Lecture Marketing channel strategy: Chapter 4 - TS. Đinh Tiến Minh

Learning objectives: Understand vertical integration as a continuum from make to buy rather than as a binary choice, explain why channel players (manufacturers, wholesalers, retailers) often integrate forward or backward with great expectations, only to divest themselves within a few years.... and other contents.
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Lecture Marketing channel strategy: Chapter 4 - TS. Đinh Tiến Minh1/28/2018Chapter 4: Make-or-BuyChannel AnalysisDINH Tien MinhLEARNING OBJECTIVES Understand vertical integration as a continuum from make tobuy rather than as a binary choice. Explain why channel players (manufacturers, wholesalers,retailers) often integrate forward or backward with greatexpectations, only to divest themselves within a few years. Frame vertical integration decisions according to whetherowning the channel, or some of its functions, improves longterm returns on investment. Recognize why outsourcing should be the base case for amarket channel, rather than vertical integration. Define six categories of company-specific capabilities.2INTRODUCTION Should a firm vertically integrate by performing both upstream anddownstream functions? In other words, Who should perform different channel functions? Should it be a single organization (manufacturer, agent, distributor,retailer—all rolled into one)? Should distribution functions be outsourced (upstream looking down)? Should production be outsourced (downstream looking up), or neither,such that manufacturers and downstream channel members remainseparate entities?411/28/2018INTRODUCTION When the manufacturer integrates a distribution function,(making sales, fulfilling orders, offering credit), itsemployees do the work, and manufacturer has integratedforward or downstream from the point of production. Vertical integration also can begin from a downstreamposition, thereby integrates backward. Whether the manufacturer integrates forward or thedownstream channel member integrates backward, the resultis that one organization does all the work, and the channel isvertically integrated.5INTRODUCTION Managers need a structured way to analyze their make-or-buy issues that provides them with a coherent,comprehensive, easily communicated rationale for theirdecisions.8Degrees of Vertical Integration921/28/2018Example of institutions performingchannel functionsFunction1) Selling (only)2) WholesaleDistribution3) RetailDistributionClassical MarketContractingQuasi-verticalIntegrationVerticalIntegrationManufacturers‘RepresentativesCaptive orExclusiveSales Agency*Producer Sales Force(direct sales force)IndependentWholesalerIndependent (3rdparty)Distribution Joint Distribution Arm ofVentureProducerFranchise StoreCompany Store10Costs and Benefits of Make-or-BuyChannels Distribution costs: personnel, transportation, warehousing,and so on The risk of the distribution operation and The responsibility for all actions in the channel Desire to control the operation Improve economic profits11Payment Options for Buying MarketingChannels Price might be expressed as a margin (i.e., the differencebetween the price ultimately paid and the reseller’s “cost ofgoods sold ”), a commission (fraction of the resale price), ora royalty (percentage of the reseller’s business). A flat fee or lump sum, or else get reimbursed for its expenses,such as through a functional discount. Future consideration1231/28/2018MAKE-OR-BUY CHANNEL OPTIONS: THEBUYING PERSPECTIVE The fundamental rationale holds that, under normalcircumstances in developed economies, markets for distributionservices are efficient The efficient markets argument also does not mean that allmanufacturers receive the same downstream services.13Six Reasons to Outsource Distribution1.2.3.4.5.6.MotivationSpecializationSurvival of the economically fittestEconomies of scaleHeavier market coverageIndependence from any single manufacturer14MAKE-OR-BUY CHANNEL OPTIONS: THEMAKING PERSPECTIVE First, vertical integration always entails substantial set-upcosts and overhead. Second, vertical integration is only worth considering if thefirm is prosperous enough to muster the necessary.2041/28/2018Six Company-Specific DistributionCapabilitiesSix major forms:1.2.3.4.5.6.Idiosyncratic knowledgeRelationshipsBrand equip- derived from the channel partner’s activitiesCustomized physical facilitiesDedicated capacitySite specificity21THE END!www.dinhtienminh.net5