Version 4/22/06
Support Material: Hackers, Hits and Chats
Keyterms: cannibalization; channel conflict; cookies; extranet; intranet; marketing mix; peer to peer; price; product; rfid; standards; supply chain; the long tail; xml


Place, the third element of the marketing mix (product, price, place promotion) deals with the movement of the product to the final consumer. The internet has created opportunities for companies to develop shorter channels to their customers, with many companies moving to more direct distribution. This has created the potential for channel conflict as existing channels see the threat of being disintermediated. Managing the potential for channel conflict while also competing directly with other firms has proven a difficult business challenge. Dealing more directly with customers has created the opportunity for acquiring customer data that would normally sit with other intermediaries. This data, market intelligence, can provide advantages companies can have over their channel members and competitors. Technology has also enabled outsourcing and offshoring to the benefit of India and China. Global trends that look set to continue.

Channel Management

A channel usually comprises more than one member, and is the organization of companies that gets a product from source to market. It consists of organizations such as manufacturers who produce the finished product, wholesalers who store products and create appropriate assortments for retailers who interact with the final consumer. While this is a relatively simplistic view of a typical channel, the focus here is to look at how the internet and related technologies have impacted channel management. Essentially the following trends are evolving: It is an attractive proposition for companies that produce products to try to deal directly with their final consumer, as this allows them more control over the marketing aspects of the product. It also provides an opportunity to gather valuable customer data that typically would be horded by the retailer which can then use this 'intelligence' as it negotiates terms with the producer and others upstream in the channel. There is a delicate balance for producers to manage their relationship with retailers who have the relationship with the customer in many cases.

Clearly these channel intermediaries (between the producer and final consumer) add cost to the product. Thus intermediaries need to provide value over and above that cost. The internet is now starting to enable producers to take on some of the tasks of intermediaries (communicating directly with customers for example), which marginalizes the value intermediaries provide.

There are cases where intermediaries have been essentially eliminated from channels. Travel Agents are a good example. Prior to the internet the travel agent provided a useful role, connecting vacation resorts and airlines with customers planning a vacation. Now these connections are occuring at sites like orbitz, travelocity, FareCompare and at airlines' and hotels' own sites. The role agents played is no longer essential, and unless they have repositioned themselves (example: offering tailored package holidays) they are no longer in business.

Travel agents, x and y are all victims of disintermediation, but in many instances where it perhaps makes sense for a marketer of a product to go directly online, they have chosen not to in order to avoid channel conflict and cannibalization of other channels. Alternatively they have made arrangements with existing channels such that those channels are not harmed by the online, direct-to-customer, initiative. Companies with these types of relationships (pre existing traditional channels) have found it harder to adapt to the internet as a channel than those whose business model included direct to customer trasactions in the first place. Thus Dell was able to embrace the internet much more easily than some of its competitors.

Channels typically have a dominant member to ensure effective management. This may be via ownership, contracts or simply size and scale of an individual channel member. While channel leaders typically manage the one channel, other channel members may be participating in multiple channels. Two commonly cited examples of channel leaders are Dell (manufacturer) and Wal Mart (retailer).

Retail Leader: Wal Mart comprises 20% of retail sales in the US. It clearly has an impact on the entire US economy with its everyday low pricing strategy. It is reknown for squeezing as much cost out of its supply chain as it can and pass those savings onto its customers. It is the largest purchaser of goods in many consumer industries (from sneakers to clothing). 80% of its manufacturers reside in China. This is part of a low cost strategy that is necessary for suppliers to compete for business at Wal Mart. For this supply chain to work Wal Mart has been a pioneer in technology, especially technology for supply chain logistics.

Product Leader: Dell leads its supply chain in an aggresive fashion. Dell's advantage over its competitors is its built to order model, which requires extremely tight integration with its suppliers, many of which are located in close proximity to its two manufacturing facilities, which are actually in the US, which is a little departure from the push to offshore manufacturing that has been pursued by retailers such as Wal Mart and other product manufacturers such as Nike.

source: Living in Dell Time Demand shaping: Thinking about Dell; Wal Mart: is wal mart good for america; Wal-Mart effect

Outsourcing and Offshoring

Outsourcing and offshoring are recent phenomenon which are a direct result of the developments in information technology which allow companies to better connect together and therefore shift production and services to the lowest cost provider.

Offshoring manufacturing has been popular since the early 90s, and with China's entrance into the WTO has increased in popularity. As noted above, 80% of Wal Mart's products come from China. China exported $169 bn of products to the US in 2004. China's advantage of production in other countries is cost and scale. Not only can they produce products cheaply due to the low cost of wages, but they can focus production of specific products in specific regions due to the numbers of citizens China has in various population centers. By being popular as the low cost producer China runs the risk that offshoring can move to another country (Bangladesh for example) if it does not remain competitive. To prevent this China will need to build some kind of lock-in to retain production within its borders. China is also interested to explore the outsourcing phenomena, which requires a work force with a greater skill set (and english speaking).

India has taken advantage of the outsourcing phenomena. Thus many IT services have now shifted to India (Bangalore being the main beneficiary). These services include software development and customer service centers. Given India is in a different time zone to the US, the services provided can ensure twenty four hour coverage. India is popular for outsourcing IT services because of cost savings, the use of the english language and a highly educated workforce (the IITs for example are world reknown).

Risks associated with outsourcing and offshoring:

Another recent trend is the growth of outsourcing logistics to third party logistics providers. UPS and FedEx are big players in this space.

source: outsourcing logistics: UPS Logistics; UPS Logistics Group To Manage Global Distribution For National Semiconductor; Ford Motor Company and UPS Logistics Group Ahead of Schedule In Vehicle Delivery Improvements ; FedEx Supply Chain Services; UPS and FedEx Compete to Deliver third party logistics providers in China

outsource: bangalore

Outsource2india: what can be outsourced to india; India: Let The Deals Begin; China starts IT services push; Offshoring Market in China Expected to Grow Further; Buying Chinese goods saves Americans $100 bln a year

value chain: decompose and digitize
It's a Flat World After All

Online Retailing

The internet has become a popular medium for direct to consumer transactions (retailing). Online retailing accounted for $143.2 b in 2005, a growth of 20% over 2004.

As a prospective retailer of products you have choices:

If the product is also retailed offline, then there is a potential for channel conflict, principally if the ownership of the online and offline environments are different (franchises for example). Retailers are now exploring better means to integrate their on and offline environments such that both can benefit from each other, especially as customers appear to benefit from the multi channel access to products. Some customers may enjoy learning about products online, yet make the final purchase offline, alternatively a customer may prefer to spend time browsing the retail store, yet make the purchase in the 'privacy' of his own home. Designing a system where each environment is fairly compensated for this 'behaviour' is important to incentivize the appropriate people to make the sale.

Advantages of online retailing versus offline include:

24 / 7 / 365 essentially means the customer can gather information and make a purchase in his / her own time, and not be limited by store hours. Reach / richness refers to the ability of the internet to offer content worldwide, tailored to the individual consumer browsing the store (using cookies). The Long Tail refers to the unlimited shelf space available online and the search capabilities that make it viable to retail products that perhaps would have been removed from the shelf of a traditional retail store as the product went through its own life cycle. Thus products that are not easily found in traditional stores are likely to be available on the web.

Online retailing has also created a more robust second hand marketplace, essentially a more viable customer-to-customer platform, via sites like eBay.

sources: Embrace Multichannel Shopping

The promise of B2B exchanges ?

The internet promised much in the way of the development of B2B auction exchanges and other B2B portals that would be used to trade goods with other members of the supply chain, multiple supply chains and competitors. The theory that it would be easy to connect entities together, and the very connectivity would provide obvious advantages has not played out as expected. Major car companies (GM, Ford and Daimler Chrysler) combined resources to create Covisint, an Auto Industry B2B exchange, it did not last but a few years. The companies involved could not create the advantages they were looking for from a separate 'channel' they could not get from their own systems. One could assume the bitter rilvalry between the companies made it difficult for each company to give up control over its own supply chain in order to fully cooperate with this venture. Developing the appropriate technologies and creating appropriate standards that were derivative to each company's proprietary standards was also a major undertaking. Similarly VerticalNet (then and now), a Pennsylvania-based company that provided vertically integrated systems for different industries has been similarly unsuccessful. Again, its likely a huge challenge to persuade channel leaders to relinquish some control over their channel(s) in order to participate in more open exchanges.

Despite the lack of success of some major undertakings, business to business auctions do make sense, especially in terms of managing excess inventory levels and such. Examples of these systems include Business & Industrial and Business & Industrial.

source: Covisint's Last Chance; Compuware to acquire Covisint B2B exchange; Covisint Resets Strategy (xml stuff);; VerticalNet Headed Down

New emerging Technologies

Three key technologies have enabled developments in the supply chain. They are: XML is an internet language standard that is used for sharing data, and this is used in the development of extranets that combine multiple organizations within a supply chain (as well as for intranets within an organization).

Technologies like bar scanning and RFID are creating intelligence in the supply chain that did not exist. Making the supply chain more adaptable to change. A retailer such as Wal Mart can determine exactly how much stock it has in each of its stores and can share this information with its suppliers in order to ensure it avoids uneccesary stockouts. It can also use this information to move product from one store to another. Similarly Dell is able to make quick decisions on order needs to its suppliers based on real time demand.

Intranets, supply chains more tightly woven

source: XML Tutorial; RFID Reshapes Supply Chain Management; Enhance Your Supply Chain with RFID

Digital Distribution

Digital products are a natural for direct distribution via the internet. Thus software providers will have a web-site where the software can be downloaded directly to the customer's computer.

Peer-to-Peer networks are a form of customer-to-customer distribution. Napster was a pioneer in terms of exploiting this form of distribution for music, others include Kazaa, Limewire, Bearshare and Gnutella. These systems are principally used to 'share' content, music, video and software. Given the intellectual property rights associated with the content, this type of distribution has come for heavy criticism and legal scrutiny. They did pave the way for the Apple iTunes Music Store, which has become a viable vehicle for content distribution.

A sidenote, Malware uses peer to peer networks to distribute itself.