In-Depth Notes on Distribution Strategy

Distribution Strategy

• Definition: The process and logistics through which products are made available to consumers.
• Channel Intermediaries: Interdependent organizations that facilitate the transfer of products in the distribution system.

Channel Setup

• Direct Channel: No intermediaries involved.

  • Example: Tesla sells cars directly to consumers without a dealership.
  • Tailored clothing directly from the producer (e.g., buying from a farmer).

• Non-Direct Channels: Involves intermediaries.

  • One Intermediary: Producers/Manufacturers → Retailer → End Consumer

  • Examples: Target, Amazon, Macy's (B2C model).

  • Multiple Intermediaries: Producers/Manufacturers → Wholesalers/Distributors → Retailers → End Consumer

  • Wholesalers sell in bulk (B2B), not directly to the end consumer.

Key Definitions

• Title of Ownership: Refers to owning an item after purchase.
• Manufacturer/Producers (m): Entities that create goods.
• Wholesalers/Distributors: Entities that sell in larger quantities but do not deal directly with consumers.
• Agents/Brokers: Intermediaries that aid transactions without taking ownership of goods.

B2B vs. B2C

• B2B: Business to Business
• B2C: Business to Consumer

Necessity of Intermediaries

• Given:
  • Let M = number of manufacturers, X = number of customers, N = total number of transactions.
• Without intermediaries: N = m imes x (e.g., N = 80 = 10 imes 8)
• With one intermediary: N = m + x (e.g., N = 18 = 10 + 8)

Discrepancies Addressed by Intermediaries

• Discrepancy of Quantity: Difference between optimal quantities for manufacturers and consumers.
• Discrepancy of Assortment: Consumers desire a variety of products, while producers offer a smaller selection.
• Temporal Discrepancy: The gap between production and consumption times, which intermediaries help bridge.
• Spatial Discrepancy: Geographical distance between production and consumption locations.

Functions of Intermediaries

1. Transactional Functions:

   • Negotiating
   • Risk-taking
   • Promotions

2. Logistical Functions:

   • Physical storing
   • Physical sorting
   • Physical distribution

3. Facilitating Functions:

   • Researching
   • Financing

Distribution Intensity

• Intensive Distribution: Saturates market presence with products available anywhere.
• Selective Distribution: Available but not everywhere; firms control accessibility.
• Exclusive Distribution: Products available only at one retailer, limiting accessibility.

Influencing Factors on Distribution Intensity

• Market Factors: Type and size of target market (broad= intensive; small= exclusive).
• Product Factors: Type of product (low-priced= intensive; high-priced= exclusive).
• Producer Factors: Desired image, control over retail locations.

Channel Relationships

• Analogous to human (romantic) relationships.
• Arms-Length Relationships: Minimal interaction.
• Cooperative Relationships: Regular yet casual interactions, often via contracts.
• Integrated Relationships: Deep collaboration akin to marriage involving shared resources.

Power Dynamics in Relationships

• Power can stem from incentives, ownership of desirable goods, or emotional connections.
• Control: Power exerted to influence behavior; typically, the most powerful entity leads interactions.
• Conflicts may arise from differing objectives; resolution often favors the more powerful entity.

Real World Examples of Channel Power Dynamics

1. Vlasic vs. Walmart: Walmart's pricing power dominated due to sales dependence.
2. Nike vs. Footlocker: Nike retained pricing power despite retailers’ negotiations.
3. P&G vs. Walmart: Equal power led to negotiation without significant concessions.
4. American Airlines vs. Expedia: Equally matched power led to collaboration after a brief separation.

Types of Retailers

• Small Independent Retailers (1950s-1960s): Mom & pop stores, less prevalent now.
• Chain Stores/Corporate Stores: Dominating the market today.

Categories of Retail Stores

• Department Stores: e.g., Macy's, Dillard's; multiple sections, moderate service.
• Specialty Stores: Focused on one category (e.g., sports stores), higher service but limited assortment and higher prices.
• Supermarkets: Primarily food-oriented with a high selection and moderate pricing.
• Convenience Stores: Extended hours, limited selection, higher prices (e.g., 7-Eleven).
• Drug Stores: Sell pharmaceuticals, heavily regulated, high service level.