Chapter 10
Analyzing the
Value Chain:
Distribution
Channels
Overview
• Distribution as a competitive strategy
• Distribution channel options
• Creating a distribution strategy
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10-2
Distribution Is Now
a Competitive Strategy
• Mass customization requires a different
distribution strategy
• Rapid pace of markets requires minimizing
products held in inventory
• Low cost distribution (e.g. the internet) is a
powerful tool for value creation
• Disintermediation: reducing the length of
the value chain
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Distribution Trends
• Collapse of the middle
– Bundles and value-added solutions
• Emergence of new customer groups
• Migration within the value chain
• Redefinition of the product/service (e.g.,
Starbucks and coffee)
• Consolidation of industries
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10-4
Distribution Channel Options
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10-5
What Defines an Effective Channel?
• Inventory
• Ownership
• Negotiation
• Gathering of market information
• Financing and payment
• Risk management
• Member power
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10-6
Value Chain Is Basis
for Business Model
• What does the value chain look like?
• What is your role in it?
• Who else is involved?
• Who will pay whom and how much?
• How can we make money?
• What infrastructure must be in place?
• What changes will customers have to make?
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10-7
Blurring of Distinctions
Among Value Chain Members
• CompUSA—build-to-order kiosks
– Not just retailer, but now an assembler
• Intel—entering the computer market?
– Selling complete motherboards
• Hotels in the restaurant business
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10-8
Need for Indirect Channels to
Provide Value for Manufacturers
• Channel assembly
– Manufacturers ship semi-finished products
to distributors
– Build products based on demand
• Co-location
– Distributor’s employees work from vendor
manufacturing site to ship completed products
to resellers
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10-9
Evolution of High Tech Channels
Time
Mass
Merchants
Traditional
Retailers
Direct Sales
to OEMS
Pre-early
Distributors
to grow base
of VARs
Early
Adopter
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Mass market
Mature
Market
10-10
Distribution Channel Design
(Mohr 2001)
• Channel objectives, constraints,
external environment
– Customer needs and buying habits
– Purchase quantity, location, speed
– Competitors
– Product characteristics
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10-11
Design: Choice of Channel Structure
• Direct versus indirect
– Most companies do both
– Hybrid channels have more complex
management issues
– May eliminate intermediary, but not
the function
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10-12
Factors Affecting Choice
• Costs
• Market coverage
• Control of distribution
• Speed and reliability
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10-13
Distribution Strategy:
Traditional Channel
Costs
Sells at $6
Sells at $10
Manufacturer
Sells at $19.95
Distributor
Retailer
Consumer or
End-user
Difference = Overhead + Profit
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10-14
Distribution Strategy:
Direct Channel
Mfg takes on responsibilities
of distributor and retailer
Manufacturer
Sells at $12.99
Customer
Difference = Overhead + Profit
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10-15
Distribution Strategy:
e-Commerce
Sells at $6
Sells at $10
Manufacturer
Sells at $15.95
Distributor
E-tailer
Customer
Difference = Overhead + Profit
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What Do Intermediaries Do?
• Aggregate heterogeneous goods into a
line of goods
• Break bulk
• Provide customer/market information to
the producer/manufacturer
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10-17
Screening an Intermediary
• Check current listing of products
• Does the intermediary handle your competitors?
• Check sales volume—consistent level of growth
• Check for sufficient warehouse space and
up-to-date communication technology
• Check the marketing plan
• Can the intermediary handle servicing?
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10-18
Take-Aways
• List what students took away from the
discussion in real time
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10-19