Another way to foster cooperation in a channel is to establish a vertical marketing system. In a vertical marketing system, channel members formally agree to closely cooperate with one another. (You have probably heard the saying, “If you can’t beat ’em, join ’em.”) A vertical marketing system can also be created by one channel member taking over the functions of another member.
Procter & Gamble (P&G) has traditionally been a manufacturer of household products, not a retailer of them. But the company’s long-term strategy is to compete in every personal-care channel, including salons, where the men’s business is underdeveloped. In 2009, P&G purchased The Art of Shaving, a seller of pricey men’s shaving products located in upscale shopping malls. P&G also runs retail boutiques around the globe that sell its prestigious SK-II skin-care line. [6]
Franchises are another type of vertical marketing system. They are used not only to lessen channel conflicts but also to penetrate markets. Recall that a franchise gives a person or group the right to market a company’s goods or services within a certain territory or location. [7] McDonald’s sells meat, bread, ice cream, and other products to its franchises, along with the right to own and operate the stores. And each of the owners of the stores signs a contract with McDonald’s agreeing to do business in a certain way.
By contrast, in a conventional marketing system the channel members have no affiliation with one another. All the members operate independently. If the sale or the purchase of a product seems like a good deal at the time, an organization pursues it. But there is no expectation among the channel members that they have to work with one another in the future.
A horizontal marketing system is one in which two companies at the same channel level—say, two manufacturers, two wholesalers, or two retailers—agree to cooperate with another to sell their products or to make the most of their marketing opportunities. The Internet phone service Skype and the mobile-phone maker Nokia created a horizontal marketing system by teaming up to put Skype’s service on Nokia’s phones. Skype hopes it will reach a new market (mobile phone users) this way. And Nokia hopes to sell its phones to people who like to use Skype on their personal computers (PCs). [8]
Similarly, Via Technologies, a computer-chip maker that competes with Intel, has teamed up with a number of Chinese companies with no PC-manufacturing experience to produce $200 netbooks. Via Technologies predicts that the new, cheaper netbooks the Chinese companies sell will quickly capture 20 percent of the market. [9] Of course, the more of them that are sold, the more computer chips Via Technologies sells.
KEY TAKEAWAY
Channel partners that wield channel power are referred to as channel leaders. A dispute among channel members is called a channel conflict. A vertical conflict is one that occurs between two different types of members in a channel. By contrast, a horizontal conflict is one that occurs between organizations of the same type. Channel leaders are often in the best position to resolve channel conflicts. Vertical and horizontal marketing systems can help foster channel cooperation, as can creating marketing programs to help a channel’s members all generate greater revenues and profits.
REVIEW QUESTIONS
What gives some organizations more channel power than others?
Why do channel conflicts occur?
Which organization(s) has the most power to resolve channel conflicts?
How can setting up vertical and horizontal marketing systems prevent channel conflicts?
[1] Michael Hitt, Stewart Black, and Lyman Porter, Management, 2nd ed. (Upper Saddle River, NJ: Prentice Hall, 2009), chap. 5.
[2] Michael Hitt, Stewart Black, and Lyman Porter, Management, 2nd ed. (Upper Saddle River, NJ: Prentice Hall, 2009), chap. 5.
[3] Matthew W. Evans, “Beauty.com Undergoes a Revamp,” Women’s Wear Daily 194, no. 66 (September 26, 2007): 17.
[4] “Ten Mistakes to Avoid with Channel Partners,” irieAuctions.com,http://www.irieauctions.com/Alternate_Distribution_Channel.htm (accessed December 12, 2009).
[5] “Ten Mistakes to Avoid with Channel Partners,” irieAuctions.com,http://www.irieauctions.com/Alternate_Distribution_Channel.htm (accessed December 12, 2009).
[6] Jack Neff, “P&G Acquires the Upscale Art of Shaving Retail Chain,” Advertising Age 80, no. 2118 (June 8, 2009): 2.
[7] Don Daszkowski, “What Is a Franchise,” About.com,http://franchises.about.com/od/franchisebasics/a/what-franchises.htm (accessed December 12, 2009).
[8] “Skype Expands Mobile Push,” Financial Times, March 31, 2009, 20.
[9] Kathrin Hill, “Via to Help New PC Makers Enter the Netbook Market,” Financial Times, May 18, 2009, 16.
LEARNING OBJECTIVES
Understand how supply chains differ from marketing channels.
Describe the types of organizations that are part of supply chains.
In the past few decades, organizations have begun taking a more holistic look at their marketing channels. Instead of looking at only the firms that sell and promote their products, they have begun looking at all the organizations that figure into any part of the process of producing, promoting, and delivering an offering to its user. All these organizations are considered part of the offering’s supply chain.
For instance, the supply chain includes producers of the raw materials that go into a product. If it’s a food product, the supply chain extends back through the distributors all the way to the farmers who grew the ingredients and the companies from which the farmers purchased the seeds, fertilizer, or animals. A product’s supply chain also includes transportation companies such as railroads that help physically move the product and companies that build Web sites for other companies. If a software maker hires a company in India to help it write a computer program, the Indian company is part of the partner’s supply chain. These types of firms aren’t considered channel partners because it’s not their job to actively sell the products being produced. Nonetheless, they all contribute to a product’s success or failure.
Firms are constantly monitoring their supply chains and tinkering with them so they’re as efficient as possible. This process is called supply chain management. Supply chain management is challenging. Done well, it’s practically an art. We’ll talk more about supply chains in the next chapter and what companies can do to improve them to better satisfy customers and gain a competitive edge.
KEY TAKEAWAY
All of the organizations that figure into any part of the process of producing, promoting, and delivering an offering to its user are part of the offering’s supply chain. In recent decades, firms have begun looking at these organizations in addition to the organizations that sell and promote their products. The process of managing and improving supply chains is called supply chain management.
REVIEW QUESTION
What are the benefits of looking at all of the organizations that contribute to the production of a product versus just the organizations that sell them?
8.7 Discussion Questions and Activities
DISCUSSION QUESTIONS
What’s the ideal number of marketing channels a firm should have?
Is a pull strategy superior in all markets?
Is selling power the only source of channel power? From what other sources could an organization derive channel power?
The chapter listed a number of scenarios that can cause channel conflicts. What other factors can you think of that might cause channel conflicts?
Amazon.com has carved out a unique niche for itself as an intermediary. Amazon sells products on behalf of manufacturers such as Dell, Sony, and Calvin Klein, as well as retailers such as Macy’s and Toys“R”Us. How should Amazon be categorized? As a retailer, wholesaler, or broker?
ACTIVITIES
Think of some products you currently use. Are there any you would like to buy via different marketing channels? Do you think the products could be successfully marketed this way?
Describe a time in which you did business with a company and received conflicting information from its different channels (for example, a store’s Web site versus a visit to the store). How did it affect your buying experience? Have you done business with the company since?
Break into groups and make a list of four to five different types of products. Decide which channels should be used to distribute each product. Present your findings to your class and see if they agree with you.
Make a list of products you believe failed because of poor marketing channel choices.
Chapter 9
Suppose you have developed a great new product like Ghostbusters: The Video Game. Not only is the game terrific, but you’ve managed to maximize to get it sold in every marketing channel you can. The product is selling at GameStop, Walmart, Best Buy, and Amazon, and it’s slated to come out on Sony’s PlayStation Portable console. That’s the end of the story, right? Not quite. Sooner rather than later, in addition to focusing on the firms “downstream” that sell your product, you will also look “upstream” at your suppliers and “sideways” at potential firms to partner with. It’s only natural. (Or in the case of Ghostbusters: The Video Game, should we say supernatural?)
As we explained in Chapter 8 "Using Marketing Channels to Create Value for Customers", your product’s supply chain includes not only the downstream companies that actively sell the product but also all the other organizations that have an impact on it before, during, and after it’s produced. Those companies include the providers of the raw materials your firm uses to produce it, the transportation company that physically moves it, and the firm that helped build the Web pages to promote it. If you hired a programmer in India to help write computer code for the game, the Indian programmer is also part of the product’s supply chain. If you hired a company to process copies of the game returned by customers, that company is part of the supply chain as well. Large organizations with many products can have literally thousands of supply chain partners. Service organizations also need supplies to operate, so they have supply chains, too.
As you learned at the end of the last chapter, the process of designing, monitoring, and altering supply chains to make them as efficient as possible is called supply chain management. The term supply chain management was first coined by an American industry consultant in the early 1980s, but it’s an old idea. Part of Henry Ford’s strategy in the early 1900s was to extract as much efficiency (and money) as he could by taking ownership of the supply chains for his automobiles. Ford owned the foundries that converted raw iron ore to steel for his cars. He also owned the plantations from which rubber was extracted to produce his automobiles’ tires, and the ships on which the materials and finished products were transported. [1]
Today, many companies still take a narrow view of their supply chains; they look at supply chains mainly in terms of the costs they can save. Cost reduction is definitely an important part of supply chain management. After all, if your competitors can produce their products at a lower cost, they could put you out of business.
Keep in mind, however, that a firm can produce a product so cheaply that no one will buy it because it’s shoddy. That’s why smart companies view their supply chains as an integral part of their marketing plans. In other words, these companies also look at the ways their supply chains can create value for customers so as to give their firms a competitive edge.
Today, the term value chain is sometimes used interchangeably with the term supply chain. The idea behind the value chain is that your supply chain partners should do more for you than perform just basic functions; each one should help you create more value for customers as the product travels along the chain—preferably more value than your competitors’ supply chain partners can add to their products.
Zara, a trendy but inexpensive clothing chain in Europe, is a good example of a company that has managed to create value for its customers with smart supply chain design and execution. Originally, it took six months for Zara to design a garment and get it delivered to stores. To get the hottest fashions in the hands of customers as sooner, Zara began working more closely with its supply chain partners and internal design teams. It also automated its inventory systems so it could quickly figure out what was selling and what was not. As a result, it’s now able to deliver its customers the most cutting-edge fashion in just two weeks. Not only that, but the company set a new standard for the clothing industry in the process. [2]
[1] Donald J. Bowersox and David J. Closs, “Ten Mega-Trends That Will Revolutionize Supply Chain Logistics,” Journal of Business Logistics 21, no. 2 (2000): 1.
[2] Jeremy N. Smith, “Fast Fashion,” World Trade 21, no. 12 (2008): 54.
9.1 Sourcing and Procurement
LEARNING OBJECTIVES
Explain why sourcing and procurement activities are an important part of supply chain management.
Describe the reasons why the use of outsourcing and offshoring has grown.
Explain some of the drawbacks companies face when they outsource their activities.
Sourcing is the process of evaluating and hiring individual businesses to supply goods and services to your business. Procurement is the process of actually purchasing those goods and services. Sourcing and procurement have become a bigger part of a supply manager’s job in recent years, in part because businesses keep becoming more specialized. Just like Ford’s workers became more efficient by performing specialized tasks, so, too have companies.
Ford Motor Company no longer produces its own tires for its cars. It buys them from tire producers like Michelin and Goodyear. It’s still possible to “own” your supply chain, though. The diamond company DeBeers owns its own mines, distributorships, and retail diamond stores. The problem is that it’s very costly to own multiple types of companies and difficult to run them all well, too.
Firms look up and down their supply chains and outside them to see which companies can add the most value to their products at the least cost. If a firm can find a company that can add more value than it can to a function, it will often outsource the task to that company. After all, why do something yourself if someone else can do it better or more cost effectively?
Rather than their own fleets of trucks, ships, and airplanes, most companies outsource at least some of their transportation tasks to shippers such as Roadway and FedEx. Other companies hire freight forwarders to help them. You can think of freight forwarders as travel agents for freight. [1] Their duties include negotiating rates for shipments and booking space for them on transportation vehicles and in warehouses. A freight forwarder also combines small loads from various shippers into larger loads that can be shipped by more economically. However, it doesn’t own its own transportation equipment or warehouses.
Other companies go a step further and outsource their entire order processing and shipping departments to third-party logistics (3PLs) firms. FedEx Supply Chain Services and UPS Supply Chain Solutions (which are divisions of FedEx and UPS, respectively) are examples of 3PLs. A 3PL is one-stop shipping solution for a company that wants to focus on other aspects of its business. Firms that receive and ship products internationally often hire 3PLs so they don’t have to deal with the headaches of transporting products abroad and completing import and export paperwork for them.
The Growth of Outsourcing and Offshoring
Beginning in the 1990s, companies began to outsource a lot of other activities besides transportation. [2] Their goal was twofold: (1) to lower their costs and (2) to focus on the activities they do best. You might be surprised by the functions firms outsource. In fact, many “producers” of products no longer produce them at all but outsource their production instead.
Most clothing companies, including Nike, design products, but they don’t make them. Instead, they send their designs to companies in nations with low labor costs. Likewise, many drug companies no longer develop their own drugs. They outsource the task to smaller drug developers, which in recent years have had a better track record of developing best-selling pharmaceuticals. The Crest SpinBrush (toothbrush) wasn’t developed by Procter & Gamble, the maker of Crest. A small company called Church & Dwight Co. developed the technology for the SpinBrush, and P&G purchased the right to market and sell the product.
Outsourcing work to companies abroad is called offshoring. Figure 9.2 "Percentage of Supply Chain Functions Offshored in 2008" shows the percentage of supply chain functions three hundred global manufacturers and service organizations say they now offshore and the percentages these organizations expect to offshore by 2010.
Figure 9.2 Percentage of Supply Chain Functions Offshored in 2008 [3]
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