Chapter 2 Marketing Strategy and Channel Design

Major Topics for Ch. 2

1. Major Decisions to Make

2. When to Emphasize channel strategy?

3. Channel Design: Value Chain and Value Chain Analysis 4. Three Strategic Questions 5. Segmentation: Service Output Demand

Objective 2:

Major Decisions To Make* 1. The role of distribution in the firms overall objectives & strategies (Strategy Level Issue) 2. The role distribution should play in the marketing mix (Program Level Issue) 3. -The design of the firms marketing channels -The selection of channel members 4. -The management of the marketing channel -The evaluation of channel member performance

Objective 5:

When to Emphasize Distribution Strategy

IF : or

Distribution is the most relevant variable Parity exists among competitors in the other three variables of the marketing mix.

or or

A high degree of competitive vulnerability exists

Distribution can create synergy among marketing channels.
The firm should choose distribution strategy for strategic emphasis

THEN:

Objective 6:

Marketing Strategy & Channel Design

Differential advantage occurs when a firm attains a long-term, advantageous position in the market relative to competitors.

Caterpillar Versus Komatsu

Channel Design
What is channel design?
Decisions associated with forming new or altering existing channels.

Why are channel design decisions critical?

They directly influence all other marketing decisions. Key external resource for many manufacturers.

McGraw-Hill Companies, Inc. 2002

The Value Chain

Firm infrastructure Support Activities Human resource management Technology development Human resource management

Inbound logistics

Operations

Outbound Marketing logistics & sales

Service

Primary Activities

Objective 8:

Three Strategic Questions*

How close a relationship should be developed with the channel members?
3 Strategic Questions How should the channel members be motivated to cooperate in achieving the manufacturers distribution objectives? How should the marketing mix be used to enhance channel member cooperation?

Question1: Closeness of Channel Relationships

Factors to consider

Distribution intensity Targeted markets* Products* Company policies* Middlemen Environment Behavioral dimensions

Number of Intermediaries at Each Level

Outlet

Use as many outlets as possible

Outlet Outlet

Use as few outlets (intermediaries) as possible Exclusive Distribution

Intensive Distribution
Outlet Outlet Outlet

Intermediaries

Not all available intermediaries are Selective used Distribution

Intermediaries
McGraw-Hill Companies, Inc. 2002

Intermediaries
10

Analyzing Target Market Behaviors

Current and potential buyer behaviors: Who is doing the buying? Where,when and how end users buy: Seasonal Shopping from home Knowledge of industry (and its language)
McGraw-Hill Companies, Inc. 2002 11

Analyzing Product Characteristics

Product Characteristics Unit value: length Standardization: length, intensity Bulkiness: length Complexity: length, intensity Stage of Product Life Cycle: intensity, ownership Implications for Channel Design
McGraw-Hill Companies, Inc. 2002 12

Changes in Life Cycle and Channels: The Case of Designer Apparel

Value added by channel Utility Added by Channel
High Low Introductory Stage
Boutique (e.g., service utility)

Low Declining/ Death

Offprice Outlets (e.g., convenience utility)

Market Growth Rate High

Growth Stage
Better Department Stores (e.g., selection utility)

Mature Stage
Merchandisers (e.g., lot size utility)

Exhibit 3.4

McGraw-Hill Companies, Inc. 2002

13

Question 2: Marketing Mix in Channel Management

Product Strategy (Quality/Branding)

Distribution strategy

Marketing Mix

Pricing Strategy (Wholesale/Retail/Consumer)

Promotion Strategy (Push/Pull)

Objective 9:

Question 3: Motivation of Channel Members

Portfolio concept:

A tool for motivating different types and sizes of channel members

Question: What makes a distributor work for you?

Objective 10:

Evaluation of Channel Member Performance

Channel managers involvement in evaluating member performance is integral to developing & managing channel

Have provisions been made in the design and management of the channel to assure that channel member performance will be evaluated effectively?

Ex) Measurement and Reward of Channel Performance

TABLE 2-1: ESTIMATED NUMBER OF U.S. CONSUMERS USING ONLINE BILL PAYMENT, VARIOUS YEARS
YEAR # U.S. CONSUMERS PAYING AT LEAST 1 BILL ONLINE (millions, est.) % OF U.S. POPULATION (est.)

1998 2001 2002 2003 2004

3.4 20.4 25.5 35 65

1.3% 7.3% 9.1% 12.5% 23%

Notes: 1998: in 1998, just 2% of U.S. households used online bill payment, according to Tower Group (Bielski 2003). From U.S. Census data, in 1998, there were 100 million households in the U.S., with an average of 1.7 adults per household; thus, 2 million households or 3.4 million adults were using online bill payment in 1998. 2001: A Forrester Research report said that nearly 17 million U.S. households will pay bills online in 2002, up 41 percent from 2001 numbers (Higgins 2002). Thus, in 2001, 12 million U.S. households paid bills online. From U.S. Census data, there were 108 million households in the U.S., with an average of 2.58 adults per household; thus, there were 20.4 million adults using online bill payment in 2001. 2002: The same Forrester Research report said that nearly 17 million U.S. households will pay bills online in 2002 (Higgins 2002), while a Tower Group report said that 13.7% of U.S. households did pay bills online in 2002 (Bielski 2003). The table therefore reports the numbers from Bielski. There were 109 million households in the U.S. in 2002; thus, 15 million households paid bills online. Further, there were an average of 2.58 adults per household in the U.S. in 2002 (from U.S. Census data), yielding the estimate of 25.5 million adult online bill payers in 2002. 2003 and 2004: A Gartner study cites 65 million U.S. consumers paying at least some bills online, and reports this is almost twice as many as in 2003 (Park, Elgin et al. 2004). We therefore estimate that 35 million U.S. consumers paid bills online in 2003.

TABLE 2-2: ONLINE BILL PAYMENT: THE CONSUMER EXPERIENCE

OPTION: SET-UP PROCESS: Paper Bill Payment None Direct Biller Online Pay Consumer logs on to billers website; Enters information about account, name, bank account fr/which payment will be made, etc.; Picks a password, specific to this website, to gain access in future; Activation usually occurs within 24 hours Either through U.S. mail (see paper bill) or electronic bill presentment through e-mail alert; both note payment due date Third-Party Online Bill Payer (e.g. bank, Quicken) Consumer logs on to third-party website; Enters information about each account individually; Picks a password, specific to this site but common across all bills paid at this site, to gain access in future Arrival of electronic bill noted through e-mail alert; Third party may/may not offer actual bill presentment Consumer visits third partys website to view bill (if no presentment by third party) and reconcile; Enters amount and date of payment (may need up to 5 days to clear payment)

BILL PRESENTMENT TO CONSUMER:

Consumer receives bill through U.S. mail in envelope containing summary of bill charges & due date, payment stub, & payment envelope Consumer reconciles bill with paper receipts; fills out payment stub; writes paper check; inserts check and stub in envelope; puts U.S. firstclass stamp on envelope; mails payment Only when next bill is received does consumer learn if previous payment was received in time (unless consumer telephones biller) Cost of first-class stamp; No cost to learn system; Cost of time to process bill & write check; Cost of paper check; Risk-adjusted cost of late payment (perceived very low) No monthly fee for payment processing

CONSUMER BILL REVIEW AND PAYMENT AUTHORIZATION:

Consumer reconciles bill with receipts; Visits biller websites payment page; Enters amount and date of payment; [website indicates how fast payment will be made]

CONFIRMATION OF PAYMENT TO CONSUMER: COST TO CONSUMER:

Typically, e-mail confirmation of payment receipt the day payment is recorded

Typically, e-mail confirmation that payment was made

No stamp; Initial learning time, for each billers system; Cost of time to check bills accuracy; No check writing or cost; Risk-adjusted cost of late payment (perceived low); No monthly fee for payment processing

No stamp; Initial learning time, once for whole system; Cost of time to check bills accuracy; No check writing or cost; Risk-adjusted cost of late payments (moderate: up to 5 days to clear payment) May be a monthly fee (e.g., Quicken: $9.95/month for up to 20 bills, plus $2.49 per 5 bills thereafter; but many banks now do not charge for service); May be low cost to integrate with home

TABLE 2-3: BUSINESS-TO-BUSINESS CHANNEL SEGMENTS FOR A NEW HIGH-TECHNOLOGY PRODUCT

Respondents allocated 100 points among the following supplier-provided service outputs according to their importance to their company:

= Greatest Discriminating Attributes

= Additional Important Attributes Responsive Support/ PostSales Segment 4 4 10 9 9 Full-Service Relationship Segment 6 5 8 8 References and Credentials Segment

Possible Service Output Priorities

References and Credentials Financial Stability and Longevity Product Demonstrations & Trials Proactive Advice & Consulting Responsive Assistance During Decision Process

Lowest Total Cost/ Pre-Sales Info Segment 5 4 11 10

25 16 20
10 6

14
4

10

One-Stop Solution
Lowest Price Installation and Training Support Responsive Problem Solving After Sale Ongoing Relationship with a Supplier Total

1
8

18
8

3
6 10 3 1 100

32
10 8 1 100

15 29 11
100

12 10 15
100

Source: Reprinted with permission of Rick Wilson, Chicago Strategy Associates, 2000.

% Respondents

16%

13%

61%

10%

FIGURE 2-1: IDEAL CHANNEL SYSTEM FOR BUSINESS-TO-BUSINESS SEGMENTS BUYING A NEW HIGH-TECHNOLOGY PRODUCT

Manufacturer (New High Technology Product)

Associations, Events, Awareness Efforts

Pre-Sales
Dealers

Sales

VARs

TeleSales/ TeleMktg

Post-Sales

Internal Support - Install, Training & Service Group

ThirdParty Supply Outsource

Segment

Full-Service

Responsive Support

References/ Credentials

Lowest Total Cost

Source: Reprinted with permission of Rick Wilson, Chicago Strategy Associates, 2000.

TABLE 2-4: SHIPPING CHARGES FOR $150 PURCHASE OF SHIRTS FROM LANDS END

Buyers Location
United States

Shipping Method
Standard UPS

Shipping Charge
$11.95

Time to Delivery
3 to 5 business days

Mexico
Mexico Mexico

Surface Mail
Priority Air UPS

$20.00
$30.00 $50.00

8 to 12 weeks
2 to 4 weeks 1 to 2 weeks

Source: www.landsend.com website.

FIGURE 2-2: ADVERTISING COPY FOR AN AD FOR BN.COM

Advertising Copy Really free shipping: offers free shipping if 2 or more items are purchased. We make it easy and simple. Fast & easy returns: end-user can return unwanted books to a bricks-and-mortar Barnes & Noble bookstore. Just try and return something to a store that isnt there. Books not bait: promises no additional sales pitches to buy non-book products. Same day delivery in Manhattan: delivery by 7:00 p.m. on any item(s) ordered by 11:00 a.m. that day. No other online bookseller offers that. The gift card that gives more: can be used either online or in the bricks-and-mortar bookstores, nationwide.

Service Output Offered Customer service

Quick delivery (for returns), spatial convenience; note implicit comparison with amazon.com, the pure-play online bookseller Assortment/variety: just books (targeting the book lover). Again, note implicit comparison with amazon.com. Quick delivery: the offer is possible because of Barnes & Nobles warehouses in New Jersey, near Manhattan. Note direct comparison with other online booksellers (notably, amazon.com) Spatial convenience, assortment/variety: when buying a gift for a friend, this provides virtually limitless assortment, and does so anywhere the recipient lives in the United States. Assortment/variety: direct comparison with amazon.com, offering a broader assortment of titles to the consumer

bn.com 1,000,000 titles; amazon.com 375,000 titles

Source: advertisement for bn.com in Wall Street Journal, November 20, 2002, p. A11.

TABLE 2-5: THE SERVICE OUTPUT DEMANDS (SOD) TEMPLATE

SERVICE OUTPUT DEMAND:
SEGMENT NAME/ DESCRIPTOR BULK BREAKING SPATIAL CONVENIENCE DELIVERY/ WAITING TIME ASSORTMENT/ VARIETY CUSTOMER SERVICE INFORMATION PROVISION

1. 2. 3. 4. 5.

INSTRUCTIONS: If quantitative marketing-research data are available to enter numerical ratings in each cell, this should be done. If not, an intuitive ranking can be imposed by noting for each segment whether demand for the given service output is high, medium, or low.

TABLE 1-1: SERVICE OUTPUT DEMAND DIFFERENCES (an example of segmentation in the book-buying market)

Browser buying best-sellers to take on vacation Service Output Demand Level Medium

Student buying textbooks for fall semester at college Descriptor I only need one copy of my Marketing textbook! I dont have a car, so I cant travel far to buy. I just got to campus, but classes are starting tomorrow and Ill need my books by then. Im just buying whats on my course reading list. I can find books myself, and dont need any special help. My professors have already decided what Ill read this semester. Service Output Demand Level High

Descriptor Bulkbreaking Spatial convenie nce Waiting and delivery time Assortme nt and variety Customer service Informati on provision Im looking for some good read paperbacks to enjoy. I have lots of errands to run before leaving town, so Ill be going past several bookstores. Im not worried about getting the books now I can even pick up a few when Im out of town if need be. I want the best choice available, so that I can pick what looks good. I like to stop for a coffee when book browsing. I value the opinions of a wellread bookstore employee; I cant always tell a good book from a bad one before I buy.

Medium

High

Low

High

High

Low

High

Low

High

Low

TABLE 2.1: SERVICE OUTPUT DEMAND DIFFERENCES

(an example of segmentation in the soft drink market) SERVICE OUTPUT Bulk-breaking FAMILY SERVICE OUTPUT DESCRIPTOR
DEMAND LEVEL

OFFICE EMPLOYEE SERVICE DESCRIPTOR

OUTPUT DEMAND LEVEL

I buy groceries weekly for my family, and all of us like soft drinks I drive to the supermarkets in my area to shop
We usually have some extra cans of soft drinks in the house, so Ill just come back the next time if I cant find the drinks I want on this trip My husband and I like Coke and Pepsi, but our kids arent permitted to drink caffeinated soft drinks. They like caffeine-free fruitflavored soft drinks

LOW

Im on my coffee break and I have only have time for one can of soft drink
I only have 15 minutes for my break, so I need to buy whatever is handy

HIGH

Spatial convenience Quick delivery

LOW

HIGH

LOW

If I dont get my soft drink right at 3:00 when my break starts, Ill never have a chance to go back later and get one I cant be too particular about which soft drink I pick. Its important to me to get one, as long as it has caffeine

HIGH

Assortment and variety

HIGH

MODERATE