Channel Structure and strategic choice in distribution channels Essay
Channel Structure and strategic choice in distribution channels
This article mainly talks about the importance of marketing channel of marketing channel strategy decisions, they are highlighted by: 1) term consequences and 2) the constraints andopportunities that they represent..The present paper incorporates strategic management theory into marketingchannels literatures to examine the impact of different channel structures onthe choice of a generic channels strategy. Specifically, the contingent effects of channel power/control and the degree ofvertical integration are examined as they affect the choice between thegeneric strategies of overall costleadership, differentiation, focus, andcombination strategies. Besides research on the manipulation of power and influence attempts, littleattention has been given to the study of channel strategies. The intent of the present paper is to examine how one strategy concept,choice of a generic strategy, can be applied in a channel context. The basis of the discussion of strategy will be Porter’s strategy typology,though supporting literature wiU also be used. Overall LowCost Leader, The OLC strategy stresses economies of scale,proprietary knowledge, preferendal access to raw materials, aggressive pricingpolicies, cost minimizadon, stable product lines and other factors which leadthe firm to become “The” low-cost producer or supplier in its industry.
Specifically, I will be concerned with how varying levels of vertical integrationand power/control within the channel affect the choice of a generic strategy. I first need to provide a brief review of the strategy framework to be utilized. The Strategic Framework The work by Porter defines three generic strategieswhich firms might choose to pursue in order to establish a competidveadvantage: overall low-cost leader, differentiation and focus. According to Porter, a firm’s compeddve advantage combines with its scope ofacdvides to determine which of the three generic strategies the firm willchoose. The generic strategy, will, in turn affect the performance of the firm. 80 Firms stressing the differendadon strategy seek to be unique in theirindustry along some dimensions that are widely valued by buyers. Focus The focus strategy rests on the choice of a narrow compeddve scopewithin an industry. The firm following this strategy selects a segment or subsecdon of an industryand sets a strategy to serve it better than anyone else in the industry. Combination Strategies Porter states that each of his strategies is a”Fundamentally different approach to creadng and sustaining a compeddveadvantage”.
Further support for a combination strategy is found in Wright, et al. Interestingly, the firms with the highest performance followed a combinationstrategy. Vertical Integration and Strategy The literature just discussed providesevidence that organizations may pursue more than one strategy at a time,thus allowing for a combination strategy. The current paper will include four potential strategies from which firms mightchoose: OLC, differentiation, focus, and combination. The following section will develop propositions, which identify contingentchannel conditions, which affect the choice of a generic strategy. Development of Propositions A number of management researchers have putforth contingency approaches, identifying under what conditions each genericstrategy is appropriate. On the internal end, are cost minimization, low cost leader, and defenderstrategies, consistent with the vertically integrated firm?
At the other end ofthe continuum are maximizing, prospecting, and differentiating strategies,consistent with the nonintegrated firm. PI: Firms which are highly vertical integrated are more likely to choose an OLCstrategy. P2: Firms with low levels of integration are more Ukely to choose adifferentiation strategy. In terms of a combination strategy, there is evidence to suggest that firms,which generate high growth and high profits, are better equipped to use botha differentiation and an OLC strategy. When combined, these strategies produce enhanced economies of scale andimproved ROI. Some researchers take the position that power is necessarily a negativeaspect in that, those who possess it will attempt to infiuence exchangepartners by use of coercive influence strategies. If the firm chooses a focus strategy, it will attempt to “Own” a particularmarket segment either through price leadership or differentiation.
The difference between this strategy and the focus strategy is the fact thatfocus concentrates on a particular segment, while this strategy is industry-wide. The choice between these two strategies is likely to depend on the scope ofthe supplier’s activities. While these firms are able to compete on an OLC strategy, there is not muchincentive to do so. When competing firms counter the low cost leader strategy, firms musteventually turn to some form of differentiation or suffer long-runconsequences for the industry. P5: When faced with the superior power of buyers, suppliers with a regionalcompetitive scope will attempt to combat the power of buyers by choosing afocus strategy.
As discussed in the section on vertical integration, the pursuit of tactics suchas integration, cost reductions, and reliance on standardization of practices,is consistent with an overall low-cost leader strategy. P6: When faced with high levels of supplier power, buying firms willemphasize on a differentiated focus strategy. The concept of channel strategy has received little attention. Specifically, the contingent effects of channel power/control and the degree ofvertical integration have been examined as they affect the choice betweenthe geneVic strategies of overall cost-leadership, differentiation, focus, andcombination strategies. Contingent propositions is meant to show the interrelationship of channelstructure and subsequent channel strategies.