CRAVENS

PIERCY

8/e
McGraw-Hill/Irwin

2006 The McGraw-Hill Companies, Inc., All

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Chapter Ten
Value Chain
Strategy

McGraw-Hill/Irwin

2006 The McGraw-Hill Companies, Inc., All

10-3

Value Chain
Strategy

Strategic role of distribution

Channel of distribution
strategy
Managing the channel
International channels
Supply chain management
issues

10-4

Strategic Role of
Distribution
Distribution functions
- buying and selling activities
- product assembly
- transportation
- financing
- processing and storage
- advertising and sales promotion
- pricing
- reduction of risk
- personal selling
- communications
- servicing and repairs
Channels for Services
Direct distribution by
manufacturers

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Illustrative Example:
Internet Impact on
Distribution

The Impact of Technology

on Value Chains
In India

E-Government
Computer Kiosks
Agricultural e-commerce
Tele-medicine

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The Marketing
System
Manufacturers and producers

Marketing intermediaries
Agriculture and
raw materials
suppliers

Retailers
Agents-brokers
Wholesalers-distributors

End users
Consumer
Industrial-institutional

Facilitating
organizations
Financial
Transportation
Advertising
Other

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Marketing
Channels
Manufacturers/producers

Agents/brokers

Wholesalers/
distributors

Retailers

Retailers

Consumers and organizational end users

10-8

Illustrative Example:
Samsung

Goal of moving from cheap imitative

electronics products to a cool brand
Feature-packed products
Products removed from shelves of WalMart and Target and positioned with
higher-end chains like Best Buy and
Circuit City
Samsung competes through hardware
innovation, product customization and
speed
Samsung sells only higher-end goods and
resists pressures towards marketing lowprice products
Strategy is implemented in part through
supply chain and distribution choices

Distribution by
Manufacturers

10-9

Manufacturers have three

distribution alternatives:
Direct distribution is necessary
Use of intermediaries is
necessary
Both direct and intermediary
contact are feasible

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Factors Favoring Distribution by

Manufacturer
Opportunity
for
Profit margins
competitive
adequate to support advantage
distribution
Rapidly changing
organization
market environment

Complete line
of products
Distribution
by the
manufacturer
Purchases
are
large and
infrequent

Early stages of
product life cycle

Complex product
application

Extensive
Small number of
purchasing
geographically
Supporting process
concentrated
services are
buyers
required

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Illustrative Example:
Retail Initiatives by
Manufacturers

Apple Computer
To educate consumers about computers and
music players

Sony Electronics, palmOne

Reinforce brands with affluent consumers and
better understand market trends

Driving forces are market access and

market learning

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Channel of
Distribution Strategy
Types of distribution
channel
Distribution intensity
Selecting the
channel strategy
Strategies at
different
channel levels

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Steps in Channel Strategy

Selection
(1) Type of channel arrangement

Conventional

Vertically coordinated

Ownership

Contractual

Administ
ered

(2) Desired intensity of

distribution

Intensive

Selective

Exclusiv
e

(3) Selection of a channel configuration

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Distribution Intensity
Illustrations
Trading Area

+
+

+
+
+

Exclusive
distribution

Selective
distribution
Illustrations

Cadillac automobiles
Ethan Allen furniture
Revlon cosmetics
Caterpillar equipment
Este Lauder cosmetics
Timex watches

C
++
+++
+
++++
+
++++
++
++++
++
+++
Intensive
distribution

Selecting the Channel Strategy

10-15

Design stages
Decision criteria
Identification
of channel
alternatives

Evaluation and
selection of
channel(s) to
be used

Selection
of channel
participants

Intensity of distribution
Access to end users
Prevailing distribution
practices
Necessary activities and
functions

Revenue-cost analysis
Time horizon for
development
Control considerations
Legal constraints
Channel availability
Select the channel

Market coverage
Capabilities
Intermediarys needs
Functions provided
Availability

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Illustrative Channel Strategy

Evaluation

Evaluation
Criteria

Manufacturers
Representatives

Company
Salesforce

Market access

Rapid

1 to 3 year
development

Sales forecast (2 years)

$10 million

$20 million

Forecast accuracy

High

Medium to low

Estimated costs

$1 million*

$2.4 million**

Selling Expense (cost/sales)

10%

12%

Flexibility

Good

Control

Limited

Fair
Good

Includes 8% commission plus management time for recruiting and training

representatives.

** Includes $100,000 for 10 salespeople, plus management time.

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Managing the Channel

Channel leadership
Management structure and systems
Physical distribution management
Channel relationships
Conflict resolution
Channel performance
Legal and ethical considerations

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International Channel of
Distribution Alternatives
Home country

Foreign country
The foreign marketer
or
producer sells to or
through

Domestic
producer or
marketer sells
to or through

Open
distribution
via domestic
wholesale
middlemen

Exporter

Importer

Foreign
agent or
merchant
wholesalers

Foreign
retailer

Foreign
consumer

Export management company

or company
sales force

Source: Philip R. Cateora, International Marketing, 7th ed., Homewood, Ill.: Richard D. Irwin, Inc., 1990, 572.

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Strategic Value Chain

Management
Supply chain management

Efficient Consumer Response

program
Lean supply chains
Agile supply chains
Impact of supply chain strategy on
marketing
E-business models
Retailer and distributor power
Strategic flexibility and change

Efficient Consumer
Response

10-20

Traditional channel problems

Forward buying and diverting

Excessive inventories
Damages and unsaleable goods
Complex deals and deductions
Too many promotions and coupons
Too many new products

Efficient Consumer Response

Category management
Value pricing replaces promotions
Continuous replenishment and cross-docking
Electronic data interchange
New performance measures
New organizational processes and structures
Internet-based network for supplier-buyer trading

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Lean Supply Chain

Elements
1. Definition of Value

2. Identification of Value Streams and

Removal of Muda (Waste)

3. Organizing Around Flow, Instead

of Batch and Queue

4. Responding to Pull Through

the Supply Chain

5. The Pursuit of Perfection