Channel innovation is a driving force in retail competition. The retail industry is changing rapidly and there is a growing diversity of retail formats (eg non-store formats and vertical marketing systems). With this in mind and using current retail examp - Essay Example

Channel Innovation and Section # of This paper is about the channel innovations that have occurred recently in the retail industry, keeping into account the pros and cons of a secured and controlled channel management system. Introduction The dynamic nature and the speed of change that is linked to the retail industry cannot be underestimated by any means; this leads up to the increased competition that exists in the markets today compared to where the competition stood five years back. As a matter of fact, the changes in the industry norms of the past five years have been much more compared to what happened even in the decade prior to the past five years.

The biggest revolution in the retail industry has been from the brick-and-mortar model to the click-and-mortar model, moving the conventional physical stores to the online/virtual presence or the non-store format. According to Kotler (2007), the major forms of general merchandising retailing that were very much assumed to be based on stores only, have now been forced to move to the e-solution as the latter provides tremendous cost cutting, ultimately leading to either better margins or transferring the cost effectiveness to the readily inflation-hit consumer market; examples include drug-stores, departmental stores, specialty stores, full-line discount stores, category specialists, pop-up stores, and off price retail formats.

Another trend picking up pace has been the acquisition of vertical chain by any one participant of the value chain to make business more profitable for the investor, and at the same time, enhancing the price value proposition for the customer. Dell is a classical example of vertical integration of the supply chain whereby Dell sells its product directly to the customer using multiple channels. Virgin Records that is owned by Richard Branson in an example of backward vertical integration. Virgin records expanded into talent management area and also in the areas of record production.

Zara practices successful vertical integration between the manufacturing of their products, distribution of their products and lastly retailing. Zara has the potential of placing garments in a time period of two to three weeks in anywhere around the world where they have their stores. This depicts that that Zara’s supply chain is highly efficient. What is a Secured & Controlled Distribution Channel? According to David (2006), Secured & Controlled Distribution Channel (SCDC) is defined as the presence and velocity of control features over the participants of a value chain – the power held by a single participant over others in a value/supply chain.

It works in-line with the growing trends of non-store and vertical marketing systems. For example, from a manufacturer’s point of view, SCDC would exist when they would be performing all the distribution functions i.e. from the manufacturing of the product to the sales and installation of the same to the customer. Classical example of such a scenario is IKEA – a business that makes, sells, and installs, all by itself. Franchising is another example of SCDC; franchising is a form of licensing whereby the corporate head i.e. the franchiser gives license to the franchisee for producing and/or selling the products and services on his behalf.

Nike is a good example of the same structure, alongside food chains such as Pizza Hut, KFC, etc. in regions other than their point of origination. Franchiser is responsible to ensure that the franchisee allocates appropriate resources and follows the guidelines to provide the required quality standards. For a retailer perspective, SCDC would exist if the retailer is responsible for buying the product, selling it across, and is also responsible for the installation of the same – the scope of this retailer can vary from a whole-seller to a traditional retailer.

Advantages & Disadvantages of SCDC for a Manufacturer SCDC has numerous advantages associated: When defining value chain concept, Taylor. (n.d.) states that it is visible that at each step in the chain, every participant has margins, and ultimately, the price of the product rises for the end consumer because it is the latter that has to carry the burden of these margins. Using SCDC concept, or via reducing the number of intermediaries or partners to the value chain, a business can choose to be cost effective, and ultimately transfer the benefit of this cost saving to the customer.

SCDC is a controlled and a structured environment, which means that since IKEA, for example, is in-charge of its complete value chain, it can ensure best value proposition and worth for the customer – the aspect of quality assurance in terms of both product and services can be ensured. By reducing/removing the number of intermediaries, a retailer/manufacturer reduces the bargaining power of the value chain drastically, which is a huge plus in the long run. Following are some of the demerits of SCDC: The core competency of a firm rises from the basic operations e.g. Cadbury’s operation is manufacturing chocolates, that where it can develop its core competency.

Application of SCDC requires a manufacture to take in their hands some functions of a business which are not their core competency – this can lead to a set-back in the future. Businesses need to concentrate on what they are good at and what their functions are. Application of SCDC implicates limited reach for a business, and additional investments; in case of approaching via retailer network; there are readily achieved economies of scale for the retailer, whereby, the retailer can exercise a bigger reach for the customers and the business.

Advantages & Disadvantages of SCDC for a Retailer There are some pros associated with SCDC for retailers are as follows: Retailing is a specialized form of business within itself, giving consumers a choice or option to select from a variety of products. SCDC kills the idea of options or variety, because it is assumed that NOKIA stores would only have a NOKIA phone, while a mobile retailer, on a general note, would have a variety of brands. According to Hunter (2005), retailers have huge network to derive benefits and economies from; they have exceptionally high reach and can assist manufacturers to reach areas where there is good potential, and reaching otherwise would not be possible.

There are some cons of SCDC for the retailers as well: Extending the value chain participants adds marginal burden at each step of the value chain, thus, adding to the cost of the product and burden on the final consumer. A retailer has several brands to work on, and thus, there might be biasness to the brand that gives better margins. Retailer performance may be assumed as brand performance by the customer on a broader scale. Conclusion The level of competition in today’s world is very much on the higher side especially with globalization taking toll, and the rise of e-commerce, online shopping, and other mediums that enhance the variety of choice for a customer.

Adding the flavour of rising inflation in the past few years, manufacturers or the retailers need to ensure cost effectiveness as the price elasticity has also increased tremendously. When comparing the application of SCDC or a concept such as vertical marketing system or even virtualization for that matter, it is important to study the trade-off between the variables that have been identified in this paper; variable such as cost, reach, specialization, and so on and exceptionally important to be studied prior to taking a strategic step such as this.

References David, Fred, Kotler, Philip and Armstrong, Gary, 2007. Strategic Management: Concepts and Cases with Principles of Marketing. Pearson Education. David, Fred R., 2006. Strategic Management: Concepts and Cases. 11th Edition. Prentice Hall. Hunter, Dick, 2005. Tying Supply Chain to Customers. [online] Available at: [Accessed 15 April 2012] Taylor, David A., (n.d.) Supply Chains - A Managers Guide - Chapter 1. [online] Available at: [Accessed 15 April 2012].