Channels:

1
Channels The Design and Management of Supply
and Distribution Channels
2
Starbucks vs. McDonalds
Starbucks stores are company owned
McDonalds stores are often franchised
Both chains worry about consistency
Both chains worry about each stores performance
Why the difference?
3
Chevron
Researchers are difficult to monitor Hard
to monitor how hard someone is thinking
Ideas do not affect demand for a long time
Impact depends upon other factors.
How can Chevron motivate its employees to work
hard?
4
May Company 1
May Co. is one of the largest department store
conglomerates in the country with annual sales
exceeding 10 billion.
Different departments use different language to
describe products, sales, profit margins, and
prices
How can corporate managers work out what is going
on?
5
May Company 2
Almost all of the clothing May Company sells is
manufactured in low wage Asian countries.
Some of these clothes are sourced by May Company
itself and others are purchased from US
intermediaries.
The clothes purchased from intermediaries tend to
be more fashionable - varying more from year to
year.
Why does May Company not source more fashionable
clothing itself?
6
Continental Airlines
If Continental outsources its airport operations
to another airline it must share information
about reservations and plane operations The
information is proprietary Continentals
information systems uses different
hardware Agents have to be trained to use
Continentals information systems
Does Continental outsource its airport operations?
7
SAP
SAP designs software that lets all of a companys
departments share the same information system.
The benefit it is easier to share information
between departments.
Why dont all firms adopt this type of
standardized software?
8
State Farm
Insurance brokers collect information from
clients and provide it to State Farm
This is a task that that the web is almost
ideally suited to perform
Why has State Farm been slow to market its
products over the Internet?
Which insurance companies are more likely to use
the Internet?
9
Burger King 1
If Burger King makes local advertising decisions
itself it can ensure that the advertising
occurs. Franchisees may be reluctant to
advertise they pay all of the costs and
only get a share of the benefits
However the franchisees are better placed to
evaluate whether local advertising is needed.
What is the solution?
10
Burger King 2
At Burger King customers form 1 line one
employee takes the order another employee gets
the food.
At McDonalds customers line up behind different
registers and the same employee takes the order
and gets the food.
McDonalds process is faster and customers like it
more.
Why doesnt Burger King change?
11
Sloan
At Sloan the marketing faculty are all located in
E56 across the car park from the rest of the
school
At Chicago the marketing facultys offices are
spread throughout the school
Is this difference important?
12
1980 Acquisition of Houston Oil and Minerals
Corp. by Tenneco
Houston Oil was a very successful oil exploration
company.
Houstons success was largely due to its
bonus-driven, aggressive, entrepreneurial work
force.
Tenneco at the time was the largest US
conglomerate which included oil distribution
activities.
Why did the acquisition fail?
13
Reebok vs. Nike
The companies compete for the same customers
Nike No product is made by a single
supplier No single supplier represents a large
proportion of its business Regularly changes
suppliers
Reebok 50 of its products are made by a
single supplier
14
Reebok vs. Nike
Advantages of a single supplier they are more
willing to invest in resources enjoy benefits
of economies of scale fewer decision
makers/inputs more repeated interactions
Disadvantages of a single supplier exclusivity
gives market power (are incentives
aligned) risk not diversified technical
failures, disputes
15
Coordination and Incentive Issues
Coordination Issues The optimal performance of
one task may depend upon the performance
of other tasks Coordination problems arise
within and between firms
Incentive Issues Firms and employees may have
different goals Incentive issues arise within
and between firms
16
Coordination When is it difficult?
Too many inputs (American Airlines)
Decision makers too far from information
(centralized decision making)
Too many decision makers (decentralized decision
making)
Specialization different languages (May
Co.) different information systems
(Continental)
Incentive problems (Continental)
17
How Does Outsourcing Affect Coordination?
Coordination is difficult at large
firms Decision makers too far apart
(decentralized) Decision makers too far from
information (centralized) Hard to measure the
impact of actions (Chevron)
Coordination is difficult between
firms Procurement need to negotiate price and
terms (Knez and Simester) More decision makers
(Burger King) Incentive issues proprietary
information (Continental) Harder to implement
standardization (Continental) Harder to
implement other coordination mechanisms
(co-location)
18
Incentives When do problems arise?
Goals not congruent Within firms
vacations Between firms wholesale price
Implications Adverse Selection distort
information Moral Hazard distort actions and
decisions
Note relationship between incentive and
coordination issues
19
How Does Outsourcing Affect Incentives?
Owners not employees at the division
level Helps if goals are consistent manage
employees Hinders if goals are inconsistent
Burger King ordering process
20
Aligning Incentives Using Contracts
Enforcing contracts Input measures
(accountants) Output measures (sales people)
Complexities Multiple tasks Group
performance Uncertainty
21
Intermediate Solutions
Outsourcing is not the only option
Vertically integrated Chicago Tribune
Franchising Pizza Hut Licensing Tiger
Woods Cooperatives Ace Hardware
Joint Venture PowerPC Strategic
Alliances Coke and McDonalds
Outsourced Nike
Different channels for different segments May
create coordination and incentive problems (State
Farm)
22
Bose JIT Program
Coordination Standardize (information systems)
Co-location Not negotiating prices and terms
Incentives Owners watch over suppliers employees
(good) Give suppliers market power (bad)