November

09

TermPaper SalesandDistributionManagement

Internet

Analternativechannelofdistribution
Undertheguidanceof:Prof.K.R.Rao

Submitted By: Abhay Negi 2008PGP003D Section B

IndianInstituteofManagement,Indore

TableofContents
Introduction Summary Reasonsforchoiceofsubject Relevance Literaturesurveyandstateoftheart PreparingfortheFuture Web2.0 Widgets OnlineBuzzMonitoring AnalysisandObservations OnlineDistributionChannels ShiftingofChannel TheimpactoftheInternetonthevaluechainoftheorganization TechnologicalProductDistribution Recommendationsforfurtherwork Conclusions References

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Introduction

Adistributionchannelisasetofinterdependentorganizationsinvolvedintheprocessof makingaproductorserviceavailableforuseorconsumptionbytheconsumerorbusiness users.Distributionchannelshavebeenviewedasastrategicassetandchanneldesignhas beenrecognizedasakeytosuccessfulcompetition.

Ecommerce (particularly B2B) has revolutionized and fundamentally reshaped business relationships and has caused dramatic shifts in channel power as information and communication imbalances disappear. Online exchanges are infiltrating distribution channelsatanoutstandingrate. AsgrowthintheuseofInternetaccelerates,distributorshavebeenwarnedrepeatedlythat they risk being cut out of the channel by aggressive Websavvy, and purely virtual competitors. In recent years, it has been widely accepted that ecommerce signifies the dawn of a frictionfree market; structural changes in markets, such as disintermediation, wouldoccurduetotheimpactofelectronictradeandelectronicinformationage. During the past decade, organizational theorists, telecommunication managers, business consultants, have directed our attention to the strategic role that information technology can play in the competitive strategy of firms. Throughout the 1980s, the use of telecommunication networks linking firms to their suppliers and distribution chains conveyed important first mover advantages were discussed. The Internet businessto business (B2B) space is gaining much attention, with valuation for publicly traded B2B companiesescalatingrapidly. Ontheotherhand,theexistenceofdistributionchannelshashelpedtomakesocietymore efficientinresourceallocation.Mostproducersuseintermediariestobringtheirproducts to market. They try to forge distribution channel a set of interdependent organizations involvedintheprocessofmakingaproductorserviceavailableforuseorconsumptionby theconsumerorbusinessusersIntermediarycreateseconomicssavingsforthesystemand thesavingsbecomemoredramaticasthenumberofproducer/consumersincreases.

Summary
The Internet has traditionally been a communication channel and a transaction channel. Butrecentlyithasalsoemergedasanimportantchannelfordistribution,.TheInternetwas notdesignedtobeamarketchannelnorforanyspecificsetofconsumerservices.Hadit beendesignedtoserveconsumersandthemarketplace,itwouldlikelyhavebeenamore centrallyorganized.ButasthechannelfunctionsoftheInternetareevolvingitisseriously emergingasachannelofdistributionforsomespecifickindsofproducts.

Ecommerce (particularly B2B) has revolutionized and fundamentally reshaped business relationships and has caused dramatic shifts in channel power as information and communication imbalances disappear. The rise of the internet has fuelled discussion on whetheritcanreplacethetraditionalchannelsofdistributioncompletelyinthefuture.The issue of place retention by traditional channels or its replacement by ecommerce will depend on a number of factors chief among them being the valueadded and the cost of eachchannel. Thecurrentstudylooksathowhastheinternetevolvedasadistributionchannelandthe possibilityofitreplacingthetraditionaldistributionchannels.

Reasonsforchoiceofsubject

Withtheadventoftechnologyanditbecomingmoreeasilyaccessibletothecommonman, internethasemergedasthebackboneofalargenumberofcommercialtransactions.The lastdecadehasseenajumpinecommerceasapopularmodeofbusiness.Duetoitseasy accessibility, high reach and costeffectiveness it is seen as a big threat to the traditional distributionchannels.Butseveralattemptshavefailedintheirattemptsbecauseoflackof understandingoftheimplicationsofremovingkeyelementsofthedistributionchannel. Hence, evaluating the impact of ecommerce on the roles of distributors in the times to come is of utmost importance for every business in designing its sales and distribution strategyforthefuture.

Relevance

Internet as a medium for distribution presents an altogether new opportunity for the industry. For the customer ecommerce can simplify tasks, reduce time, and optimize the customerexperience.Anonlinecustomerrelationshipcontributestothelifetimevalueof customersbyreducingacquisitioncosts,increasingsales,extendingthecustomerlifecycle, and strengthening customer retention. The rise of overnight delivery services and the ubiquity of the Internet have offered increased opportunities for firms that originate productsandservicestoselldirectlytoconsumers. Ecommerceishencebeenwidelyacceptedasthefutureofdistributionforallproductsdue to the clear advantages it entails but it has to be carefully used to replace the existing channels.Marketingasanexerciseisincreasingstartingfocusingonthesenewerchannels topromotetheirproducts.Thesechannelsareexpectedtoreplacethetraditionalchannels in the next few decades as the primary source of marketing, sales and distribution of all kindsofproducts.

Literaturesurveyandstateoftheart

The appeal of the internet as a distribution channel seems to be unstoppable the eCommerceturnover has been growing at a decent pace for the last decade. As instore salesflattenorevendeclineformanyretailersworldwide,multichannelsalescontinueto grow. The following reasons can be mentioned as an impulse for the positive development and thedrivingforceofthemarket: o Hightransparencyofprice o Lowpricedcostofdistribution o Emotionaladdressofcustomers o Motor in years to come is especially mobile commerce, as well as interactive participationofthecustomers(Web2.0)

PreparingfortheFuture

As a critical first step, brands should improve strategies and fix the basic functionality of theirwebsites.Oncesitesachieveminimumlevelsofinnovation,performanceandquality, newtechnologiesandstandardsshouldbeevaluated,testedandadoptedastheybecome available and practical. At the moment, web 2.0 functionality, widgets, mobile and online buzz monitoring are examples of functionality becoming increasingly common. But even more critical in the future will be the strong integration of both on and offline efforts, supportedbyengagingandinteractivefunctionslikethosehighlightedhere.

Web 2.0

Web2.0,socialnetworkingandcrowdsourcingwillbeincreasinglyrelevantasadvertising andcommercialmodelswillbecomemoredependentonsocialmediatoconnectbrandand user. More and smarter mechanisms for user generated content will also be key differentiators, including enhanced versions of user forums, product feedback, and facilitationofproductorvendorchoice.Web2.0maybehardtoproducebutcanbehighly effectivewhensuccessful.

Widgets
Widgets allow websites to add dynamic, customizable componentsto otherwise static pages. Typically thirdparties create addon widgets that are especially applicable to e commerce.Theyallowthemoldofstoretoshoppingcartretailingtobebrokenbywidgets floatingonawebpage,andareeasilycustomizedbyusers.

Online Buzz Monitoring

Newdigitalscanningtechnologiessearchtheweblikeadigitalradarwheremonitoringof online buzz can be incorporated back into shaping the internal websitesso the community chatter around your brand, competitive price and banner monitoring can be addedasimportantmeasurementandoptimizationtoolsprovidingintelligenceintheweb osphere.

AnalysisandObservations

OnlineDistributionChannels

A web enabled distribution network helps a distributor work with multiple business models; collaborate with business partners for better pricing and enables a smoother supplychain.Selling,sourcingandshippingconstitutesapartofvirtualoperationsandthe distributoristhesalesagentandthelogisticscoordinatortoo.

TraditionalDistributionChannel

Producer/ Suplier

Distributor

Wholesaler

Retailer

Consumer

OnlineDistributionChannel

Supplier

Supplier

Customer

NewIntermediaries

Customer

Selling is accomplished through the Internet and traditional distribution channels and information about customers helps forecast demands. A no risk, no title approach to sourcingandnegotiatingpricingisthecurrentscenario.Alongwithcollaboratedworking
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with other distributors, partners and manufacturers can create demand forecasts and negotiateallocations. Someofthekeyfeauturesofanonlinedistributionchannelare: o Collaborationbetweendistributors,customers,suppliers,logisticproviders o Consolidation mergers and acquisitions and many other suitable cooperative arrangements o Ecommerceinitiativesbetweenbusinessesandcustomers o Valueenabledsupplychainsmultiplemethodstoexpandanddistribute o Reductionincostsandquickerresponsetimes The Internet distribution offers companies the coverage of new target groups and a potentialsalesvolume.

TheconfigurationoftheInternetchannelofdistributionimpliesmultifacetedchallenges. Someofthesechallengeshavebeenlistedbelowwhichhavestoodinthewayofinternet becomingthepreferredchannel: o Resistancebycurrentchannelfortheprocessofshiftingofthechannels o ShopSystemsChoices o Usability o Paymenttransaction,security o OnlineMarketing(SEM,SEO,EMailMarketing, o AffiliateMarketing,WebAnalytics,WebControlling) o Mass Customization (Participation of the visitor/customer in development and design) o SocialCommerce o MobileCommerce(ApplicationsundServices) o Certification,sealofquality Themostimportantamongthesei.e.resistancetotheshiftingofchannelshasbeen discussesbelow.

ShiftingofChannel

Electronic commerce presents opportunities to expand or shift elements of existing channels from the physical marketplace to the virtual market space. However the bargaining power of buyers and suppliers is a critical force shaping industry competitivenessandthepresenceofsuchpowerwillremainvitalindeterminingafirms ability to exploit online markets. In particular, those manufacturers that have dominated traditional retail sales may be undermined by their earlier success. Their reliance on traditional outlets makes them susceptible to retailer pressure to curb online experimentation and limit deep discounting online. Maintaining both channels also presents barriers to execution resulting if attempts to straddle multiple markets limit operationaloptimization. CompaqhadfacedduringthePCindustry'sincreasingshifttoonlinechannels.Inthefirst quarter of 1999, Compaq was forced to halt sales to deepdiscount online retailers in response to pressure from its traditional (and much larger) retail base. Dell was able to takeuseofthisopportunityandcapturedamajorchunkofthenotebookmarketinavery smalltimespan. Similarly, Amazon.com has suffered at the hands of noncomplaint suppliers as it has attempted to expand into consumer electronics. Many leading electronics manufacturers refused to authorize and supply the web retailer for fear of retaliation from larger brick andmortarchains,forcingAmazontotakecostlystepstosecurepopularitemsfromother retailers. Hence formulating ecommerce plans without considering the channel partner dynamiccanresultinfinancialloss,reputationdamage,andweakerpartnerrelationships. TheInternet'sabilitytobringtogethergeographicallydiversebuyersandsellershasledto ariseinleveragingauctionmarketsasdistributionchannels.However,therelativescarcity of items offered has significant impact on motivating auction participants as well as in creatingcompetitiveadvantagefortheauctionoperator.Forprovidersofrareproductsor services with exclusive or limited access however, auction models present a compelling alternative to traditional channels. Indeed, both suppliers and buyers as markets of first choicemayviewthesemarkets.Suppliersofraregoodsseeklargemarketsbecausemore buyerswillbidpriceshigher.
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Similarly, buyers seeking rare goods first visit the largest market to maximize their likelihood of finding the item sought. This virtuous cycle creates the demandside economies of scale of network effects. eBay's success provides a stunning example of the strengthofthesebenefits.Amazonhaveofferedcompetingserviceswithlowerfees.eBay has maintained its network advantage via an online rating system for evaluating auction participants.Theratingsystemhashelpedlowertheriskpremiumassociatedwithdoing business on eBay and it creates a switching costs, strengthened over time, in that participants who leave must recreate their reputation anew at another service. The successofeBay'smarketefficiencyauctionsforcollectableshascreatedacriticalmassof consumers that has allowed the firm to leverage this client base to expand into other markets. The extent of the collapse of distribution channels brought about by the advent of the Internet appears to have been over estimated. Instead we are faced with an undulating distribution channel that can contract, shift into cyberspace, or expand depending on the complex interaction of industry players, value delivery, product offerings and characteristics, and market power. An understanding of the interplay of these disparate forces is vital for those seeking to determine how ecommerce will impact a firm and its industry.

TheimpactoftheInternetonthevaluechainoftheorganization
Organizations should operate and combine different activities, which form their value chain in order to offer differentiated products or products at the lowest cost companies. Eachoftheseactivitiescanaddvaluetotheirinputs,andasaresulttheorganizationcan obtainsustainablecompetitiveadvantage. The value chain of an organization is composed by primary activities (inbound logistics, operations, outbound logistics, marketing and sales, service) and support activities (procurement,technologicaldevelopment,humanresourcesmanagement,infrastructure). During its activity an organization interacts with its suppliers, customers, other organizations from complementary/related industries, and all of these have their own valuechains.
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Marketinghastwoimportantrolesinthevaluechain: o Stimulatethedemandforaproductorservice; o Offerinputs(data)forproductspecifications,includingestimationofthedemands. TheInternethasseveralcharacteristicsthroughwhichitinfluencestheprimaryand supportactivitiesofthevaluechain: o MediatingTechnology:TheInternetpermitstheorganizationstotrytoknowmuch better their customers, to be in direct relation with their buyers, the information flux to be bidirectional, and as a result organizations through their marketing activities can better evaluate the needs, expectations of the market, can facilitate innovations generated by customers, easily stimulate the demands, due to direct contactwithcustomers. o Time moderator, distribution channel and universal: The Internet permits organizations to address customers from a larger geographical area, offers a new way of distribution, local companies can serve larger markets (national or even international), increases the ability to extend the area of sales and (after sales) services activities, without the necessity of physical contact with customers, it allows a wider choice of inputs, geographically dispersed manufacturing, remote testing, instantaneously delivery of information, services, sometimes instantaneously delivery of products. It reduces the costs related to logistics and delivery,andapartoftheseeconomiesofcostscanbeofferedforcustomersinthe form of lower prices. Customers will get value through prompt delivery, lower pricesandqualityproducts. o Reducerofinformationasymmetriesandtransactioncosts:Theinternetreducesthe necessary inventories, because customers can be served directly by the manufacturer, through direct delivery. A general fear in the new economy is disintermediation,whichmeansthatmanufacturerscanofferdirectlytheirproducts to the enduser consumers, eliminating distributors from the value system. But it seemsthatdistributorsarenoteliminatedtotally,andnewtypesofintermediaries appear. o Being scalable and having and infinite virtual capacity the Internet and developments in information and communication technology allow for many informationintensivebusinessestooperateatlargerscale,asaresulttheeffectof economiesofscalewillappear.
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We can observe that the Internet has important impact on many of primary and support activitiesofcompaniesfromindustriesbasedoninformationandofdistributors.Inother industries the Internet has impact first of all on the marketing and sales activities, which cangeneratechangesinthewholevaluechainoftheorganization.

TechnologicalProductDistribution

High technology products have been the frontrunners in accepting internet as a distribution medium. Technological products are novel technologies developed to satisfy knowncustomerneeds.Suchproductsandservicescompeteonthebasisofperformance, rather than price or quality. The development of multimedia products and services is a recentexampleofsuchacoevolutionoftechnologiesandmarkets.Competitionisbased on serving specific market niches and on close relations with customers. Innovation typicallyoriginatesorisincollaborationwithpotentialusers.

Differentiatedproductsarethoseinwhichboththetechnologiesandmarketsaremature, andmostinnovationsconsistoftheimproveduseofexistingtechnologiestomeetaknown customerneed.Productsandservicesaredifferentiatedonthebasisofpackaging,pricing andsupport. Next,theemergenceofInternetfinanciersandlenders,increasedlendingbyfinancialand other institutions, and decreasing need for storage occasioned by computerized stock
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managementsystemsandJIT,couldhaveimpactedthelikelihoodoftherolesoftraditional distributors to producers being replaced. Lastly, availability of truck transportation and increasedefficiencymayhavecontributedtothelikelihoodoftraditionaldistributorsbeing replacedinprovidingsafeandtimelytransportation. Customers and producers may not need to rely on brick and mortar distributors, but dependonforwardersorcouriersforreliableshipment. Forundifferentiatedproducts(i.e.architectural,technological,andcomplexproducts),itis less likely (compared to differentiated products) that disintermediation will occur. Customersandproducersarenotyetreadytotakeoverthedistributorsrolesevenafter theclearfinancialbenefitsitpresentstotheparties.Ontheotherhand,eshoppersareless likelytocloseatransactionusingtheInternetwhentheproductissomewhatcomplicated.

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Thus far, most of the producers are still unprepared, either technologically or from a business process perspective, to pipe a large portion of their B2B transactions over the Internettopromotecomplexproductsthatareoftendifficulttodescribe.Thetransaction costsinvolvedmaybetoohightobeabsorbedbyboththecustomersandproducers. Fromtheproducersstandpoint,theextracostsincurredmayincludetheneedtoprovide immediacy, flexible pricing structure, advanced customer support, digital signatures or financial clearing for largesum transactions. From the customers perspective, sourcing informationfrommultipleWebsitesforasinglenonstandardizedproductmaynotbecost effective. This may be a carry over effect of single supplier source era. Also, the effectiveness of distributors in getting critical mass could be apparent to producer and cannot be underestimated. On top of that, the efficiency and value added by performing these functions could be one of their concerns. Unless the producers have resources to internalize the channel activities within its organizational boundaries, it may be deemed morecosteffectivetoleavethesefunctionstothehandsofdistributors. Several implications of study are raised based on the findings. The research may provide distributorsanideaofwhichofthefunctionsthatcanbereplacedandwhicharethosethat cannotbesubstitutedbasedontypesofproducts.Forthosefunctionsthataremorelikely tobereplaced,distributorsshouldcollaboratewithproducersandcustomerstointegrate theiroperationalactivitiesinordertoachievehigherefficiencylevel,whichwilleventually benefitallpartiesinthesupplychain.Forthosefunctionsthatarelesslikelytobereplaced, distributors may continue to strengthen their competitive edge and further add value to customersandproducers,inparticularintodaysworldofsolutioncentricbusinessmodel. Traditionaldistributorsshoulddeliversolutionsinsteadofjustcommodities,whichisthe only way they can retain an important place in the channel. Distributors may need to ensurethatmassiveamountofsupplyanddemanddataiswellmanagedandnearperfect informationtobuyersandsellersareeasilyavailable.Theabilityofdistributorstoprovide market intelligence to producers will be considered as value added as it is difficult for producers to monitor each and every one of their customers. Furthermore, with the findings, distributors may make some strategic decision as to whether to concentrate on demandfulfillmentbusinessordemandcreationactivities. Therefore,sinceproductsimplicity(i.e.noncomplication)isnegativelyassociatedtoane
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shippers propensity to use a vehicle other than the Internet to close a transaction, brick andmortardistributorsmaywishtoexploitthisopportunitycreatedbytheinabilityofe commercetobeginandcompletedeliveryofcomplexproductsorhighlytechnicalproducts by extension. Besides that, the findings may trigger discussion on the possibility of consortialike electronic marketplace being the next business model for distribution channelsinceitmayhelptoachievetoamoreefficientmarket. Distributors need to be ready and prepared for the next possible distribution channel evolution.Asmuchasthefunctionsofdistributorsofundifferentiatedproductsmaybeless likely to be replaced in near term, however, the Internet will continue to deliver information and options to customers at an exponentially accelerating rate that may changethetraditionalchannelpracticesinthelongrun.

Recommendationsforfurtherwork

The current study only considered the high technology product space based on only two factors market novelty and technological novelty. Further work should cover wider industry sectors including more independent factors for a more comprehensive study. Some of the factors suggested are how well verse are customers in using Internet, investment in information technology by producers and customers, readiness of the infrastructure in supporting usage of Internet, and cultural differences in different countries. The new advances in the Internet technology with the advent of Web 2.0, widgets and online buzz should be studied. These technologies present a more dynamic and collaborative environment, which changes the distribution and sales environment currentlyused. Thefuturesuccessofecommercedependsonhighlevelsofonline/offlineintegration,as consumers make use of mobile technologies instore, and also continue to use online retailing as research for instore purchases. For example, loyalty cards present an important opportunity to be utilized as a vehicle to integrate on and offline customer experiences,giventheamountofdatacompiledaboutcustomersinloyaltyprograms.

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Conclusions

Consumers are living in an increasingly digital world where the traditional channels of digitalmediaareconverging,Ecommerceasweknowitiscomingtoitsendwithbranding, marketing and retail converging in integrated experiences that cut across traditional and digital channels with mobile playing an ever more important role. This has ensured that digital distribution is a channel not just for advertising and brand building, but also for price, promotions and merchandising. Those companies that are ahead of the curve in prioritizingdigitalstrategyarelikelytobethemostsuccessfulinaddressingtheneedsof thedigitalconsumer. Ecommercehasimportantimpactontherolesofdistributors,butitisfarfromreplacing the traditional channels as the primary source of distribution. The likelihood of distributorsfunctions(forproducers,forcustomers,andforboth)beingreplacedishigher for differentiated products followed by architectural product, technological products, and subsequently complex products. Companies can leverage digital as more than merely another channel but as an enabler for business transformation that can complement the other channels of distribution for the time being and maybe replace it completely in the future. But for now, we need to leverage the internet as an important marketing and distributioncomplementingthetraditionalchannels.

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References
o Viabilityofecommerceasanalternativedistributionchannel, www.nasstrac.org/.../NASSTRAC_Visibility_eCommerce_As_Alternative_Distribution_Channel. pdf ECommerceandtheUndulatingDistributionChannel, www2.bc.edu/~gallaugh/cacmundulating02.pdf UsingECommercetoLeverageYourProductsUpstream,www.clickin.com/clickinreport ecommerce.pdf Theimpactoftheinternetoftheorganisationsinternalmarketing, http://imtuoradea.ro/auo.fmte/files2008/MIE_files/KANYA%20HAJNALKA%202.pdf

o o o

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