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May 11, 1994
Designing Channels of Distribution
For many businesses, the successful launch of new products is critical to maintaining market leadership. Unfortunately, empirical data indicate that one-third to one-half of all new products fail to meet a firm's financial and marketing goals.1 A survey of 183 Fortune 1000 firms indicated that nearly half of them had new product failures exceeding 40%.2 This result is indeed surprising because these failed products had been screened for technical soundness and commercial feasibility. Various explanations have been offered for these failures: insufficient attention to the commercialization process, lack of management support, and poor marketing planning and execution. In this article, we focus on one aspect of the launch decision: the choice of distribution channels. We offer a method to systematically evaluate, plan, and execute the channel choice decision for new industrial products.
The primary question is about channel structure; that is, which intermediary, or intermediary combination, is best suited to take the new product to market? There is an equally important corollary question: How should the intermediary network be managed once it is up and running? This and related management issues are dealt with in greater detail in a later article, "Reorienting Channels of Distribution."
Fundamentally, the approach that we offer is similar to that suggested by Stern and Sturdivant3 and Rangan, Menezes, and Maier.4 The starting point is the customer and the building block is the channel function. In our experience the method has worked best when implemented by a cross-functional task force headed by a senior executive reporting directly to the CEO. The new product development team in many cases could double up as the channels task force. It is important for the task force, however, to commission appropriate teams to participate in the various steps, rather than assume all the expertise themselves. We first present a schematic overview of the design method, highlighting its six important steps, followed by an illustrative application.
1 Booz Allen & Hamilton, Inc. (1982), New Product Management for the 1980s (New York: Booz Allen & Hamilton).
2G. Dean Kortge (1989), "Simultaneous New Product Development: Reducing the New Product Failure Rate," Industrial Marketing Management, 18(4), 301-306.
3Louis W. Stern and Frederick D. Sturdivant (1987), "Customer-Driven Distribution Systems," Harvard Business Review (July-August).
4V. Kasturi Rangan, A.J. Menezes, and Ernie Maier (1992), "Channel Selection for New Industrial Products: A Framework, Method, and Application," Journal of Marketing, Vol. 56, July, 69-82. Professor V. Kasturi Rangan prepared this note as the basis for class discussion. Copyright © 1994 by the President and Fellows of Harvard College. To order copies, call (800) 545-7685 or write to Harvard Business School Publishing, Boston, MA 02163. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School. 1
Designing Channels of Distribution
The Channel Design Framework
Step 1 consists of identifying homogeneous customer segments. Obviously, customers with similar requirements will need similar channel sources. It is important to keep in mind, however, that a customer is usually an end-user and rarely a channel intermediary. For example, producers of agricultural chemicals should target the farmer and not the dealer. But producers of plastic pellets for making milk bottles should probably focus on the "dairy," not the "consumer," because that is where the product has value in the eyes of the end-user. A dairy, especially a large one, will certainly need to worry about the cost and quality of the milk bottles....