session 15: distribution strategy file15.810 marketing management session 15: distribution strategy...

15.810 Marketing Management

Session 15: Distribution StrategyBarco – distributors were the key to market intelligence

Calyx & Corolla – replace long distribution system with Fedex

Southwest Airlines – ticketing through website

Intuit – used the pull strategy rather than push, service excellence reduces cost to retailer

Swatch (and Levi's) – department store vs. jewelers (specialty shops)

Tweeter – segment the market, price perceptions, branded variants

Coming: Aravind


Distribution – today’s topicsDiscrepancy of assortment.

What channels do?

Rule of efficiency.

Analysis framework.

Power and conflict.

Coordinating mechanisms.

Markets develop for efficiency

POTS

HATS

BASKETS

KNIVESHOES

HATS

BASKETS

KNIVESHOES

POTS

5 x 40 = 200 contacts

Manuf.M1 M2 M3 M4 M5

C1 C39C3C2 C40customers

. . .

Discrepancy of assortment

Manuf.

5 + 40 = 45 contacts

customers

. . .

M1 M2 M3 M4 M5

C1 C39C3C2 C40

INTERMEDIARY

Channels develop for efficiency

Discussion exampleNielson (division of Cadbury) – best selling chocolate bars in Canada

Sabritas (division of Pepsico) –distributor of salted snacks in Mexico

Most of sales through “Tiendas”

Tienda

Neilson Hershey NestleSalted snacks

Other food products

…

Sabritas

Tienda Tienda Tienda Tienda

450,000 TiendasPlus other outlets


What do channels do?

MANUFACTURER

Information/Market

Feedback

Selling Activities

Physical Distribution

Pricing/ Financing Service

CUSTOMER

Manufacturer

Candy Consumer

Assortment

Local Knowledge

Local Availability

Salesforce Efficiency

Rapidity

Search Cost

Financials

MarketInformation

Manufacturer

Candy Consumer

Assortmentmany candy bars

food productsconvenience products

Local KnowledgeTiendas

governmentconsumers

Local Availabilitytrucksstoragedetails

Salesforce Efficiencye.o.s.

delivery, storageassortment

Rapidityre-supplyheat, melt

Search Costcandies whereconsumers are

Financialscredit, currency

promotionreturns

MarketInformation

Changingtastes,

competitionadv., etc.

A structure to analyze channel tactics

Auto partsCandy

Frequent purchaseMf. assure qualityLittle service

Brand competitionwithin store

Assort efficiencyDisplay

FurnitureCons. Electronics

POS criticalSome serviceModerate density

AutomobilesSailboats

Service is keyQuality assuranceBrand-Channel

Combination

Provide serviceAssure quality

Examples

Customers

Competition

Company Skills

IntensiveSelectiveExclusive


Rule of efficiency“The rule is very simple – the most efficient organization for the task should perform the function.”

Department storeSpecialty store

FloristsFedex

Own distributorsBox distributors

Department store (US)Jewelers (Europe)

High-end, box sales

Levi’s

Calyx & Corolla

Barco vs. Sony

Swatch

Tweeter

For what?Most efficient?Example


Which functions are done best by:Sabritas or Neilson?

AssortmentLocal knowledgeLocal availabilitySalesforce efficiencyRapiditySearch costFinancialsMarket informationProduct qualityNational advertising

Neilson

Sabritas

Consumers


Channel advantages come from:personal relationshipsunderstand customers

assortment economicsprovide value to the customer

represent many suppliersefficient “tours”

reduce supply chain delay (JIT)

capture some of consumer surplus

computer systems, florists, etc.

Local knowledge

Local availability

Salesforce efficiency

Rapidity

Search cost

Systems integration


Will Nielsen and Sabritas always see eye to eye?

Neilson

Sabritas

Consumers

1st rule of (core) economics:

Marginal Revenue = Marginal Cost


Shared demand is the root of conflict on service and quality.

Pepsico

Sabritas

Consumers

Neilson

Sabritas

Consumers

MC (product) not sharedMC (service) not shared

gain in sales shared

MR in sync with MC

both costs and benefits are shared


Shared demand is the root of conflict on margins.

Pepsico

Sabritas

Consumers

Neilson

Sabritas

Consumers

MR (Neilson margin) not sharedMR (Sabritas margin) not shared

MR (loss in sales) is shared

MR in sync with MC

both revenue and loss of demand are shared


The effect of mismatch in MC ≠ MR.

tempted lowerwants higherSabritas service

wants highertempted lowerNeilson quality

tempted higherwants lowerSabritas margin

wants lowertempted higherNeilson margin

SabritasNeilson


Net result without coordination.

Both have higher margins → higher prices

Sabritas provides less service

Nielsen provides lower quality


ConflictDifferent goals

Coke wants vending machines stockedDistributors lose money on marginal machines. Prefer to “free ride”.Training, set-up, etc. for sound system (Tweeter vs. Circuit City)Who carries the inventory?

Multiple ChannelsHigh-end & new electronics needs selling (Tweeter vs. Circuit City)

avoid perceived overlap & enable Tweeter to capture value from service

New franchisesGray market (diversion, Swatch)Value-added resellers (VARS) conflict with distributors

Brand vs. MarketBrita gives a supermarket a trade discount on filters.Does the supermarket have the incentives to pass it on if it means only that consumers switch from other PUR filters to Brita?

Coordinating mechanisms

AssortmentLocal knowledge

Agree on margins, cheat on service

Long-term relationships

Complex accountingand monitoring

Must offer to everyone.Hard to get right.

When possible

Can work, many details

Some progress

Can align incentives.

Share the revenue to align MC = MR

Joint ownership

Contracts

Implicit understandings

Profit sharing

Quantity discounts

CONsPROs


All dealers will receive a 20% discount from published suggested retail price. Value added incremental discounts will be awarded as follows:

1. Dealers with salespeople who routinely and personally visit, call on, and promote our products to at least 15% of the end-users in the dealer’s trading area. 10%

2. If not above, provide a catalog that is distributed to at least 80% of customer base in which all our major products are featured. 2%

3. Maintain and inventory of our products that represents no less than 60 days of estimated or historical sales and at least one item for demonstration or display. 5%

4. Offer open account privileges to all responsible customers and provide financing or leasing alternatives for large purchases. 2%

5. Schedule at least 1 week of detailing with us and organize not less than 2 clinics per years with at least 12 end-users , the cost to be paid by the dealer. 2%

6. Provide reasonable parts inventory and employee capability to handle routine returns, exchanges, and warranty replacement or repair. 1%


Sabritas v. Neilson?Quality of the candy?

Exclusivity?

Quality of the advertising?

Quality of the service?

Candy v. salted snacks?

Neilson

Sabritas

Consumers


Can Neilson monitor Sabritas?Local presence?

Local knowledge?

Understand culture?

Visit all the tiendas?

Beyond Mexico?

Neilson

Sabritas

Consumers


Brand name sharing?What are Sabritas’ incentives?

What are Sabritas’ investments?What does Sabritas risk?

What are Neilson’s incentives?What are Neilson’s investments?What does Neilson risk?

Milch vs. Mr. Big and Crispy Crunch?

Is brand name sharing an effective coordinating mechanism?


Some puzzlesTo illustrate how to work through channel issues.

Is it always cheaper to buy at a double-coupon store?

Do price matching guarantees help consumers?

Why can’t you ever find the item number that is reviewed in Consumer Reports?

Can it ever be cheaper (per oz.) to buy two small cans of tuna than one large can?


Final case – Aravind

What is the best channel to distribute “cured eyes?”


The channel is a means to serve downstream customers.

The channel is a customer too!

Analyze with 5 C’s.

MANUFACTURER

Information/Market

FeedbackServiceSelling

ActivitiesPhysical

DistributionPricing/

Financing

CUSTOMER

session 15: distribution strategy file15.810 marketing management session 15: distribution strategy...

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