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Marketing of High-Technology Products and Innovations Jakki J. Mohr
Chapter 8: Distribution Channels and Supply Chain Management in High-Tech Markets
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Topical Agenda for Ch. 8 Channel Design and Management
Specific Channel Considerations in High-Tech Markets Adding New Channels: The Internet Supply Chain Management © 2000 Jakki Mohr
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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 © 2000 Jakki Mohr
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Distribution Options © 2000 Jakki Mohr
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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 © 2000 Jakki Mohr
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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 © 2000 Jakki Mohr
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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 © 2000 Jakki Mohr
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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 © 2000 Jakki Mohr
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Channel Design and Management
© 2000 Jakki Mohr
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Channel Objectives, Constraints
Base channel design on consideration of: Customer behavior and needs Competitors’ channels Product characteristics © 2000 Jakki Mohr
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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 © 2000 Jakki Mohr
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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 © 2000 Jakki Mohr
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Choice of Type of Intermediary
Resellers: between distributors and end-users Typically local May customize for end-users Distributors Typically national © 2000 Jakki Mohr
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Types of Resellers VARs and VADs Systems Integrators
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 © 2000 Jakki Mohr
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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 Vertical/territorial restrictions © 2000 Jakki Mohr
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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 © 2000 Jakki Mohr
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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 © 2000 Jakki Mohr
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Bilateral Controls Relational norms to work together
Flexibility, mutual sharing of benefits/burdens, information sharing Joint interdependence and commitment Trust © 2000 Jakki Mohr
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Legal Considerations Tying Exclusive Dealing
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 © 2000 Jakki Mohr
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Evaluation of Performance
© 2000 Jakki Mohr
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Channel Considerations in High-Tech Markets
© 2000 Jakki Mohr
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Specific High-Tech Channels Issues
Blurring of Roles Distributors/resellers backward integrating into assembling products Suppliers forward integrating into computer manufacturing © 2000 Jakki Mohr
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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 © 2000 Jakki Mohr
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Specific High-Tech Channels Issues (Cont.)
Evolution of high-tech channels Shown on next slide To “cross the chasm” Direct sales channel useful, but requires volume and predictability of revenues May need VARs and VADs Retail channel useful for mainstream market rather than crossing the chasm Does not create demand nor deliver “whole product” © 2000 Jakki Mohr
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© 2000 Jakki Mohr
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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 © 2000 Jakki Mohr
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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 Selective Distribution Lack of intra-brand competition may invited gray marketers © 2000 Jakki Mohr
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Causes of Gray Markets (Cont.)
Producers perform marketing functions Reduces customer’s risk in buying from unauthorized distributors Incompatible compensation policies Volume quotas © 2000 Jakki Mohr
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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 © 2000 Jakki Mohr
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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 © 2000 Jakki Mohr
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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 © 2000 Jakki Mohr
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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 © 2000 Jakki Mohr
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Contingency Model © 2000 Jakki Mohr
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Matching Tasks to Channels, By Segment
© 2000 Jakki Mohr
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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 © 2000 Jakki Mohr
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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 © 2000 Jakki Mohr
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What if a Company Downplays the Web to Avoid Conflict?
Invites competition, which threatens long-term survival Inconsistent with “creative destruction” © 2000 Jakki Mohr
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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 © 2000 Jakki Mohr
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Supply Chain Management
Minimize inventory as work-in-progress Work on build-to-order model Reduce cycle time Electronic links to customers © 2000 Jakki Mohr
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Matching Type of Innovation to Supply Chain Functions
© 2000 Jakki Mohr
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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 where Focus on responsiveness (speed and flexibility) Consistent with trends to channel assembly © 2000 Jakki Mohr
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Trends in Supply Chain Management
Vertical markets on the Internet Hubs used to connect suppliers to their manufacturing customers Often owned by cybermediaries Supply chain management software Bring data from manufacturing, inventory, and suppliers to integrate decision making © 2000 Jakki Mohr
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