Channeldesign decisions according to the size of the market

The size of the market and the variety in customer profiles often justify the use of indirect distribution channels so as to eliminate gaps in market coverage. This is even more important for high-tech products, especially when they are entering the growth phase at full speed, meaning that they try to reach the majority of mainstreams customers, which make up the bulk of the market. At that time, it is necessary to add channels and even sometimes to switch from one category to another [8].

The computer market, which unquestionably follows this pattern, has gone through four characteristic phases. During the first phase (the 1950s), the systems were sophisticated and potential customers were few; this corresponded to direct sales through contact between sales engineers and customers. From the 1970s on, the arrival of minicomputers and the increased number of users led to the development of external distribution channels, usually in the form of OEM, which added specific applications to computers before the actual sale.

The development of microcomputers during the 1980s led to a greater use of distributors, who became the key success factors for Apple and Compaq. Similarly, the popularity of microcomputers brought about the development of direct marketing. Dell was the first company to sell its computers directly by mail order without any physical intermediary and has since been imitated by a score of other firms.

Since the onset of the 1990s, large computer firms that want to reach a greater variety of market segments have to manage different marketing structures. These companies sell some of their smaller products, such as servers or PCs, through authorized dealers, establish marketing agreements with distribution chain, such as Comp USA, Computown, or U.K.-based Tiny Computers, and are in contact with dealers in the used computer market. For consumer goods such as MP3 players, digital cameras, or PDAs, vendors such as HP, Samsung, and Sony also use electronics retailers. Major electronics retailers in the United States are Best Buy (500 stores), Radio Shack (5,300 stores), Musicland (1,100 stores), Tweeter, and Ultimate Electronics.

Sales can also be made directly from computer to computer using electronic data interchange (EDI) or the Internet, which both are experiencing strong growth.

Though worldwide market estimates vary significantly from one institute to another as shown in Table 7.1, clearly on-line B2B is bigger than B2C. Today it can be estimated that e-commerce represents 12% of revenues for telecom and technology companies. For instance, the Cisco Systems and the HP Internet sites allow prospective business customers to search for products and services, review the specifications of Cisco or HP machines, and contact sales representatives to place orders or even order directly through the Internet. Similarly, Oracle Corporation, the leading database software vendor, now distributes a new product over the Internet, as well as through physical channels. In the consumer business, Dell has implemented a direct order system through the Internet, a practice imitated by Apple Computer.

The rise of e-marketplaces has spurred the growth of on-line B2B, because this is where buyers and sellers could meet to procure products through on-line catalogs, auctions, or direct exchanges. At the outset most of the e-marketplaces were public or driven by consortia, such as Covisint or Supply On in the automotive industry, Aeroxchange or Exostar in the aviation industry, or consortium-led E2open and Converge for the high-tech industry.

However, e-marketplaces are now more frequently private, functioning by invitation only and focusing more on process than price. In fact, because partners on a private exchange already know each other they can share crucial aspects of their business more efficiently: information, production

Table 7.1 Estimates about the Worldwide B2B E-Commerce Volume in 2003 (Millions of Dollars)

Dollars in

Dollars in

B2B

Millions

B2C

Millions

e-marketer,

1,409

e-marketer,

250

February 2002

February 2002

Jupiter Research

2,940

Merrill Lynch

1,317

Computer

1,853

Goldman Sachs

1,392

economics, June

2002

planning, inventory management, and other supply chain processes, as well as auctions. Firms like IBM or Sun Microsystems have bought a billion dollars of computer hardware components through private exchanges. More than 30% of Fortune 2,000 companies had set up their own private exchanges in 2003 and the trend is accelerating, according to AMR Research.

In B2C, on-line markets provide better visibility of what consumers are buying, when they are buying it, and from whom they are buying it;best of all, they bring this information instantly to marketers. Some firms such as Nedstat, NetlQ, SteelTorch, and Red Sheriff are providing marketers with real-time information about what, when, and where customers are buying. In a way, those firms are the Nielsens of the Internet. On-line businesses also provide better margins since on-line commissions tend to range from 5% to 10% of sales according to the category of the goods [9].

On the other side, privacy concerns may impede this new customer visibility. In the United States, Microsoft was compelled to halt its automatic downloading of information about user system configurations as part of the process of registering from Microsoft Network. In France, getting electronic information on consumers or businesses is severely restricted by law: Anyone always has the right to see the content of the information stored and may refuse to have this information used for business purposes, such as being listed on a customer database.

Figure 7.1 illustrates and summarizes this development of channeldesign choices and its consequences in terms of the organization for a major computer vendor. The increase in channels parallel the computer technology life cycle as much as it is necessary to reach more mainstream customers in the early or late majority. The problem with running so many distribution channels is that they overlap on customer reach and, as a consequence, risk conflicting with each other. The solution for avoiding such a difficulty is to differentiate products and tailor margins to distinct retail channels, like Packard Bell NEC has done. In 2003, Packard Bell NEC introduced a distribution plan, dubbed "NEC Now Program," allowing more than 250 qualified resellers and Value Added Reseller (VARs) to deliver notebooks and other products directly through direct access to NEC's build-to-order manufacturing plants. The different channels are not competing because customers pay the same price, whether they purchase direct or through resellers.

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