Question

On the basis of Walmart. answer the following questions.
DISTRIBUTION CHANNEL APPLICATION CRITERIA.
1. types of distribution channel functions
2. channel strategy decisions.
3. channel design and competitive advantage.

Answer 1

Question No 1

About Walmart Marketplace

Launched in the year 2009, Walmart marketplace is a reputed and popular e-commerce platform owned and operated by “Walmart”. Walmart partners with multiple Marketplace Sellers and brings in millions of products and brands to its customers. In short, Walmart Marketplace permits third-party sellers to list their products on its website – Walmart.com, much like you do in Amazon or eBay. Given their immense audience visiting the website on a daily basis, selling on Walmart marketplace can be a great place to promote your products.

Walmart uses the intensive distribution strategy or intensive distribution channel design for this marketing mix element. In the strategy, the company’s stores and e-commerce websites generally offer the same variety of goods and services, and all stores have similar functions in their operations. This element of Walmart’s marketing mix helps attract customers by making shopping convenient in terms of strategic physical locations of stores and the high accessibility of online services. The combination of online and non-online distribution channels for retail and other services maximizes the company’s reach in its target markets around the world. In a way, this element of the marketing mix relates to Walmart’s corporate structure based on how the organizational design involves divisions for e-commerce and non-online operations.

Distribution Channel

A distribution channel, also called a marketing channel, is the path or route decided by the company to deliver its good or service to the customers. The route can be as short as a direct interaction between the company and the customer or can include several interconnected intermediaries like wholesalers, distributors, retailers, etc. Hence, a distribution channel can also be referred to as a set of interdependent intermediaries that help make a product available to the end customer.

Types of Distribution Channels

Channels of distribution can be divided into the direct channel and the indirect channels. Indirect channels can further be divided into one-level, two-level, and three-level channels based on the number of intermediaries between manufacturers and customers.

Direct Channel or Zero-level Channel (Manufacturer to Customer)

Direct selling is one of the oldest forms of selling products. It doesn’t involve the inclusion of an intermediary and the manufacturer gets in direct contact with the customer at the point of sale. Some examples of direct channels are peddling, brand retail stores, taking orders on the company’s website, etc. Direct channels are usually used by manufacturers selling perishable goods, expensive goods, and whose target audience is geographically concentrated. For example, bakers, jewelers, etc.

Indirect Channels (Selling Through Intermediaries)

When a manufacturer involves a middleman/intermediary to sell its product to the end customer, it is said to be using an indirect channel. Indirect channels can be classified into three types:

• One-level Channel (Manufacturer to Retailer to Customer): Retailers buy the product from the manufacturer and then sell it to the customers. One level channel of distribution works best for manufacturers dealing in shopping goods like clothes, shoes, furniture, toys, etc.
• Two-Level Channel (Manufacturer to Wholesaler to Retailer to Customer): Wholesalers buy the bulk from the manufacturers, breaks it down into small packages and sells them to retailers who eventually sell it to the end customers. Goods which are durable, standardized and somewhat inexpensive and whose target audience isn’t limited to a confined area use two-level channel of distribution.
• Three-Level Channel (Manufacturer to Agent to Wholesaler to Retailer to Customer): Three level channel of distribution involves an agent besides the wholesaler and retailer who assists in selling goods. These agents come handy when goods need to move quickly into the market soon after the order is placed. They are given the duty to handle the product distribution of a specified area or district in return of a certain percentage commission. The agents can be categorized into super stockists and carrying and forwarding agents. Both these agents keep the stock on behalf of the company. Super stockists buy the stock from manufacturers and sell them to wholesalers and retailers of their area. Whereas, carrying and forwarding agents work on a commission basis and provide their warehouses and shipment expertise for order processing and last mile deliveries. Manufacturers opt for three-level marketing channel when the user base is spread all over the country and the demand of the product is very high.

Dual Distribution

When a manufacturer uses more than one marketing channel simultaneously to reach the end user, he is said to be using the dual distribution strategy. They may open their own showrooms to sell the product directly while at the same time use internet marketplaces and other retailers to attract more customers. A perfect example of goods sold through dual distribution is smartphones.

Distribution Channels for Services

Unlike tangible goods, services can’t be stored. But this doesn’t mean that all the services are always delivered using the direct channels. With the advent of the internet, online marketplaces, the aggregator business model, and the on-demand business model, even services now use intermediaries to reach to the final customers.

The Internet as a Distribution Channel

The internet has revolutionized the way manufacturers deliver goods. Other than the traditional direct and indirect channels, manufacturers now use marketplaces like Amazon (Amazon also provide warehouse services for manufacturers’ products) and other intermediaries like aggregators (uber, Instacart) to deliver the goods and services. The internet has also resulted in the removal of unnecessary middlemen for products like software which are distributed directly over the internet.

Functions of Distribution Channels

In order to understand the importance of distribution channels, you need to understand that it doesn’t just bridge the gap between the producer of a product and its user.

• Distribution channels provide time, place, and ownership utility. They make the product available when, where, and in which quantities the customer wants. But other than these transactional functions, marketing channels are also responsible to carry out the following functions:
• Logistics and Physical Distribution: Marketing channels are responsible for assembly, storage, sorting, and transportation of goods from manufacturers to customers.
• Facilitation: Channels of distribution even provide pre-sale and post-purchase services like financing, maintenance, information dissemination and channel coordination.
• Creating Efficiencies: This is done in two ways: bulk breaking and creating assortments. Wholesalers and retailers purchase large quantities of goods from manufacturers but break the bulk by selling few at a time to many other channels or customers. They also offer different types of products at a single place which is a huge benefit to customers as they don’t have to visit different retailers for different products.
• Sharing Risks: Since most of the channels buy the products beforehand, they also share the risk with the manufacturers and do everything possible to sell it.
• Marketing: Distribution channels are also called marketing channels because they are among the core touch points where many marketing strategies are executed. They are in direct contact with the end customers and help the manufacturers in propagating the brand message and product benefits and other benefits to the customers.

Question No 2

Walmart's supply chain management strategy has provided the company with several sustainable competitive advantages, including lower product costs, reduced inventory carrying costs, improved in-store variety and selection, and highly competitive pricing for the consumer.

Walmart Distribution Centers

Walmart boasts more than 150 distribution centers and is the main hubs of its business. Its distribution operation is world’s one of the most prominent activities, servicing clubs, direct deliveries, and stores to the customers. Its transportation alone has an incredible fleet of 61,000 trailers, 7,800+ drivers, and 6,100 tractors.

• Walmart’s distribution network ships dry groceries, general merchandise, and perishable groceries with other categories to its consumers on a daily basis.
• It has six disaster distribution centers, located strategically across the country. Each is stocked with adequate products to provide immediate response to the struggling communities during a natural disaster.
• Every distribution center measures over 1 million sq.ft and has more than 600 personnel unloading as well as shipping on 200+ trailers on a daily basis.
• Each distribution center is built across a radius of 150 or more miles and can hold 90 – 100 stores in it.

Apart from the U.S., Walmart International operates in 27 different countries, which comprises 3 major categories:

• · Wholesale
• · Retail, and
• · Others

These three categories have multiple formats, which include:

• · Supermarkets
• · Supercenters
• · Warehouse clubs
• · Hypermarkets
• · Ecommerce

Distribution Channel Strategy Decisions

Selection of the perfect marketing channel is tough. It is among those few strategic decisions which either make or break your company. Even though direct selling eliminates the intermediary expenses and gives more control in the hands of the manufacturer, it adds up to the internal workload and raises the fulfillment costs. Hence these four factors should be considered before deciding whether to opt for the direct or indirect distribution channel. The strategies taken into consideration are,

Market Characteristics

This includes the number of customers, their geographical location, buying habits, tastes and capacity and frequency of purchase, etc. Direct channels suit businesses whose target audience lives in a geographically confined area, who require direct contact with the manufacturer and are not that frequent in repeating purchases. In cases of customers being geographically dispersed or residing in a different country, manufacturers are suggested to use indirect channels. The buying patterns of the customers also affect the choice of distribution channels. If customers expect to buy all their necessaries in one place, selling through retailers who use product assortment is preferred. If delivery time is not an issue, if the demand isn’t that high, the size of orders is large or if there’s a concern of piracy among the customers, direct channels are suited. If the customer belongs to the consumer market, longer channels may be used whereas shorter channels are used if he belongs to the industrial market. Understanding consumer behavior is essential for deciding the most effective marketing channel for the business.

Product Characteristics

Product cost, technicality, perishability and whether they are standardized or custom-made play a major role in selecting the channel of distribution for them. Perishable goods like fruits, vegetables and dairy products can’t afford to use longer channels as they may perish during their transit. Manufacturers of these goods often opt for direct or single level channels of distribution. Whereas, non-perishable goods like soaps, toothpaste, etc. require longer channels as they need to reach customers who reside in areas which are geographically diverse. If the nature of the product is more technical and the customer may require direct contact with the manufacturer, direct channels are used. Whereas, if the product is fairly easy to use and direct contact makes no difference to the number of sales, longer channels are used. The per unit value of the product also decides whether the product is sold through a direct channel or through an indirect channel. If the unit value is high like in the case of jewelry, direct or short channels are used, whereas products like detergents whose unit value is low use longer channels of distribution.

Competition Characteristics

The choice of the marketing channel is also affected by the channel selected by the competitors in the market. Usually, the firms tend to use a similar channel as used by the competitors. But some firms, to stand out and appeal to the consumer, use a different distribution channel than the competitors. For example, when all the smartphones were selling in the retail market, some companies partnered with Amazon and used the scarcity principle to launch their smartphone as Amazon exclusive.

Company Characteristics

Financial strength, management expertise, and the desire for control act as important factors while deciding the route the product will take before being available to the end user. A company having a large amount of funds and good management expertise (people who have sufficient knowledge and expertise of distribution) can create the distribution channels of its own but a company with low financial stability and management expertise has to rely on third-party distributors. The companies who want to have tight control over the distribution prefer direct channels. Whereas, those companies to whom such control doesn’t matter or those who are just interested in the sales of their products prefer indirect channels.

Question No 3

Walmart competitive advantage

• Walmart inventory innovation: Strategic vendor partnerships : Walmart has long practiced strategic sourcing to find products at the best price from suppliers who are in a position to ensure they can meet demand. The company then establishes strategic partnerships with most of their vendors, offering them the potential for long-term and high volume purchases in exchange for the lowest possible prices. Furthermore, Walmart streamlined supply chain management by constructing communication and relationship networks with suppliers to improve material flow with lower inventories. The network of global suppliers, warehouses, and retail stores has been described as behaving almost like a single firm.
• Investing in advanced inventory technology : In its relentless pursuit of low consumer prices, Walmart embraced and invested in technology to become an innovator in the way stores track inventory and restock their shelves, thus allowing them to cut costs. In 2015, the company spent a reported $10.5 billion on information technology and has also invested significantly in improving their eCommerce capability.

Channel Design and Competitive advantage

When choosing distribution channels, companies need to rely on design principles that are aligned with their overall competitive strategy and performance objectives. Channel design facilitates the flow of goods from the manufacturer to the end-user. The link between the manufacturer and the customer is the distribution channel. The purpose of the distribution channel is to distribute the product from manufacturer to the end user to the right time to the right place. The channel of distribution is the marketing manager’s bridge to the market. Channel design creates a competitive advantage that separates market winners from market losers. The efficient distribution channel design and administration can offer opportunities to develop sustainable competitive advantage in the long term. The channel should achieve all tasks which are necessary to affect a sale and deliver products to the end user.

As environments stabilize, distribution arrangements should become fewer, more substantial, and more stable, and reflect a coherent, articulated channel strategy.

Designing the Channel Strategy

The channel design process is similar to the steps followed in developing a competitive strategy. The difference is that the channel supports the overall strategy: its prime requirement is to enhance effective delivery of the customer value proposition. In this support role, the channel must meet the requirements of:

1. Effectiveness — How closely does the channel design address customers’ stated and unstated requirements?

2. Coverage — Can the customer find and appreciate the value in a firm’s offering?

3. Cost-efficiency — Can the company justify a tradeoff in cost-efficiency to gain greater strategic effectiveness and coverage because of the multiplier effect that distribution has on increasing the impact of the other marketing variables?

4. Long-run adaptability — Can the channel design handle possible new products and services and incorporate emergent channel forms?

Assessing the Company’s Situation

The first step in channel design is to identify the threats, opportunities, strengths, and weaknesses that will influence channel performance and viability. A company should analyze competitor’s shares of existing channels, the relative profitability of each channel, coverage of the market served, and the cost of each channel function. A company must consider likely changes in buying patterns, potential competitive entrants, long-run cost pressures, and new technologies such as the Internet or multimedia retail kiosks. A company should assess what customers are seeking from channels by asking:

• What service attributes do the target customers value?

• How can we use the differences in preferences to segment customers with similar needs?

• How well do the available channels meet the needs of the segments?

Selecting Alternatives

When a firm is confronted with myriad possibilities, how should it choose a channel arrangement? It should rely on strategic design principles, subject to the constraints of prior strategic commitments, resource availability, and rigidities. The principles are consistent with our theoretical analyses, while recognizing that the channel strategy must contribute to the business’s overall performance objectives.

1. Align channels with the overall competitive strategy, by:

• Designing channels from the market back, so the channel activities meet the anticipated requirements of the target market.

• Creating barriers to competitive response. To do so, the firm may have to pay the price of locking itself into an internal operation or into close ties with selected channel partners, which usually obliges the partner to lock in a chosen supplier and lock out competing suppliers.

• Enhancing the delivery of superior customer value. The choice of a channel is also dictated by whether a firm elects to compete on operating excellence (e.g., by emphasizing reliability and competitive pricing of standard products and services), customer responsiveness (through some variant of mass customization or business partitioning), or superior performance. Each strategic thrust reflects the choice of a specific target segment, with distinct requirements and needs.

2. Decompose and recompose channels into integrated collections of functions. Channel functions are the basic building blocks of the design process. While functions cannot be eliminated, they can be combined creatively to reduce cost and to improve responsiveness and be dispersed among several different players. It is essential to take advantage of advancing IT capabilities to improve system coordination.

3. Invest in learning. Firms in high-velocity environments, where means-ends relationships are uncertain, should create a portfolio of options for coping with inevitable uncertainty. These options enable a firm to explore channel design by trial and error. Some experiments will fail. However, the costs incurred — even when there is a failure — should not be viewed as losses but as investments in learning how to understand and gain access to the market. As the market stabilizes, the firm should choose particular channels rather than continue to experiment.

4. Translate strategic choices into programs, projects, and near-term plans and establish controls for monitoring channel performance. These controls define the information collected, standards for performance, and ways to quickly and graphically compare expectations with results. Without this information, there is no basis for learning, correcting mistakes, and adjusting assumptions to better fit reality. Thus the end of this step signals the beginning of another cycle in the design process.

Conclusion

Many firms see distribution as peripheral to their competitive strategy. Increasingly, they have recognized that benign neglect is risky and wastes opportunities for competitive advantage. Under pressure from powerful market trends and technological changes, they are vigorously scrutinizing past practices, commitments, and relationships. How should firms deal with external forces that disrupt once-stable patterns of channel commitment, compress vertical systems, proliferate horizontal alternatives, while decomposing channels into distinct functions that are reassembling into new patterns? A channel design process that follows sound design principles is needed to identify and select among the myriad of channel alternatives. Ultimately, a channel strategy is a series of trade-offs and compromises that align the company’s resources with what it should do to satisfy its target customers and stay ahead of competitors.