Marketing of High-Technology Products and Innovations

1. Marketing of High-Technology Products and Innovations Distribution Channels in High-Tech Markets

2. Topical Agenda • Channel Design and Management • Specific Channel Considerations in High-Tech Markets • Adding New Channels: The Internet

3. Distribution Channels • Comprised of the various firms and players in the flow of product from producer to consumer. • Manufacturers must manage flow of product • Mftr must manage relationships between firms • Distribution tasks include; • Logistics and physical distribution functions • Design and management of the channel

4. Distribution Options

5. Some Global Concerns • Firms at different stages of the channel: • May have conflicting goals and objectives • Often don’t think in terms of joint problem solving

6. Overarching Concerns • Goal: Manage all functions to provide value to end customer • Meet customer needs in most effective/efficient mode possible • Functions include: • Providing assortments (product amount/variety) • Providing service and facilitating functions • Communicating with end-users

7. Overarching Concerns • Effective channels: • Identify redundancies that lead to inefficiency and conflict • Develop relationships and alliances • Work toward cost efficiency and customer satisfaction • Rely on technology solutions • Use channel members as partners

8. Complexities in Managing High-Tech Channels • High value of products • Pressure to minimize inventory in channel • Rapid pace of market evolution • Price pressures • Need to maintain sales/service support • Problems with pirating • Complexities with the Internet

9. Channel Design and Management

10. Channel Objectives, Constraints • Base channel design on consideration of: • Customer behavior and needs • Competitors’ channels • Product characteristics

11. Choice of Channel Structure • Direct: Manufacturer sells directly to end-users • Own sales force • Internet • Catalogs, 800#, etc. • Indirect: Mftr. uses intermediaries to market, sell, deliver product to end-users • Hybrid channel: Uses both direct + indirect

12. Considerations in Choice of Channel Structure • Hybrid channel invites complexities— • As more firms compete for customers, conflict increases • Indirect channels subject to less control • Direct channels may not be cheaper • Eliminate intermediary, but not the functions

13. Choice of Type of Intermediary • Resellers: between distributors and end-users • Typically local • May customize for end-users • Distributors • Typically national

14. Types of Resellers • VARs and VADs • Purchase components from different manufacturers, customize for various vertical markets • Systems Integrators • Manage larger projects • In-bound (has a store-front for walk-in traffic) versus Out-bound (dealer sales force calls on customers) • Traditional intermediaries • Mass merchants, small dealers, franchisees

15. Penetration/Coverage: # of Intermediaries • Coverage vs. Intra-brand competition • Price competition may damage mftr.’s reputation • Dealers make lower margin, lowering incentive for service and support

16. Channel Management • Recruit/select channel members • Rely on trade shows, targeted direct mail, publicity, personal selling • Control and Coordination to manage, guide, and monitor reseller activities • Legal Issues

17. More on Control and Coordination Mechanisms • Authoritative controls via • Ownership • Formal designation of decision making (franchising) • Power • Bilateral controls focused on mutual interest • See next slide • Legal controls

18. Bilateral Controls • Relational norms to work together • Flexibility, mutual sharing of benefits/burdens, information sharing • Joint interdependence and commitment • Trust

19. Legal Considerations • Tying • Sale of popular product linked to second product • Ex: Microsoft case partially based on tying of operating system to Internet browser • Found to be anticompetitive • Bundled rebates • Exclusive Dealing • Dealer can carry only one mftr.’s product • Designed to ensure incentive for service, but antitrust issues if access to competition restricted

20. Evaluation of Performance

21. Channel Considerations in High-Tech Markets

22. Specific High-Tech Channels Issues • Blurring of Roles • Distributors/resellers backward integrating into assembling products • Suppliers forward integrating into computer manufacturing

23. Specific High-Tech Channels Issues (Cont.) • New strategies to increase value of indirect channels • Channel assembly • Customization, speed • Based on build-to-order model • Co-location • Distributor’s employees work from vendor’s site • Customization • Shift to services

24. Specific High-Tech Channels Issues (Cont.) • Evolution of high-tech channels • Shown on next slide

26. Specific High-Tech Channels Issues (Cont.) • Gray Markets: diversion of goods to unauthorized distributors, sold at discounted prices • Causes confusion and channel conflict • Loss of service incentive with legitimate members • Intra-brand competition

27. Causes of Gray Markets • Pricing policies with large volume discounts • Differential in international exchange rates • “Parallel importing” • Cost differences between different types of resellers • Free-riding of discount outlets on full-service outlets • Producers perform marketing functions may reduce customer’s risk in buying from unauthorized distributors • Selective Distribution • Lack of intra-brand competition may invited gray marketers • Incompatible compensation policies • Volume quotas

28. Solutions to Gray Markets • Track source of units and cut off gray market • Signals commitment to legitimate channels • Mitigates price erosion • May be burdensome administratively • One-price policy (no volume discounts) • Increase coverage in the market • Institute consistent performance measures

29. Specific High-Tech Channels Issues (Cont.) • Black Markets: Counterfeit goods/piracy • Especially problematic with unit-one cost structures • Export Restrictions on “dual use” products • Ostensibly to protect U.S. security interests

30. Adding New Channels: The Internet • Hybrid channels: • Conflicts between manufacturer and its dealers pursuing same customers • “Co-opetition” • Options: • Avoid the Web (and conflict) • Go to the Web (invite conflict and even mutiny) • “disintermediate” • “Click and Brick” model

31. Managing Hybrid Channels • Objectives: • Increase coverage while lowering costs • Steps: • Identify customer target segments • Delineate tasks/functions needed by segments • Allocate most effective/efficiency channel to the tasks on a by-segment basis

32. Contingency Model

33. Matching Tasks to Channels, By Segment

34. Predicting Effects of “Dis-intermediation” • Does the Web channel add a new value proposition for end-users? • Reach new customers • Less likely to cannibalize existing channels • Does the Web merely create distribution efficiencies? • Cannibalizes existing sales

35. Transition to the Internet: Avoid Conflict? • Web site disseminates product info only • Web generates leads which are directed to dealers • Web site sells limited range of merchandise • Web site takes on-line orders from only small customers or remote geographic areas • Sell on Web with little fanfare

36. What if a Company Downplays the Web to Avoid Conflict? • Invites competition, which threatens long-term survival • Inconsistent with “creative destruction”

37. Moving Full-Steam to the Internet • Assess magnitude of conflict • Establish boundaries and guidelines for channels and customers • May want to keep Web prices aligned with traditional channels • May want to compensate dealers for sales in their territories • Improve information between mftr. and resellers

38. Supply Chain Management • Minimize inventory as work-in-progress • Work on build-to-order model • Reduce cycle time • Electronic links to customers

39. Implications of Contingency Model for Supply Chain Management • For incremental innovations: • Customer needs are known • Focus on managing physical functions and close coordination to gain cost efficiencies • For breakthrough innovations • Must read uncertain market signals, knowing what inventory is required • Focus on matching what customers want by providing variety of products and responsiveness (speed and flexibility) • Consistent with trends to channel assembly

40. Matching Type of Innovation to Supply Chain Functions