Junhong Chu, Pradeep K. Chintagunta, and Naufel J. Vilcassim
Executive Summary
Firms that distribute multiple products through multiple channels must often decide which channel to enter, which channel to exit, and which product to sell in which channel. None of these are easy decisions because a firm’s channel strategy is often intertwined with its product line, market segmentation, positioning, and targeting strategies. A firm’s channel actions affect not only its own profits and consumer welfare but also its relationships with channel intermediaries and with other firms in the market. Carefully managing the vertical interactions with channel partners and the horizontal interactions with other firms is crucial for a firm’s success.
The issue of managing multiple channels along with multiple product lines is a particularly noteworthy aspect of the personal computer (PC) markets because all PC makers offer multiple product lines through multiple distribution channels, and most customers use multiple channels for shopping and purchasing. The same marketing channel may work well for one firm but not for the other. The question is which channel works better for which firm and how to evaluate the financial implications of changing the channel structure or channel–product line combinations.
Evaluating proposed changes in channels of distribution and the corresponding matching of products to channels is a difficult task for the management of any company. Unlike changes in other elements of the marketing mix, such as price, advertising, and many forms of promotions, the likely consequences of changes in distribution channel structure cannot be easily determined by running controlled experiments in test markets. Setting up distribution channels involves outside parties, and firms are often bound by contractual obligations that cannot be easily changed. The problem is made more difficult because historical sales/profits/margin data are of limited value because such data cannot answer "what-if" questions.
In such situations, what can the firms do? In this article, the authors show how the framework of structural modeling and policy simulations can be used to evaluate such policy changes and provide an empirical application of the framework to the PC industry. They estimate a structural model that is derived from consumers’ utility maximization behavior and firms’ profit maximization behavior, and the pricing model accounts for both horizontal and vertical market interactions. They first show how to assess the economic value of each channel to each firm and to consumers. Then, they simulate the profit impact on firms and the welfare impact on consumers of moving from one channel arrangement to another to determine whether firms and consumers are better off or worse off under different channel configurations. They are able to quantify the economic consequences of, and thus provide an economic rationale for, many channel actions observed in the PC marketplace, such as firms choosing to add or drop marketing channels. They also simulate the effects of the Hewlett-Packard–Compaq merger but go beyond a standard merger analysis by evaluating the effects of various potential channel actions coincident with the merger. Among their major findings are the following: (1) Channels with high (low) historical sales and profits do not necessarily have high (low) economic value to firms; (2) Dell’s decision to exit the retail channel and Compaq’s to go direct were economically justified, but Compaq needed to handle its relationships with channel partners carefully; and (3) Gateway would be better off switching its retail sales to the Internet channel, a course of action the firm has subsequently taken.
This research is not only of academic interest but also of managerial significance to firms that may be considering restructuring their channels. The proposed approach is also useful for rival firms that are interested in understanding the impact of a channel mix change by a competing manufacturer. The approach can be applied to other industries with similar channel structures.
Biography
Junhong Chu is Assistant Professor of Marketing at the National University of Singapore Business School. Her research interests include empirical analysis of consumer and firm behavior, classic and Bayesian modeling, e-business, and channel management.
Pradeep K. Chintagunta is Robert Law Professor of Marketing and the Director of the PhD program in the Graduate School of Business at the University of Chicago. He is interested in the empirical analysis of household and firm behavior.
Naufel J. Vilcassim is currently Deputy Dean for Faculty and Professor of Marketing. He joined the London Business School in August 2000 and served as the subject area chair of Marketing from 2001 to 2004. Previously he had served as a faculty member in the business schools at University of Southern California and Northwestern University. He received his PhD from Cornell University in 1986. The focus of his research has been on the use of economic theory and econometric techniques to analyze substantive marketing problems in areas such as competitive interactions and market structure, pricing and price promotion, measurement of market response to investments in advertising and other marketing-mix elements, and household choice behavior. He has published extensively in journals such as Marketing Science, Management Science, Journal of Marketing Research, Journal of Econometrics, International Journal for Research in Marketing, and Journal of Retailing, among others. He serves on the editorial board of Marketing Science, Journal of Marketing Research, Quantitative Marketing and Economics, International Journal of Research in Marketing, and Asian Journal of Marketing. He is a member of the Institute for Operations Research & Management Science (INFORMS) and the American Marketing Association. His teaching interests include marketing strategy, pricing, marketing research, marketing models, and product planning and development. He teaches regularly in the MBA, executive MBA, international MBA, and various executive development programs. He has also consulted for various multinational corporations.
Journal of Marketing Research, Vol. XLIV, No. 1, February 2007
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