Here is a channel benefit analysis, as we did on the board. You can see the list of channel benefits in the waiting of these benefits from the consumer's perspective. I like for these to sum up to a 100, to incorporate the fact that consumers cannot have all benefits all the time because our costs are not unlimited. So by summing to one 100, this force is trade offs and identifies which benefits are most important in which are less important. Now, these numbers in this table come from market research or from a conjoint analysis of consumer preferences. And all of these techniques can be learned in any market research course. Now we evaluate how well these benefits are supplied by the current channel. And as you can see, the grade point average here is pretty dismal in terms of value created for end customers. But this tells you what customers want and value, and this is the basis for creating explosive value. Now, the next step is to convert those benefits desired on the demand side with channel members who create the flows and activities that create that value for end users. So let's take a look at this spreadsheet, which is the core of the function analysis. So in the first column, we have listed the various flows that are needed. And in the next column, we have examples of the costs that might be involved in generating this flow. Then we list the percentage of total channel costs that are accounted for by each flow, again, summing to 100. Now, these numbers could come from an ABC, an activity based costing process, which is something that most firms have to do pretty regularly. Importantly, this column reflects the allocation of costs according to these specific channel functions. But what we really want to know is what these allocation costs should be in light of the channel benefits desired. So we need to wait the costs of these channel flows, and this brings us to the next column. The benefit potential column should reflect the judgmental inputs of managers about the ability of each flow to create highly valued service outputs. And another way to think of this column is to ask how important is each flow? Well, because these inputs are judgmental, it's best to use a qualitative input such as the ranking, low, medium or high. These rankings should then be used to adjust the purely cost based weights in the previous column to arrive a final weights for each flow. So when a flow gets a rating of high on benefit potential, it should receive more weight than its pure cost based weight would suggest. Because it is important not only on the cost side but also on the service output generation side. So the benefit potential column is the means by which we filter or adjust the current cost shares to reflect then what they should. Now, the sum of the final importance weights has to sum to 100. Thus, if you wish to increase the weight put on the promotion flow, it would be necessary to take some points away from some other flow. Presumably, one or more that received the benefit potential ranking of low. It is worth noting that you should not get hung up on the exact number. For example, if the revised estimate is 25% and the initial estimate is 10. No need to argue about whether that 25% should be 27%. Also, this does not mean that you should strictly interpret the proportion of the revised budget to be 25% for that flow. Instead, the interpretation should be that the flow is more important or significant than you initially thought it should be. That is, its value is increasing. Now, let's take a step back. And what does this now tell you? First of all, it tells you that financing and advice in the revised channel should be very important and costly. Promotion, negotiation, payment is less of an issue. Now, as you consider what share of total cost each function should account for, you will naturally allocate the level of resources necessary for that channel flow. Let's move on. Now that we've prioritized which functions we need and how much or what share of the total costs each should account for, we can now assign these flow tasks to various channel members. In this spreadsheet, we take the final weights from the prior page, and we now add columns for each channel. Channel flows may take time to perform. Thus making a sale through a marketing channel should be viewed more as a process than as an event. There are a couple of rules to keep in mind here. The first is that any given channel flow may be performed by just one channel member, or maybe shared by more than one channel member. In the first row, physical possession, you'll see that each channel member completes a percentage or some part of the total possession activities that need to be done. Together, the sum of this row should total 100% as each channel member completes a part of the total possession activity that must be performed. And so this is how each row is completed. In order to assess the responsibilities or share of work that each channel member performs, you take a weighted average of their column. And the weights you use are those in the final weight column. The total weighted cost share born is the percentage of all channel flow costs born by each channel member. You can use this template and the weighted cost shares to investigate questions like these. Who is doing most of the work in this channel? Is this channel member the channel captain? That is, does this channel member control the overall channel effort in this market? In the case of Cemex, we see that the end user is doing most of the work. We know from the case in the pictures at the start of the case that this is not working out well for them, as most end users are not skilled at building rooms. We know from our channel design that Cemex is the channel captain. So the discussion that needs to happen among management is how can we shift these channel flows either to the channel captain or to a channel member who can do this work efficiently and effectively? Another key part of this is to ask, are there instances of specialization in the performance of some channel flows? That is, are there rose with zeros for all channel members but one? When specialization occurs, does this specialist perform this function in the most cost effective manner possible? Are you uncomfortable being dependent on a specialist? And what would happen if this specialist either failed to perform or dropped out of your channel? Remember, that specialists have the ability to consolidate power, so ask yourself if they can be trusted with that power. Your goal in allocating channel flows and functions to particular channel members is to minimize the cost of performing those flows, subject to providing the level of service outputs desired by your target end user segments. The most efficient channel design is one that we call zero based. A zero based design is channel nirvana. This is when the entire channel system, every channel member is conducting the necessary flows at the lowest possible cost. This is very hard to achieve in most firms. Never do this. So at this point in the analysis, you'll want to ask questions such as what changes in channel flow allocation gets you closer to zero based channel design? Would it A, decrease the cost of running the channel, and or B, increased service levels to end users? Would a different channel structure that is a different set of channel members serve the market better? What flows in members would be affected by this change. Another golden rule in this analysis is that you can always eliminate the columns in the spreadsheet but you can never eliminate the rows. The functions have to happen, but who performs that function and then what volume and manner is up for debate? The final key assessment that must be made at this point regards the equity principle are the shares of total costs born by each channel member consistent with a relative channel profits earned by that channel member to the best of your knowledge? If so, we say that the equity principle is adhered to in this channel. That is, the channel members share in the profits of the channel proportionately to their costs born. If not, why not? If a channel member is getting the lion's share of the channel profits, is that channel member also the one doing most of the work? This is the notion of the equity principle. Channel members should be paid in a manner that corresponds to the work and costs they bear for the system. What you should realize is that many firms failed to do this, and instead they tend to get persuaded by various members of the channel system as to what they should be paid. And this is a mistake that should be avoided. This analysis instead should guide your allocation of channel profits. Now, let's wrap up. For each channel flow, we have now identified who performs that activity. The next step is to assess whether the supply side of our channel system, whether these flows are properly allocated or whether there is what we refer to as a supply side gap. A supply side gap occurs when the costs of performing a channel flow are too high. So how do we know if the supply side gap exists in the Cemex system? Well, you might observe that the borrowing costs for end users are too high, or that there are lots of mistakes being made in both design and actual construction. You might find that consumers have the wrong mix of products for construction or that they can't find the help they need. These gaps can lead you to identify what your next step should be to close these gaps. Maybe the time does need to be enlisted to help bring down the cost of financing. Maybe you need more technical advisers available to homeowners or more education. Maybe the dealer deliveries and product mix the customer's needs to be reconfigured. So this really is the purpose of a channel function analysis and plan. I will tell you that I've worked with companies to design such plans, and they are really effective for providing a systematic and rational framework. This works for understanding what the channel design should be, and accordingly, how members should be compensated. This analysis also provides the channel captain with clear next steps. And more importantly, it makes it easier to convince channel members why they're getting compensated the margins that they are given. And that, my dear friend, is the Cemex case discussion.
