An approach to the analysis of strategy options for marketing channel models is portrayed in the following diagram.
Current Situation
To begin, it is necessary to assess the current state of the channel strategy in place. This includes the structure of the channel, the economics of the system, competitors' strategies, market share, market size and growth, industry trends, and idiosyncrasies. The current situation should discuss issues and opportunities that the current strategy is not achieving.
Future Situation
Against this current assessment, the desired situation should be made explicit. This could be framed as a plan, budget or forecast in quantitative terms. Perhaps a targeted channel share required by management for a new channel such as on-line sales. Out of this desired state comes the ability to highlight a performance gap.
Performance Gap
The gap, then, quantifies the extent of the problem. Is it big or small? Widespread across the firm, or confined to a particular channel partner? For a particular product range, or all products? By identifying where the gaps exist, changes to channel strategies can be formulated and evaluated.
Strategy Options
Strategy options should be identified and their key characteristics noted. For example, a possible channel strategy could be adding franchised retail outlets in addition to company-owned stores to expand market coverage. The characteristics of franchised operations should be made explicit so they can be contrasted with current operations.
Each of the potential strategies should be identified so they may be evaluated against the current situation
Program Elements
After the strategy options are identified and characterised, the program elements should be examined and costs/benefits identified. For a proposed franchise system there will be additional efforts required to define and support the franchisees, including recruitment, training, branding, management, evaluation, etc. Costs for these activities will need to be included as well as the revenue expected from implementation of the program in order to evaluate this option.
The economics of the channel partner also need to be examined to ascertain that a change will positively impact the channel partners. For example, a proposed referral system to direct prospects to resellers will require development costs as well as communication, training and support costs that will be borne by either the company or by the channel partners (or both). The model should account for these costs, as well as the anticipated increase in revenue from the implementation of the referral program.
This approach, then, is to identify and model the key activities undertaken in the value chain so that any strategic change to an activity can be quantified regardless of who is performing the activity. This allows the evaluation of any change and highlights who is paying the cost/achieving the benefit of a change.
Evaluation
The quantification the revenues and costs of the strategic options are considered in a similar fashion until all are quantified. At the conclusion of this quantitative phase, all strategic options should have a score or ranking in terms of a profitability or return on investment measure.
Notes on modelling
This approach is enhanced through the use of a financial model as a means for objective measurement of the current state and to simplify the quantification of any strategic changes to achieve the desired state. It is also possible to use qualitative tools to augment quantitative analysis in the evaluation phase, as financial factors cannot always be derived for all variables impacting a strategy. This will be discussed in the next part of this series.
The level of aggregation in the financial model is dependent upon the objective of the analysis. For a channel strategy evaluation, the firm's activities would at least need to be aggregated down to the channel level with sales revenues and costs allocated to each distinct channel. Below this level the modeller might choose to disaggregate to:
- Region - region, country, state, territory, city etc.
- Channel member type - chain or store
- Product/service - product group, brand, SKU
- Organisation - business group, division, factory
If a retail network strategy is being evaluated, the model could be structured at the store level. However if it is felt that on average all stores are similar and are performing similarly, the cost of modelling at this level would probably not be worthwhile. The point is that the research intent should guide the level of modelling.
The structure of the model should provide pro forma financial statements for the current situation and for each of the strategy options. Timeframe is also a structural choice. Most strategic options are multi-year plans and should attempt to forecast results for a multi-year timeframe. This type of model shouldn't be employed to evaluate tactical decisions with short duration.
Proforma financial statements should include P&L, balance sheet and cashflow statements. Where multi-year strategies are being evaluated, discounted cashflow techniques could also be calculated to account for the time value of money.
In the next part of this topic I will discuss bringing qualitative analysis into the evaluation process and continue with the strategy selection, implementation and review steps of the process. Comments are welcome.
