CRAVENS

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McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.
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Chapter Ten

Value Chain
Strategy

McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.

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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
 10-5

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

Facilitating
Marketing intermediaries
organizations
Agriculture and
raw materials Retailers
Financial
suppliers Agents-brokers
Transportation
Wholesalers-distributors
Advertising
Other

End users

Consumer
Industrial-institutional
 10-7
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 Wal-
Mart 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 low-
price products
 Strategy is implemented in part through
supply chain and distribution choices
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Distribution by
Manufacturers

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 Early stages of

of products product life cycle
Distribution
by the
manufacturer
Purchases Complex product
are application
large and
infrequent
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

A B C

++
+++
+
+ ++++
+ +
+ ++++
++
+ ++++
+ ++
+++

Exclusive Selective Intensive

distribution distribution distribution

Illustrations
Cadillac automobiles
Ethan Allen furniture
Revlon cosmetics
Caterpillar equipment
Estée Lauder cosmetics
Timex watches
 10-15
Selecting the Channel Strategy
Design stages
Deci sion cr iteria
Identification Intensity of distribution
of channel Access to end users
alternatives
Prevailing distribution
practices
Necessary activities and
functions

Evaluation and Revenue-cost analysis

selection of Time horizon for
channel(s) to development
be used
Control considerations
Legal constraints
Channel availability
Select the channel

Market coverage
Selection
of channel Capabilities
participants Intermediary’s needs
Functions provided
Availability
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Illustrative Channel Strategy

Evaluation

Evaluation Manufacturer’s Company

Criteria Representatives 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 Fair

Control Limited 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 Open Exporter Importer Foreign Foreign Foreign

producer or distribution agent or retailer consumer
marketer sells via domestic merchant
to or through wholesale wholesalers
middlemen

Export management company

or company
sales force

Source: Philip R. Cateora, International Marketing, 7th ed., Homewood, Ill.: Richard D. Irwin, Inc., 1990, 572.
 10-19

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
10-20

Response
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