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THE MANAGER'S GUIDE TO DISTRIBUTION CHANNELS
By LINDA GORCHELS, Edward Marien, Chuck West
The McGraw-Hill Companies, Inc.Copyright © 2004The McGraw-Hill Companies, Inc.
All rights reserved.
For products or services to be successful in the marketplace, they must be a where and a how for customers who want to buy them. In addition, what support, processes, or environment (tangibles) are necessary to help would-be customers make buying decisions? Is a showroom required for customers to view and "try out" a product? How important is immediate fulfillment from inventory? What channels are consistent with the way customers want to buy? Is your firm effective (or even present) in those channels?
Banks have opened branches in grocery stores and now provide phone and Internet account accessibility. Some industrial firms have augmented their traditional channels with "big box" retailers to either reach new customers or offer existing customers more options. These changes are prompting companies to examine distribution strategies and make either strategic or tactical changes or both. The continuum of distribution issues is shown in Figure 1-1.
Dell Inc. is a company that has long focused on a direct channel to reach its customers, being a leader in direct sales by telephone and the Internet. Later, it added kiosks in shopping malls as another way to reach consumers. Next, the growth of "white-box PCs" (no-name computers put together from parts of various suppliers) to small businesses through dealers spurred Dell to evaluate this channel as well. Because many small businesses essentially view local dealers as their information technology (IT) department, they are less inclined to purchase direct. They value the training, installation, and repair services they get from the dealer, as well as the face-to-face contact. To reach this group of customers, Dell began offering an unbranded PC to U.S. dealers.
Many other firms have made strategic channel changes. Avon decided to augment its direct consumer sales channel because the average age of the customers of its traditional channel was slowly increasing. The company decided to open boutiques in JC Penney stores to reach a younger, working market. Avon's new retail line is targeting women ages 25 to 29; its typical customer ranges in age from 40 to 55. Similarly, many industrial companies have augmented their traditional direct or distributor sales channels with Internet ordering for specific products or customers.
A channel is commonly defined as a "set of interdependent organizations involved in the process of making a product or service available for consumption or use." This process can include the physical movement, warehousing, and/or ownership of the product; presale, transaction, and postsale activities; order processing, credit, and collections; and various support services. Marketing channels are also defined as "vertical value-adding chains that create competitive advantage."
A firm may use a variety of direct sales channels—a direct sales force, telesales, direct mail, the Internet, and company-owned stores—and indirect sales channels—independent reps, distributors, dealers, and retailers. Manufacturers' or independent reps are individuals or agencies that function as an external sales force for a firm. Sometimes called brokers or agents, these organizations bring together the buyer and seller, generally do not take title, and are paid through commissions. Most industrial reps carry noncompeting products from many firms, but this is not as true for consumer reps.
Distributors and wholesalers generally buy products, are compensated through discounts off list price, and usually sell to customers out of inventory; the customers could be other resellers, integrators, manufacturers, or the end users. Special types of distributors include value-added resellers (VARs) and dealers. Definitions of some common terms related to distribution channels are included in the box just below. It's worth noting that the distinction between types of intermediaries is blurring, and many manufacturers are creating hybrid channels by contracting to have necessary functions performed by businesses that may or may not have been part of the traditional channel.
Channel redesign or refinement may be required to respond to changes in market dynamics, a shift in strategy or a new product launch, as shown in Figure 1- 2.
The growth of the Internet has arguably had a more pronounced impact on channel functioning than almost any other recent external issue. Although the concept of disintermediation (i.e., bypassing channel intermediaries through exclusive use of the Internet) has been largely discredited, there is no question that the Internet will continue to play a significant role in channel (or supply chain) operations. Wholesale drop shipping has been used for years by traditional catalog retailers but has grown with the increase in online purchases. Ingram Micro, a computer distributor for companies such as IBM, HP, and Toshiba, has historically drop-shipped products for retailers who called in their orders. However, their drop shipments increased from 70 percent of U.S. orders before e-commerce to 84 percent in 2003.
For manufacturers reaching the consumer market through mass retail channels, the Internet is streamlining ordering and inventory management processes. For example, Wal-Mart Stores, Inc. announced it will require its 10,000 or so midsize suppliers to connect to it through the Internet using a specific set of communication protocols (electronic data interchange or EDI) called EDI-INT AS2. Radio frequency identification (RFID) tags are also a data capture technology that is beginning to impact channel productivity. Point-of-sale (POS) and point- of-installation (POI) technologies are providing important data with which to manage new product introductions and inventory levels as well as to capture results of sales promotions. Wal-Mart has given its major suppliers the requirement to implement RFID tags by 2005. These types of technologies are changing the relationship between manufacturer and reseller, as well as the role of the salesperson responsible for the relationship.
In other situations, consumers are using the Internet to gather information before making significant purchases such as cars; manufacturers will need to work with the channel to provide the best information and sales training or support given the increasingly sophisticated end-consumers.
The Internet has also had an impact on business-to-business (B2B) channels. Some manufacturers are providing e-commerce tools for dealers to incorporate into their Web sites. Honeywell, for example, offers its HVACR (heating, ventilating, air conditioning, and refrigeration) dealers E-StorePro, a customized Web site to help them sell replacement parts and services to contractors. The Web site features unique home pages for contractors, a current Honeywell catalog, and the ability to sell replacement parts and services online. It's become more common for the Internet to be used as a tool to enhance the relationship between reseller and end user because a major asset of a B2B channel is the quality of relationships with end customers.
In addition to technology, regulatory changes might prompt a company or an industry to rethink the traditional marketing channels. The Gramm-Leach-Bliley Act of 1999, for example, repealed former restrictions on financial institutions and facilitates affiliations among banks, securities firms, and insurance companies. New channels have emerged as a result of this regulation. Nationwide Financial Services has targeted certified public accounts as a new distribution channel for its retirement and other financial services. Insurance companies are selling their products through banks, ca
Excerpted from THE MANAGER'S GUIDE TO DISTRIBUTION CHANNELS by LINDA GORCHELS. Copyright © 2004 by The McGraw-Hill Companies, Inc.. Excerpted by permission of The McGraw-Hill Companies, Inc..
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