Various Distribution Alternatives

Distribution-Scope Strategies
Intensive distribution
Distribute from as many outlets as
possible to provide location
convenience
Selective distribution
Appoint several but not all retailers
Exclusive Distribution
Limiting the distribution to only one
intermediary in the territory

Approaches to Channel Based
Distribution
Intensive--essential to
low involvement goods
Selective--desire to
maintain image
Exclusive--very high
prestige needed or
very high service
requirements
Admission By
INVITATION
ONLY
Mass/ Intensive distribution

Distribute from as many outlets
as possible to provide location
convenience
Intensive Distribution

Characteristics
Low value, repeat purchase items
Low involvement products, least effort
by customers
Biggest imbalance between the
production levels and consumption
levels
Low shelf life in many cases
Maximum no. of intermediate players
Example of Intensive
Distribution
Commodities, Food & grocery,
stationery, medicines, mobile prepaid
cards etc.
Cigarettes, Matches, Tobacco products
Pharmaceuticals

Advantages:
Increased sales, wider customer
recognition, and impulse buying
Disadvantages:
Characteristically low price and low-margin
products that require a fast turnover
Difficult to control large number of retailers
Average retailer order size very small (shop
size & money constraints)

Intensive Distribution
Which are the largest selling
FMCG brands in India?
Gold Flake 3000 crore
Wills 2000 crore
Pepsi 2000 crore
Thums Up
Britannia
Parle
Colgate
Coca-Cola
Wheel
Nirma
Source: Brand Equity research 2006
Which are the largest selling
FMCG categories in India?
Personal care 9000 crore+
Cigarettes 8000 crore+
Soft drinks 7000 crore+
Source: Brand Equity research 2006

One common factor for the largest
brands is the greatest distribution width
and scale
Typical FMCG distribution
( Intensive distribution)
Distributor 2
Factory
Depot / C&F
Distributor Wholesalers Retailers
Consumers
Distributor 3
Factory
Depot / C&F
Distributor Wholesalers Retailers
Consumers
Distributor 3
Host of Intermediaries
Between Distributor to Consumer,
there can be wholesalers, sub-
wholesalers, commission agents,
store based retailers, patri-wallas,
mobile retailers (push carts and
pheri-wallas) etc.

Life is not so simple
Potential conflict areas
Factory
Depot / C&F
Distributor Wholesalers Retailers
Consumers
Distributor 3
Distributor 2
Another Conflict
Factory
Depot / C&F
Distributor Wholesalers Retailers
Consumers
Distributor 3
Distributor 2
More Confusion
Factory
Depot / C&F
Distributor Wholesalers Retailers
Consumers
Distributor 3
Distributor 2
New Developments: growth of
organized retailing
Factory
Depot / C&F
Distributor No
intermediary
Organized
Retailers
Consumers
Distributor 3
Direct co. to retailer
Distributor 2
Collapsing outbound supply chain
Earlier Carpet bombing technique

Manufacturer Mother godown CFA

Retailer Wholesaler Distributor

Consumer
Collapsing outbound supply chain
New trend Precision bombing
technique

Manufacturer Retailers w/h or DCs

Consumer Retail stores

Intensive Distribution a specific
case
Q. Which is the most perishable
commodity today?
Answer
Newspapers
Average shelf life: 3 hours

Typical newspaper distribution
The printed newspaper is dispatched to
various distributors across the country
through transportation.
Transportation is normally through
private contract carriers within local
area, public transport in case of longer
distances and through couriers in other
cases.



Contd..
The newspaper distributor has sole
rights to distribute the newspaper
in his area. His revenue is based on
a commission on the sale of every
newspaper.
He achieves circulation through
salesmen appointed and salaried
by him, who in turn pass it on to
hawkers.

Contd
Hawkers, vendors and book stall
owners are the last link of the
supply chain before newspaper
reaches readers.
The hawkers remuneration is
based on a commission system and
is the highest in the entire supply
chain.
Optimization model

The entire distribution network can be
segregated into various hawker points and an
optimized route proposed for each of them,
based on the vehicle capacity constraints.

Starting at the first hawker, newspaper
requirements are accumulated until the vehicle
limit is reached. At this hawker, another
vehicle route is begun. The procedure is
continued until all the hawkers are included in
some route.
Contd.
After the routes that include all the hawkers
and that satisfy the vehicle capacity
constraints have been constructed, the time
constraints must be checked. The routes
describe the distance the vehicle must travel
on each route and the sequence in which
hawkers on that route are visited. For each
route, the distance along the route, from the
production facility to the last hawker point
visited can be calculated. The time the vehicles
stop at each hawker also needs to be
considered.

Production schedule
The production schedule can be deduced by
arranging the routes in a sequence that will
ensure delivery of all the newspapers by the
prescribed time.
This sequence is developed by arranging the
routes in descending order of the total route
length distance from the production facility to
the last hawker.
Usually, newspapers for the farthest locations
are produced and shipped first since the total
delivery time is greater.
Dark zone -> City edition -> Metro edition ->
local supplements
Mass distribution some issues
Differential taxation across states.
Leads to cross-state movement of
goods, territory infiltration, rate issues
& market conflict.
Case : Nimulid Tablets
Delhi VAT 4%, UP VAT 9%
Suggest solutions to Panacea Biotech
HUL
A distribution giant
Selective distribution

Appoint several but not all retailers

Selective Distribution
Characteristics
Somewhat expensive, infrequent purchase
items (life usually more than 6 months)
Relatively high involvement products, more
effort by customers (can go 3-5 kms)
Less of impulse purchase
More impact of store image & atmospherics
Lower level of distribution

Products Distributed through
Selective Distribution
Consumer Durables, Mobiles, Apparels,
Watches, Footwear, Sport goods, Toys,
Kitchenware, Jewelry, etc.

Selective Distribution
Advantages:
More control and less cost than intensive
distribution
Concentrate effort on few productive outlets
Selected firms capable of carrying full product
line and provide the required service
Selective Distribution (contd)
Disadvantages:
May not cover the market adequately
Difficult to select dealers (retailers) that
can match your requirement and goals
Typical Consumer Durables
distribution
Sub dealer
Factory
Distribution Center
Dealer1 Customer
Dealer 2
Distributor 1
Dealers in
small towns
Customer
Dealers
Spaced out within a market
Usually carry Multi-brands
Product presentation is critical
Customer handling by sales person is
key
Clearing of doubts at the purchase point
(dissonance reducing buying behavior)
After sales service is a must
The biggest selective
distribution model in India
LG
T/O 10000 crore+
43 branches, 150 area offices, 10000+
channel partners
No. 1 or 2 in most of its product
categories:
AC 30%, CTV 27%, Washing m/c
35%, Refrigerators 30%, Microwaves
40%
New distribution network
Factory
Distribution Center
Dealer1 Customer
Dealer 2
Distributor 1
Dealers in
small towns
Customer
Sub dealer
Exclusive
outlet
New developments: growth of
organized retailing
To have better control on their brand
and customer interaction,
manufacturers started retailing activities
Raymonds shop, Bata Stores
Exclusive Brand outlets; either owned
or franchised
EBOs are in addition to the regular
MBOs
A special case of selective
distribution Film distribution
The production house (like Yash Raj Banner)
sells the territorial rights to film distributors
(like Shringar Films).
The price is decided by the cost of the project
and the trade potential of the movie.
Retailers are the exhibitors (theatres)
The spectrum has organized chains like PVR
& Imax at one end to single screen theatres
at the other.
Why selective distribution?
Not feasible to release a movie on all the
screens of a market
Neither it is desirable
Multiplexes have clearly sliced the market into
classes & masses.
Films are now produced with this
segmentation in mind right at the onset.
Only universally potential movies find
acceptance by all kind of exhibitors.
Further selectivity down south
South India more selective distribution
Thriving vernacular movie industries in 4
languages
Huge demand and high number of screens
Depending on the catchment area, the
exhibitor prefers the language of the movie
out of broad 6 choices.
Exclusive Distribution

Limiting the distribution to only one
intermediary in the territory.

Depending on the market strength,
the territory can be one entire state,
town or a major region of a city.
Exclusive Distribution
Characteristics

Generally expensive, capital expenditure,
once in a lifetime purchase items
Can be meant for a particular class or
community
High involvement products, more effort by
customers (can go fair distance to purchase
the products)
More impact of store image & atmospherics
Generally 1-level distribution

Examples of Exclusive
Distribution
Two-wheelers, cars, Luxury goods,
home furnishings & carpets, etc.

Exclusive Distribution
Advantages
Maximize control over service level/output
Enhance products image & allow higher
markups
Promotes dealers loyalty, better
forecasting, better inventory and
merchandising control
Restricts resellers from carrying
competing brands
Exclusive Distribution
Disadvantages
Betting on one dealer in each
market
Only suitable for high price, high
margin, and low volume products
Typical Auto Industry
distribution
Customer
Manufacturing
Location
Dealer1
Dealer 3
Dealer 2
Dealers
Pop & potential: the basic criteria for
selection
Spaced out within a big city
Only 1 in a small city
Exclusive Brand Outlets Only
Have to give lot of customer education
Product presentation, demonstration is critical
Customer handling by sales person is key
After sales service is a must
After Sales Service network in
auto industry
Service network has to be more
distributed than sales network
Mostly through Authorized Service
Stations
Recently, Companies started realizing
service as a key differentiator
Maruti itself opened service stations -
MSM
Why should service be more
distributed than sales for auto
industry ?
Sales one time purchase activity by the
customer
High involvement product; more effort by the
customer
Service more frequent and routine
Emergency repairs, accidents
Bigger earning potential for the company
Customer would like service station to be as
close to him as possible.


Does Auto Industry require
Mass Distribution?
Yes For its spare parts.
Spare Parts are relatively low value, repeat
purchase products.
They are sold through car spare parts dealers
in specific markets apart from the authorized
service stations.
Small repair garages, workshops and
mechanics purchase them from these outlets.
Taking exclusivity to a new level
World leader in luxury, LVMH (Louis Vuitton
Mot Hennessy)
Louis Vuitton possesses a unique portfolio of
over 60 prestigious brands. The Group is
active in five different sectors:
Wines & Spirits
Fashion & Leather Goods
Perfumes & Cosmetics
Watches & Jewelry
Selective retailing

LVMH The Brands
Louis Vuitton
Kenzo
Givenchy
Fendi
Thomas Pink
Donna Karan
Mont Blanc etc.
LVMH in India
Only 3 outlets till 2008:
The Oberoi, New Delhi, 2003
The Taj Lands End, Mumbai, 2004
Taj Mansingh, New Delhi, 2005

Lack of the right retail environment, where
their target segment can meet them.
The emerging scenario
A few of the existing malls in India fulfill
their requirements Select Citywalk.
Some super-luxury malls are being
developed DLF Emporio
Recently, LVMH has signed-up for their
stores in these.
Has also a store at UB World, Bangalore
Channel Management
Selecting Channel Members
Training Channel Members
Motivating Channel Members
Conflict Management

Channel Management
Decisions
Selecting Channel
Members
Identify characteristics
that distinguish the
best channel members
Managing and
Motivating Channel
Members
Partner relationship
management (PRM) is
key


Evaluating Channel
Members
Performance should be
checked against
standards
Channel members
should be rewarded or
replaced as dictated
by performance
Channel Management
Decisions
Selecting channel
members
Managing and
motivating channel
members
Evaluating channel
members

Which characteristics
are important?
Years in business
Lines carried
Growth and profit
record
Cooperativeness and
reputation
Type of customer
location
Decisions
Selecting Channel Partners
Getting good channel partners is a difficult
part of doing business
Some of the methods employed to select
channel partners are:
Sales people identify prospects and talk to them
Press advertising (industrial goods)
Existing channel partners can give good
references
Competitors channel members for reference, or
poaching
Setting up the Distribution Channel
Q. Which players do you select and appoint
(have a contract)?
A. 1. Primary Distributors / Exclusive Dealers
who will become your authorized channel
partners.
2. Franchisees
3. CFAs incase you do not want to have
your own distribution center
Rest of the players ie wholesalers, retailers,
multibrand dealers are only convinced and
motivated to sell your products.
Selection Criteria
Qualitative: willingness, confidence in
company products, willingness to abide
by company rules, building company
image, innovativeness etc
Quantitative: financial status,
infrastructure, location, present
businesses, customer relationships,
market standing etc
Selection ..contd.
Determine the number at each level
required in any territory
Estimate the potential business from each
member
Identify capable parties (FEED principle at
Gillette)
Selection
ROI & cost of servicing the account
Convince, negotiate, finalize, sign a formal
agreement (in case of primary partners)
The core channel offerings
The financial returns which the channel
partner will get
The quality of the product
The reputation of the brand
The advertising support
The price at which it is being offered to
the market
Delivery reliability
Market goodwill
Training Channel Members
Starts from the time of recruitment
Channel member owner and his staff
Market views channel member as part of the
company he has to behave in a like manner
hence training assumes significance
Training could be on the job field training or
classroom training
Training is an ongoing process.
Channel Management
Decisions
Selecting channel
members
Managing and
motivating channel
members
Evaluating channel
members

Partner relationship
management (PRM) for
long-term partnerships
Software available to
coordinate members
Decisions
Motivating Channel Members
Ambitious volume and growth targets
continuous motivation required to achieve
Motivation includes:
Capacity building programs
Training
Promotions support
Marketing research support
Working with company personnel
Incentives
Motivating the distributors
Through ensuring high secondary sales
Healthy profit and ROI
Image building
Joint publicity newspaper ads, trade-fairs,
hoardings & banners, road-shows
Sales promotion schemes QPS, target
incentives, volume discounts, trips, contests
etc.
Training to their teams
Transparency and fairness in dealing
Regular communication from the seniors
Motivating the retailers
Periodic retailer promotions
Providing display material free or at
subsidized prices
Cooperative advertising and promotion
Display contests
Window hiring
Mystery shopper
Also training retailers in how to use & where
to use the display is necessary to get his
interest and cooperation.
Channel Management
Decisions
Selecting channel
members
Managing and
motivating channel
members
Evaluating channel
members

Check channel
performance of:
Sales
Inventory
Customer delivery
Promotion and
training
Customer service
Decisions
Channel Members Evaluation
Effectiveness of the distribution channel
determines the success of the company
Company would like its channel partners to
perform at the highest standards possible
Need to constantly evaluate performance on
sales targets, coverage, productivity,
inventory holdings, attending to servicing
requests etc
Role of ROI..
ROI as a Measure
Leading FMCG companies feel that an ROI of
30% for a distributor is healthy and is a fair
indication that he is performing well.
If the ROI is more, additional tasks are given
If the ROI is less, the company may provide
additional support
Post evaluation tasks include counseling,
retraining and motivating. In extreme cases it
may result in termination.
Calculating ROI
The investment by the channel
members is in capital and infrastructure
For a particular period, R = {S X P (Tc
+ Sc)} / Wc + Ic
R=Return, S=Sales volume, P=Profit
per unit, Tc=Transaction cost,
Sc=Shipping cost, Wc=Working capital
cost, Ic=Infrastructure cost
Performance Evaluation
On pre-agreed tasks only. No surprises.
Specific targets on periodical basis are set.
Targets on volume and outlet productivity could
be for a week or a month
Targets relating to increasing market shares or
total outlet coverage could be for 6 months
Different weightages could be given for each of
the parameters for evaluation
The performance appraisal is open and
transparent
Modifying Channel Arrangements
Modification becomes necessary when the
distribution channel is not working as
planned.
When consumer-buying patterns change.
When the market expands.
When new competition arises.
When innovative distribution channels
emerge.
And when the product moves into the later
stages in the product life cycle.
Multi-channel Marketing
Systems
Multi-channel marketing occurs when a
single firm uses two or more marketing
channels to reach one or more
customer segments.
By adding more channels, companies
can gain three important benefits:
Increased market coverage.
Lower channel cost.
More customized selling.
Multi-channel Costs
The gains from adding new channels
come at a price:
New channels typically introduce
conflict and control problems.
Two or more channels may end up
competing for the same customers.
The new channel may be more
independent and make cooperation
more difficult.
Distribution & Logistics Mgmt
issues involved
More dependent on outsiders (not
employees
All the flows in the channel have to be
performed and even one missing link
will make the channel ineffective
Generally products compete with many
others in the same channel
Proper ROI to be generated through
volumes or higher margins
Channel conflict
Each member is an independent
business entity having own goals and
orientation

When one member perceives the
behavior of other member to be
impeding its effective functioning.

Channel Behavior
Channel Conflict
Occurs when channel members disagree
on roles, activities, or rewards.
Types of Conflict:
Horizontal conflict: occurs among firms
at the same channel level
Vertical conflict: occurs among firms at
different channel levels
Typical reasons for Channel
conflicts
Unfulfilled commitment from either side
Unrealistic expectations
Ambiguous terms of business
Personality clash between the party and
the company sales person
Infringement in assigned sales territory
by other distributor
Different treatment to different channel
partners
Lower prices in wholesale (in the case
of mass-products)
Multi-channel Conflict
Multi-channel conflict exists when the
manufacturer has established two or
more channels that sell to the same
market.
Multi-channel conflict is likely to be
especially intense when the members
of one channel get a lower price
(based on larger volume purchases) or
work with a lower margin.
Four Stages
LATENT
MANIFEST
FELT
PERCEIVED
Each stage is progressively more severe than the earlier one
Conflict Resolution Styles
Avoidance
Aggression
Accommodation
Compromise
Collaboration
Least effort and
results
Maximum effort and
Best results
Kenneth W Thomas
Styles are a combination
of assertiveness and
co-operation.
Utilizing Power in the Channel
In the era of Retailers and the influence of the
Internet on retailing, it is interesting to consider which
channel member(s) is/are powerful and how the power
is being utilized.
1. Reward power: The ability of one member to
provide financial or other type rewards to others for
compliance.
2. Coercive power: The ability of one member to
punish others through various means for non-
compliance.
3. Legitimate power: This is based on the notion that
one member has the right to influence others and that
others should accept it.
4. Referent power: The power derived by one member
by identifying with another.
5. Expert power: The power based on the perception
that one member has expertise or special knowledge.
Managing Channel Conflict
Diplomacy
Mediation
Arbitration
Diplomacy
Mediation
Arbitration
Methods to Manage Channel
Conflict
Motivating Methods
Punitive Methods
Cooptation
Diplomacy


Mediation
Arbitration
The above two are
third party
mechanisms
At any point,
skillful
negotiations are
very important in
resolving
conflicts
Relationship Marketing
via the Marketing
Channel
Typology of Relationship Marketing
Relationship Nature




Relationship
Purpose
Ad Hoc On Going
Strategic Alliance
Relationship
Partnering
Relationship
Operational Transactional
Relationship
Cooperative
Relationship
Strategies for conflict
resolution
Significance of Individual Goals
Low High


Nature of
Relationship
Maintenance
Partnering Compromising by
sacrifice
Integrating by
negotiation
Transactional Withdrawing by
avoidance
Forcing by
domination
Definition:
Continuing and mutually supportive
relationship between the manufacturer
and its channel members in an effort to
provide a more highly motivated team,
network, and alliance of channel
partners
Strategic Alliances and
Partnerships in Marketing
Channels
Traditional us-against-them mentality
is replaced with a new cooperative
perception of us in an effective
channel partnership or strategic alliance

Thus, partnerships or strategic alliances
go well beyond the ad-hoc, on-again /
off-again interactions typical of
traditional relationships among channel
members
Requirements for Partnerships or
Strategic Alliances in Marketing Channels
(1) Recognition of interdependence of channel
members
(2) Close cooperation between channel members
(3) Careful specification of roles, rights, and
responsibilities in the relationship
(4) Coordinated effort focused on common goals
(5) Good communications and trust between
channel members
Building Relationships
with Channel Members
Find Out the Needs and Problems of
Channel Members
-informal information system
(grapevine)
-research studies of channel
members
-research studies by outside parties
-marketing channel audit
-distributor advisory councils
Offer Support to Channel Members that is
Consistent with Their Needs and Helps Solve their
Problems
-cooperative arrangements
-partnerships and strategic alliances
-distribution programming
Provide Leadership to Motivate Channel Members
-use power effectively
-recognize causes of conflict
-resolve conflicts
Building Relationships
with Channel Members
Contd
Key relationship factors and IT-based
distribution system
Reasonable ROI Company
&
Transparency in dealing its
Warehouses
Prompt info sharing
QR techniques
Fixed / smaller replenishment cycles IT-enabled
Zero-defect delivery dist. channel
Early recovery system
Tracking info
Servqual consistency

Channel

members
IT enabled Distribution systems
Disintermediation vs. Reintermediation
Cybermediary, Infomediary,
Intermediary empowerment
Strategic framework

Impact of e-commerce on
Distribution
Many researchers predicted the demise
of traditional distribution channels with
the advent of e-commerce.
Most of them wrote about the DTC
model for products / services.
Has complete disintermediation
happened?
E-commerce leads to:
Disintermediation: Elimination of
intermediary organizations by substitution
or consolidation using IT &
communication linkages.
Does not completely eliminate
intermediary functions in most categories.
Either automates or shifts intermediary
functions upstream or downstream of a
supply chain.

The E-Distribution

Comparison between various channels of
distribution reveal that e-channels have the
lowest cost-per-transaction and low value
added service.

On the other hand, traditional physical
channels that include salespersons have the
highest cost-per- transaction and the highest
value added service.


The E-Distribution

Choice of utilizing the traditional physical
channels (brick only), e-channels (pure-
play, click only) or dual channels (brick &
click).

While some marketers use brick only
channels (ex. SMEs) or click only
channels (Amazon.com), many have
settled for a dual channel system (ex.
Wal-Mart).
The E-Distribution

While some use dual channels for
promotion, sales and distribution of their
products/services, others are confined to
promotion and service via the e-channel of
their products sold through physical
channels.

For instance, automotive companies use
their websites to drive traffic to their brick
sites (dealerships).
Honda
Honda.com
Dealership
Dual Channel Complementary 1
In this case, Hondas Website provides vehicle and dealer
information and directs customers to the nearest dealer.
Sony
Sony.com
Best Buy
Dual Channel Complementary 2
In this case, Sony sells certain products/services through Best Buy
and others through its own Website.
Prentice Hall
PrenHall.com
USA Bookstore
Dual Channel Competing 1
In this case, book publisher Prentice Hall sells books via university
book stores and also via their own Website.
Wal-Mart
Stores, Inc.
Walmart.com
Supercenters
Dual Channel (Retailer) Competing 2
In this case, retailer Wal-Mart sells certain products thru competing
channels while others thru a single channel.
Emergence of newer forms of
intermediary
Some functions like information search,
demand aggregation, title exchange
and communication are more efficiently
performed by electronic intermediaries
than traditional distribution channels.
Other functions like product promotion,
integration, negotiation, logistics are
still the forte of traditional channels.
Major transformations due to IT
environment
Disintermediation
Meaning To remove the middleman
Biggest benefit getting closer to the
customer and managing less number of
intermediaries
What about cost?
Cost advantage accrues only if service /
control over market is not compromised
2 types of disintermediation
Partial disintermediation
Reduction or bypass of a few 3
rd
party
intermediaries.
Example Airlines adopting direct booking / e-
ticketing for their privileged corporate clients.
They have disintermediated at least one out of
agencies and CRS vendors, and pass on the
savings on commissions to the clients in terms
of value-added offers, loyalty program.
Contd
Complete disintermediation
Remove all channel partners and sell through
the Internet.
New term coined for this distribution model
Cybermediary
Example Dell uses either its direct sales force
(for B2B dealings) or through Internet (for B2C
business)
Benefits fast and wide reach to customers,
automatic paperless record keeping, no brick-n-
mortar outlets and no pipeline inventories

Growth of Reintermediation
The process of using the Internet to
reassemble sellers, buyers & business partners
in new ways
Disintermediated players can regroup and fight
back.
Emergence of new IT-based intermediaries
between customers and suppliers to provide
info based services like source search and
evaluation, price comparisons etc.
Example E-bay
2 forms of reintermediation
emerging
Infomediary
Marketing intermediary in the business of
providing information
Serves as an electronic information broker,
providing shopping services or buying
assistance to help buyers and sellers find
each other
Example - NTE in USA, Job-search sites,
Mutualfundsindia.com, Property-search
sites
2
nd
type of reintermediation
Intermediary Empowerment
To take out costs from the most potent area i.e.
distribution; organizations are using IT for
developing linkage with their strategic channel
partners
Major advantages of this are sharing of working
methodology, transparency and real-time
availability of information regarding order-status,
shipment schedules, replies of inquiries, credit-
status, inventory management etc .
This leads to empowerment of the channel
partners and creates committed team-players.
Disintermediation vs.
Reintermediation
Concept of disintermediation even the
smallest producers gain exposure to vast
number of customers. All they need is a
good enough website.
Reality has proved otherwise.
In many cases, addition of intermediaries
has happened in the channel
(reintermediation)
Example Amazon.com, Indiatimes.com,
Auto-by-Tel, Peapod
The verdict
The jury is still out on the issue.
Good examples of reintermediation do not mean it
has prevailed over disintermediation
A powerful example of successful disintermediation
is Dell ( which sells over $40 million worth of goods
everyday directly)
No matter how technologically superior Internet is,
the law of economics will always hold true.
Efficiency in the performance of distribution tasks
is what will determine the form of the channel
structures to emerge.
Information flow vs. Product
flow
5 flows in channels product, money, title, information
and promotion.
Internet can superbly handle flow 2,3,4 & 5 as all of
them have information which can be digitized.
However in maximum cases, flow of products i.e. actual
fulfillment of transaction has to be in the old-fashioned
way i.e. through people, warehouses, packaging,
transportation means etc.
It is the product flow which is at the core as in the
absence of it, no other flow is required.
Thus internet is not a complete marketing channel.
Depending on the product category and behaviour of
customer segments, electronic channels will have
different role and impact for companies.
Strategic framework for adopting various
IT-enabled distribution systems
1. Product characteristics All products
are not fit for e-comm. A larger %age of
e-based sales come from products which
can be digitized.
Product characteristics GRID:

Nature of product
Non-physical Physical product

Configuration of
the product
features
Simple features Cybermediary Partial
disintermediation
Complex features Infomediary Intermediary
empowerment
2. Consumer Involvement in
Purchase decision
Involvement can manifest itself in 2
forms information search and
inspection of product attributes.
Consumer sensitivity GRID:

Need for info search
low
Need for info search -
high
Need for physical
inspection - low
Cybermediary Infomediary
Need for physical
inspection - high
Partial disintermediation Intermediary
empowerment
3. Distribution Profile of the
organization
Most firms have limited direct distribution resource
capability.
Conflicts between established and new channel is
one of the biggest issues, specially in consumer
goods companies.
Harmonious relationships with entrenched
intermediaries are very important to them for growth
& long-term peformance.
Distribution profile GRID:

DD Resource
capability of the firm
- Low
High
Need for harmonious
channel relationship
low
Infomediary Cybermediary
High Intermediary
empowerment
Partial disintermediation
4. Role of intermediaries
It is expected that intermediaries who
primarily facilitate information exchange
will be eliminated by e-comm.
Depending on the quantum of logistical
and marketing value addition, a GRID
based on role of intermediaries is
formed:

Logistical value
addition - low
High
Marketing value
addition- low
Cybermediary Partial
disintermediation
High Infomediary Intermediary
empowerment
Strategic framework for adoption of Internet-based
Distribution system
Factors


IT-
enabled
system
s
Product
characteristics
Consumer
involvement
Role of
intermediaries
Distribution
profile of firm
Nature
of
produc
t
Product
features
Need
for info
search
Need
for
physical
inspecti
on
Logistica
l value
add
Marketi
ng
value
add
DDS
resourc
e
capabili
ty
Need
for
harmoni
ous
channel
relation
Cyberme
diary
Non-
physica
l
Simple Low Low Low High High Low
Partial
disint.
Physica
l
Simple Low High Low High High High
Infomedi
ary
Non-
physica
l
Comple
x
High Low Low High Low Low
Intmdy.
empowe
rment
Physica
l
Comple
x
High High High High Low High
Summary of the changes in
distribution due IT
Metamorphic transformation is possible in
traditional distribution structures.
Disintermediation (partial or total) as well as
reintermediation in the form of infomediary
and intermediary empowerment is
happening.
Disintermediation in the short-run with the
bypassed players regrouping and getting
reintermediated through use of IT is a big
possibility.