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    Channel Selection For New Industrial Products

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    Provakar Deb
    This journal is focused on distribution management

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    © All Rights Reserved
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    f V. Kasturi Rangan, Melvyn A. J. Menezes, & E. P. Maier A Channel Selection for New Industrial Products: A Framework, Method, and Application The authors present a framework and method for addressing the new product channel choice decision and demonstrate its use with an application for a new industrial product. First, on the basis of extant literature, they disaggregate a distribution channel into eight functional components. These functions are representative of the various product-market factors influencing channel choice. Next, they offer a three- step method that involves (1) obtaining evaluations of the new product on each function from several experts, (2) analytically combining those evaluations, and (3) identifying the channel alternative that ef- fectively and efficiently addresses customer requirements of those functions. This method requires ex- tensive management participation to facilitate its implementation. Finally, the authors provide an illus- trative application to demonstrate its managerial usefulness. 'OR many businesses, the successful launch of new products is critical to maintaining market leader- ship. Unfortunately, empirical data indicate that one- third to one-half of all new products fail to meet a firm’s financial and marketing goals (Booz Allen & Hamilton 1982; Cooper and Kleinschmidt 1991; Korige 1989; Mansfield and Wagner 1975). A recent survey of 183 Fortune 1000 firms indicated that nearly half of them had new product failures exceeding 40% (Hise 1989). This finding is indeed surprising because the failed products had been screened for technical sound- ness and commercial feasibility. Various explanations have been offered for these failures: insufficient at- tention to the commercialization process (Wind and Mahajan 1988), lack of management support (Crawford 1977, 1987; Urban and Hauser 1980), and poor marketing planning and execution (Choffray and \. Kasturi Rangan is Professor and Melvyn A. J. Menezes is Assistant Professor of Business Administration, Harvard University .P. Maer is Marketing Operations Manager, Abrasives Division, SM. Company. Funding for tis project was provided by the Division of Research at the Harvard Business School. The authors thark John Hauser, Tom Kinnear, Vijay Mahajan, Brian Ratchford, and three anonymous JM re viewers for providing valuable comments on previous versions ofthe ace, Journal of Marketing Vol. 56 (July 1982}, Lilien 1980; Cooper 1979; Mahajan and Wind 1991). In this article, we focus on one aspect of the launch decision—the choice of distribution channels. We of- fer a method for systematic evaluation, planning, and execution of the channel choice decision for new in- dustrial products. Though distribution decisions can- not be made in isolation from other marketing-mix de- cisions such as pricing, we emphasize channel selection because it has not received much attention in the lit- erature, Booz Allen & Hamilton (1982) categorized new products into six groups: (1) new-to-the-world products, 10%, (2) new product lines, 20%, (3) ad- ditions to existing product lines, 26%, (4) revisions to existing products, 26%, (5) repositioning, 7%, and ©) cost reduction, 11%. The method we offer is best applicable for the second and third groups—new product lines and additions to existing product lines. For such new products, the channel decision usually is made at a latter stage of the launch process (Cooper 1990) because firms already have knowledge of the potential channel options from their experience of ex- isting product channels (Business Week 1989). ‘The ‘method we outline is less useful for new-to-the-world products. Using the extant channel literature (which does not Channel Selection for New Industrial Products / 69 Conwicht © 2001. All Richta Reserved. distinguish between new and mature products), we identify a list of product-market factors that influence channel choice. We then combine groups of factors into eight generic functions that serve as the frame- work for the channel selection method. We use data from in-house experts and lead users to evaluate the new product on each of the eight functions. Knowing the profile of the channel function requirements, we identify feasible channels for the new product and fi- nally choose one that maximizes management's goal (e-g., profit). "After outlining the conceptual framework, we de- scribe the method and present an illustrative appl cation. We conclude with a discussion of the meth- ‘od's managerial and research implications. Conceptual Framework ‘The distribution channe! literature can be divided into design and management subject areas. Channel design research (€-g., Williamson 1985) examines the or- fanization ofthe distribution channel system and the rationale for having intermediaries such as salesforce, agents, distributors, wholesalers, and retailers. In Contrast, channel management research examines how channel systems can be managed once they are in place. Most of this research pertains to how manufacturers and distributors use their power base (Beier and Stern 1969; Gaski 1984) to influence the achievement of their business objectives (Frazier and Rody 1991). Con cepts of conflict and cooperation are central to this Tine of research (Anderson and Narus 1990; Stem and Brown 1969). For the problem of new product channel selection, the channel design literature isthe appropriate starting point. ‘The primary question is about channel struc- fure—-that 1s, which intermediary, or intermediary Combination, is best suited 0 tak the new product to market? Though the conclusions from the current Channel management research stream do not directly adress the issue of channel choice, they have strong implications for channel management once the chan- nel is up and running. Frazier (1983) and Rangan and Jaikumar (1991), for instance, highlight the value of anticipating management issues even during the pro- cess of designing distribution channels. Hence, in de- veloping a channel selection method, we consider “Gesign’ and “management” isues in combination, Channel Design Issues The channel design literature dates back to the work of Aspinwall (1962), whose predictions on channel outcomes are based on five product characteristics: re- placement rate, gross margin, adjustment (or product customization), time of consumption, and (customer) searching time, He predicts that goods with a low re- 70 / Journal of Marketing, July 1982 placement rate and high gross margin, adjustment, time of consumption, and searching time will be sold di- rectly. Conversely, he predicts that goods with the op- posite profile will be sold through distribution or retail channels. Miracle (1965) adds considerable richness to Aspinwall’s framework by including several indi- cators of customer buying behavior, such as signifi cance of purchase and purchasing effort, Table I lists factors that have been posited to determine channe! choice. The early work on channel choice was atheoretic and did not explain the basis for selecting direct ver- sus distribution channels. Bucklin (1966) provides an underlying explanation for the predictions offered by ‘Aspinwall and Miracle. According to Bucklin, four basic service output levels are important: market de- centralization (fragmentation), lot size, assortment, and waiting time; firms chose channels that minimized the distribution costs associated with delivery of these outputs, Bucklin's work closely parallels the literature on distribution logistics that focuses on physical distri- bution costs (Bowersox 1969). Physical characteris- tics of the product, such as bulkiness, handling con- venience, and weight/value ratio, are important determinants of channel choice because of their im- pact on transportation and storage costs. Lilien (1979) confirms many of Miracle’s speculations in a cross- sectional sample of 22 industrial firms. One of Lilien’s findings is that these firms usually sold new products directly and sold mature products through distributors. Without knowing the underlying ration- ale for such a decision (which Lilien failed to pro- vide), itis difficult to generalize that result, especially because innovation leaders consistently route a large proportion of their products through distributors (Business Week 1989) Williamson's work on transaction costs (1975, 1979, 1981, 1985, 1991) provides a useful theory for analyzing such governance issues as vertical integra- tion. Transaction cost theory (TCT) was originally formulated to address the “make or buy” choice; we clarify its interpretation for stuyding the choice of “direct” versus “indirect” distribution channels. Ac~ cording to this interpretation, Williamson's (1985) theory has two key constructs—asset specificity (du- rable investments undertaken in support of particular transactions that cannot be redeployed without sub- stantial loss of value) and uncertainty (in the product- market environment as well as in the behavior of the transacting parties). A third construct, frequency, is not directly relevant here because of our focus on dis- tribution arrangements, which involve recurrent (i. frequent) transactions. ‘Asset specificity affects production and distribu- tion costs (economies of scale and scope associated Conwicht © 2001. All Richta Reserved. TABLE 1 Factors Determining Channel Choice Salestoree Distributor W: ‘Aspinwall (1962) 1 Replacement rate Low High 2. Gross margin High Low 3. Adjustment High Low 4. Time of consumption High Low 5. Searching time igh Low Miracle (1965) . Unit value igh Low 7. Significance of purchase High Low 8. Purchasing effort High Low 9. Rate of technological change High Low 10. Technical complexity igh Low 11. Need for service High Low 12, Frequency of purchase Low High 13, Rapidity of consumption Low High 14, Extont of usage Low High Buckiin (1966) 15. Market decentralization Low 16. Lot size Large Small 17. Assortment Narrow Wide 18. Waiting time High Low Lilien (1879) 18. Order size Large Small 16. Product complexity High Low 17. Product life-cycle stage Introduction Maturity 18. Frequency of usage Low High ‘Transaction Cost Theory: Constructs Used in Marketing Channel Studies (Anderson and Schmittlein 1964; John and Weitr 1888; Klein, Frazier, and Roth 1380) "9, Product customization requirements Low 20. Need for special equipment or services Low 21. Complexity of customer buying and decision-making process Low 22. Complexity of product information to be exchanged Low 23, Transaction size ‘Small 24, Rate of technological change tow 25. Volatility of demand i with taking a product to market) as well as gover- nance costs (hazards of opportunism). When asset specificity exceeds a critical value, the total combined costs of distribution and governance favor a vertically integrated, or company-owned, channel; when asset specificity levels are below the critical value, the costs favor a market, or an independent distributor, chan- nel. According to Williamson (1985, p. 56-60), at ow levels of uncertainty (no bounds on human ra- tionality), there should be no reason to vertically in- tegrate; at high levels, the channel choice should be determined by the levels of asset specificity. Williamson's inclusion of governance cost in ad- dition to distribution costs resembles the “political economy” framework advocated by marketing theo- rists (Arndt 1983; Stern and Reve 1980). Though this framework identifies the variables that potentially in- fluence channel choice, it does not provide the direc- tionality underlying the relationships. By contrast, transaction cost theory identifies the channel out- comes that would occur in the presence of different levels of the theory’s key construct—asset specificity. Similarly, though Macneil’s (1980, 1985) theory of relational exchange provides a parallel to Williamson's asset specificity construct by organizing exchange along a continuum from purely discrete transactions (i.¢., one-shot) to relational exchange (i.e-, ong term), the theory itself centers on contracting norm differences along the continuum rather than Variations in channel structure. Several variations of TCT have been applied to the study of marketing channels (Anderson 1985; Anderson and Coughlan 1987; Anderson and Schmittlein 1984; Anderson and Weitz 1986; Heide ‘and John 1988; John 1984; John and Weitz 1988; Klein, Frazier, and Roth 1990). The central thrust of the studies has been to empirically confirm (or discon- firm) TCT propositions about downstream vertical in- ‘Channel Selection for New Industrial Produets / 71 Conwicht © 2001. All Richta Reserved. tegration. Collectively, this stream of empirical re- search suggests that direct sales channels (or vertical integration) would be preferred to indirect sales chan- nels (or independent distributors) under the following conditions. + When the downstream investments required to support the sale are not easily usable outside the specific context of the transaction. This condition is common with highly feustomized products or when specialized equipment ot service is required to market the product. When the performance of the channel members is dif- ficult to assess by simply measuring their sales output Such is often the case in long-lead-time transactions re- {uiring the salesperson to cultivate multiple members of the buying decision-making unit or in transactions in volving extensive exchange of information When the size of the transaction in units or dollars is large enough to provide the seller with scale or scope ‘When there is an increase in the uncertainty of the en vironment in which the distribution activity s being per- formed. This condition typically occurs with products that have rapidly evolving technologies and in markets that are characterized by volatile demand. ‘Therefore, as seen in Table 1, the previous work on factors influencing channel choice is consistent with TCT. The main difference, however, is that TCT pro- vides an economic rationale for the channel choice, namely transaction cost minimization. From a field study of 50 industrial firms, Corey, Cespedes, and Rangan (1989) concur with the list in Table 1. Like Aspinwall and Miracle, Corey and his colleagues do not provide the underlying reasons for their assertions on channel choice. Their work, how- ‘ever, provides evidence that the list of product-market factors and their effects on channel choice are robust and current. By classifying similar factors under a common function, we offer a parsimonious list of eight channel functions and their implications for channel choice (Table 2).' A brief description of the eight channel choice functions follows. 1. Product information. Customers seck more informa tion on certain kinds of products (Aspinwall 1962; Miracle 1965), particulary products that are new and/ or technically complex (Lilien 1979; Williamson 1985) tnd those that have a rapidly changing technological ‘component (Williamson's uncertainty factor) Litera "An underying economic assumption guides the channel choke for cach function, which may or may not be applicable in every case For example, the product information function favors a diect sales: force if “high” and « distibutor channel if “low.” The rauonale is that the wansaction cost of providing complex information would be higher under the distributor option because of the need for 3 gover tance strcture 10 overs the accuracy ofthe information and the peed with which its passed on to customers. This may be tne in feneral, but it may not apply in every specific product market com {ext Hence, x calibration ofthe channel choice implications indicated in Table 2 must be done before industy specific applications are un deraken, 72 / Journal of Marketing, July 1982 ture indicates that customers usually prefer a direct channel when information requirements are high 2. Product customization. Some products inherently need technical “adjustment” (Aspinwall 1962); they require ‘customization to fit the customer's production require- ments (€-g., special steel for a maker of surgical in struments). Commonly, however, even a standard product must fulfill specific customer requirements on factors such as size or grade (Corey, Cespedes, and Rangan 1989; Williamson 1985). Literature indicates that customers prefer a direct channel when custr zation requirements are high 3. Product quality assurance. A customer might place emphasis on product integrity and reliability because ‘of the consequences the product has forthe customer's ‘own operations (Corey, Cespedes, and Rangan 1989) For example, 2 standard chemical reagent may be of utmost importance to pharmaceutical manufacturers ‘because of the liability associated with a defective final product. This function is a measure of the application's Importance to the customer (Miracle 1965). Literature indicates that customers usualy prefer a direct channel to ensure product quality 4. Lot size. This function reflects the customer's dollar ‘outlay for the product (Lilien 1979). Ifthe product has ‘thigh unit value o if ti used extensively, itis likely to represent a significant financial decision for the cus- tomer (Bucklin 1966) and is likely to lead to a con certed purchasing effort (Miracle 1965). Literature in dicate that customers usually seek direct channels when lot size requirements are large. 5. Assoriment. A customer may need a broad range of products (Bucklin 1966) and_may require one-stop shopping (Corey, Cespedes, and Rangan 1989). For ‘example, an electrical contractor may need products that satisfy different electrical codes, depending on the na- ture of the project. In other cases, assortment needs ‘may be related simply to the breadth ofthe product fine (eg., size) and availablity of complementary products (e.g, wires with electrical switches). Literature indi- cates that customers usually seek indirect channels when they have broad assortment needs. 6. Availability. Some customer environments require the ‘channel to support a high degree of product availabilty (Aspinwall 1962; Miracle 1965). A customer’s product- usage rate may be difficult to predict (e.g.. spare parts, because they are required only when a machine breaks down) or a customer may prefer to switch to compet- itors rather than wait when the product is unavailable. "Notions of demand uncertainty (Williamson 1985) and. ‘equirements of buffer inventory (Bucklin 1966) ae re lated to this function. Literature indicates that cus- tomers usually seek indirect channels when they have imense product availability needs 7. Afer-sales service. Customers need services such as installation, repair, maintenance, and warranty. Though Miracle and Bucklin refer to this function generally as. service intensity, we chose to unbundle the aftersales. ‘component because the previously described functions already reflec the presales service requirements (e.8.. product information). Literature indicates that cus: tomers usually seek indirect channels for supporting their after-sales service requirements 8. Logistics. Transporting, storing, and supplying prod. ‘ucts to the end user involve levels of complexity. For example, transshipping and transporting hazardous Conwicht © 2001. All Richta Reserved. Se: yy }) TABLE 2 Channel Choice Functions Product Market Factor Customer's Requirement of Identified in the ‘Channel Functions Literature Reference: Direct if: Indirect If: 1. Product information ‘Searching time, technical Aspinwall (1962), Miracle High Low ‘complexity, rate of (1965), Lilien (1979), technological change Williamson (1985) 2. Product customization Adjustment, ‘Aspinwall (1962), High Low ‘customization, Williamson (1985), ‘customer importance Corey, Cespedes, Rangan (1989) 3, Product quality Product criticality, Miracle (1965), Corey, Important. —_Unimportant assurance significance of Cespedes, Rangan purchase (1389) 4, Lot size Purchasing effort, unit Miracle (1965), Bucklin Large Small value, extent of usage, (1966), Lilien (1979), order size Williamson (1985) 5. Assortment Assortment, one-stop __Bucklin (1966), Corey, Esser shopping Cespedes, Rangan 6. Availability Frequency of usage, time ‘of consumption, replacement rate Waiting time, need for service Need for special equipment, transportation convenience 7. After-sales service 8. Logistics chemicals may require special investments tha ae likely to increase handling costs (Bowersox 1969). More- ‘over, once such investments are in place, governing their effective use involves additional transaction costs (Williamson 1985). Literature indicates that customers usually seek direct channels when logistics require- ‘ments are complex. In short, extant literature offers a comprehensive list of functions that determine whether a manufac- turing firm should choose a company-owned direct or ‘outside (indirect) distribution channel. The direct ver- sus indirect distribution dichotomy imposed by the lit- erature cannot be taken too literally, however. Usu- ally a multitude of channel alternatives are available to take a product to market (e.g., agents, brokers, manufacturer's reps, value-added resellers) and sev- ral may have the characteristics of direct as well as, indirect channels. Some observers expect these hybrid channels to be the dominant design of the 1990s (Moriarty and Moran 1990). Unfortunately, the chan- nel design literature fails to provide the underlying ra- tionale for the existence and emergence of hybrid structures (Anderson and Weitz 1986; Klein, Frazier, and Roth 1990). This deficiency can be overcome by focusing on channel functions instead of institutions, Functions, in fact, are the basic determinants of ‘channel structure. McCammon and Little (1965), for ‘example, argue that a distribution structure is simply (1989) Aspinwall (1962), Miracle Not critical Critical (1965), Bucklin (1966), Williamson (1985) Miracle (1965), Bucklin Not critical Critical (1966) Bowersox (1969), Complex Simple Williamson (1985) a transient system designed to perform necessary tasks. We present the channel choice implication for each function, but it is useful to recall that customers re- Quire their preferred channel system to deliver a complete bundle of channel functions (Stem and Sturdivant 1987). Channel choice decisions therefore ‘ust be based on the full profile and not on individual functional requirements. Though the extant literature provides channel implications for extreme profiles, implications for the intermediate positions are un- clear. For example, in Figure 1 the functional profile marked 1 is clearly suitable for a direct sales channel and that marked 2 is appropriate for an indirect (dis- tributor) channel. The profile marked 3, however, re- {quires a hybrid of direct and indirect channel func- tions. The exact nature of this hybrid intermediary will vary from industry to industry. It could be a value- added reseller in the computer industry or a con- verter/molder in the plastics industry. In any case, by focusing on a full profile of customers’ channel fune- tion requirements, we can broaden our channel op- tions from the restrictive direct versus indirect di- chotomy imposed by the extant literature. Channel Management Issues ‘Two related channel management considerations be- come important at this stage of the channel design. The first consideration originates from the difficulty Channel Selection for New Industrial Products / 73 Conwicht © 2001. All Richta Reserved. FIGURE 1 Channel Choice implications of changing distribution channels once they are in place (Bonoma 1981). Such a change could cause disruptive conflicts and lead to a dysfunctional exercise of power (Gaski 1986). As a product matures, customers’ re quirements of the channel functions may evolve (Lele 1986). The implemented channel structure therefore rust be capable of dovetailing with customers” chan- rel function requirements as the product-market evolves without unduly disrupting existing channels. As a re- sult, two sets of evaluations are necessary—one for the new product and another when the product is es- tablished, that is, when the product, its features, and its applications become widely known in the market, ‘Admittedly, this projection is a difficult one for cus- tomers to make; nevertheless, attempting to gauge channel trends up front is important if costly channel conflicts are to be avoided. The second channel consideration involves the ‘constraints a company may find when developing and implementing the selected channel profile from Figure 1, For example, a small manufacturer of new high technology products may lack the resources to hire a 1 salesforce even though customer considerations may indicate the need for exactly that. (Heide and John 1988 provide a similar example from the distributor's point of view.) Under those circumstances, the man- tufacturer will probably choose an indirect channel but attempt to structure distribution arrangements so that the implemented channel approximates the profile re- quired by customers. This approach may involve granting special rewards and incentives to the distrib- ‘utor for performing certain key channel functions. Thus, in translating the required channel profile from Figure 1 to a conerete channel option, the manufacturer must consider contextual, firm-specific constraints. It is important, however, to start with the unconstrained solution first in order to know the loss imposed by the constraint. 74 / Journal of Marketing, July 1982 ‘When the management and design considerations ‘are combined, several options may emerge that can deliver customers’ channel function requirements. The best option is obviously the one that maximizes the company’s primary goal without sacrificing some of its secondary objectives. Financially, this may trans- late to maximizing sales or profits, or minimizing dis- tribution costs subject to attaining managerial goals on factors such as market share or return on investment (Bowersox et al. 1980). The Method To facilitate its application, we translate the preceding, conceptual framework into a three-step implementa- tion process Step 1 ‘The eight generic channel functions identified in Ta- ble 2 must be operationalized to reflect the product- ‘market context under evaluation. Each function has ‘multiple indicators (as seen in Table 2). The specifics are best obtained from persons who are most familiar with the product-market context, such as selected cus- tomers, distributors, and salespeople, in addition to design and development managers. Usually the help of a focused decision maker, such as the product man- ager, is necessary to trim the list to a consistent and concise set of indicators. It is also useful at this stage to verify the validity of the underlying assumptions (ee footnote 1) that influence the channel choices in- dicated in Table 2. ‘fier constructing the operational indicators, we need to evaluate customer requirements for each of the eight channel functions. The research approach of obtaining this information from a large sample of end users is ruled out because of the new product context. ‘A company may have an accurate list of its potential users but, because they have neither bought nor used the product, their responses are probably unreliable. We therefore need a team of experts who have special knowledge of the product and how customers are likely to buy and use it. We suggest using two such groups of experts—customer lead users and managers, ‘von Hippel (1986) identifies customer lead users as “users whose present strong needs will become ‘general in a marketplace months or years in the fu- ture. Since lead users are familiar with conditions which lie in the future for most others, they can serve as a need-forecasting laboratory for marketing research,” von Hippel outlines a process for incorporating lead user data and further demonstrates its usefulness in a new industrial product application (Urban and von Hippel 1988). The process involves identifying users who lead the market in their ability to adopt innova- tions (Rogers 1983) and analyzing their buying be- Conwicht © 2001. All Richta Reserved. haviors to project onto the general market of interest. ‘The second group of experts, managers, has often been tapped by the decision calculus literature (Fudge and Lodish 1977; Little 1970, 1986). These decision makers are most likely to be knowledgeable because of their involvement in various aspects of the new product-market development process. Research on ‘managerial decision-making processes indicates that managers’ expert judgments usually are most helpful in unprogrammed decision contexts where institu- tional data about the product or market are lacking (Larréché and Moinpour 1983; Mcintyre 1982; Per- kkins and Rao 1990). The new product channel context is one in which judgmental projections of experienced salespeople, product managers, sales managers, and product development engineers can compensate for the absence of extensive customer data on purchase and usage behaviors. Step 2 Combining the experts’ evaluations is essential to making a good channel decision because knowledge is generally dispersed in the early stages of the prod- uct life cycle. Two broad approaches are used for ‘combining experts’ opinions—group-oriented when interaction among the experts is possible and analyt- ical when interaction among the experts is impossible because of physical separation or confidentiality. Though several group-oriented procedures are avail- able, including the widely known Delphi method (Linstone and Turoff 1975), the evaluations them- selves may be biased because of bandwagon effects, hierarchical managerial effects, and issues of power politics (Lilien and Kotler 1983). Moreover, cus: tomers in competition with each other may refuse to participate in such an exercise. Various analytical procedures have been sug- gested for combining experts” estimates, ranging from fa simple average to a trimmed mean to a Bayesian revision process (¢.g., DeGroot 1974; Huber 1979; Morris 1977; Roberts 1965; Winkler 1968). Most of these procedures do not formally allow for the pos- sibility of dependence among the experts’ estimates. For example, the in-house experts’ estimates may all be based on common training and experience and thus cannot be treated as independent estimates. We adopted the consensus method developed by Winkler (1981) for combining the experts’ responses, which formally allows for dependence among the experts. ‘The sence of the method involves estimating the true un- known value of each channel function on the basis of a composite involving means, variances, and inter- dependencies among the experts. We briefly outline the procedure in Appendix A. Step 3 ‘After obtaining the required channel profile of eight functions for both the new and the established prod- ucts, we translate the functional evaluations to con- crete channel alternatives. Identifying the type of ‘channel that would satisfy customer requirements in- dicated in the previous analysis is the objective at this stage. Though identifying generic channel strategies ‘may be possible with a knowledge of channel function requirements and the channel choice implications in- dicated in Table 2, managers/decision makers with context-specific knowledge are likely to be capable of specifying the detail. Not just pure structures, such as salesforce or distributors, but also hybrid combina- tions of channel entities are valid alternatives. ‘Once the feasible channel alternatives are known, the final task is to identify the option that best meets the company’s new product goals. From our discus- sion of channel management considerations in the conceptual framework section, recall that the goal maximization process is subject to several manage- ment constraints. First, the cost of conflict manage- ‘ment that certain channel options may pose must be included in the calculation. Also, the start-up costs of new channels must be factored in, Finally, the finan- cial impact of the new product channel effort on isting products (opportunity costs) must be consid- ered. Illustrative Application ‘We applied our method to the selection of distribution channels for a large industrial company's new prod- uct. Manufacturing process changes had enabled this company to develop a new product, Scotchfiber (dis- guised name), in 1987. Customers used Scotchfiber- type products for a variety of applications such as deburring metal parts, deflashing plastic and paper utensils, cleaning golfballs, tiles, and rubber articles, gripping fabric in textile mills, and containing com- ponents for assembly. Managers were convinced of Scotchfiber’s superiority, especially in the $100 mil- lion industrial cleaning and finishing market, which consisted of many specialty applications. Scotchfiber was a new product line for the com- pany. Potential customers currently used a variety of alternative solutions to address their needs. Scotch- fiber applications had little overlap with the compa- y's current product lines. About 95% of the com- pany's current products were sold to end users through a network of more than 500 independent distributors with the help of the company’s 100 salespeople. Be- cause of the new product’s numerous potential appli- cations and the strength of its distribution channels, the managers were inclined to route Scotchfiber through ‘Channel Selection for New Industrial Products / 75 Conwicht © 2001. All Richta Reserved. present channels, which consisted of general-line fin- ishing distributors. ‘We applied our method in the following three steps. ‘Step 1 With the help of the marketing manager, product manager, and two sales representatives, we worked ‘out operational definitions for each of the eight chan- nel functions identified in Table 2 to reflect the ‘Scotchfiber marketing context. The function “product information,” for example, was characterized by the degree of information a customer sought on (1) roll fiber length, fiber property, and construction density and (2) usage properties, such as the ability to finish inregularly shaped pieces and interiors. The opera- tional definitions for each function were typed on sep- arate cards to be used as the basic interview guide. Using the process von Hippel (1986) suggests for identifying lead users, we chose 10 potential “cus- tomer experts” who were at the leading edge of adopt- ing and using the new product. These lead users were generally considered to be trendsetters in their indus- tty and either had already started to use Scotchfiber in production trials or were in the process of placing the trial order. In addition, we also selected 11 indi- viduals from the company who had special knowledge about the product and/or its customer applications. ‘Some of these “producer experts” were intensely in- volved in Scotchfiber product and application devel- opment, and the rest were involved in marketing the product to lead users. Experts were interviewed individually for approx- imately an hour to an hour and a half each to obtain their evaluations of customers’ anticipated channel function requirements. Knowing the problems of re- liability usually associated with such judgmental data (Chakravarti, Mitchell, and Staelin 1979), we ensured that the respondents were thoroughly processing the information at a disaggregate level before their overall judgments were sought. (The procedure is described in further detail in Appendix B). We chose three years as the time horizon for the new product channel study because, in the estimate of the company's top man- agers, that would be the time frame required for Scotchfiber to become established in the market, if successful Step 2 ‘Operationally, to combine the evaluations of the var- ious experts, it was first necessary to estimate the level of interdependence among them. The correlations be- tween the experts might be inferred from a history of their previous estimates or judgments on a common stimulus. In this case, such data were not available. Consequently, we used the correlation among the ex- perts’ evaluations as a measure of their interdepen- dency. 76 / Journal of Marketing, July 1982 ‘The average correlation was found to be rp = .543 among the 11 producer experts and r, = .607 among the 10 customer experts. The average correlation be- tween the 11 producer experts and the 10 customer experts was tp, = .413, This range of correlations confirms our view that experts were indeed providing thoughtful responses to our questions. A very low within-group correlation would have cast doubts on the reliability of our measures. Winkler (1981) indi- cates that the multivariate normality assumption is ro- bust for this range of correlation values; it becomes crucial only for correlations of .8 and higher. A com- monly used test for the significance of the correlations is based on the statistic Ltr (1/2) 1n— ‘whose distribution is approximately normal. Using this (est, we found that the correlation among producer ex- perts was significantly different from zero (z= 2.194, P< .029) and the correlation among customer experts was significantly different from zero (z = 2.539, p < 011). However, the correlation between producer and customer experts was not significantly different from zero (z = 1.584, p < .56). Because the judgments of producer and customer experts were correlated within ‘each group, but not between, we treated the two groups independently and used equations Al and A2 (Ap- pendix A) to calculate the means and variances of the consensus separately for the producer and the cus- tomer experts, for both years 1 and 3. We then com- bined the producer and customer consensus values us- ing equations A3 and A4 (Appendix A) to obtain the overall evaluations for years 1 and 3, respectively, as shown in Table 3 Step 3 ‘The channel function profiles in Table 3 were pre~ sented to the Iaunch team, which was made up of six members of the division’s marketing and sales staff who were responsible for drafting an initial Scotch- fiber marketing plan. None of them had participated 8s experts in the previous evaluations. In addition, we gave the group our subjective interpretations of the channel requirements for each function. These infer- ences, stated in Table 4, along with the profile in Ta- ble 3, helped managers specify the feasible channel alternatives. After discussions lasting almost three hours, the group came to the following conclusions. + The intensity of the anticipated customer requirements for product information, product customization, and product quality assurance for the new product consi Conwicht © 2001. All Richta Reserved. TABLE 3 Evaluation of Distribution Channel Functions (figures in parentheses are standard deviations) Year+ Yours ‘Producer Experts’ Customer Experts’ Combined Producer Experts’ Customer Experts’ Combined Consensus Meant Consensus Means [Means Consensus Means Consensus Means Means 7, Product information 42 (091) 70 (098) 86.085) 27 (108) “56 (066) 44 (066) 2. Product 162 (101) ‘96 (080) 81.087) 18 (087) 51 (117) .28 (070) customization 3. Product qual 41 (088) 84.097) 62 (067) 28 (096), 38.098) 33 (069) 4, Lot sie 23.1116) 50(107) 38.079) 38 (096) 32101) 36 (069) 5. Assortment 83 (087) 67 (098) 78 (084) 57 (117) ‘46 (090) 50 (071) 6. Availabilty 169 (083) 167 (082) 68.086) 44 (095) 50 (107) 47 (071) 7. Aftersales service 161 (095) 72 (082) 66 (067) 33 (099) “45 (097) 39 (069) 8. Logistics 03 (080), 11 (087) __.07 (.063)_08 (089), 192 (080) _04 (063). TABLE 4 Evaluation of Distribution Functions (figures in parentheses are standard deviations) ‘Overall Means: ‘Overall Means Channel Determinants (Year 1) Comments (ear 3) Comments 1. Produet information “56 (065) Does not favor either ‘44 (068) Does not favor either distributor or salestorco distributor oF direct salesforce 2, Product customization 81.(067) Viewed as highly 28 (070) Because the customization customized, suggesting ‘content is low, customers customers would ‘would have litte difficulty probably prefer a direct ‘Ordering from distributors sales contact 3, Product quality 162.(067) Fairly important, suggesting _—-33 (069) Because customers by now assurance that a direct salesforco ‘would probably have ‘would be preferred standardized their specifications, they would have litle ditfcuty ‘ordering from distributors 4, Lot size 28 (079) Because lot size is not 36.069) Because lot size is not large, customers could be could be best served by distributors distributors 5, Assortment 76.064) Assortment not essential; 50.(071) Does not favor either hence @ distributor ‘distributor or salesforce 6, Availabilty $8 (066) AT (071) Does not favor either distributor or salesforce 7. Aftor-sales service 165 (067) Post sales service 29 1069) _Post-sales service requirements are not requirements are marginally critica, favoring distributors (istibuton is not necessary 8, Logistics 07 (063) Simple product; a 104 (063) Simple product; 3 distributor could handle it distributor could handle it ‘a well as anyone el erably exceeded the current capabilites ofthe division's. zeneral-line Finishing distributors. + The channel function profile after the product was es- tablished matched that of the division's other products ‘currently being routed through genera-line finishing dis tributors, + A new class of distributors, fiber specialists, which the ‘company did not currently’ use, would also'be able 10 2s well as anyone else satisfy the functional requirement for the established product. However, they would have difficulties fulfilling the first thee functional requirements for the new prod- uct, but {o'a lesser degree than the curent distributors. Six channel paths were identified initially as fe sible options for taking the product to market (see Ta~ ble 5); two were pure options and the other four were hhybrid combinations of salesforce and distributors Channel Selection for New Industrial Products / 77 Conwicht © 2001. All Richta Reserved. TABLE 5 Feasible Channel Options 3 Years Later (when Now (when product product is Option is new) established) 1 Salesforce Generalline finishing distributors 2 Salesforce 3 Salesforce and general-line finishing distributors 4 Salesforce and fiber specialists 5 Salesforce and generalline finishing distributors 6 Salesforce and fiber specialists Fiber specialists Generai-tine finishing Fiber specialists Fiber specialists General-tine finishing distributors sharing channel tasks for the new product. Options 5 and 6 were eliminated, however, as the group thought both options would entail very high switching costs and channel conflicts because of the required change from one class of distributor to the other. Thus, the choices for the optimal channel were reduced to four alternatives. At the subject company, new products were as- signed sales and profit targets; line managers were ex- pected to achieve or surpass both. The division's area sales managers and their key sales representatives were contacted for revenue and cost estimates of going t0 market with each of the four channel options. Instead of estimating variations in sales revenues through each option, area sales managers felt more confident in es- timating the intensity of channel coverage required of each option for achieving the fixed sales target. From that information, the cost of each channel option can be estimated. Distribution costs were disaggregated into seven elements: demand generation (salesforce time, marketing, and advertising), distributor techni. cal training, distributor administrative training, sales support (inventory carrying and customer credit), lo- istics (order processing, transportation, and ware- housing), distribution margin, and opportunity costs (of salesforce time taken away from selling existing products) Many cost elements, such as logistics, sales sup- port, and distribution margin, can be computed once the channel options and the’ details of their imple- mentation are known. Others, such as distributor training costs and opportunity costs, are essentially judgments for new products and channels. They were obtained from area sales managers and subsequently refined by headquarters’ accounting staff. We aggre- gated the costs for each channel option. Because the 78 / Journal of Marketing, July 1982 sales target was identical for all four options, the op: timal channel in this case was the cost-minimizing op- tion. The relative cost numbers are reported in Table 6. Option 3 was the optimal choice. In option 3, the salesforce and the general-line fin- ishing distributors together call on end users to estab- lish the product and effect sales. In three years, after Scotchfiber has become established, these same dis. tributors would be expected to take full responsibility for the product line; itis assumed that the distributors would be sufficiently trained by then to service and maintain the several applications for the product. Discussion To evaluate the usefulness of the proposed method, we went back to the company a year after the new product launch to obtain information on how Scotch- fiber was performing. We interviewed several mem- bers of the original launch team and a cross-section of the field sales managers and sales reps directly in- volved in the Scotchfiber marketing effort. A full year after product launch, Scotchfiber sales were running 25% ahead of sales targets and profits were running 34% above expected levels. ‘Though these results pertain to evaluations at the cend of the first year of a three-year planning horizon ‘model, managers believed the suggested method helped them make a good decision. Without the aid of this method, the company would have decided to distrib- lute the product through its 500 distributors, which managers thought, on hindsight, would have been mistake. The channel support required for the new product’s launch was underestimated initially by the company’s decision makers. Formally incorporating customer judgments, which is an essential part of the method, helped remedy management misperception. In our interviews, factors such as effective com- munication between headquarters and field sales per- sonnel were also identified as key reasons for Scot fiber’s success. Two of the top three reasons. were “involvement of the direct salesforce” and “the chat nel selection process.” A key contribution of the re- search was the process itself. In addition to bringing ‘ conceptual framework to the new product channel decision, the research process integrated judgments from three important constituencies: (1) lead-use cus- tomers (the potential early adopters of the product), (2) in-house experts (such as the product manager and distribution development manager), and (3) line man- agers (sales reps and sales managers). As Figure 2 indicates, the process combined chan- nel concepts with experts’ judgments and managers’ inputs to arrive at an appropriate channel for the new product. The managers’ active participation generated substantial commitment to the method and facilitated Conwicht © 2001. All Richta Reserved. Lx TABLE Relative Costs of Feasible Channel Options Demand Distributor Training and gates Total Generation __Malnteonance Costs Support Logistics Distrbution Opportunity Cost Option Costs Technical Administrative Costs __Costs_‘Margin Index eee riatl Low Low High Medium Low een 102 2 High Low High High Medium = Medium jh 110 3 Medium — Medium Low Medium Low High Low 100 4_Medium __Mé High Medium Medium High High m0 FIGURE 2 ‘Schematic Representation of the Method srs gts - SE “i _ gomenas | [Sne, ie re. : eee —_ : its implementation (Little 1970). The very process of systematically focusing on the new product channel problem led to the discovery and improvement of sev- eral related (but not central to the method) tasks, all of which magnified the impact. The key lesson is that the process of method development and implemen- tation is perhaps as important as the underlying con- ceptual framework itself. ‘The method has research implications as well. By disaggregating a distribution channel into its func- tional components and by requiring both producer ex- perts and customer experts to evaluate the product ex- plicitly on these functions, we ensured that the short list of channel paths selected would satisfy customers’ channel requirements and would thus effectively serve the market demand, which is an attractive feature. Without this method, it would have been necessary to estimate the expected revenues and costs of going to market over a much wider variety of channels. That type of approach has two problems. First, it is not based on customer-driven demand for channel fune- tions; second, estimating new product sales through such a variety of channel options is an extremely dif- ficult task, given the lack of data and customer input. ‘Our method simplifies the channel selection process by comparing only those channel options that could effectively satisfy customer requirements. In addition to addressing the new product distri- bution channel choice issue, our method has another innovative feature. Though the formation of consen- sus judgments has been the topic of considerable in- terest in the decision sciences literature, it has had lit- tle application in marketing. Our method could be potentially useful for new industrial product research in general because it uses a combination of judgments from producer experts, who have product knowledge, and customer experts, who have information on usage behavior. Despite several attractive features, our method has ‘an important limitation. Ideally, the channel selection problem should be integrated into the business plan Different channel options and their interactions with ther elements of the marketing mix affect the bottom line differently. Channel selection can be truly opti- mal only when considered simultaneously with other marketing components. The drawback of our method is that channel selection does not influence sales tar- gets and other marketing mix elements; itis sequential rather than iterative. Future research would certainly benefit from the development of more integrated channel selection models. Incorporating our frame- work into the new product screening literature (e.g. Cooper 1985; Cooper and de Brentani 1984) could be useful starting point. ‘Our method has other limitations as well. First, the robustness of the eight channel functions should bbe tested over a wider variety of industrial marketing situations. Second, the use of analytical techniques to aggregate expert judgments should be contrasted with more traditional methods, such as Delphi, to ensure validity. Third, the extent of bias introduced by man- ‘Channel Selection for New Industral Products / 79. Conwicht © 2001. All Richta Reserved. agers’ extensive participation in the process should be measured. In spite of the limitations, we believe our method provides a useful framework for viewing the impor- tant but under-researched problem of new product channel choice. Both academicians and practitioners are likely to benefit from increased attention to this area, Our work is only a start. Appendix A ‘A Model for Comi Judgments We let 6, represent the unknown but true value of the new product om the i® determinant, i = 1,2, ... , N, Let the product be evaluated by k experts. Expert j's distribution of & |s approximated by a normal distribution with mean y,, and variance 0”), Ifa,

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