Adv Topic Mrkting 9-9

V MARKETING STRATEGY: CHANNELS OF DISTRIBUTION

Growing Importance of Marketing Channels Strategic Channel Management Marketing Channels and Sustainable Competitive Advantage Supply Chain Management Strategic Alliances, Partnerships, and Networks The Internet and Electronic Marketing Channels

What is different about the Marketing Mix model as we close the 1990’s and move into the next millennium?

Over the past three decades, the overwhelming emphasis in the Marketing Mix has been on: Product Strategy with Pricing Strategy and Promotional Strategy also being stressed.

BUT…

Marketing Channel Strategy

(Place); the fourth “P” in the Marketing Mix has been largely neglected

But this is changing....

Marketing Channel Strategy is Growing in Importance. Why?

Five Reasons 1)

2)

3) 4)

5)

Search for sustainable competitive advantage Growing power of retailers in marketing channels The need to reduce distribution costs The increased role and power of technology The new stress on growth

I The Search for Sustainable Competitive Advantage

Sustainable Competitive Advantage:

A competitive advantage that cannot be quickly and easily copied by competitors

A sustainable competitive advantage is becoming more difficult to attain through: Product Strategy - rapid technology transfer enables competitors to quickly produce similar products Pricing Strategy - global economy allows competitors to find low cost production to match prices Promotion Strategy - high cost, clutter, and short life promotional campaigns limit competitive advantage

Competitive Advantage Based on:

Superior marketing channel strategy is more difficult for competitors to copy because:

Channel Strategy

Channel strategy is long term Requires a channel structure Depends on relationships and people Requires effective interorganizational management

II Growing Power of Retailers in Marketing Channels Retailers

Retailers....

Are growing larger Enjoy substantial channel power Act as buying agents for customers rather than selling agents for suppliers Often operate on low price / low margin model

Operate in saturated markets and fight for market share

Retailers Are Growing Larger

Concentration of Sales Among the Top 50 Retail Firms

77.6%

22.4%

Top 50 Rest

Kinds of Retailers Where Largest Four Firms Account for At Least 50% of Total Sales 44%

21%

45%

56%

79%

Conventional Department Stores

Discount Mass Merchandisers

Variety Stores

36%

42%

31%

69%

Misc. General Merchandisers

64% Athletic Footwear

55%

58%

Toy Stores

Four Largest Firms All Other Firms

Percentage Distribution of Retail Firms and Sales by Size of Firms 83.5 Sales as a percentage of the total Firms as a percentage of the total

62.8

15.6 13.1

7.0 1.8

14.6

1.6

$10,000,000 $5,000,000 to$1,000,000 to Less than or more $9,999,999 $4,999,999 $1,000,000

Enjoy Substantial Channel Power Retailer

Retailers act as buying agents for customers rather than as selling agents for suppliers

Retailers often operate on low price / low margin model

Retailers operate in saturated markets and fight for market share

Power or Dominant Retailers are therefore the “Gatekeepers” into the Consumer Marketplace Thus, Effective Channel Strategy for Dealing with Power Retailers is Crucial

III The Need to Reduce Distribution Costs Distribution Costs

Distribution costs often account for a significant percentage of the final price of products

Sometimes distribution costs are higher than the manufacturing cost or the costs of raw materials and component parts

Some Examples... FAX MACHINE S

PACKAGE DFOODS

30%

41%

19%

30%

33%

53%

40%

26%

SOFTWARE

GAS

15%

25%

28%

MANUFACTURING40%

65% 10%

AUTO S DISTRIBUTIO N

RAW MATERIAL & COMPONENTS

45%

While terms such as “restructuring”, “flattening out”, “downsizing”, and “rightsizing” have usually been mentioned in the context of corporate organizations, they also apply to marketing channels. the latest term....

Disintermediatio

IV Increasing Role and Usefulness of Technology

Technology has the power to greatly enhance the effectiveness and efficiency of marketing channels and could potentially change the entire structure of distribution around the world.

Some Examples... The Internet Hand held / Portable Computers Electronic Data Interchange (EDI) Computer Shopping Telecommunications Interactive Television Shopping Robotics & Automated Warehousing Computerized “Salespeople”

Firms that make effective use of these technologies in their channel strategy can gain a substantial competitive advantage

Competition

V The New Stress on Growth Strategy

In American Business Circles “Growth” has Overtaken “Restructuring” as the #1 Buzzword

Out

In

Reengineering Restructuring Downsizing Flat Organizations Lean and Mean

Growth Expansion New Markets Market Share

QUESTION

In a slow growth economy (1.5% to 2.5%), how can an individual company selling mature products in mature markets grow?

ANSWER Share of Mind = Share of Market

Translation By getting channel members to focus on your products to a greater extent than your competitors, you gain market share and growth

Summary Search For competitive advantage Growing size and power of retailers Need to reduce distribution costs Power and potential of technology Stress on growth instead of downsizing

Bottom Line

Marketing Channel Strategy Has Become Critically Important For Most Businesses

Strategy in Marketing Channels

Channel Strategy

The broad principles by which a firm expects to achieve its distribution objectives for satisfying its customers

Basic Strategic Questions 1)

2)

3)

4)

5)

What role should distribution play in the firm’s overall objectives and strategies? What role should distribution play in the marketing mix? How should the firm’s marketing channels be designed to achieve its distribution objectives? What kinds of channel members should be selected to meet the firm’s distribution objectives? How can the marketing channel be managed to implement the firm’s channel design effectively and efficiently on a continuing basis?

The relationship between customer satisfaction and the company’s marketing mix can be represented as:

Cs = f (P1, P2, P3, P4) where: Cs= degree of customer satisfaction P1= product strategy P2= pricing strategy P3= promotional strategy

Distribution channel strategy should receive especially heavy emphasis if one or more of the following conditions prevails: Distribution appears to be the most relevant variable for satisfying customers Parity exists among competitors in the other three marketing mix variables High degree of vulnerability exists because of competitors’ neglect of distribution Distribution channel strategy can foster synergies

Classic Marketing Channel Strategies Still Relevant Today        

Dual Distribution Exclusive Dealing Full-Line Forcing Price Differentiation Price Maintenance Refusal to Deal Resale Restrictions Tying Agreements

The Most Basic Questions in the Design of Marketing Channels When do customers buy? Where do customers buy? How do customers buy? Who buys? Who makes the actual purchase? Who uses the product? Who takes part in the buying decision?

Supply Chain Management

QUESTION Is this just another “buzzword” for logistics getting the right product in the right quantity, at the right time and right place?

OR

Is there something more substantive to this term?

ANSWER There IS something more than semantics here: Supply Chain Management takes a broader perspective by viewing logistics as an integral part of the marketing channel relationship

Supply Chain Management Can Therefore be Defined as:

A long-term “partnership” among marketing channel participants aimed at reducing inefficiencies, costs, and redundancies in the logistical system in order to provide high levels of customer service

Contrasts Between a Traditional Logistics System and Supply Chain Based System Supply Chain Mgmt. System Factor Traditional Inventory Management

Logistics System

Total Cost Approach

Independent Effort Minimize Firm Costs Short-Term Limited to Needs of Current Transaction Transaction Based Not Relevant

Time Horizon Information Sharing and Monitoring Joint Planning Compatibility of Corporate Philosophies Channel Leadership Sharing of Risks and Rewards Inventory Flow

Not Needed Each Channel Member on Their Own “Warehouse” Mentality Storage Safety Stocks

Joint Effort to Reduce Channel Inventories Channel-Wide Cost Efficiencies Long-Term Continuous Effort to Gather and Monitor Ongoing Important for Major Initiatives Required for Coordination and Focus Risks and Rewards Shared over Long-range “Distribution Center” Orientation-JIT, Quick Response, Cross Docking

Common Issues in Supply Chain Management Order Processing Time 2) Order Assembly Time 3) Delivery Time 4) Inventory Reliability 5) Order Size Constraints 6) Consolidation Stipulation 7) Consistency of Delivery 8) Frequency of Sales Visits 9) Ordering Convenience 10) Order Progress Information 11) Inventory Backup During Promotion 12) Invoice Formats 13) Physical Condition of Goods 1)

14) Claims Response 15) Billing Procedures 16) Average Order Cycle Time 17) Order Cycle Time Variability 18) Rush Service 19) Product Availability 20) Competent Technical Reps 21) Equipment Demonstrations 22) Availability of Literature 23) Accuracy in Filling Orders 24) Terms of Sale 25) Protective Packaging 26) Degree of Cooperation

The Internet and Electronic Distribution

Some Predictions.... “By the year 2000, sales via ITV and PC will reach $300 billion” -Discount Store News (1995) “Within 10 years, consumers will purchase 20% of their groceries via in -house electronic commerce” -Arthur Andersen “Within 20 years 55% of all retail transactions will be done on interactive systems.” -Kurt Salmon Associates-

Some Current Facts and Figures

Total U.S. Retail Sales = $2.1 trillion Catalog, T.V., Mail Order = $60 billion (2.8%) T.V. Home Shopping (QVC; HSN) = $3 billion (0.14%) Internet Shopping = $2.0 billion (> 1%)

How About Potential? 



  

45% of Americans purchase from Catalogs 7% of Americans buy via television 40 million PCs in U.S. homes 25 million Internet users 10,000 new users added daily

Electronic Home Shopping- Customer Perspectives Advantages 







Global access to multitude of products and times Speed relative to physical shopping Information and screening enhanced Lower costs in long run

Disadvantages    

Delayed gratification No real product contact No shopping atmosphere Personal and social motives for shopping not satisfied

Personal Motives for Shopping  Role playing  Diversion  Self-gratification  Learning about new trends  Physical activity  Sensory stimulation

Social Motives for Shopping  Social expression outside the home  Communication with others holding similar interests  Peer group attraction  Status and power

Electronic Home Shopping- Company Perspective

ADVANTAGES Expanded geographical coverage Centralized inventories Lower transaction costs Complete customer database Better targeted products and promotions Superior performance measurement

Disadvantages Company must pick, pack, and deliver products usually one at a time Limited opportunity to demonstrate products High return rates (25% for QVC & HSN) Reduced impulse purchasing Limited opportunity to use atmospherics & entertainment

Strategic Alliances and Partnerships in Marketing Channels

Definition: Continuing and mutually supportive relationship between the manufacturer and its channel members in an effort to provide a more highly motivated team, network, and alliance of channel partners

Traditional “us-againstthem” mentality is replaced with a new cooperative perception of “us” in an effective channel partnership or strategic Thus, partnerships or alliance strategic alliances go well

beyond the ad-hoc, onagain / off-again interactions typical of traditional relationships among channel

Requirements for Partnerships or Strategic Alliances in Marketing Channels 1)

2)

3)

4)

5)

Recognition of interdependence of channel members Close cooperation between channel members Careful specification of roles, rights, and responsibilities in the relationship Coordinated effort focused on common goals Good communications and trust between channel members

Relationship Marketing via the Marketing Channel

Relationship Marketing The practice of building long-term relations with key parties customers, suppliers, distributorsin order to retain their long-term preference and business Because of the importance of channels of distribution, building good relationships in the marketing channel is key to successful relationship marketing

Building Relationships with Channel Members

Find out the needs and problems of channel members informal information system (“grapevine”) -research studies of channel members -research studies by outside parties -marketing channel audit -distributor advisory councils

Building Relationships with Channel Members (Cont’d) Offer support to channel members that is consistent with Their Needs and Helps Solve their Problems cooperative arrangements partnerships and strategic alliances distribution programming

Provide leadership to motivate channel members use power effectively recognize causes of conflict resolve conflicts

Bases of Power in the Marketing Channel   

 

Reward Power Coercive Power Legitimate Power Referent Power Expert Power

Effective channel management depends on how well these power bases are combined and used

Causes of Marketing Channel Conflict

      

Role Incongruities Resource Scarcities Perceptual Divergences Expectational Differences Decision Domain Disagreements Goal Incompatibilities Communication Difficulties

Ten Trends in Marketing Channels as We Move into the Next Millennium 1)

2) 3)

4)

5)

Growing emphasis on marketing channel strategy More and more stress on technology Focus on efficiency and reducing distribution costs Shortening and flattening of distribution channels (disintermediation) Development of new types of intermediaries in channels (reintermediation)

Trends Continued... 6) Continued growth in partnerships and

alliances (relationship marketing) 7) Increasing power for retailers and wholesalers (gatekeepers) 8) Mergers and acquisitions to gain distribution clout 9) Flexible and focused distribution to match micro, niche, and database marketing 10) Attention to the behavioral dimensions of distribution to augment technology