Week 8 - IBM_Channel Management (SW).pdf

# Channel strategy framework This section outlines a three-step framework for designing effective channel strategies, encompassing analysis, decision-making, and implementation [22](#page=22) [3](#page=3) [4](#page=4). ### 1.1 Overview of the framework The channel strategy framework is a structured approach to developing and implementing effective distribution channels. It consists of three core phases: Analysis, Decision, and Implementation [22](#page=22) [3](#page=3) [4](#page=4). ### 1.2 Analysis phase The initial phase focuses on understanding the current landscape and identifying needs. Key components include [22](#page=22) [4](#page=4): #### 1.2.1 End user analysis This involves understanding the target audience through segmentation. This helps in tailoring channel strategies to meet specific customer needs and preferences [22](#page=22) [4](#page=4). #### 1.2.2 Channel analysis This component involves conducting a thorough audit of existing channels to identify any gaps or inefficiencies. Understanding current channel performance is crucial for identifying areas of improvement [22](#page=22) [4](#page=4). #### 1.2.3 Make-or-buy analysis This critical step assesses whether specific channel functions should be performed in-house or outsourced to external partners. This decision impacts resource allocation, cost, and control [22](#page=22) [4](#page=4). ### 1.3 Decision phase Following the analysis, this phase focuses on designing the channel structure and strategy. Based on the insights gathered in the analysis phase, decisions are made regarding the optimal channel mix, partnerships, and operational models [22](#page=22) [4](#page=4). ### 1.4 Implementation phase The final phase involves putting the designed channel strategy into action. A key aspect of this phase is benchmarking [22](#page=22) [4](#page=4). #### 1.4.1 Benchmarking Benchmarking involves comparing and contrasting the newly designed channel structure and strategy with traditional and emerging channel systems. The goal is to identify best practices and opportunities for continuous improvement [22](#page=22) [4](#page=4). > **Tip:** Effective benchmarking requires a clear understanding of both internal capabilities and external market trends to identify relevant comparisons and actionable insights. --- # End user analysis and segmentation End user analysis and segmentation is a crucial process for understanding the target client and their expectations, enabling effective channel strategy design. The primary goal is to satisfy the final customer as channels act as a bridge to match customer demand with the offerings from producers [10](#page=10) [6](#page=6) [9](#page=9). ### 2.1 The core of channel strategy: the end user The ultimate objective of any distribution channel is to satisfy the final customer. Channels play a vital role in fulfilling this demand by providing a collective effort from manufacturers and intermediaries like wholesalers and retailers [10](#page=10) [9](#page=9). #### 2.1.1 Understanding client expectations To effectively design a channel strategy, it is essential to answer the key question: "Who are the clients I want to sell to and what are their expectations?". Clients consume more than just products; they consume a bundle output comprising the product (or service) and the services provided by the channel intermediaries [11](#page=11) [7](#page=7). > **Tip:** Understanding client needs goes beyond simply knowing what they want to buy; it critically involves understanding *how* they want to buy [12](#page=12). ### 2.2 Segmentation criteria: service output requirements Clients' needs can be understood through five key service output dimensions [13](#page=13): * **Product Variety:** The range of products or services offered. * **Bulk Breaking:** The ability to purchase in smaller quantities than produced in bulk. * **Spatial Convenience:** The ease of accessing products or services geographically. * **Waiting and Delivery Time:** The time it takes from order placement to delivery. * **Customer Service & Information:** The level of support and information provided to the customer. #### 2.2.1 Price as an outcome of service output Price is not an isolated factor but rather an outcome of the 'product + service' bundle that the client receives. Clients' sensitivity to price and service levels varies significantly [14](#page=14) [15](#page=15). * **Price Insensitive / Service Insensitive:** Characterized by convenience products. * **Price Insensitive / Service Sensitive:** Characterized by specialty products. * **Price Sensitive / Service Insensitive:** Characterized by unsought products. * **Price Sensitive / Service Sensitive:** Characterized by shopping products. Clients are willing to pay a premium price for high service levels, especially if their needs align with the service offered [16](#page=16). ### 2.3 The process of end-user segmentation A systematic three-step approach is recommended for segmenting end-users [18](#page=18): 1. **Listen to customer needs and their potential service outputs desired:** This involves gathering insights into what customers value beyond the core product. 2. **Define channel segments that best describe end-user’s service output:** Group customers based on their shared preferences for service outputs. 3. **Name each channel segment to capture its identifying characteristics:** Develop memorable and communicative names for each segment. #### 2.3.1 Characteristics of effective channel segmentation A robust channel segmentation should be: * **Understanding:** Based on both declarative statements and observed purchasing behaviors [19](#page=19). * **Segmenting individuals into groups which:** * Are maximally similar within a group. * Are maximally different between groups. * Differ on dimensions that are relevant for the distribution system. * **Naming:** Segments should have memorable names that are easy to communicate [19](#page=19). #### 2.3.2 Next steps after client segmentation Once client segmentation is complete, the subsequent steps involve: 1. **Segment clientele:** Clearly define the identified segments. 2. **Target most promising subset:** Identify and focus on the segments that offer the greatest potential. 3. **Customize channel system solutions:** Develop tailored channel strategies and solutions for each targeted segment [20](#page=20). ##### 2.3.2.1 Example of distinctive client segments One segmentation model identifies four distinctive client segments based on price sensitivity and the criticality of after-sales service [21](#page=21): * **Want-it-All:** (61%) Price insensitive, after-sales service highly critical. * **Deal Seekers:** (16%) Price sensitive, after-sales service less critical. * **Skepticals:** (13%) Price insensitive, after-sales service highly critical. * **High care seekers:** (10%) Price sensitive, after-sales service less critical. > **Example:** A luxury brand might segment its market into "high care seekers" who are willing to pay a premium for personalized service and expedited delivery, and "deal seekers" who are more price-conscious and may be interested in bundled offers or sales events. This allows the brand to tailor its channel strategies, potentially using exclusive boutiques for the former and online sales or outlet stores for the latter [21](#page=21). --- # Channel gap analysis: costs and services This section details the process of analyzing channel audits to identify cost gaps and service gaps, ensuring the channel meets target client expectations efficiently [23](#page=23) [24](#page=24). ### 3.1 Channel audit objectives and framework The primary objective of a channel audit is to gain detailed knowledge about which channel functions are performed by each channel member, specifically by whom, at what level, and at which cost. This understanding is crucial for improving the overall system and delivering the right level of service output [24](#page=24). #### 3.1.1 The nine channel functions The analysis is based on nine core channel functions [25](#page=25): * **Physical possession**: Involves the movement and storage of goods [25](#page=25). * **Ownership**: Refers to the transfer of title or rights to the product [25](#page=25). * **Promotion**: Activities undertaken to inform and persuade customers [25](#page=25). * **Negotiation**: The process of reaching an agreement between parties [25](#page=25). * **Financing**: Providing financial support or credit [25](#page=25). * **Risking**: Bearing the potential losses associated with the channel activities [25](#page=25). * **Ordering**: The process of placing an order [25](#page=25). * **Payment**: The transaction of money for goods or services [25](#page=25). * **Information sharing**: The exchange of data and knowledge [25](#page=25). #### 3.1.2 Associated costs of channel functions Each of these channel functions incurs associated costs [26](#page=26): * **Physical possession**: Costs related to storage and delivery [26](#page=26). * **Ownership**: Primarily inventory holding costs, including safety stock [26](#page=26). * **Promotion**: Expenses for personal selling, advertising, sales promotion, publicity, public relations, and trade shows [26](#page=26). * **Negotiation**: Involves employee time and legal expenses [26](#page=26). * **Financing**: Costs associated with credit terms and conditions of sale [26](#page=26). * **Risking**: Expenses for price guarantees, return allowances, warranties, insurance, and after-sale service [26](#page=26). * **Ordering**: Costs related to order processing [26](#page=26). * **Payment**: Includes cash collection and bad debt expenses [26](#page=26). * **Information sharing**: Costs for collecting and storing information [26](#page=26). ### 3.2 Cost gaps analysis A cost gap occurs when the total cost of performing all necessary channel functions is excessively high. This often stems from one or more relevant channel functions being performed at too high a cost [27](#page=27). > **Tip:** High costs in one channel function can potentially be compensated by low costs in another, leading to an overall reasonable cost for the customer, provided the total service output remains adequate. For example, Amazon compensates for high shipping costs with low warehousing costs [27](#page=27) [28](#page=28). #### 3.2.1 Identifying and reducing cost gaps To reduce costs within a channel system, consider the following strategies [29](#page=29): * **Eliminate less valued or non-valued functions**: Remove functions that do not negatively impact customer or channel satisfaction, such as excessive sales calls [29](#page=29). * **Eliminate redundant activities**: Avoid duplication of effort, for instance, when both distributor and manufacturer sales forces call on the same accounts [29](#page=29). * **Redefine or combine tasks**: Streamline processes to minimize steps or reduce the cycle time for a sale [29](#page=29). * **Modify IT systems and automate activities**: Implement technology to reduce costs in areas like prospecting, order entry, and quote generation [29](#page=29). ### 3.3 Service gaps analysis A service gap arises when the service output supplied by the channel does not align with the target client's expectations, meaning it is either too high or too low. The goal is for the service output supplied to equal the service output demanded ($SS = SD$) [30](#page=30). > **Example:** In music retailing, a standard music shop might offer different service levels to distinct customer groups. Young digital natives (18-25) may demand on-line streaming and minimal customer service, while vinyl aficionados (50+) may prefer physical albums, expert advice, and in-store purchasing. A mismatch here would constitute a service gap [31](#page=31) [32](#page=32). #### 3.3.1 Understanding service output supplied vs. demanded The service output supplied ($SS$) refers to what the channel actually provides, while the service output demanded ($SD$) represents what the target client expects [30](#page=30) [34](#page=34). * If $SS < SD$, there is a service gap where the supplied service is too low [30](#page=30) [34](#page=34). * If $SS > SD$, there is a service gap where the supplied service is too high [30](#page=30) [34](#page=34). * If $SS = SD$, there is no service gap [30](#page=30) [34](#page=34). > **Example:** The music retailing example illustrates this: a shop offering only full albums on CD to young digital natives might have $SS < SD$ if those customers primarily want to stream individual songs. Conversely, an overabundance of in-store sales assistance for digital natives could represent $SS > SD$ [33](#page=33). ### 3.4 Combining service and cost gaps analysis Analyzing both service and cost gaps together provides a comprehensive view of channel performance [34](#page=34). * **No Cost Gap, Service Gap ($SS > SD$)**: This scenario indicates that service levels are right but costs are too high. This situation might offer the right price/value proposition for a more demanding segment [34](#page=34). * **No Cost Gap, No Service Gap ($SS = SD$)**: This is the ideal "zero-gap" state, where service levels match demands efficiently, representing the right price/value proposition for a less demanding segment [34](#page=34). * **No Cost Gap, Service Gap ($SS < SD$)**: Here, service levels are too low, and costs are too high. This points to inefficiencies in providing inadequate services [34](#page=34). * **Cost Gap, Service Gap ($SS > SD$)**: In this case, service levels are right, but costs are too high, suggesting the channel is over-servicing or inefficiently delivering [34](#page=34). * **Cost Gap, Service Gap ($SS < SD$)**: This represents a situation where service levels are too low and costs are too high, indicating a severe channel inefficiency [34](#page=34). --- # Make or buy channel analysis: vertical integration vs outsourcing This topic explores the strategic decision of whether a company should perform channel functions internally (vertical integration) or delegate them to third parties (outsourcing) [35](#page=35). ### 4.1 Understanding the make or buy decision The core question in channel analysis is whether to "make" (perform a function internally) or "buy" (delegate a function to a third party) for each of the nine universal channel functions. This decision hinges on achieving a high level of performance for each function [36](#page=36). ### 4.2 Definitions of vertical integration and outsourcing * **Vertical integration:** This occurs when a single organization performs all channel functions, extending from manufacturing to distribution and retailing. Essentially, different stages of the channel are combined as one entity [37](#page=37). * **Outsourcing:** This involves delegating channel functions to third parties, leading to separate manufacturing, distribution, and retailing entities [37](#page=37). ### 4.3 Types and degrees of vertical integration #### 4.3.1 Forward and backward integration * **Forward integration:** Moving closer to the end customer. For a manufacturer, this could involve setting up their own sales branches, offices, or even warehouses to reach customers directly or through distributors [38](#page=38). * **Backward integration:** Moving further away from the end customer, closer to the raw material or component suppliers. This might involve a manufacturer establishing a central buying team or acquiring their suppliers [38](#page=38). #### 4.3.2 Degrees of vertical integration Vertical integration exists on a spectrum, ranging from complete outsourcing (Classical Market Contracting) to complete internal performance (Vertical Integration), with a middle ground (Quasi-Vertical Integration) where the company and a third party share costs and benefits [39](#page=39). * **Classical Market Contracting:** The third party performs the function, taking on its people, money, risk, responsibility, operation, and gain or loss for a price [39](#page=39). * **Quasi-Vertical Integration:** Both the company and the third party share the costs and benefits of performing the function [39](#page=39). * **Vertical Integration:** The company performs the function entirely, using its own people, money, risk, responsibility, operation, and bearing all gains or losses [39](#page=39). > **Example:** For the function of selling, classical market contracting might involve a manufacturer's representative, quasi-vertical integration could be an exclusive sales agent, and full vertical integration would be a direct sales force. Similarly, for wholesale/distribution, classical contracting is an independent wholesaler, quasi-integration is a distribution joint venture, and full integration is the producer's own distribution arm (e.g., a warehouse). For retail distribution, classical contracting uses an independent retailer, quasi-integration is a franchise store, and full integration is the company's own store [41](#page=41). ### 4.4 When to outsource A company should consider outsourcing when: * Little money is at stake, indicating a minor function [42](#page=42). * The company cannot afford the resources required to establish an internal operation [42](#page=42). * The company can achieve a better utilization of its resources by focusing on other core activities [42](#page=42). ### 4.5 Advantages of outsourcing Outsourcing to an external company can bring several advantages: * **Superior motivation:** Third-party providers may have higher intrinsic motivation to perform a specific function efficiently [43](#page=43). * **Specialization:** External partners are often specialists in their particular function, leading to higher expertise and efficiency [43](#page=43). * **Economies of scale:** Outsourcing partners may be able to achieve greater economies of scale due to serving multiple clients [43](#page=43). * **Heavier market coverage:** A specialized third party might offer broader market reach than a single company could achieve internally [43](#page=43). * **Independence from any supplier:** By outsourcing, a company can avoid becoming overly reliant on any single supplier [43](#page=43). ### 4.6 Advantages of vertical integration Integrating vertically offers distinct benefits: * **Direct contact and close relationships:** Enables close ties with all parties in the channel [44](#page=44). * **100% control:** Provides complete oversight and command over all chain operations [44](#page=44). * **First-hand information:** Offers direct insights into customer behavior and market trends [44](#page=44). * **Ability to test and learn:** Facilitates rapid experimentation with new ideas and concepts [44](#page=44). * **Coping with environmental uncertainty:** Serves as a strategy to manage risks and unforeseen changes in the business environment [44](#page=44). > **Tip:** While vertical integration offers control, a significant risk is that former partners may become competitors if they gain critical knowledge or capabilities. Another drawback is the potential loss of focus and dispersion of resources across too many activities [44](#page=44). > **Example:** Amazon's integration of logistics with its PRIME AIR service exemplifies vertical integration, aiming to enhance delivery speed and control. Amazon also navigates the make-or-buy decision for its logistics, owning trucks and expertise while also partnering with small business owners through programs like Freight Partner [45](#page=45) [47](#page=47). ### 4.7 Case study: Fashion industry make or buy decision The decision of whether to make or buy is crucial when launching a business, especially in dynamic sectors like apparel. Key considerations include understanding client expectations, assessing the adequacy of the channel's service level and costs for the target group, and then deciding whether to deliver these services internally or externally [50](#page=50) [51](#page=51). #### 4.7.1 Integrated vs. Outsourced models in fashion The fashion industry presents two distinct models for companies with similar product positioning and target consumers: * **Consumer Target:** Fashion-conscious, young, female consumers who value novelty, exclusivity, and are also price-sensitive [52](#page=52). * **The Offer:** Up-to-date assortments with broad variety, quick delivery, current styles, and affordable pricing [52](#page=52). **Integrated Model (e.g., Zara):** * **Focus:** Cost control [52](#page=52). * **Operations:** Zara maintains significant in-house capabilities, including fabric production, dyeing, and a substantial portion of manufacturing (40% in Spain). They have a large design team (300 designers) producing around 10,000 new designs annually. Their trucking operations and logistics are also internalized [53](#page=53). * **Distribution:** Stores receive deliveries twice a week [53](#page=53). * **Speed:** The time from creation to store is remarkably short, approximately 4-6 weeks [53](#page=53). **Outsourced Model (e.g., H&M):** * **Focus:** Speed-to-market [52](#page=52). * **Operations:** H&M relies heavily on outsourcing, working with a vast network of approximately 900 suppliers primarily located in developing countries like Bangladesh, China, and Turkey. Their design team is smaller (95 designers in Stockholm and through brand partnerships) but they generate a larger volume of new designs annually (2,000-4,000) [54](#page=54). * **Distribution:** Stores also receive deliveries twice a week [54](#page=54). * **Speed:** The lead time from creation to store is longer, ranging from 9-12 weeks, due to the shipping from developing countries to Sweden [54](#page=54). --- ## Common mistakes to avoid - Review all topics thoroughly before exams - Pay attention to formulas and key definitions - Practice with examples provided in each section - Don't memorize without understanding the underlying concepts

| Term | Definition | |------|------------| | Channel strategy | The plan a company develops to deliver its products or services to its target customers, involving decisions about intermediaries, functions, and their integration. | | Channel strategy framework | A structured approach comprising multiple steps, typically analysis, decision-making, and implementation, used to design and execute an effective channel strategy. | | End-user segmentation | The process of dividing the final customers into distinct groups based on shared characteristics, needs, or behaviors, allowing for tailored channel strategies. | | Service output | The bundle of benefits and utilities that a channel provides to the end-user, extending beyond the core product or service itself, such as convenience, variety, or customer service. | | Channel functions | The various activities performed by channel members to move a product or service from the producer to the consumer, including promotion, negotiation, and physical possession. | | Channel audit | A systematic review and evaluation of the current channel structure, its members, the functions they perform, and their associated costs and service levels. | | Channel gap analysis | The process of identifying discrepancies between the service outputs demanded by target customers and the service outputs actually supplied by the channel, as well as analyzing cost inefficiencies. | | Cost gap | A situation where the total cost of performing all channel functions is excessively high, often due to one or more channel functions being too expensive or inefficiently managed. | | Service gap | A disparity where the service output provided by a channel does not align with the expectations of the target client, either by being too high or too low relative to demand. | | Make or buy analysis | A strategic decision-making process where a company evaluates whether to perform a specific channel function internally (make) or to contract it out to an external provider (buy). | | Vertical integration | A strategy where a company controls multiple stages of its supply chain, from production to distribution or even retail, by owning and operating those entities. | | Outsourcing | The practice of delegating specific business functions or tasks to external third-party providers, rather than performing them in-house. | | Forward integration | A form of vertical integration where a company moves downstream in its supply chain, closer to the end customer (e.g., a manufacturer opening its own retail stores). | | Backward integration | A form of vertical integration where a company moves upstream in its supply chain, acquiring or controlling its suppliers (e.g., a retailer buying a manufacturing plant). | | Quasi-vertical integration | A relationship where two or more independent organizations collaborate closely on certain channel functions, sharing costs and benefits without full ownership, such as in joint ventures. | | Classical market contracting | A basic market-based relationship between independent entities in a channel, where transactions occur through standard contracts with limited integration or collaboration. |