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LEARNING OBJECTIVES
LO 12-1 Define a value network and how organizations operate within this approach.
LO 12-3 Understand the impact of intermediary contributions via physical distribution
functions, transaction and communication functions, and facilitating functions.
LO 12-5 Utilize suitable criteria to select appropriate channel approaches.
LO 12-7 Understand the role of retailing and e-commerce in delivering the value offering to
the customer.
CHAPTER OUTLINE
I. THE VALUE CHAIN AND VALUE NETWORKS
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II. CHANNELS AND INTERMEDIARIES
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III. FUNCTIONS OF CHANNEL INTERMEDIARIES
A. Physical Distribution Functions
i. Breaking Bulk
ii. Accumulating Bulk and Sorting
iii. Creating Assortments
iv. Reducing Transactions
v. Transportation and Storage
B. Transaction and Communication Functions
C. Facilitating Functions
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IV. DISINTERMEDIATION AND E-CHANNELS
V. VERTICAL MARKETING SYSTEMS
A. Corporate Systems
B. Contractual Systems
C. Administered Systems
VI. CHANNEL BEHAVIOR: CONFLICT AND POWER
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VII. SELECTING CHANNEL APPROACHES
A. Distribution Intensity
i. Intensive Distribution
ii. Selective Distribution
iii. Exclusive Distribution
B. Channel Control and Adaptability
C. Prioritization of Channel Functions – Push versus Pull
Strategy
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VIII. LOGISTICS ASPECTS OF SUPPLY CHAIN
MANAGEMENT
A. Order Processing
B. Warehousing and Materials Handling
C. Inventory Management
D. Transportation
IX. LEGAL ISSUES IN SUPPLY CHAIN MANAGEMENT
A. Exclusive Dealing
B. Exclusive Territories
C. Tying Contracts
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X. RETAILING AND ELECTRONIC COMMERCE
A. Business-to-Consumer Electronic Commerce
i. Advantages of E-Retailing
a. Extensive Selection
b. Considerable Information Available for
Product Research and Evaluation
c. Build Product Communities
d. Individualized Customer Experience
ii. Disadvantages of E-Retailing
a. Easier for Customers to Walk Away
b. Reduced Ability to Sell Features and
Benefits
c. Security of Personal Data
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B. B2B E-commerce
XI. SUMMARY
KEY TERMS
supply chain A complex logistics network characterized by high levels of coordination and
integration among its members.
supply chain management The process of managing the aspects of the supply chain.
value network An overarching system of formal and informal relationships within which the
firm participates to procure, transform, and enhance, and ultimately supply its offerings in final
form within a market space.
value co-creation The combining of capabilities among members of a value network to create
value.
network organization (virtual organization) – Organizations that eliminate many in-house
business functions and activities in favor of focusing only on those aspects for which it is best
equipped to add value.
nimble To be in a position to be maximally flexible, adaptable, and speedy in response to the
many key change drivers affecting business.
channel of distribution A system of interdependent relationships among a set of organizations
that facilitates the exchange process.
intermediaries Organizations that play a role in the exchange process between producers and
consumers.
merchant intermediaries Intermediaries who take title to the product during the exchange
process.
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agent intermediaries Intermediaries who do not take title to the product during the exchange
process.
multiple sources and sorting it into different classifications for sales through the channel.
sorting The process of classifying products for sale through different channels.
creating assortments The process of accumulating products from several sources to then make
those products available down the channel as a convenient assortment for consumers.
reducing transactions The process of lowering the number of purchasing transactions carried
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contractual VMS The binding of otherwise independent entities in the vertical marketing
system legally through contractual agreements.
(VMS).
partner relationship management (PRM) A strategic alliance that includes connectivity of
inventory, billing systems, and market research among marketing channel members.
channel power The degree to which any member of a marketing channel can exercise influence
over the other members of the channel.
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convenience goods Frequently purchased, relatively low-cost products for which customers have
little interest in seeking new information about or considering other product options.
slotting allowance (shelf fee) Extra incentives paid to wholesalers or retailers by the
manufacturer for placing a particular product into inventory.
pull strategy Promotional and distribution strategy in which the focus is on stimulating demand
for an offering directly from the end user.
outbound logistics The process of a product’s movement from production by the manufacturer
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exclusive territory The protection of an intermediary from having to compete with others
selling a producer’s goods.
tying contract A formal requirement by the seller of an intermediary to purchase a
supplementary product to qualify to purchase the primary product the intermediary wishes to
buy.
retailing Any business activity that creates value in the delivery of goods and services to
consumers for their personal, nonbusiness consumption.
electronic commerce (e-commerce) Any action using electronic media to communicate with
customers; facilitate the inventory, exchange, and distribution of goods and services; or make
payment.
APPLICATION QUESTIONS
1. Consider the concept of value co-creation.
a. In your own words, explain the concept of value co-creation.
b. What are some specific ways value can be co-created?
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c. Provide an example of a specific value network you believe results in a high level of
value co-creation.
d. Provide an example of a specific firm or firms that could benefit by establishing a value
network and engaging in value co-creation. In what ways would this approach be an
improvement over their existing business approach?
2. The chapter discusses the importance of being “nimble” in all aspects of a firm’s operation –
that is, to be in a position to be maximally flexible, adaptable, and speedy in response to
change.
a. Identify two firms in two different industries that you believe exhibit a nimble nature in
their operations.
b. What specific evidence leads you to believe these firms are nimble, especially in their
channel and supply chain activities?
3. Consider the issue of disintermediation in electronic channels.
a. Do you believe that all channels will disintermediate down to simple direct channels over
time? Why or why not?
b. Does your opinion change if the question is asked only about B2C channels? Only for
B2B channels? Why?
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c. What functions does the campus website perform well and what functions does it perform
poorly? Explain.
d. What e-commerce functions do you think should be added to the website’s capabilities
that are not presently offered?
MANAGEMENT DECISION CASE
Restoration Hardware— Using the Brick & Mortar Store as a “3D Catalog”
Although many students will not have shopped at Restoration Hardware, this case is focused on
two areas upon which most will be experts: shopping in retail stores and shopping via the
Questions for Consideration
1. RH’s CEO believes that the internet is limited in its ability to facilitate differentiation among
retailers. Do you agree? Which retailers do a particularly effective job at presenting their
products through their websites?
Students will likely disagree with RH’s CEO and may offer examples of online retailers who
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2. Does the RH strategy work only for high end/prestige products or are there elements of their
approach that would be appropriate for retailers at all price levels? Choose one of your
favorite retailers and discuss how that company could best apply the approach that RH is
using.
While the precise strategy (elaborate galleries in historic buildings) is probably most
appropriate for high end products, the general concept should be transferable. There are
3. Is it environmentally responsible for RH to produce and distribute such large paper catalogs?
Are there ways they could mitigate the environmental impact of this program? How could
they best deal with the likely negative reaction from “green” customers?
Articles in the case reference list provide some background on the controversy around RH’s
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4. What are some other novel ways that retailers could define the role of their brick and mortar
stores to optimize their effectiveness in contributing to increasing firm revenues and profits?
Since the goal is to get customers to go to the trouble of going to a store, students should be
asked what causes them to do this versus just shopping online. Several prompts could help
the brainstorming process:
SUGGESTED VIDEO
Creston Vineyard’s Distribution Channels (10:47 minutes)
Description: Creston Vineyards outlines their structure of distribution channels. Video discusses
the process it takes to make their product available from the manufacturer to the consumer.
1. Should Creston Vineyard use a push or pull strategy in its channels?
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2. Describe Creston Vineyard’s distribution intensity strategy.
Supply Chain: How Domino’s Gets Pizza to Plate (4:59 minutes)
Description: Domino’s needs an efficient supply chain in order to profitably serve pizza to its
large customer base. This video explains various aspects of the company’s supply chain
operations and relationships.
1. Most of the ingredients needed for pizza could be acquired from local suppliers located in
close proximity to the Domino’s stores in a given city, eliminating the extensive supply chain
network that Domino’s utilizes with their hub-and-spoke approach. What are the likely
reasons that Domino’s chooses to employ the supply chain strategy described in the video?
Is Big Box Retailing Right for Your Product? (3:41 minutes)
Description: Vosges Haut-Chocolat, a luxury chocolate brand, introduced a mid-market brand
called Wild Ophelia to appeal to a different customer segment. Unfortunately, dealings with two
large retailers interested in selling the product did not go well. The video explains what went
wrong.
1. What were the key execution problems noted in the video for the new Wild Ophelia brand (at
both WalMart and Walgreen’s?
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2. What steps could be taken to ensure that Vosges’ next attempt at distribution for Wild
Ophelia is more successful?