Distribution Channel Strategy

1. Distribution Channel Strategy BA 266:2Pete Bucklin Office: F498; Tel: (510) 642-4872 E-mail: pbucklin@haas.berkeley.edu Website: haas.berkeley.edu\~pbucklin\BA266Spring 2000Haas School of BusinessUniversity of California, Berkeley

2. Today's Menu • Some Basic Channel Concepts • The Course in Brief • Design of the End-User Interface

3. Some Basic Channel Concepts • The concept of a channel • The concept of value added • The concept of channel strategy • The process of channel design • The process of channel management

4. What is a Channel? • A channel comprises the set of institutions and related activities that bring products/services to the end user from their manufacturing source • From the perspective of any individual firm, the channel comprises the means by which its end users are served; its goods and service requirements are met

5. Arrow Channel Structure Component Suppliers Services provided Payments, data Distributors End Users

6. Arrow Channel with Express Component Suppliers Services provided Payments, data Distributors E-Market End Users

7. Value Added in the Channel • Value added represents the benefits provided by one channel member to another • Basic services may be roughly divided into two parts • Logistic – nearby inventories (stores), fast delivery • Informational – product specs, suitability, availability • Additional value added services may include manufacturing, consulting, credit, sub-system management (supply chain, ordering)

8. Delivering Efficient Value • Determining value added and related pricing characterizes the firm’s channel model • Stern admonishes that decisions about the degree of value added must derive from an understanding of end user needs • Value added must be balanced against its cost • Building a channel and its VA characteristic is central to being market driven

9. Channel Components • The Commercial Channel: The network of organizations cooperating to provide value added services to end-users • Commercial channels are distinguished by their number, type and juxtaposition of members and degree of closure • Channel length refers to the number of levels in the channel • Juxtaposition is their geographical relationship to each other • Closure reflects the degree of channel membership control • The End-User: an active channel member, consumer • Performs channel functions such as purchasing, transport, storage • Incurs significant real and opportunity costs • May integrate backward in the form of consumer cooperatives • Ancillary Channel Members: horizontal service providers

10. Channel Strategy • Channel strategy represents the application of channel design and governance to the creation of a unique differential advantage in the market • The design would provide a unique combination of efficient value added • Governance calls for the coordination of all channel activities affecting the delivery of value added by the provision of a mix of incentives and managerial controls • Channel strategy may be expressed in a single or multiple distribution systems

11. Channel Components Component Suppliers Commercial Channel Members Distributors E-Market End Users Services provided Payments, data

12. Hosiery Mill Chain Warehouse The Story of L’eggs • Historically, better hosiery sold exclusively through centrally located department • Importance of personal choice • Key role of assortments • By the late 1960s, women were entering the work force in great numbers • Demand for hosiery expanded • Intensive use caused runs, requiring frequent repurchase Department Store in Central City Market Area

13. New Channel Strategy Hosiery Mill • Need for a more convenient location. Ideally the supermarket? • Traditional women’s hosiery could not be sold within a supermarket • Too many sizes • Fragile packaging • Not suitable for self service • Hane's solution: L'eggs • One-size-fits all panty hose (wellalmost) • Extensive promotion of brand name • Imaginative egg shaped packaging • Special store-door delivery system • Intensive distribution through supermarkets Company Warehouse

14. L'eggs Supply Chain • Special racks • Initially part of a self-standing display • Later designed to fit into traditional shelves • Specially marked delivery trucks • Delivered goods through the "front door: • Sales persons restocked, rotated, collected data • Sold on consignment to retailer • Supply channel removed risk, retail handling problems

15. Effect of the L’eggs Innovation • Rapid market roll-out in early 1970s • Within 9 months was in markets representing 3.5% of the U.S. potential • By 1971, the product was distributed in 33% of all supermarkets • By 1972, distribution neared 100% • Reduced prices: • Lower channel costs • Reliance on pull channel strategy • Became best selling hosiery in the U.S.

16. Arrow’s Channel Strategy • To provide a set of value added services in logistics and information that would cause customers to become dependant upon its support and help • To enable close ties with suppliers to provide price protection, return merchandise opportunities, and price discrimination • Electronic component supplier strategy?

17. Electronic Component Supplier Channel Strategy • To shift the great proportion of channel value added responsibility to wholesalers • To maintain control over price to major customers through the wholesaler to facilitate price discrimination • To motivate wholesalers to carry and promote by: • Controlling price competition among franchised wholesalers to encourage them to win new product designs • Motivating them to carry sufficient inventory to meet demand fluctuations

18. Process of Channel Design • Identify end user target to be served • Identify value added services desired • Identify existing channels serving the target, service levels provided, prices • Identify most efficient channel system providing desired service levels • Identify gaps in services/provided • Identify potential alternative structures to provide services: evaluate costs, ability to deliver value

19. Channel Designs for Hosiery Traditional Alternate Mill Mill Wholesaler Warehouse Immediate conveyance of title Consignment Dept. Store Supermarket End-Users

20. Some Design Challenges • Planning end-user channel services • Segmentation must not stop with the the product, but extends to channel services • Variations in product assortment, availability, location, information • Changing consumer characteristics continuously obsoletes existing designs, creates opportunities for new entry • Adapting existing channel designs to new demands creates enormous conflict within and between channel members

21. Drivers of Channel Evolution • Change in consumer needs: income, brand loyalty, product assortments, product life cycle • Rate of innovation in channel activities such as logistical and information systems • Ease of entry by outside channel members as facilitated by low entry barriers, absence of political restrictions, monopoly, and vertical controls • Introduction of new products with different end user service needs

22. Process of Channel Management • Channel management refers to the extent to which all members of the commercial channel are centrally governed • Some channels are tightly governed by vertical integration • Other channels reflect an autonomous membership coordinated by repeated transactional negotiations • Most channels are mix between integrated and autonomy

23. An Open ChannelThe Dutch Flower Auction Grower Grower Grower Flower Auction Chain Store (DC) Wholesaler Local Retailers Chain Retailer Small Retailers

24. A Closed ChannelAlbert Heijn & Bakkar-Fatels Integrated Production Assembly Transport of Fresh Produce B-F HRS: Heijn Retail Store (food) DC: Distribution Center B-F: Bakkar-Fatels Produce Supplier Auction Integrated linkage Exclusive long-term contract Non-produce Heijn DC HRS HRS HRS HRS HRS

25. Some Governance Challenges • Changes in channel structure that call for change in operations • Increasing degree of market segmentation that can only be served by different channels • Inability to maintain product control in a closed system • The need to motivate without engendering conflict among channel members

26. The Course • Subjects • The end-user interface (1 day) • Channel design (6 days) • Channel governance (6 days) • Class Operation • Class discussion of cases, articles • Theory (readings and lectures) • Group project • Student Performance • Contribution to class discussion 40% • Group project 35% • Open book final or research paper 30%

27. Channel Design • Determining the structure of the end-user interface (EUI) • Study EUI design via questions about automobile retailers • Understand the key EUI-EU trade-off • Determining the structure of the commercial channel • Examine logistics and just-in-time systems in Europe and US • Identify information requirements in the channel looking at: • An industrial channel • A company distributing software to a mixed end user market • Egghead’s new web distribution channel

28. Channel Governance • Managing channels by means of incentives through channel closure and exclusivity • The supermarket case • Selective distribution in cosmetics • Motivating channel members by means of contract • The use of exclusive distribution contracts • The use of franchise contracts • Vertical integration • Managing conflict among channel members caused by multiple channels and gray markets

29. Class Discussion • Leadoff students should propose a solution along with reasons supporting this--provide strong supporting reasons • Debate several options • Discuss the key issues controlling channel design, governance • Argue the facts and interpretation of the answers to the questions posed by the issues • Assess the relative importance of each issue • Reach firm conclusion on solution • Draw generalizations as to what has been learned; examine non-managerial dimensions

30. Components of Case Analysis • Problem identification • Not simply to increase profits • Identify barriers that prevent firm from realizing goals • Alternatives • Strategic options designed to remove the barriers • Options should provide firm with a real choice • Issues • Factors affecting the viability of one or more options • Take form of questions requiring the analysis of case data • Solution • Determination which of the options will be most suitable for the company, build upon issues • Provide reasons why choice is better than other options

31. Designing The EUI • Some EUI strategies • Identifying end user value added services and intensity of need • Identifying the parameters of the EUI service tradeoff • Defining the EUI channel service signature

32. Retail Channels and End User Service Models • Department store services • Broad assortments • Opportunity to view colors • Personal assistance • Supermarkets service • Easier access • Lower margins from self-service • Box store services • Limited access • Limited assortments, large package sizes

33. Premier Industrial Corp. • Industrial market component distributor • Broad assortment of “hard-to-find” parts • In stock policy for all listed skus • Immediate end-user telephone access; off-hour availability • Twenty-four hour shipment, 95% fill rate • Regional locations • Higher prices

34. Key Definers of End User Need • Level/need for product knowledge • The importance of touch, seeing, and trying as means of conveying product quality • Importance of product characteristics to satisfying EU consumption requirements • Predictability of product needs • Ability to afford and manage inventories • Willingness and ability to travel • Sensitivity to price

35. The EUI Trade-off • To provide that level of service that minimizes costs for the EU and the EUI • Service adds value when it reduces the end-user’s costs of acquiring goods • The absence of service raises the EU’s costs • Providing service is expensive for the EUI • An efficient EUI balances all service outputs against the incremental value to the EU

36. EU Accessibility Trade-off Costs/Transaction Total System Costs Equilibrium End-user Costs Commercial Channel Costs Number of EUI in Market

37. Assortment Trade-offs And Customer Buying Behavior Greater Breadth Product Feature Shoppers One Stop Time Savers Price Comes First Convenience Buyers Low Number of Categories: Variety Low

38. End of the Century Retailers Choice/Price Greater Breadth One Stop Shoppers Specialty Shops Department Stores Category Killer Super Centers Price/Choice Supermarkets Wholesale Clubs Low Greater Variety Low

39. EUI Service Design Clusters • NW Cluster: Depth, little breadth--related to fashion, personal (information) service • NE Cluster: Both depth and breadth, Large, general merchandise stores such as Wal-mart • SE Cluster: Breadth, little depth--Large, variety stores, low prices, services: Costco • SW Cluster: Little breadth or depth, convenience, high margins:Seven Eleven Stores

40. Channel Service Signature End-user Interface Services Ease of Access Information Availability Assortment Ambiance Financing Assembly End-user

41. The Next Class • Designing the automobile end user interface • How does design affect post-purchase service? • What is the importance of broad inventory to the end-user? of service? • How is this decision affected by product delivery versus product service needs of the end-user? • Are there economies of scale in retail operation? • How many retail points are optimal? • Come prepared with your design for Ford • Meet guest consultant, Steve Weeks of Daimler-Chrysler

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