market coverage
Selection
Capabilities
of channel Intermediary’s needs
participants Functions provided
Availability
 Illustrative Channel Strategy Evaluation
Evaluation Manufacturer’s Company
Criteria Representatives Salesforce

Market access Rapid 1 to 3 year development

Sales forecast (2 years) $10 million $20 million

Forecast accuracy High Medium to low

Estimated costs $1 million* $2.4 million**

Selling Expense (cost/sales) 10% 12%

Flexibility Good Fair

Control Limited Good

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

representatives.

** Includes $100,000 for 10 salespeople, plus management time.

Strategies at Different Channel Levels

 A push strategy uses the manufacturer’s sales

force, trade promotion money, and other
means to induce intermediaries to carry,
promote, and sell the product to end users.
 A pull strategy uses advertising, promotion, and
other forms of communication to persuade
consumers to demand the product from
intermediaries.
Channels and Marketing Decisions Strategy
3. Managing the Channel
Channel leadership

Management structure and systems

Physical distribution management

Channel relationships

Conflict resolution

Channel performance

Legal and ethical considerations

4. International Channel of Distribution Alternatives
Home country Foreign country
The foreign marketer or
producer sells to or through

Domestic Open Exporter Importe Foreign Foreig Foreign

producer or distributio r agent or n consumer
marketer sells n merchant retaile
via wholesalers r
to or through
domestic
wholesale
middleme
n

Export management company

or company sales force
 5. Strategic Value Chain Management
 Supply chain management
– Efficient Consumer Response program
– Lean supply chains
– Agile supply chains
 Impact of supply chain strategy on marketing
 E-business models
 Retailer and distributor power
 Strategic flexibility and change
 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
End of Chapter