Channeldesign decisions according to the flexibility of the distribution network

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A distribution contract is often specifically for a fairly long period of time. A consumer electronics manufacturer could not easily change from a specialized sales force to direct sales through superstores.

However, recruiting and training a network of distributors takes time and requires an investment since this network cannot be put into effect immediately. In the high-technology-product world, product ranges follow each other at a high rate and market segments are constantly changing, which makes establishing a distributor network even more difficult.

In the telecom or the computer industry, distributors have replaced a traditional sales force but are now threatened by direct marketing channels, such as phone or the Internet. However the most successful marketing companies do not throw out the baby with the bath water. They know that it takes time and energy to set up, train, motivate and manage a channel. Consequently they try to extract the maximum value of their different channels instead of turning one off, as soon as it is seems to be less effective.

For instance, in 2002, Cisco initiated some major changes in its distribution strategy in Europe, as well as in Middle East and Africa. Among its distributors, Cisco differentiated two different categories and created 7 Cisco Distribution Partners (CDP) and 10 Cisco Authorized Distributors (CAD). In that two-tier scheme, CDPs only have a direct purchasing relationship with Cisco while CAPs procure Cisco products from a CDP and no longer directly from Cisco. Except for procurement, CDP and CAD have a direct relationship with Cisco for information, service and expertise.

Such an organization actually means that CAD can focus more efficiently on the selling of services and Cisco solutions while relying on CDP for the logistic and supply side. It provide them with much more flexibility, faster product lead time, no more inventory costs and risks, as well as freeing their working capital for use in developing their business.

As for the CDPs, they get a better use and profitability from their fixed cost infrastructure through larger shipments. They also get the opportunity to generate new revenues on activities such as configurations, staging or private label; finally they increase their customer base to include CAD. By offering win-win solutions and maximizing the synergies between the different categories of distributors this program has been extremely successful. It has allowed Cisco to increase its market share so far.

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