????????????????????????????? Distribution Channel Management

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?????????????????????????????Distribution
Channel Management
Chapter 9
Vertical Integration In Distribution
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Chapter 9 Outlines
Learning Objectives

• Understand vertical integration as different
  degrees from make to buy
• Diagnose the reasons why channel players often
  integrate forward
• and backward
• Explain six reasons why outsourcing is the
  preferred choice than
• vertical integration
• Understand three situation why vertical
  integration is better choice than
• outsourcing
• Define six categories of company-specific
  capabilities
• Know reasons why vertical integration can cope
  with volatile environment
• Learn how vertical integration reduce
  performance ambiguity

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Vertical Integration
Points of Discussion

• Why channel players would like to integrate
  forward
• or backward
• Should all the distribution functions rolled
  into one
• company?
• Should distribution flows be outsourced?

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Vertical Integration
The Five Puzzles for Our Consideration

• Why Whirlpool let another company perform the
• logistic function?
• Why Luxottica take a risk to purchase
  LensCrafters
• acting as its own retailer?
• Why Best Power dismantled its in-house
  operation
• and has turned to independent value-added
  resellers?
• Why Jean Delatour integrate backward into the
• production of Jewelry related products?
• Why supermarkets invest heavily in creating its
  own
• brands, private labels?

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Vertical Integration
The Make or Buy Decision

• It is a critical strategic choice in marketing
  channels
• The manufacturer can gain much of its market
• intelligence from its channel
• The decision once made is difficult to reverse
  and
• determines the firms future performance path
• For downstream channel members, their decisions
  to
• integrate backward consume resources, put them
  into
• conflict with their other suppliers

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Vertical Integration
Points of Discussion

• Do Channel Members have to choose between
  purely
• Make or Buy arrangement?
• If not, what are the other options remaining?

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Degrees of Vertical Integration
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Vertical Integration
Cost and Benefits of the Choice to Make

• Manufacturer assumes all the costs of
  distribution i.e.
• personnel costs, costs of all other channel
  flows
• (warehousing, logistics, customer outstanding)
• Risk of the distribution operation
• The responsibility of all actions
• Benefits are control of operation, improvement
  of market
• share, return on investment

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Outsource Distribution
Point of Discussion

• Why outsourcing is the preferable choice
• among channel members?

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Outsource Distribution
Six reasons to outsource the channel function to
an outside party
1. Motivation channel members aim for both
positive (profit) and negative (fear of loss)
motivation 2. Specialization outsourcing allows
each party to stick to their specialties 3.
Survival of the economically fittest there are
no places for incompetent channel members as
businesses are highly competitive, easy to
enter and easy to exit
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Outsource Distribution
Six reasons to outsource the channel function to
an outside party
4. Economies of scale justify by deep brand
assortment from multiple manufacturers 5.
Heavier market coverage having assortment of
goods to call on many customers more often 6.
Independence from any single manufacturer
channel members act as independent counsel
and know their customers well which can build
strong customer loyalties
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Vertical Integration Forward
Points of Discussion

• What are the meaning of Company-specific
• assets?
• How the Company-specific assets creates an
• economic rational for Vertical Integration
• option?

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Vertical Integration Forward
Six types of Company specific capabilities
critical in distribution
Intangible Capabilities
1. Idiosyncratic knowledge specific knowledge
about products, operating methods, product
application 2. Relationships connections
between distributor personnel and personnel
of the manufacturer or customers 3. Brand equity
that derives from the channel partner activities
? two cases can be distinguished - the
brand name that enjoys substantial brand equity
- downstream channel members have a critical
impact on the firms brand equity
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Vertical Integration Forward
Six types of Company specific capabilities
critical in distribution
Tangible Capabilities
4. Customized physical facilities an important
transaction specific asset as in the case of
Amazon online bookseller 5. Dedicated capacity
warehousing, transportation, selling, billing
and others 6. Site specificity a location which
is well suited to specific needs for the
business
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Vertical Integration
There are switching cost upon changing from
vertical integration to outsourcing

• accounting costs
• opportunity costs
• psychological costs
• recruiting, relocating, training personnel,
  setting up
• infrastructure associated with new operation
• setting up former employees in business as
  third-party
• providers of distribution services

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Vertical Integration
Point of Discussion
Why the manufacturer should integrate forward to
meet the uncertain environment?
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Vertical Integration
There are two schools of thought for vertical
integration to cope with environmental uncertainty
1. Manufacturer needs to take control in order to
cope with the environment 2. The uncertainty
demands distributing through third parties
and changing to another third party as the
situation demands (committing to no one)
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How environmental uncertainty impacts vertical
integration
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Vertical Integration
Points of Discussion

• What are the areas of unclear performance
  happening
• in channel distribution?
• How vertical integration reduce performance
  ambiguity?

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Vertical Integration
Vertical Integration is preferable as the way to
reduce performance ambiguity

• Unfamiliar market situation that there is no
  baseline to
• judge whether result are good or bad,
  particularly for
• innovation products
• Difficult or impossible to gather relevant,
  timely, accurate
• result indicators