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Distribution Strategies 1 - Introduction (13:38)
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Wharton Business Foundations Capstone
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Marketing Plan for Review
In this Module, you'll write your Marketing Plan for your product or service that will be part of your final project. Because determining who the audience is for a product or service, and how to talk the audience about it is critical to the success of your capstone, you'll have the opportunity to get feedback on creativity and analytical strength of your marketing plan before you submit is as part of your final project. Once you submit your idea, please review the Marketing Plans of five of your peers.
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Christian TerwieschAndrew M. Heller Professor at the Wharton School, Senior Fellow Leonard Davis Institute for Health Economics Co-Director, Mack Institute of Innovation Management
The Wharton School
[MUSIC]
So, welcome back everybody.
We're continuing with go-to-market strategies.
And this time we're going to talk about customer access and distribution.
So the fourth P, place distribution.
So, let me just run through how we're going to address place as we go through.
There's really just going to be two key themes.
The first theme is how do channels of distribution
develop the structure that they do?
So, who's doing what?
Who's getting the product to the end consumer?
And then secondly, how do channels get coordinated?
Because channels of distribution are often places full of conflict.
So for example, I'm Procter & Gamble.
I'd love it if all Walmart did was only sell Tide, but
of course Walmart wants to have a lot of variety on the shelf.
Why is that? Because not everyone wants to buy Tide.
People want choice, and so often times in a channel of distribution
there is inherent conflict, so we're going to look at the structure of channels and
also how channels get coordinated.
So let me begin with some interesting things, I think,
about distribution or place.
We call place sometimes the final frontier, the final P.
Often times people don't think about distribution as a way to innovate but
I think they really should and here's some reasons why.
So distribution can really be an important source of
sustainable competitive advantage.
So think about the kind of advantage that a company like Apple has developed through
the fact that it owns it's own stores and it owns the experience with the customer.
Secondly, distribution can provide increasing returns to scale.
What do I mean by that?
If I'm a large brand like Coca-Cola and
I'm distributed by every single outlet in the state of Pennsylvania,
I make it a disproportionate return to market share just because I'm everywhere.
And then the third thing to think about is distribution decisions can be sort of long
lived and difficult ones.
If you build physical distribution it's going to cost you some money to do so, so
you need to really be sure about the return that you going to get.
Now, as I said earlier I think distribution is often overlooked, but
also it's a place where there can be tremendous value unlocked in
terms of new business ideas, new services and new products coming into play.
So think about the way that you can change the nature of distribution channel by
taking a hard good and turning it into a soft good.
Let me give you an example of that.
So when money is money and only cash, there are certain things you can do with
it, but when money becomes credit or when money becomes available on your mobile
phone, that really frees up the way people can transact.
If you think about a movie, when a movie can only be watched in a theater,
that's very different than being able to stream a movie onto your mobile phone.
So anytime a good that is a hard good and can be changed into a soft good through
an innovation and distribution, that can really change the nature of markets.
Even what we're doing now, through our Coursera class,
is kind of an example of this.
Normally, the Coursera course, or the marketing course that Barbara and
Pete and I teach together, would be taught in a physical facility at
the Wharton School to a limited audience in a particular time.
Now of course, it can be taught to a much broader audience, and
we're really happy about that, and also it can be taught at any time.
You guys can be watching these videos as many times as you like.
So the first thing we're going to do in customer access and distribution is
think about the structure of the channel and who the key players are.
And the most basic thing to think about here is whether a channel is direct
meaning that the provider of the good or service is going straight to the end user.
Or whether or not there are some intermediaries or layers involved.
And let's look at this example on the slide of the American Hospital Supply
company to kind of illustrate, why sometimes it can be efficient to place
an intermediary between the producer of a local service and the end user.
So let's imagine we have a market with three manufacturers on the left-hand side,
the three squares and three consumers indicated by the three circles.
Now if every manufacturer had to sell individually to every consumer,
that would be a possibility of three by three or
nine different combinations of buying and selling or
transacting occurring as Barbara spoke about in the very first sessions.
On the other side, imagine now that a distributor,
or a middle person, comes into this market.
There are still three manufacturers and three consumers, but
now the three manufacturers just sell their product to the distributor and
the three consumers just visit the distributor or the retailer.
So now there are only six possible interactions.
So by adding a distributor to a channel creating an indirect channel.
I dramatically reduced the number of transactions.
Well probably not dramatically in this example, but
if you look below the line it's certainly dramatic.
So American Hospital Supply found that it could reduce
the total number of transactions that would be needed in this market
from 850 million by aggregating down to only about a hundred thousand.
It's still a lot but it's a huge reduction.
So that's the economic theory of why an indirect channel
is sometimes preferred over a direct channel because it reduces the total
number of transactions that are required.
So again, there are some efficiency advantages of having an indirect channel
over a direct channel.
However, there are other advantages of going direct.
What might some of those reasons be?
Well, if I go direct to the end customer,
I might create a special kind of barrier to entry for others in that market.
So, now, for example, that Apple, as a manufacturer, goes direct to its end
customers through its own retail store, it makes it difficult for other sellers
of hardware and related softwares to do the same thing, or to do it just as well.
Another reason for
going direct is you get sometimes much better feedback from the market.
If you have to rely on some intermediary to tell you what customers really like,
what variety and what prices, they may be unwilling to do so.
So by going direct you can kind of go around or cut out the middle man.
The third thing that you can do is you can sometimes bundle other goods or services,
more efficiently higher margin products.
So if I go into the Apple Store to buy an iPhone maybe they can also sell me
a laptop and some other devices while I'm in there because now the manufacturer
is controlling that channel and going direct to the end consumer.
So what I'm showing here now is a diagram that kind of explains in a graphical form,
all of the things that happen in a channel of distribution,
all of the various flows that have to take place.
This is a pretty long channel of distribution, as you can see,
going all the way from the supplier of the good and
service on one side all the way to the end customer on the other side.
So here are the five things that have to happen.
And this is an interesting diagram,
because it also helps you understand how this flow can be disrupted.
So first of all,
physical product has to move from the supplier all the way down to the end user.
Secondly, sometimes there's a flow of title or ownership.
Of course, there's a flow of payment.
Somehow the end user has to send the payment back to the supplier.
And then of course, there is information and promotional flows, as well.
So what I want us to think about here is in a channel of distribution, that there
are players who are responsible for the flow of both goods and information.
So as you look at this chart, I'd encourage you in your own time to think
about how the channel of distribution could be disrupted in a way that's very,
very innovative, that might lead to a new business.
So let's look at the one on the top which is the physical flow of goods and
services.
And let's relate that back to our course case Quidsi.com.
So how did Quidsi change or disrupt this existing channel of distribution?
Well, In the pre-Quidsi days, if I wanted to buy some detergent, I had to go to
a supermarket who'd receive that product from a manufacturer via warehouses and
distributors, pick it up myself, and take it home.
What Quidsi did was innovating on the delivery to end customers by
sending their product via Federal Express or UPS directly to my home.
We're seeing, of course, increased innovation in this area, too,
as companies like Ebay, Google, Amazon and
so on are figuring out ways to either send things directly to a home, for
physical goods and services, or perhaps send them to intermediate places,
like existing stores, where there are lock boxes and we can go and pick them up.
The same thing also applies for services not just for physical products.
Think about the process whereby in the old days you might want to book a hotel if you
were going to New York City for a vacation.
You might have to call a travel agency or even go to the hotel website and
find out if the product was available or call somebody.
Now of course that's been disrupted by apps such as hotel tonight.
You can just go onto an app.
You can see all of the hotels in New York City where you can stay for
one night at whatever the rate is for a single night and
you can just book directly on your mobile phone.
So again this is a very, very interesting chart, because I'm sure as you go through,
you can think of ways that this system can be disrupted, either for
information, for physical goods, or for title and so on.
One other example I think is an old one, but very,
very instructive, if you go back to what Michael Dell did way back in the 1990s.
He realized that there was a physical flow of computers where the manufacturers like
Hewlett-Packard, IBM, and so on, sold into distributors and
the product eventually ended up on the shelf in computer stores where Chris,
my friend and I, would go shopping.
And we would talk to a salesperson, Amy,
who would tell us what we needed and so on.
So very long, complicated channel involving people handling inventory and
everything else.
At a certain point, Michael Dell realized well,
people know enough about computers now to order them directly on their own.
They can call 1-800-DELL, we could make it, and customize it, and
ship it directly.
So, I can't really stress enough how the distribution is a tremendous
source of advantage of new business ideas and also of leverage.
We'll just give one more example,
just so you can think about this in simple terms to compliment the previous chart.
Think about distribution channels as providing flows for
physical things and for information things.
So what do I mean by this?
So the distribution channel might be required to establish an assortment,
it might be required to deliver things, to do installation and repair.
Those are all physical things that need to be done.
The distribution channel also needs to provide information, so understand what
customers want, generate leads, procure market feedback and so forth.
So almost everything that's done in a distribution channel
is some combination of a physical flow and also an information flow.
So now what I'd like to do is share with you a very useful tool or
a very useful framework for understanding how a distribution channel
actually functions in terms of the activities that need to be done.
It’s called a hybrid grid.
A hybrid grid is just simply a matrix.
I know you learned a lot about various matrices from Pete.
This is the same idea in a different context.
So the columns of our matrix are going to be the activities
that need to be performed.
Everything from generating initial leads all the way through to the sale of
the product of service, and then potentially even after sale.
The rows are going to be the individuals or entities who will be responsible for
performing these various tasks.
And the idea is you want to construct a system of distribution
that's optimized for the customers that you're trying to reach.
You want the exact right person to be performing the exact right customer
such that the channel operates efficiently and smoothly.
So the example I'm going to give, interesting product,
it's actually a business to business product sold to farmers, it's called BGH.
It's a bovine growth hormone, I'm not suggesting that you should buy any of
this, but I'm going to show you how it works in terms of the hybrid grid.
So the marketing challenges for the company, Monsanto,
who produced this product for multiple,
in particular they had four things they really had to worry about.
So how they could they educate farmers that this was a good thing to
use on their herd?
How can they assure quality?
How could they make sure that the farmers were using it correctly?
And then also how could they recycle and take care of used syringes and so on?
So the question was who on earth is going to do what?
So now let me show you this by way of a chart.
Again, you can see from the left to the right and
the columns are all of the activities that need to be performed.
Everything from generating awareness,
all way through to monitoring that the vids and the farmers are actually,
sorry that the farmers are using the product properly.
On the rows, we see all of the entities or individuals who are responsible for
various activities.
And where I blued in the square, the idea is
this is the optimal combination of activity and person who’s performing it.
And the way you figure out the optimal combination is to figure out two things.
First of all, who's best at doing this, from a customer point of view.
And secondly, who's going to get the compensation or rewards for doing so.
So, if we start, for example with generating awareness and
interest, that is a task that was going to fall to the agency.
Outbound telemarketing and also Monsanto sales people,
that's not something that local vets are probably going to be motivated to do
unless they're going to be somehow compensated for doing that.
So the idea is it's the person or entity that's best at doing it, and
also the person or entity who's going to receive
the benefit from actually undertaking the effort to engage in that activity.
So again if you wanted to apply this I would encourage you to take your existing
business or business idea if you're an entrepreneur and
try to figure out what needs to be done, activities.
And then who should actually be doing these activities from the point of view
of optimizing the design of the channel.
[MUSIC]
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