Evaluation of Alternative Channel Structure - Essay Example

? Prepared For Submitted Number - Executive summary This report was prepared for Mr. David Clarke from “Webjet Limited”. The aim of the report was to outline the most effective channel structure for Webjet Limited using the channel design decision paradigm. The report found that Webjet had various strengths and opportunities which could be exploited in order to come up with an effective channel design. The first task therefore involved carrying out a situational analysis for the company then set and coordinate distribution objectives. Specification of distribution tasks in order to achieve the set objectives was done using the five task groups namely physical distribution, after sale service, channel support, selling and risk assumption. The next stage involved selecting alternative channel structures using the channel levels, intensity and intermediary levels after which evaluation of the alternatives was done using the weighted factor score approach. This helped to determine the effective channel strategy which was to provide accommodation services so as to reduce costs for tourists hence attract them. This is to differentiate Webjet from the competitors and gain sustainable competitive advantage. An implementation plan was then designed to achieve the results needed. Table of Contents Executive summary 1 Table of Contents 2 List of Tables and Figures 4 1. Introduction 5 1.1 Authorization 5 1.2 Limitation 5 1.3 Scope of Report 5 2. Case Background 6 2.1 Company Background 7 2.2 Channel Design Decision Paradigm 7 3. Major Case Issues 9 4. Situation Analysis 9 4.1 Internal AND EXTERNAL Analysis 9 4.2 INTERNAL ANALYSIS 10 4.3 External Analysis 11 4.4 Setting and Coordinating Distribution Objectives 11 4.5 Distribution Tasks 12 4.5.1 Selling 12 4.5.2 Channel Support 13 4.5.3 Physical Distribution 13 4.5.4 Product modification and after-sales services 14 4.5.5 Risk Assumptions 14 5. Identifying Alternative Channel Structures 14 5.1 Number of Channel Levels 15 5.2 Intensity at Each Level 16 5.3 Types of Intermediaries 16 5.4 Alternative Channel Structure Strategy 16 6. Evaluation of Alternative Channel Structure 17 6.1 Company Variables 17 6.2 Market Variables 18 6.3 Product Variables 19 6.4 Intermediaries Variables 20 6.5 Weighted Factor Score Approach 20 7. Recommended Strategy 21 8. Implementation plan 21 9. Conclusion 22 10. List of References 24 List of Tables and Figures Figure A- Channel Design Paradigm Adapted from (birch, 2006) 9 Figure B - Channel levels in travel agency Adapted FROM (Holma, 2010) 15 1. Introduction 1.1 Authorization This report has been authorized by Mr. David Clarke to outline the most effective channel structure for Webjet Limited. In the production of the report, the seven steps of the channel decision paradigm will be utilized. 1.2 Limitation Various limitations were noted while conducting research and producing the report. One of the major limitations was not having a clear timeline for completion of the report. This meant the report could be delayed due to lack of urgency and timeline leading to outdated information which has been overtaken by events and also delays in implementation which could lead to severity of the problem. Another limitation was lack of useful and relevant information from the literature and inability to obtain timely communication from Webjet. 1.3 Scope of Report This report examined a number of ways on how to create or modify the channel design of Webjet Limited. This involved looking into the existing channels and determining if they are suitable for the organization and what could be done to improve on them. This was to assist Webjet to recognize the need to make a decision on the channel design. This involved undergoing the seven channel design stages to come up with the right channel for Webjet. Firstly, a brief background was given for the company selected (Webjet) containing company profile, locations, products and company history together with the channel design decision paradigm. A case issue was then formulated aimed at finding out how the company could maintain a sustainable competitive advantage in the face of a highly competitive global environment. Secondly, a SWOT analysis was undertaken to find out the strengths, weaknesses, opportunities and possible threats facing Webjet. It was found out that the major strength for the company was its dominant market position and the major weakness was its high prices compared to other competitors such as Expedia. However, the growth in global airline traffic provided a great opportunity for the firm while increased fuel prices poses a major threat. Thirdly, the report was to come up with distribution objectives and related distribution tasks in order to choose an optimal or effective distribution channel for Webjet. This was to be conducted using the second and third stages of the channel design paradigm after which the fourth stage would be utilized to develop channel structures. This was accomplished by determining the number of levels in the channel, intensity at various levels as well as the type of intermediaries at each level. Finally, evaluation of channel variables was carried out to determine the ‘best’ channel structure and channel members. These variables include market, product, company, intermediary and environmental variables. Then some of these variables were used in a weighted fact scores approach to find the best possible strategy as seen in the table. This was followed by designing of an implementation plan. 2. Case Background The company background as well as the channel design decision paradigm is discussed in this section of the report. 2.1 Company Background Webjet Limited is considered as Australia and New Zealand’s largest online travel agency. It offers flights, insurance, hotel reservations and car hire services to customers. It operates in Australia, New Zealand, North America, Singapore and Hong Kong. It was founded by former Jetset Travel Chief Executive in 1998 and publicly listed in Australia Stock Exchange (ASX) in 1999 (Webjet, 2012). It was voted as number one Travel Agency Website by Hitwise (ASX Media Releases, 2012). This was the third year in a row and the ninth award since 2007. The vision of Webjet is “to be the world leading online travel agency by provision of exciting travel experience to customers and creation of long term value for shareholders’. This is reflected in the range of product choices offered to customers through comparison of all five of the major domestic airlines (Webjet, 2008). It aims at revolutionalizing the market through the internet and other innovative customer and market-focused services as well embracing and leveraging diversity in the workplace. Its purpose is directed towards customers, shareholder, and employees among other stakeholders. The annual net profit before tax for Webjet for the year ended 30th June 2012 was 19.3m compared to 15.4m in 2011; a growth of 25% while net profit after tax grew by 24%. Shareholders received 13 cents per share which is 31% growth from 2011 (Webjet, 2012). 2.2 Channel Design Decision Paradigm According to Rosenbloom (2004 p. 186) Channel Design refers to those decisions involving the “development of new marketing channels, either where none previously existed or modification of existing channels. Those who are involved in channel design include firms, wholesalers and retailers. There are various channels such as e-channel, direct selling and direct marketing that can be used by companies. However, a channel design decision Paradigm which comprises seven distinct steps must be followed before making a decision. These steps will all be covered in this report. These are aimed at improving Webjet channel delivery to their target market. The seven distinct steps are as shown in figure A below and should be followed to the latter in order to come up with an effective channel. Figure A- Channel Design Paradigm Adapted from (birch, 2006) 3. Major Case Issues The major issue facing Webjet Limited is increased competition in the travel and tourism industry. Many online travel agencies are coming up each day some such as Zuji offering lower prices. The situation is worsened by tides of consumer confidence in domestic leisure market and cut backs on discretionary spending on holiday travel. The management thus needs to make a decision on an effective channel that would ensure sustainable competitive advantage. This can be enhanced by conducting a situation analysis. 4. Situation Analysis The situation analysis looks into the internal and external factors affecting the company. This can be done by conducting the SWOT analysis that looks at a company’s strengths, weaknesses, opportunities and threats. In analyzing the internal and external factors, a company can be able to build on its strengths to exploit opportunities and be able to overcome its weaknesses and deal with threats hence competitive advantage. Table 1 shows the SWOT analysis for Webjet. 4.1 Internal AND EXTERNAL Analysis STRENGTHS Dominant market position Customer loyalty Strong liquidity Technology advancement and product innovation WEAKNESSES High prices Weaker performance margin OPPORTUNITIES Growth in global airline traffic Positive outlook for Australian travel and tourism industry Shift towards online booking system THREATS Increased fuel prices Online identity theft and hacking Unforeseen circumstances TABLE 1- THE SWOT FACTORS FOR WEBJET 4.2 INTERNAL ANALYSIS The internal analysis is usually carried out to examine the strengths and weaknesses of a firm thus take advantage of strengths and overcome weaknesses. The major strength for Webjet limited is its dominant position in the market. Dominance in the market is important for companies as it results to brand popularity and loyalty and consequently customer loyalty. The firm is able to enter new markets due to popularity of the brand hence increased market share. The company also has gained customer loyalty. This is manifested by the way customers continue to return to search, compare and book all their travel needs according to John Guscic the Managing Director (Webjet, 2012). Research (Maritz, 2010) indicates that customer loyalty is crucial as a tool for gaining sustainable competitive advantage. Webjet in this case therefore, has an advantage over other competitors even though they charge lower prices. Technological advancement enhances product innovation thereby enabling a company to be the leader in the market. Webjet offers a wide range of products thanks to its innovative capacity and this may shield it from competitors. The major weakness for Webjet is charging higher prices than competitors. This may push customers to competitors especially during hard economic times. The other weakness that might affect Webjet Limited is weaker performance margins. Its shares in the stock exchange have lost marginally over time and this may influence its investment capacity or shun away potential investors (Webjet, 2012). 4.3 External Analysis The external analysis shows both opportunities and threats for Webjet. The growth in global airline traffic is an opportunity for Webjet to increase its customer base since it relies on available airlines. This is also enhanced by a positive outlook for the Australian travel and tourism industry. Technological advancement has also changed the travel industry prompting a shift towards online booking system. It has also expanded the range of channels that tourism suppliers might use to distribute their products (Pearce 2009). As a result, multi- channel distribution is now common and this is an opportunity for Webjet which has technological strength. Webjet is also faced by major threats in the industry. One of the major threats is increased fuel prices. This consequently leads to increased price for air tickets and consequently decline in the number of holiday makers or travellers. Though Webjet is technically innovative, there are risks associated with online identity theft and hacking which may hurt the business. There are also unforeseen circumstances such as war or terror that may affect its operations. 4.4 Setting and Coordinating Distribution Objectives The second stage in the channel design decision process is setting and coordinating distribution objectives. According to Birch (2006) consideration of distribution in formulation of overall objectives and strategies depends on the importance it is given by management. The consideration of distribution has gained importance over the years due to increased competition. However, it is through distribution that firms can provide the kinds of levels of services that are satisfactory to customers. As such marketing channels should be closely linked to customer need satisfaction thus developing distribution objectives which are customer oriented is imperative (Czinkota & Ronkainen 2007). Some distribution objectives for Webjet limited may be as follows: Webjet Limited will provide free accommodation to the first 50 persons that book an Australian destination flight within the next 1 month. Webjet will provide the first 100 customers with half price car rental if they book within the next 10 days. Webjet will provide the next 100 people with the opportunity to get hotel products at a discounted rate of 12.5% in any of their chosen Australian destination. These distribution objectives will enable Webjet to attract more customers and gain and advantage over competitors. There is need to align these objectives with overall objective of the organization so as to get better results. 4.5 Distribution Tasks This is the third stage in the channel design decision making paradigm. Distribution Tasks are tasks that are performed to reach the distribution objective and outlining them is situationally dependent on the firm (Rosenbloom, 2004). These tasks are grouped into 5 task groups: selling, channel support, Physical distribution, product modification and after sales service and finally Risk assumption. 4.5.1 Selling Distribution task that need to be completed under sales and promotion relate to things that deal with promotional activities establishing new and serving current accounts and negotiating price and terms. Webjet would need to complete the following tasks for this channel to be successful: Sales promotion Offering bonus and discounts Making deals with airlines, hotels, car rentals and other concerned groups in ensuring customers get the best. Ensure signing of contacts with service providers to avoid conflicts. 4.5.2 Channel Support This according to Birch (2006) is the general marketing and training of personnel. Developing a cordial relationship between customers and suppliers is crucial in ensuring that distribution objectives are achieved. Webjet Limited can thus embark on the following tasks: Conducting market research to find out customer preferences in target markets Research on the product costs and their impact on the organization. I.e. cost implications of achieving the set objectives. Keep customers informed so that they can make the right choices for example by providing them with brochures or newsletters. Train personnel on new products and strategies to lure new customers 4.5.3 Physical Distribution Physical Distribution refers to the “handling, movement, and storage of goods from the point of origin to the point of consumption or use, via various channels of distribution”(Business Dictionary 2011). It requires the use of intermediaries to handle the delivery of products such as middlemen and online book stores. However, Webjet is an online travel agency hence handles all its transactions through the internet and as such does not require to physically distribute its products. One can access services anywhere through its website. 4.5.4 Product modification and after-sales services Rosenbloom (2007) indicates that products can be modified to suit customer’s preference. A product can be modified through use of new design, new contents and new packaging among other methods. However, since online services are not tangible all Webjet can do is modify its website to attract more customers and offer more products online. After- Sales service on the other hand refer to the service which a person receives after purchasing a product (Rosenbloom 2004). For example, if one buys a TV set and it develops some problems one can get repair for free from the seller. In this case, Webjet can follow up on customers to check if they enjoyed its services and if not see what it can do to assist them. 4.5.5 Risk Assumptions Risk Assumptions is defined as risk management which is a process of absorbing minor losses but protecting against catastrophic losses (Businessdictionary, 2012). It is also mitigation against lawsuits. Some of the tasks that need to be completed by Webjet include Ensure the legality of its deals For example; much controversy exists as pertains to lowering its hotel rates against hotel owners wishes. Protect consumers against hacking of their information from their database. 5. Identifying Alternative Channel Structures The fourth stage of the channel design decision paradigm is identifying alternative channel structures. This involves analyzing the channel structure dimensions which include: Number of channels levels Intensity of each level Types of intermediaries at each level 5.1 Number of Channel Levels The number of channel levels range from two to five or more depending on the type of organisation or good (Rosenbloom 2004). For example, a retail shop might have four channels these being manufacturer, wholesaler, retailer, and consumer but some goods such as agricultural products or perishable goods may involve two channels only. That is, from producer to consumer. They may also move from producer to retailer and then to manufacturer. However, service based industry only have two or three channels; the service provider and the consumer or to consumer through an agency. An example of airline travel services industry is indicated in Figure B. Figure B - Channel levels in travel agency Adapted FROM (Holma, 2010) From the figure we can deduce that Webjet limited which is a travel agency acts as an intermediary between the airline and the client and is paid a commission for that purpose. The agency has direct contact with both the airline and the client but has a risk of losing business if the client goes directly to the airline or uses the services of another agent. It is thus imperative for the agency to have sustainable competitive advantage over other agencies to avoid such incidences from happening. The number of levels can be limited by industry practices, nature and size of the market and availability of intermediaries (Rosenbloom 2004). 5.2 Intensity at Each Level “Intensity refers to the number of intermediaries at each level of the market channel” (Rosebloom 2004, pg 196). There are three intensity dimensions which include intensive, selective and exclusive dimension depending on the number of intermediaries. An intensive dimension has many intermediaries; selective has few while the exclusive dimension has only one intermediary (Birch 2006). Since Webjet utilizes a few domestic and international airlines such as Virgin Australia, Qantas, jetstar among others it can be said to have a selective dimension. 5.3 Types of Intermediaries There are numerous types of intermediaries depending on the manager’s emphasis on the types of distribution tasks they perform (Rosenbloom 2004). The intermediaries act as a link between the consumer and supplier and are involved in tasks such as negotiating prices or airfares in case of travel business. The Webjet utilises the electronic channel to serve its suppliers and customers thereby eliminating intermediaries. Since distribution functions and tasks need to be done, the principle is to ensure e-channels perform the function efficiently. 5.4 Alternative Channel Structure Strategy The channel strategy should be aimed at achieving the overall objectives of the organisation. The channel strategy indicates the principles by which the firm expects to achieve its distribution objectives for its target markets (Birch, 2006). Webjet does not aim at developing a new channel but at its modification so as to attain sustainable competitive advantage. It has the strength of being a product innovator and keeping up with technological changes hence the e-channel remains its channel strategy. The alternatives proposed thus include: 1. Webjet should engage in the hotel business so as to offer accommodation to its clients 2. Webjet should enter the airline business to offer airline services directly to customers and reduce costs. 3. Webjet should make connections with car rentals or other transport services to reduce costs and for convenience of clients. The above alternative channels will be evaluated to find out the most efficient alternative that would result in competitive advantage. 6. Evaluation of Alternative Channel Structure This is the sixth stage of the Channel Design decision paradigm. This section evaluates a number of variables to determine the channel strategy to adopt. These variables include: 1. Company variables 2. Market variables 3. Product variable 4. Intermediaries variables 6.1 Company Variables Company variables are discussed in Table 2. These are the variables that affect the company directly (Rosenbloom 2004). The variable included size, financial capacity, managerial expertise and objectives and strategies and are discussed in relation to Webjet Company. Table 2- company Variables FOR WEBJET Company Variables Size The range of options depends on size. Webjet is a large organization thus it can adopt all the strategies. It is the largest online travel agency hence has an advantage if it wants to expand its market share and maintain its dominance in the industry (Webjet, 2012). Financial Capacity Webjet boasts of a strong liquidity. It has been experiencing profit growth over the years with a profit before tax of $19.3M and growth of 25% in 2012. As such, it can stop depending on intermediaries and consider other options such as direct flights. Managerial Expertise The managerial staffs of Webjet have a lot of experience and expertise hence have been able to retain the title of number1 online travel agency (Webjet, 2008). Intermediaries are thus not needed to steer the company to success. Objectives and Strategies Its corporate objective to create value through electronic marketing limits use of intermediaries (Webjet, 2008). From table 2, it is evident that each of the company variables could have an impact on any strategy chosen. However, the company can take advantage of its favourable state to expand its business thus achieve sustainable advantage. 6.2 Market Variables Table 3 discusses market variables which refer to issues relating to the consumers market (Bucklin et al 1995). The variables include Market geography, market size, market density and market behaviour. Table 3- Market Variable for WEBJET Market Variables Market geography Webjet is located near to the consumers than airlines themselves hence act as their intermediary. It also serves a large geographical size which would serve as an advantage for its expansionary purposes. Market Size Webjet serves a wide international market than domestic customers due to economic reasons (Webjet 2012). Domestic tourists rather cut back on holiday spending due to increased costs of consumer goods and besides they do not need an agent since the airlines are closer to them. Market Density Webjet does not have a high market density. Market Behaviour Webjet products are bought by travellers who are tourists and holiday makers. Travellers often use the products but holiday makers buy on season. They buy tickets online through its website to various destinations. From table 3, we can deduce that the consumer market is uniform in many ways as pertains to market size, density, market behaviour and geography. It is therefore essential to develop a differentiation strategy in order to gain competitive advantage in the market. This can be done by offering differential treatment such as car rental discounts or entering the airline industry which would also pose a problem due to competition. Offering accommodation services on top of agency services can go a long way in enhancing its differentiation tactic. 6.3 Product Variables The product variables entail product features such as perishability, weight, degree of standardization, unit value and technical versus non technical products. Though Webjet offers a wide range of products they are all similar to what other travel agencies offer. As such, a differentiation strategy is critical to success of Webjet. By adopting strategy one, clients would be able to get adequate and cheap accommodation thus utilise the company for their bookings. The second strategy would enable the company to have control over their clients and also expand its business although it may not be viable due to costs involved. Strategy three would get cheaper means of transport hence convenience. However, strategy one would work best. 6.4 Intermediaries Variables Table 4 discusses intermediaries’ variables. These relate to the how convenience they are to the marketer (Irani 2011). These include availability, cost and service. Table 4- Intermediary Variables for WEBJET Intermediary Variables Availability Intermediaries such as those offering car rentals are available hence can be utilized. Cost The cost of intermediaries may be high to ensure convenience in transportation. However, the other two strategies do not require intermediaries. Services The services offered are related to selection of channel members. Use of car rentals service will require choosing a firm that offers such services and which has same aims and purpose as Webjet. The availability of intermediaries, costs and services affect the channel structure. Use of discounted car rental services requires such an intermediary to be present and be willing to offer the service. The member should also reflect the channel strategies the firm has developed to achieve its distribution objectives. Members are also required to reflect the strategies and objectives of the overall organization (Rosenbloom, 2004). It may thus affect the channel structure. However, strategy one and two do not require channel members. 6.5 Weighted Factor Score Approach Evaluation criteria Wgt Strategy 1: Strategy 2: Strategy3 Rating W x R Rating W x R Rating W x R Cost 0.35 9 3.15 1 0. 35 6 2.1 Availability 0.3 10 3.0 4 1.2 8 2.4 Service Quality 0.15 7 1.05 3 0.45 7 1.05 Time restrains 0.2 5 1.0 3 0.6 7 1.4 TOTAL 1.0 28 8.2 33 2.6 13 6.95 RANKING 1.0 BEST 3RD 2ND Table 5- Strategy Outcomes for WEBJET 7. Recommended Strategy The strategy that should be adopted by Webjet is strategy 1. This advocates for Webjet to engage in the provision of accommodation services to clients. This would enable travellers especially from international destinations to get cheap and readily available accommodations hence eliminate all the hassle associated with hotel bookings through intermediaries. This will enable Webjet to differentiate itself from other agents and gain more customers. After that, it also needs to establish links and alliances with car rental companies to enable clients to move easily and enjoy their holiday. Later, it can decide to open its own airline. 8. Implementation plan After determining the ‘best’ strategy, the firm needs to develop an implementation plan so as to put it into action. This requires setting timelines, establishing what is to be done and by whom. Table 6- Implementation Plan for chosen Strategy What is to be done To be done by By when Deciding on timeline David Clarke 1st November 2012 Approval by committee Committee members 30th November 2012 Action taken-buying rooms Board of Directors 30th April 2013 Installation of online system IT staff 31st May 2013 Check for any problems IT staff 1st August 2013 Advertise the online accommodation bookings Marketing personnel 1st October 2013 9. Conclusion This report was aimed at providing the management of Webjet with an outline of how the company can come up with an effective channel structure in order to gain sustainable competitive advantage. The report was presented to David Clarke who is the chairman of the company. The report gave a brief background of the company as well as the channel design decision paradigm which comprised of seven stages. These form the basis of the report. A SWOT analysis was then undertaken which provided vital information on internal and external factors affecting the company and which were used to set distribution objectives and tasks. The major strengths were market dominance and customer loyalty while its weakness was fund to be high price and weak performance margin. The major opportunity was a shift towards online booking system due to advanced technology while the major threat was fuel prices and online identity theft. After developing objectives and tasks, the report set out to develop alternative channel structures. This was accomplished using channel levels, intensity, types of intermediaries. These were useful in helping to understand the available channels. The channels were then evaluated to come up with the best channel which could be implemented to achieve results. The company, product, market and intermediary variables were used to evaluate the channels. The report found out that the most effective channel was to establish accommodation facilities which could be booked online thus making it cheaper and faster for travellers to get hotel bookings even during peak seasons. 10. List of References ASX/Media Releases. 4 April 2011. Webjet Voted Number 1 Travel Agency Website by Hitwise. Available at:http://www.webjet.com.au/media-release/webjet-voted-number-i-travel-agency-website-by-Hitwise. 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