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FROM DISTRIBUTION TO
GROWING DISTRIBUTION
CHANNELS
Let’s keep the cannibals in the family
By
Group 2
Marketing LMN
AGENDA
• The chapter deals with situations where the new distribution
channels have emerged and the companies face the dilemma
whether or not to change their distribution channels. If yes, then to
what extent.
• The chapters explains each situation with suitable examples like Dell,
Compaq, Ryan Air and the Music industry.
• The chapter also gives steps in the channel migration strategy.
WHEN A NEW DISTRIBUTION CHANNEL
EMERGES WE NEED TO ASK THE
FOLLOWING QUESTIONS
• To what extent does the new channel complement or replace existing
industry distribution channels?
• To what extent does the new channel enhance or devalue existing
capabilities and value network?
The answers to the above questions will help arrive at a migration strategy, the
level of internal resistance and the external channel conflict that one should
anticipate as well as provide insight to the migration process
Penetrate
Keep Existing channels
Add New Channel
Reinforce Current
Capabilities
Low internal Resistance
Low Channel Conflict
Develop
Keep Existing Channels
Add New Channel
Develop New Capabilities
Medium Internal Resistance
Medium Channel Conflict
Switch
Exit Existing Channels
Add New Channel
Reinforce Current
Capabilities
Medium internal Resistance
High Channel Conflict
Reinvent
Exit Existing Channels
Add New Channel
Develop New Capabilities
High Internal Resistance
High Channel Conflict
External
Impact
Internal Impact
Enhances Existing Capabilities Requires New Capabilities
Complimentary
Replacement
Replacement vs Complementary
Replacement
• Cannibalism, Channel conflicts,
and resistance to change occur
more in this situation
Complimentary
• Compel companies to move
certain types of transactions and
customers to new channel
distribution.
The nature of channel migration determined by whether a distribution channel
compliments or displaces existing distribution channels.
Core Capabilities Core Rigidities
• With the advent of new type of distribution channels, companies
tend to take advantage of the same without hindering their
traditional way of approach.
• The problem is generated when they try to sail on two boats at once
which makes them jack of all trades and master of none.
Instances of Channel Migration in
PC Industry
• To take leverage from DELL’s success of direct distribution channel, HP copied the
same but kept its traditional channels alive which created a state of confusion in
the customer’s mind and the attempt at replication of the former was an utter
failure.
• Taking a leaf out of Compaq’s success story of sales with 3rd party
re-sellers, DELL decided to expand its distribution to the same channel but the
decision did not bear fruits and for the first time DELL reported a net loss of $ 36
Million in 1993.
Irrespective of the fact whether another channel dislodges existing distribution channel at an industry level, it will
probably influence the core competences and distribution network resources of existing players. New channels may
help a few organizations influence their core competences and distribution resources, it hinders other organizations
inside of the same industry.
The Reinvention of Music
Distribution Business Models
• The most difficult channel migration strategy is to reinvent distribution channels
• Necessary in the face of both replacement efforts and the need to develop new
capabilities.
• Currently such a situation can be seen in online distribution of digital products like movies,
music, games, books and software.
• The music industry cost structure has two significant crises- the cost of distribution and
logistics and the absolute costs of handling the returns of not so hit CDs
• The emergence of Internet brought with it the opportunity to sell directly to consumers
• The music manufacturer selling online has benefits of not having to pay, the retailer’s
margin, greater customer knowledge and positive working capital.
The search for a digital distribution
model
• Broadband Internet has opened up an entirely new digital form of music
distribution.
• Music executives and artists launched lawsuits against online music
swapping
• Apple Computer launched iTunes to give access to consumers to download
unlimited music at a reasonable price giving way to a new a viable new
business model.
• This business model would transform the music business from a packaged
goods industry to an electronic distribution industry.
The Channel Migration
Process
• A company should assess the performance of its existing channels
• New Channels do not mean the solution to problems of existing channels’
problem
• Example: In an FMCG company managers complaint about price pressure
large retailers were exerting
• However, audit proved them to be most profitable
• Why? How?
• The difference lies in manufacturer’s cost to serve the channels.
Step 1: Conduct a Distribution
Strategy Audit of Existing Channels
Step 2: Articulate the strategic logic
for channel migration
Following questions about the new channel help evaluating
opportunity presented by new channel:
• Attractiveness of value proposition to target customers?
• Is the target audience attracted to new channel, large enough?
• Is there a differentiated value proposition or cost advantage?
• Is our cost structure and value network optimized for new network?
• What can and will competition do with new channel?
• How will new channel affect customers’ channel preference and
existing channels’ strategies?
Step 2 (Contd)
• To articulate new channel of distribution, plot the value curve
• It would reveal that no channel is best. Each has its own strengths &
weakness
• Priceline.com was successful for flight tickets but online grocery business
failed
• Reason?
• The target segment and value proposition were too small.
Exploit online channels when network effects exist:
• Internet’s most important attribute is reduction of transaction cost or cost of
connecting people
• That is why ebay, MMPG and Sony’s EverQuest is successful
Consider Cost And Competitive Moves:
• Developing strategy towards the new distribution channel
• Optimal approaches are what major competitor do with online sales and what is our
level of online sales
• Key questions are
• First mover in the industry will workout all political and technological kinks
Step 2 (Contd)
Step 3: Mobilize support For Channel
Migration
• A strong strategic logic is necessary for channel migration
• New channels threaten both sales volumes in existing channel
• Managers in the organization responsible for that
• Implementation plan should answer the five channel migration
questions
• Company sales should migrate across various channels, and managers
should have frame work of milestone
• Channel conflicts will occur because of distribution channel to be
chasing the same customers with same brand
• Channel members call conflict is a healthy competition
• Main objective of conflict management is not to eliminate rather
manage it so
Step 4: Actively Manage Channel
Conflict
Expanding Channels
• Having multiple channels should be built on a clear end user segmentation
strategy.
• Wal-Mart and convenience stores serve two different segments.
• Channel conflict can be managed by dedicating parts of the product line to
different distribution channels, though it’s often unsustainable.
• Dedicating different brands to different channels is known as channel brands.
• To reduce channel conflict, some manufacturers agree to let offthe existing
channel to increase sales in new channel.
Step 4 (Contd)
Over distribution
• More number of distributors dilutes the support.
• Thus the products requiring high level of support should not be over
distributed.
• Channel conflict arises due to different prices offered to different channel
members.
Step 4 (Contd)
Conclusion
• To conclude, Nirmalya Kumar says that new distribution channels rarely fit
the industry approach to the market.
• The tricky part is to cannibalize their own profitable business for
questionable returns from emerging channels.
• If one company does not then its competitor will.
• So he suggests that it is always better to have cannibals in the family and
the rate at which channel migration should be done is very critical.

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From distribution to growing distribution channels: HBR case study

  • 1. FROM DISTRIBUTION TO GROWING DISTRIBUTION CHANNELS Let’s keep the cannibals in the family By Group 2 Marketing LMN
  • 2. AGENDA • The chapter deals with situations where the new distribution channels have emerged and the companies face the dilemma whether or not to change their distribution channels. If yes, then to what extent. • The chapters explains each situation with suitable examples like Dell, Compaq, Ryan Air and the Music industry. • The chapter also gives steps in the channel migration strategy.
  • 3. WHEN A NEW DISTRIBUTION CHANNEL EMERGES WE NEED TO ASK THE FOLLOWING QUESTIONS • To what extent does the new channel complement or replace existing industry distribution channels? • To what extent does the new channel enhance or devalue existing capabilities and value network? The answers to the above questions will help arrive at a migration strategy, the level of internal resistance and the external channel conflict that one should anticipate as well as provide insight to the migration process
  • 4. Penetrate Keep Existing channels Add New Channel Reinforce Current Capabilities Low internal Resistance Low Channel Conflict Develop Keep Existing Channels Add New Channel Develop New Capabilities Medium Internal Resistance Medium Channel Conflict Switch Exit Existing Channels Add New Channel Reinforce Current Capabilities Medium internal Resistance High Channel Conflict Reinvent Exit Existing Channels Add New Channel Develop New Capabilities High Internal Resistance High Channel Conflict External Impact Internal Impact Enhances Existing Capabilities Requires New Capabilities Complimentary Replacement
  • 5. Replacement vs Complementary Replacement • Cannibalism, Channel conflicts, and resistance to change occur more in this situation Complimentary • Compel companies to move certain types of transactions and customers to new channel distribution. The nature of channel migration determined by whether a distribution channel compliments or displaces existing distribution channels.
  • 6. Core Capabilities Core Rigidities • With the advent of new type of distribution channels, companies tend to take advantage of the same without hindering their traditional way of approach. • The problem is generated when they try to sail on two boats at once which makes them jack of all trades and master of none.
  • 7. Instances of Channel Migration in PC Industry • To take leverage from DELL’s success of direct distribution channel, HP copied the same but kept its traditional channels alive which created a state of confusion in the customer’s mind and the attempt at replication of the former was an utter failure. • Taking a leaf out of Compaq’s success story of sales with 3rd party re-sellers, DELL decided to expand its distribution to the same channel but the decision did not bear fruits and for the first time DELL reported a net loss of $ 36 Million in 1993. Irrespective of the fact whether another channel dislodges existing distribution channel at an industry level, it will probably influence the core competences and distribution network resources of existing players. New channels may help a few organizations influence their core competences and distribution resources, it hinders other organizations inside of the same industry.
  • 8. The Reinvention of Music Distribution Business Models • The most difficult channel migration strategy is to reinvent distribution channels • Necessary in the face of both replacement efforts and the need to develop new capabilities. • Currently such a situation can be seen in online distribution of digital products like movies, music, games, books and software. • The music industry cost structure has two significant crises- the cost of distribution and logistics and the absolute costs of handling the returns of not so hit CDs • The emergence of Internet brought with it the opportunity to sell directly to consumers • The music manufacturer selling online has benefits of not having to pay, the retailer’s margin, greater customer knowledge and positive working capital.
  • 9. The search for a digital distribution model • Broadband Internet has opened up an entirely new digital form of music distribution. • Music executives and artists launched lawsuits against online music swapping • Apple Computer launched iTunes to give access to consumers to download unlimited music at a reasonable price giving way to a new a viable new business model. • This business model would transform the music business from a packaged goods industry to an electronic distribution industry.
  • 11. • A company should assess the performance of its existing channels • New Channels do not mean the solution to problems of existing channels’ problem • Example: In an FMCG company managers complaint about price pressure large retailers were exerting • However, audit proved them to be most profitable • Why? How? • The difference lies in manufacturer’s cost to serve the channels. Step 1: Conduct a Distribution Strategy Audit of Existing Channels
  • 12. Step 2: Articulate the strategic logic for channel migration Following questions about the new channel help evaluating opportunity presented by new channel: • Attractiveness of value proposition to target customers? • Is the target audience attracted to new channel, large enough? • Is there a differentiated value proposition or cost advantage? • Is our cost structure and value network optimized for new network? • What can and will competition do with new channel? • How will new channel affect customers’ channel preference and existing channels’ strategies?
  • 13. Step 2 (Contd) • To articulate new channel of distribution, plot the value curve • It would reveal that no channel is best. Each has its own strengths & weakness • Priceline.com was successful for flight tickets but online grocery business failed • Reason? • The target segment and value proposition were too small.
  • 14. Exploit online channels when network effects exist: • Internet’s most important attribute is reduction of transaction cost or cost of connecting people • That is why ebay, MMPG and Sony’s EverQuest is successful Consider Cost And Competitive Moves: • Developing strategy towards the new distribution channel • Optimal approaches are what major competitor do with online sales and what is our level of online sales • Key questions are • First mover in the industry will workout all political and technological kinks Step 2 (Contd)
  • 15. Step 3: Mobilize support For Channel Migration • A strong strategic logic is necessary for channel migration • New channels threaten both sales volumes in existing channel • Managers in the organization responsible for that • Implementation plan should answer the five channel migration questions • Company sales should migrate across various channels, and managers should have frame work of milestone
  • 16. • Channel conflicts will occur because of distribution channel to be chasing the same customers with same brand • Channel members call conflict is a healthy competition • Main objective of conflict management is not to eliminate rather manage it so Step 4: Actively Manage Channel Conflict
  • 17. Expanding Channels • Having multiple channels should be built on a clear end user segmentation strategy. • Wal-Mart and convenience stores serve two different segments. • Channel conflict can be managed by dedicating parts of the product line to different distribution channels, though it’s often unsustainable. • Dedicating different brands to different channels is known as channel brands. • To reduce channel conflict, some manufacturers agree to let offthe existing channel to increase sales in new channel. Step 4 (Contd)
  • 18. Over distribution • More number of distributors dilutes the support. • Thus the products requiring high level of support should not be over distributed. • Channel conflict arises due to different prices offered to different channel members. Step 4 (Contd)
  • 19. Conclusion • To conclude, Nirmalya Kumar says that new distribution channels rarely fit the industry approach to the market. • The tricky part is to cannibalize their own profitable business for questionable returns from emerging channels. • If one company does not then its competitor will. • So he suggests that it is always better to have cannibals in the family and the rate at which channel migration should be done is very critical.