Chapter 5 Gap Analysis I. Sources of Gaps II. Types of Gaps III. Measures to Close Gaps Ch. 5 Gap Analysis Goal: To build the channel that both meets service output demands and does so at a minimum cost of performing the Necessary Channel flows. Gap Analysis Framework: Sources of Gaps Types of Gaps Closing Gaps TIMELINE OF CHANGES IN THE AIRLINE TRAVEL CHANNEL 2/10/95: Delta limits agent commission s to $50 on RT, $25 on one-way tickets for U.S. travel 2/10/97: SAS, KLM, Lufthansa cut domestic commissions to 5-7.5% 2/11/95: American, Northwest follow 2/13/95: United, USAir follow 2/14/95: Continental follows 2/16/95: AMEX, Carlson Wagonlit announce fees for travel services 2/17/95: Travel agents file antitrust lawsuit; U.S. Justice Dept. investigation launched 3/29/95: Delta, Continental offer bonuses to travel agents exceeding sales goals 2/15/95: TWA follows 9/18/97: United cuts commissions to 8%, retains $50/$25 caps 9/23/97: American, Delta follow 9/26/97: Northwest, Continental, USAir, Midwest Express, KLM, Lufthansa follow 11/18/98: American, Delta, United cap commissions on international flights at $100/$50 11/20/98: Continen tal follows 1996: Airlines settle lawsuit, paying agents $86 million; commission caps remain in place. Online ticketing (e-ticketing) begins. 10/8-12/99: United cuts commissions to 5% with a maximum of $50 for round-trip domestic ticket, $100 for round-trip international flight; American, Delta, Northwest, KLM match I. Sources of Gaps SOURCES OF GAPS Environmental Bounds: - Local legal constraints (ex: CDW) - Local physical and retailing infrastructure (ex: Online Bill Payment)* Managerial Bounds: - Constraint due to lack of knowledge - Constraint due to optimization at a higher level FIGURE 5-2: ONLINE BILLING AND PAYMENT: GAP ANALYSIS BOUNDS GAPS CLOSING THE GAPS Environmental: Technology infrastructure: takes time to fully develop initially endowed benefits more on billers than on payers is not universally available is characterized by high fixed set-up costs, but low marginal implementation costs and thus is not attractive unless significant scale is achieved Demand-side: Assortment/variety (one-stop bill payment site not available) Waiting time too long (some e-bills took 5 days to pay) Information provision poor (thus e-bill payment viewed as risky) Supply-side: Clear lowering of many channel flow costs But consumer (as a channel member) bears more perceived risk, with no compensating price cut Cost cuts initially much more available to biller than to payer (asymmetric cost efficiencies that hamper adoption) Relax environmental bounds: Build software applications to generate back-office benefits for B2B players Presentment technology eventually developed to improve assortment/variety for consumer payers Increase promotional efforts generate information for consumers Add new specialist channel members New specialists develop new technology to provide integrated benefits to consumers and B2B payers FIGURE 5-3: ONLINE BILLING AND PAYMENT: A VIRTUOUS CYCLE C o n s u m e rs adopt e -b ill p a ym e n t B a n k s , b ille rs in c re a s e p ro m o e ffo rts to p u b lic iz e e -b ill p a ym e n t; m a y e v e n c u t c o s t to c o n s u m e r S c a le g o e s u p a t b ille r or bank D u e to e c o n o m ie s o f s c a le , p e r-tra n s a c tio n c o s t o f o ffe rin g e -b ill p a ym e n t fa lls Note: the B2B process exhibits a similar path, with the added inducement to payers of the development of technologies to integrate bill payment information with back-office (accounts payable, inventory management, and ordering) processes. II. Types of Gaps TYPES OF GAPS SOD: Service Output Demanded SOS: Service Output Supplied Demand-Side Gaps: ex) Retail Music Sales SOS < SOD SOS > SOD Which SO(s) ? Supply-Side Gaps: ex) CDW’s Promotion Cost Flow cost is too high Which flow(s)? TABLE 5-1: U.S. RETAIL MUSIC SALES, 1999-2003 Year Sales in $billion 1999 $14.6 2000 $14.3 2001 $13.7 2002 $12.8 2003 $11.8 TABLE 5-2: AVERAGE RETAIL CD PRICES IN THE U.S. Time Period Average Price 2002 (Q1) $13.90 2002 (Q2) $13.90 2002 (Q3) $13.60 2002 (Q4) $13.90 2003 (Q1) $13.80 2003 (Q2) $13.70 2003 (Q3) $13.50 2003 (Q4) $13.55 2004 (Q1) $13.25 In response to flagging sales, Vivendi Universal dropped price of Music CDs from $16.98 to $12.98 in September 2003. SERVICE OUTPUT DEMAND TEMPLATE SERVICE OUTPUT DEMAND: SEGMENT NAME/ DESCRIPTOR BULK BREAKING SPATIAL CONVENIENCE DELIVERY/ WAITING TIME ASSORTMENT/ VARIETY Customer Service 1. 2. 3. 4. 5. INSTRUCTIONS: If quantitative marketing-research data are available to enter numerical ratings in each cell, this should be done. If not, an intuitive ranking can be imposed by noting for each segment whether demand for the given service output is high, medium, or low. FIGURE 5-6: TYPES OF GAPS COST PERFORMANCE LEVEL: Demand-side Gap (SOD>SOS) No DemandSide Gap (SOD=SOS) Demand-side Gap (SOS>SOD) Price/value Price/value No Supply-Side proposition=right proposition=right Gaps No Gap (Efficient for a more for a less Flow Cost) demanding demanding segment! segment! High costs and High cost, but Insufficient SO Supply-side Gap SO is too high: SO’s are right: (Inefficiently High provision, at high costs: price &/or value is good, but no extra value Flow Cost) price &/or cost is created, but price cost too high, &/or cost is high high value too low III. Closing Gaps CLOSING GAPS Closing Demand-Side Gaps: - Offer tiered service levels - Expand/contract provision of service outputs; ex) Microsoft Media Center PC with HP* (store-within-store) - Change/Fine-tune segment(s) targeted: ex) Specialty grocers’ response to Trader Joe’s Closing Supply-Side Gaps: - Change flow responsibilities of current members - Invest in new low-cost distribution technologies* - Bring in new channel members FIGURE 5-8: DEMAND-SIDE GAP ANALYSIS TEMPLATE SERVICE OUTPUT LEVEL DEMANDED (SOD) VERSUS SERVICE OUTPUT LEVEL SUPPLIED (SOS) SEGMENT NAME/ DESCRIPTO R BULK BREAKING SPATIAL CONVENIENC E DELIVERY/ WAITING TIME ASSORTMEN T/ VARIETY CUSTOMER SERVICE INFORMATION PROVISION MAJOR CHANNEL FOR THIS SEGMENT 1. 2. 3. 4. 5. Notes and directions for using this template: Enter names and/or descriptions for each segment. Enter whether SOS>SOD, SOS<SOD, or SOS=SOD for each service output and each segment. Add footnotes to explain entries if necessary. If known and relevant, footnote can record any supply-side gaps that lead to each demand-side gap. Record major channel used by each segment, i.e., how does this segment of buyers choose to buy? FIGURE 5-10: DEMAND-SIDE GAP ANALYSIS TEMPLATE: CDW EXAMPLE SERVICE OUTPUT LEVEL DEMANDED (SOD: L/M/H) VERSUS SERVICE OUTPUT LEVEL SUPPLIED BY CDW (SOS) SEGMENT NAME/ DESCRIPTO R BULK BREAKING SPATIAL CONVENIENCE DELIVERY/ WAITING TIME ASST/ VARIETY CUSTOMER SERVICE 1. Small business buyer H (SOS=SOD) Original equipment: M (SOS=SOD) Post-sale service: H (SOS=SOD) 2. Large business buyer L (SOS>SOD) 3. Gov’t/ education L (SOS>SOD) INFORMATION PROVISION MAJOR CHANNEL FOR THIS SEGMENT Original equipment: M (SOS>SOD) Post-sale service: H (SOS=SOD) M (SOS>SOD) H (SOS=SOD) H (both presale and postsale) (SOS=SOD) Value-added reseller like CDW, or retailer Original equipment: H (SOS=SOD) Post-sale service: L (SOS>SOD) Original equipment: M (SOS>SOD) Post-sale service: L (SOS>SOD) M/H (SOS=SOD) M (SOS>SOD) L (SOS>SOD) Manufacture r direct, or large reseller like CDW Original equipment: H (SOS=SOD) Post-sale service: H (SOS=SOD) Original equipment: M (SOS>SOD) Post-sale service: M (SOS>SOD) M/H (SOS=SOD) H (SOS=SOD) H (both presale and postsale) (SOS=SOD) Manufacture r direct, or reseller; 23 percent from small business (VARs) FIGURE 5-9: SUPPLY-SIDE GAP ANALYSIS TEMPLATE (to be used in conjunction with Demand-Side Gap Analysis Template, Figure 5-8) CHANNEL [targeting which segment(s)?] CHANNEL MEMBERS AND FLOWS THEY PERFORM ENVIRONMENTAL/ MANAGERIAL BOUNDS SUPPLY-SIDE GAPS [affecting which flow(s)?] PLANNED TECHNIQUES FOR CLOSING GAPS DO/DID ACTIONS CREATE OTHER GAPS? 1. 2. 3. 4. 5. Notes: Record routes to market in the channel system. List should include all channels recorded in Figure 5-4 above. Note the segment or segments targeted through each channel. Summarize channel members and key flows they perform (ideally, link this to the Efficiency Template analysis in Chapter 3). Note any environmental or managerial bounds facing this channel. Note all supply-side gaps in this channel, by flow or flows affected. If known, record techniques currently in use or planned for use to close gaps (or note that no action is planned, and why). Analyze whether proposed/actual actions have created or will create other gaps. Ch. 3 Building and Editing the Channel Value Chain I: The Key Principles Table 3-2: PC Channel Shipment Share in the U.S. Direct inbound Direct outbound Internet Direct Dealer/VAR/SI Retail Others Total Units 2001 2003 2005 23% 18% 8% 28% 19% 5% 19% 23% 13% 22% 20% 4% 17% 25% 12% 20% 21% 4% 46.07Million 52.70Million 64.14Million FIGURE 5-11: SUPPLY-SIDE GAP ANALYSIS TEMPLATE: CDW EXAMPLE (to be used in conjunction with Demand-Side Gap Analysis Template, Figure 5-10) CHANNEL [targeting which segment(s)?] CHANNEL MEMBERS AND FLOWS THEY PERFORM* ENVIRONMENTAL (E) / MANAGERIAL (M) BOUNDS SUPPLY-SIDE GAPS [affecting which flow(s)?] PLANNED TECHNIQUES FOR CLOSING GAPS DO/DID ACTIONS CREATE OTHER GAPS? 1. CDW direct to buyer ( small business buyer) Manufacturer; CDW; Sm. Bus. Buyer (M): no screening of recruits for expected longevity with firm Promotion [sales force training/turnover] Better screening of new recruits No Buying from CDW closes gaps for customer in Risking 2. CDW direct to buyer ( large business buyer, government) Manufacturer; CDW, CDW-G; Lg. Bus. Buyer or Government Buyer (E): government requires 23 percent of purchases from small vendors (M): no screening of recruits for expected longevity with firm Promotion [sales force training/turnover] Negotiation [cannot close 23% of deals with government] Better screening of new recruits; Rely on consortium channel structure (below) No 3. CDW + small business VAR consortium member ( government) Manufacturer; CDW-G; Small VAR; consortium partner Government Buyer (E): government requires 23 percent of purchases from small vendors; (M): VAR’s small business size (M): no screening of recruits for expected longevity with firm Promotion [sales force training/turnover]; (Negotiation: only a gap for a small VAR not in the CDW alliance) Better screening of new recruits; Negotiation gap above is closed through consortium with small VARs No Note: all channel members perform all flows to some extent. Key channel flows of interest are promotion, negotiation, and risking.