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Netflixs Channel Innovation: Finding the Future by Abandoning the Past

Synopsis Time and again, Netflix has innovated its way to the top in the distribution of video entertainment. In the early 2000s, Netflixs revolutionary DVD-by-mail service put all but the most powerful movie-rental stores out of business. In 2007, Netflixs then ground-breaking move into digital streaming once again revolutionized how people accessed movies and other video content. All along the way, Netflix has acted boldly to stay ahead of the competition. Netflix began by launching its Watch Instantly service, which let Netflix members stream movies instantly to their computers as part of their monthly membership fee, even if it came at the expense of Netflixs still booming DVD business. But Netflixs stunning success has drawn a slew of resourceful competitors. Netflix knows that it cant rest its innovation machine. Competition continues to move at a blurring rate. Moving ahead, as the industry settles into streaming as the main delivery model, contentnot just deliverywill be a key to distancing Netflix from the rest of pack. Whats next? No one really knows. But one thing seems certain: Whatevers coming, if Netflix doesnt lead the change, it risks being left behindand quickly. To stay ahead, as one headline suggests, Netflix must find its future by abandoning its past.

Discussion Objective
The chapter-opening Netflix story shows how a company employing a unique online distribution strategy has disrupted an entire industry and become the dominant market leader. Netflix took on an industry of well-entrenched competitors (including Blockbuster) by breaking ranks from the standard industry distribution model of renting videos at stores or through the mail. It recognized a gap in the market and targeted customers with unmet needs through a series of totally new distribution approaches.

Starting the Discussion

To get the discussion going and to illustrate the core elements of Netflixs groundbreaking channel innovation, visit the Netflix website at Click on the How It Works and Browse Selection links to explore the many ways in which customers can enjoy a wide array of movies and other viewing options anytime, anywhere. Ask students about their experiences with Netflix and other video rental businesses. What did Netflix do better than the competition? As the discussion progresses, help students to understand how Netflix dramatically changed the distribution rules in the video rental industry. Use the questions below to focus the discussion.

Discussion Questions
1. Describe the key elements behind Netflixs innovative channel distribu tion strategy. (In 2007, Netflix set its sights on a then-revolutionary new video distribution model: Deliver the Netflix service to every Internet-connected screen, from laptops to Internet-ready TVs to mobile phones and other Wi-Fi-enabled devices. Netflix began by launching its Watch Instantly service, which let Netflix members stream movies instantly to their computers as part of their monthly membership fee, even if it came at the expense of Netflixs still-booming DVD business. Although Netflix didnt pioneer digital-streaming, it poured resources into improving the technology and building the largest streaming library. It built a customer base of nearly 25 million subscribers, and sales and profits soared.)

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Despite its recent successes, what threats does Netflix face in the future? (As baseball great Yogi Berra said, The future aint what it used to be. Certainly, there are strong and emerging competitors and as has been noted, the competition comes in many different forms. In addition, the video industry is especially volatile right now. The biggest threat may not be any given competitor, but the fact that the dust is far from settling on what consumer preference will be in the next decade. Netflix can only go in so many different directions. The CEO has made it clear that it is not attempting to be everything to everyone. It is focusing squarely upon online streaming video. It seems to be a sound strategy, but if consumer preference shifts strongly to a distribution method other than either of these two, Netflix will be scrambling to retool their strategies.) How does the Netflix story relate to the concepts presented in Chapter 12 on distribution? (The core message of the chapter is that marketers create customer value through distribution strategy. Even the best product or service doesnt mean much unless its accessible to customers where and when they need it and in a way they can use it. For Netflix, its been all about groundbreaking channel innovation that meets the needs of targeted customers.)


Use Power Point Slide 12-1 Here This chapter deals with distribution. An individual firms success depends not only on how well it performs but also on how well its entire marketing channel competes with competitors channels. To be good at customer relationship management, a company must also be good at partner relationship management. The first part of this chapter explores the nature of marketing channels and the marketers channel design and management decisions. We then examine physical distributionor logisticsan area that is growing dramatically in importance and sophistication.

Use Power Point Slide 12-2 Here 1. Explain why companies use marketing channels and discuss the functions these channels perform. 2. Discuss how channel members interact and how they organize to perform the work of the channel. 3. Identify the major channel alternatives open to a company. 4. Explain how companies select, motivate, and evaluate channel members. 5. Discuss the nature and importance of marketing logistics and integrated supply chain management.

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p. 338 INTRODUCTION Time and again, Netflix has innovated its way to the top in the distribution of video entertainment. In 2007, Netflixs move into digital streaming revolutionized how people accessed movies and other video content. Netflix has always acted boldly to stay ahead of the competition. The company began by launching its Watch Instantly service, which lets Netflix members stream movies instantly to their computers as part of their monthly membership fee, even if it came at the expense of Netflixs still-booming DVD business. But Netflix knows that it cant rest its innovation machine. Moving ahead, as the industry settles into streaming as the main delivery model, contentnot just deliverywill be a key to distancing Netflix from the rest of pack. To stay ahead, as one headline suggests, Netflix must find its future by abandoning its past.

p. 339 Photo: Netflix

Assignments, Resources Use Web Resources 1 and 2 here Opening Vignette Questions 1. How did Netflix become the leader in the video rental business? 2. What has been the secret of its distribution strategy? How has managed to provide value to its clients, and stay ahead of the competition? 3. Was Netflix CEO Reed Hastings wise to split off Netflixs DVD-by-mail service in 2011 and require a separate paid subscription for it? Why or why not? 4. Do you believe that Netflix will be successful in the long term? Why or why not? p. 340 PPT 12-3 SUPPLY CHAINS AND THE VALUE DELIVERY Chapter Objective 1 NETWORK The supply chain consists of upstream and downstream partners. Upstream from the company is the set of firms that supply
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the raw materials, components, parts, information, finances, and expertise needed to create a product or service. Marketers have traditionally focused on the downstream side of the supply chainon the marketing channels (or distribution channels) that look forward toward the customer. PPT 12-4 A better term would be demand chain because it suggests a sense-and-respond view of the market. Under this view, planning starts with the needs of target customers, to which the company responds by organizing a chain of resources and activities with the goal of creating customer value. PPT 12-5 p. 341 As defined in Chapter 2, a value delivery network is made Key Term: Value up of the company, suppliers, distributors, and ultimately Delivery Network customers who partner with each other to improve the performance of the entire system. p. 341 Photo: Honda THE NATURE AND IMPORTANCE OF MARKETING CHANNELS Producers try to forge a marketing channel (or distribution channel)a set of interdependent organizations that help make a product or service available for use or consumption by the consumer or business user. How Channel Members Add Value Figure 12.1 shows how using intermediaries can provide economies. p. 342 The role of marketing intermediaries is to transform the Figure 12.1: How a assortments of products made by producers into the Distributor Reduces the Number of assortments wanted by consumers. Channel Members of the marketing channel perform many key Transactions functions. Some help to complete transactions: PPT 12-9 Informationgathering and distributing marketing research and intelligence information about actors and forces in the marketing environment needed for planning and aiding exchange. Promotiondeveloping and spreading persuasive
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p. 341

PPT 12-6 PPT 12-7 p. 342

p. 341 Key Terms: Marketing Channel (Distribution Channel)

PPT 12-8

communications about an offer. Contactfinding and prospective buyers. communicating with

Matchingshaping and fitting the offer to the buyers needs, including activities such as manufacturing, grading, assembling, and packaging. Negotiationreaching an agreement on price and other terms of the offer so that ownership or possession can be transferred.

Others help to fulfill the completed transactions: Physical goods. distributiontransporting and storing

Financingacquiring and using funds to cover the costs of the channel work. Risk takingassuming the risks of carrying out the channel work.

Assignments, Resources Use Discussion Question 1 here Use Marketing by the Numbers here Use Additional Project 1 here Use Think-Pair-Share 1 and 2 here Use Web Resource 3 here Troubleshooting Tip Students will probably not have previously considered the complicated nature of getting products to consumers before, and the concepts of supply chain and value delivery network will most likely be foreign. Figure 12.1 is excellent in showing how complex delivery networks could become without intermediaries, and an early focus should be placed on this figure. p. 343 Number of Channel Levels

p. 343 A channel level is each layer of marketing intermediaries Figure 12.2: that performs some work in bringing the product and its Consumer and ownership closer to the final buyer. Business Marketing Channels PPT 12-10 The number of intermediary levels indicates the length of a channel. (Figure 12.2) p. 343 Key Terms: A direct marketing channel has no intermediary levels; Channel Level,
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the company sells directly to consumers.

Direct Marketing Channel, Indirect An indirect marketing channel contains one or more Marketing Channel intermediaries. PPT 12-11 From the producers point of view, a greater number of levels mean less control and greater channel complexity. Assignments, Resources Use Critical Thinking Exercise 1 here Use Individual Assignment 1 here p. 344 CHANNEL BEHAVIOR AND ORGANIZATION Channel Behavior A marketing channel consists of firms that have partnered for their common good. Each channel member depends on PPT 12-12 the others. Each channel member plays a specialized role in the channel. The channel will be most effective when each p. 344 Key Term: Channel member assumes the tasks it can do best. Conflict Disagreements over goals, roles, and rewards generate channel conflict. Horizontal conflict occurs among firms at the same level of p. 344 Photo: KFC the channel. Vertical conflict occurs between different levels of the same channel. p. 345 Vertical Marketing Systems Chapter Objective 2

p. 345 Key Terms: Conventional Distribution Channel, Vertical Marketing System PPT 12-14 A vertical marketing system (VMS) consists of producers, (VMS) wholesalers, and retailers acting as a unified system. One channel member owns the others, has contracts with them, p. 345 or wields so much power that they must all cooperate. Figure 12.3 Comparison of (Figure 12.3) A conventional distribution channel consists of one or PPT 12-13 more independent producers, wholesalers, and retailers. Each is a separate business seeking to maximize its own profits, perhaps even at the expense of the system as a whole.
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Conventional There are three main types of vertical marketing systems: Distribution Channel with PPT 12-15 1. A corporate VMS integrates successive stages of Vertical Marketing production and distribution under single ownership. System PPT 12-16 2. A contractual VMS consists of independent firms p. 346 at different levels of production and distribution who Photo: Franchising join together through contracts to obtain more Systems economies or sales impact than each could achieve alone. 3. The franchise organization is the most common type of contractual relationship. A channel member called a franchisor links several stages in the production-distribution process. There are three types of franchises: 1. The manufacturer-sponsored retailer franchise systemfor example, Ford and its network of independent franchised dealers. 2. The manufacturer-sponsored wholesaler franchise systemCoca-Cola licenses bottlers (wholesalers) in various markets who buy Coca-Cola syrup concentrate and then bottle and sell the finished product to retailers in local markets. 3. The service-firm-sponsored retailer franchise systemexamples are found in the auto-rental business (Avis), the fast-food service business (McDonalds), and the motel business (Hampton Inn). In an administered VMS, leadership is assumed not PPT 12-18 through common ownership or contractual ties but through the size and power of one or a few dominant channel members. Assignments, Resources Use Discussion Question 2 here Use Critical Thinking Exercise 2 here Use Additional Projects 2 here Use Individual Assignment 2 here Use Outside Example 1 here Use Web Resource 4 here Troubleshooting Tip
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PPT 12-17 p. 346 Key Terms: Corporate VMS Contractual VMS, Franchise Organization, Administered VMS

p. 347 Key Term: Administered VMS

Vertical marketing systems can be difficult to understand. It might actually be easier to begin discussion of the contractual VMS with the illustration of franchises. Most students understand that McDonalds is a franchise organization, and so the concept will be understood quickly and easily. A corporate VMS then becomes easy to understand, because those consumer outlets are all owned by the company whose logo is on the door. Administered VMSs can be illustrated by the example of Walmart, whose marketplace power continually makes news. p. 347 p. 347 Key Term: Horizontal Marketing Systems PPT 12-19 Horizontal Happens when two or more companies at one level join Marketing System together to follow a new marketing opportunity. p. 348 p. 348 Key Term: Multichannel Distribution Systems PPT 12-20 Multichannel This occurs when a single firm sets up two or more Distribution System PPT 12-21 marketing channels to reach one or more customer segments. (Figure 12.4) p. 347 Photo: Horizontal Marketing Channels p. 348 Figure 12.4: Multichannel Distribution System Changing Channel Organization p. 349 Disintermediation occurs when product or service producers Photo: Books p. 348 cut out intermediaries and go directly to final buyers, or when radically new types of channel intermediaries displace PPT 12-22 traditional ones. p. 348 Key Term: Disintermediation Assignments, Resources Use Real Marketing 12.1 here Use Marketing Technology here Use Small Group Assignment 1 here Use Think-Pair-Share 3 here Use Outside Example 2 here Use Web Resources 5 here
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p. 350


Chapter Objective 3

PPT 12-23 Marketing channel design calls for analyzing consumer p. 350 needs, setting channel objectives, identifying major channel Key Term: Marketing Channel alternatives, and evaluating them. Design p. 350 Analyzing Consumer Needs PPT 12-24 The company must balance consumer needs not only against the feasibility and costs of meeting these needs but p. 350 Photo: Customer also against customer price preferences. Channel Service p. 350 Needs Setting Channel Objectives PPT 12-25 Companies should state their marketing channel objectives in terms of targeted levels of customer service. The company should decide which segments to serve and the best channels to use in each case. The companys channel objectives are influenced by the nature of the company, its products, its marketing intermediaries, its competitors, and the environment. Environmental factors such as economic conditions and legal constraints may affect channel objectives and design. p. 351 Identifying Major Alternatives Types of Intermediaries PPT 12-26 A firm should identify the types of channel members available to carry out its channel work. Number of Marketing Intermediaries Companies must also determine the number of channel members to use at each level. PPT 12-27 Three strategies are available: 1. Intensive distributionideal for producers of convenience products and common raw materials. It is a strategy in which they stock their products in as many outlets as possible. 2. Exclusive distributionis when producers purposely limit the number of intermediaries
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p. 351 Key Term: Intensive Distribution, Exclusive Distribution,

handling their products. The producer gives only a limited number of dealers the exclusive right to distribute its products in their territories. 3. Selective distributionis the use of more than one, but fewer than all, of the intermediaries who are willing to carry a companys products. Responsibilities of Channel Members The producer and intermediaries need to agree on the terms and responsibilities of each channel member. They should agree on price policies, conditions of sale, territorial rights, and specific services to be performed by each party. Evaluating the Major Alternatives p. 352 PPT 12-28 Using economic criteria, a company compares the likely sales, costs, and profitability of different channel alternatives. Control issues must be considered. Using intermediaries means giving them some control over the marketing of the product, and some intermediaries take more control than others. Adaptability criteria must be applied. Companies want to keep the channel flexible so that it can adapt to environmental changes. p. 352 Designing International Distribution Channels

Selective Distribution p. 352 Photo: STIHL

p. 353 PPT 12-29 In some markets, the distribution system is complex and Photo: McDonalds hard to penetrate, consisting of many layers and large numbers of intermediaries. At the other extreme, distribution systems in developing countries may be scattered, inefficient, or altogether lacking. Sometimes customs or government regulation can greatly restrict how a company distributes products in global markets.

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p. 353

Assignments, Resources Use Video Case here Use Discussion Questions 3, 4 and 5 here Use Additional Projects 3, 4, and 5 here Use Think-Pair-Share 4 and 5 here Use Web Resources 6 here CHANNEL MANAGEMENT DECISIONS

Chapter Objective 4

PPT 12-30 Marketing channel management calls for selecting, p. 353 managing, and motivating individual channel members and Key Term: Marketing Channel evaluating their performance over time. Management p. 353 Selecting Channel Members When selecting intermediaries, the company should determine what characteristics distinguish the better ones. p. 354 Managing and Motivating Channel Members The company must sell not only through the intermediaries but to and with them. Most companies practice strong partner relationship p. 355 management (PRM) to forge long-term partnerships with Photo: Caterpillar channel members. p. 354 Evaluating Channel Members The company should recognize and reward intermediaries who are performing well and adding good value for consumers. Those who are performing poorly should be assisted or, as a last resort, replaced. Finally, manufacturers must be sensitive to their dealers. Assignments, Resources Use Real Marketing 12.2 here Use Small Group Assignment 2 here p. 356 PUBLIC POLICY AND DISTRIBUTION DECISIONS

PPT 12-31 Exclusive distribution occurs when the seller allows only certain outlets to carry its products.

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Exclusive dealing occurs when the seller requires that these dealers not handle competitors products. Exclusive arrangements exclude other producers from selling to these dealers. This brings exclusive dealing contracts under the scope of the Clayton Act of 1914. Exclusive territorial agreements occur when the producer agrees not to sell to other dealers in a given area, or the buyer may agree to sell only in its own territory. Full-line forcing occurs when producers of a strong brand sell only to dealers if they agree to take some or all of the rest of the line. This is also known as a tying agreement. In general, sellers can drop dealers for cause. Assignments, Resources Use Real Marketing 12.2 here Use Marketing Ethics here MARKETING LOGISTICS AND SUPPLY CHAIN Chapter Objective 5 MANAGEMENT Nature and Importance of Marketing Logistics p. 357 Marketing logistics (also called physical distribution) PPT 12-32 involves planning, implementing, and controlling the physical flow of goods, services, and related information from points of origin to points of consumption to meet customer requirements at a profit. Marketing logistics involves outbound distribution (moving products from the factory to resellers and ultimately to customers), inbound distribution (moving products and materials from suppliers to the factory), and reverse distribution (moving broken, unwanted, or excess products returned by consumers or resellers). It involves the entire supply chain management PPT 12-33 managing upstream and downstream value-added flows of p. 357 materials, final goods, and related information among Figure 12.5: Supply PPT 12-34 suppliers, the company, resellers, and final consumers Chain Management (Figure 12.5). Companies today are placing greater emphasis on logistics for several reasons:
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p. 357

p. 357 Key Terms: Marketing Logistics (Physical Distribution), Supply Chain Management

p. 358

1. Companies can gain a powerful competitive advantage by using improved logistics to give customers better service or lower prices. 2. Improved logistics can yield tremendous cost savings to both the company and its customers. 3. The explosion in product variety has created a need for improved logistics management. 4. Improvements in information technology have created opportunities for major gains in distribution efficiency. 5. More than almost any other marketing function, logistics affects the environment and a firms environmental sustainability efforts. Goals of the Logistics System

p. 358

The goal of marketing logistics should be to provide a PPT 12-35 targeted level of customer service at the least cost. Major Logistics Functions Warehousing p. 359 p. 359 A company must decide on how many and what types of Photo: Logistics PPT 12-36 warehouses it needs and where they will be located. Storage warehouses store goods for moderate to long periods. Distribution centers are designed to move goods p. 359 rather than just store them. Key Term: Distribution Center Inventory Management PPT 12-37 Just-in-time logistics systems: Producers and retailers carry p. 359 only small inventories of parts or merchandise, often only Photo: Staples enough for a few days of operations. PPT 12-38 Transportation Trucks have increased their share of transportation steadily and now account for nearly 40 percent of total cargo ton- p. 360 miles in the United States. Photo: Truck transportation Trucks are highly flexible in their routing and time schedules, and they can usually offer faster service than railroads.
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They are efficient merchandise.






Railroads account for 37 percent of total cargo ton-miles moved. They are one of the most cost-effective modes for shipping large amounts of bulk productscoal, sand, minerals, and farm and forest productsover long distances. Water carriers account for 5 percent of cargo ton-miles, transport large amounts of goods by ships and barges on U.S. coastal and inland waterways. Although the cost of water transportation is very low for shipping bulky, low-value, nonperishable products, it is the slowest mode and may be affected by the weather. Pipelines account for about 1 percent of cargo ton-miles, are a specialized means of shipping petroleum, natural gas, and chemicals from sources to markets. Air carriers transport less than 1 percent of the nations goods. Airfreight rates are much higher than rail or truck rates. The Internet carries digital products from producer to customer via satellite, cable, or phone wire. Intermodal transportation means combining two or more modes of transportation. Piggybackrail and trucks Fishybackwater and trucks Trainshipwater and rail Airtruckair and trucks p. 361 Key Term: Intermodal Transportation

p. 361

Logistics Information Management p. 361 PPT 12-39 Electronic data interchange (EDI) is the computerized exchange of data between organizations. Vendor-managed inventory (VMI) systems or continuous inventory replenishment systems, is the customer sharing real-time data on sales and current inventory levels with the
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supplier. The supplier then takes full responsibility for managing inventories and deliveries. Assignments, Resources Use Real Marketing 12.2 here Use Discussion Question 6 here Use Critical Thinking Exercise 3 here Troubleshooting Tip In marketing logistics, the concepts of inbound and reverse logistics should be fully explained. Most students, at this point in the chapter, will have no problems with outbound logistics. p. 363 Integrated Logistics Management p. 361 Key Term: Integrated Logistics Management

Integrated logistics management is a concept that PPT 12-40 recognizes that providing better customer service and trimming distribution costs require teamwork, both inside the company and among all the marketing channel organizations. Cross-Functional Teamwork Inside the Company

The goal of integrated supply chain management is to p. 362 harmonize all of the companys logistics decisions. Ad: Logility Close working relationships among departments can be achieved in several ways: p. 363 Permanent logistics committees, made up of managers responsible for different physical distribution activities. Supply chain manager positions that link the logistics activities of functional areas. System-wide supply chain management software.

Building Logistics Partnerships Cross-functional, cross-company teamsfor example, P&G employees work jointly with their counterparts at Walmart to find ways to squeeze costs out of their distribution system. Shared projectsfor example, Home Depot allows key suppliers to use its stores as a testing ground for new merchandising programs.
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p. 363 p. 363 Key Term: ThirdThird-Party Logistics Party Logistics PPT 12-41 Third-party logistics (3PL) providers help clients tighten (3PL) Provider up overstuffed supply chains, slash inventories, and get products to customers more quickly and reliably. (Also p. 365 Ad: Ryder called outsourced logistics or contract logistics.) Companies use third-party logistics providers for several reasons: 1. These providers can often do it more efficiently and at a lower cost. 2. Outsourcing logistics frees a company to focus more intensely on its core business. 3. Integrated logistics companies understand increasingly complex logistics environments. Assignments, Resources Use Think-Pair-Share 6 here Use Company Case here


Discussion Questions 1. Describe the key functions performed by marketing channel members. (AACSB: Communication) Answer: Members of the marketing channel perform many key functions. Some help to complete transactions: Information: Gathering and distributing marketing research and intelligence information about actors and forces in the marketing environment needed for planning and aiding exchange.

Promotion: Developing and spreading persuasive communications about an offer. Contact: Finding and communicating with prospective buyers. Matching: Shaping and fitting the offer to the buyers needs, including activities such as manufacturing, grading, assembling, and packaging. Negotiation: Reaching an agreement on price and other terms of the offer so that ownership or possession can be transferred.
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Others help to fulfill the completed transactions: Physical distribution: Transporting and storing goods.

Financing: Acquiring and using funds to cover the costs of the channel work. Risk taking: Assuming the risks of carrying out the channel work.

2. Describe multichannel distribution systems and the advantages and disadvantages of using them. (AACSB: Communication; Reflective Thinking) Answer: Multichannel distribution systems occur when a single firm sets up two or more marketing channels to reach one or more customer segments. For example, the producer sells directly to consumer segment 1 using catalogs, telemarketing, and the Internet and reaches consumer segment 2 through retailers; and it sells indirectly to business segment 1 through distributors and dealers and to business segment 2 through its own sales force. Multichannel distribution systems offer many advantages to companies facing large and complex markets. With each new channel, the company expands its sales and market coverage and gains opportunities to tailor its products and services to the specific needs of diverse customer segments. But such multichannel systems are harder to control, and they generate conflict as more channels compete for customers and sales. 3. Compare and contrast intensive, selective, and exclusive distribution. Which channel design decision does this involve? (AACSB: Communication; Reflective Thinking) Answer: When a company has defined its channel objectives, it should next identify its major channel alternatives in terms of the types of intermediaries, the number of intermediaries, and the responsibilities of each channel member. Intensive, selective, and exclusive distribution relate to the number of intermediaries to use at each level. Producers of convenience products and common raw materials typically seek intensive distributiona strategy in which they stock their products in as many outlets as possible. These products must be available where and when consumers want them. For example, toothpaste, candy, and other similar items are sold in millions of outlets to provide maximum brand exposure and consumer convenience. By contrast, some producers purposely limit the number of intermediaries handling their products. The extreme form of this practice is exclusive distribution, in which the producer gives only a limited number of dealers the exclusive right to distribute its products in their territories. Exclusive distribution is often found in the distribution of luxury brands. Exclusive distribution also enhances the brands image and allows for higher markups. Between intensive and exclusive distribution lies selective distributionthe use of more than one, but fewer than all, of the intermediaries who are willing to carry a companys
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products. Most television, furniture, and home appliance brands are distributed in this manner. 4. Discuss the complexities international marketers face when designing channels in other countries. (AACSB: Communication) Answer: International marketers face many additional complexities in designing their channels. Each country has its own unique distribution system that has evolved over time and changes very slowly. These channel systems can vary widely from country to country. Thus, global marketers must usually adapt their channel strategies to the existing structures within each country. In some markets, the distribution system is complex and hard to penetrate, consisting of many layers and large numbers of intermediaries. At the other extreme, distribution systems in developing countries may be scattered, inefficient, or altogether lacking. Sometimes customers or government regulation can greatly restrict how a company distributes products in global markets. 5. Explain how information is managed in the distribution channel. What types of information are managed? (AACSB: Communication) Answer: Companies manage their supply chains through information. Channel partners often link up to share information and make better joint logistics decisions. From a logistics perspective, flows of information, such as customer transactions, billing, shipment and inventory levels, and even customer data are closely linked to channel performance. Companies need simple, accessible, fast, and accurate processes for capturing, processing, and sharing channel information. Information can be shared and managed in many ways, but most sharing takes place through electronic data interchange (EDI), the digital exchange of data between organizations, which primarily is transmitted via the Internet. In some cases, suppliers might actually be asked to generate orders and arrange deliveries for their customers. Many large retailers work closely with major suppliers to set up vendor-managed inventory (VMI) systems or continuous inventory replenishment systems. Using VMI, the customer shares real-time data on sales and current inventory levels with the supplier. The supplier then takes full responsibility for managing inventories and deliveries. Some retailers even go so far as to shift inventory and delivery costs to the supplier. Such systems require close cooperation between the buyer and seller.

6. Describe intermodal transportation and list the different combinations used to distribute products and the benefits of using this mode of transportation. (AACSB: Communication) Answer: Intermodal transportation involves combining two or more modes of transportation.
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Piggyback describes the use of rail and trucks; fishyback, water and trucks; trainship, water and rail; and airtruck, air and trucks. Combining modes provides advantages that no single mode can deliver. Each combination offers advantages to the shipper. For example, not only is piggyback cheaper than trucking alone, but it also provides flexibility and convenience.

Critical Thinking Exercises 1. In a small group, debate whether or not the Internet will result in disintermediation of the following retail stores: (1) video rental stores, (2) music stores, (3) grocery stores, (4) book stores, and (3) clothing stores. (AACSB: Communication; Reflective Thinking) Answer: This should be an interesting debate. Many students probably already obtain most of their music onlineeither legally or illegally. Video downloading still takes a long time but streaming video from the Internet seems to be taking off. With the recent closure Blockbuster and Netflixs decision to focus on video streaming, it appears that things are moving in this direction. Most likely, students will agree that the Internet, while a viable source for food and clothing purchases, will not replace traditional retail stores in these areas because most consumers want to select food and try clothing on before purchasing them. Unlike the digital product sold through the other types of stores, products from grocery and clothing retailers cannot be distributed to the final consumer through the Internet, which will limit the disintermediation of these entities. 2. The most common type of contractual vertical marketing system is the franchise organization. Visit the International Franchise Association at and find a franchise that interests you. Write a report describing the franchise. Identify what type of franchise it represents and research the market opportunities for that product or service. (AACSB: Communication; Use of IT; Reflective Thinking) Answer: Students responses will vary. The three types of franchises are manufacturer-sponsored retailer franchise systems, manufacturer-sponsored wholesaler franchise systems, and service-firm-sponsored retailer franchise systems. Most of the franchises selected by students will likely be the latter. There is considerable information from the suggested Web site and students should be able to obtain market information for their selected franchise opportunity from several sources on the Internet. 3. Visit and watch the The Future Market video. What impact will RFID tags have on each of the major logistical functions? What are the biggest current obstacles to adopting this technology? (AACSB: Communication; Use of IT; Reflective Thinking)

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Answer: This entertaining video depicts a shady-looking character going through a grocery store stuffing items in his coat. As he walks out, he is scanned and the security guard, who looks like he is going to stop him for theft, tears off the receipt and hands it to the man. Students might conclude that RFID technology can be used to scan an entire cart of merchandise, for example, allowing shoppers to check out more quickly. RFID tags impact the channel of distribution in many ways: Warehousing Products could be more easily identified when coming into the warehouse and their location within the warehouse could be easily ascertained. Inventory RFID could help reduce stockouts, theft, error, and vendor fraud. Transportation Better tracking from ocean liner, rail, and trucking will help ensure on-time delivery. Information management Supply chain members could easily share data and locate freight within minutes. Probably the biggest obstacle to adopting this technology is price. The price is still highfor the chips, the hardware, and the software. In addition, some companies are not ready for the level of data that will be produced and the start-up costs of hiring and training IT professionals and logistic managers. Another obstacle is privacy concerns, with some likening the use of this technology to George Orwells 1984.

Marketing Technology: Omnichannels A key to satisfying retail customers is to carry products they want. However, Macys used to find that while an item was out of stock online, it had plenty of stock in the store and ended up marking it down to clear them out. Not anymore. Macys is now turning almost 300 of its 800plus stores into combination retail outlets and online warehouses to combat competitors such as, which has an extensive network of warehouses located near high-population areas. New technology dynamically updates the status of all items in every store, so if an online shopper wants an item, and it exists in any Macys store, the store will ship the item to the consumer. In-store shoppers can also have an item shipped to them from another store if its out of stock where they are shopping. Items not selling well in stores are shifted to the online site where they can be sold at full price rather than marked down. Integrated Internet and physical stores are called omnichannels. Nordstrom and Toys R Us have used omnichannels for a few years and realize fewer markdowns, improved margins, and faster inventory turnover.

1. What are the disadvantages of also treating retail stores as warehouses? Is this a good solution for competing with (AACSB: Communication; Reflective Thinking)
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Answer: Searching for products and filling orders by hand on a one-by-one basis can be inefficient. Store clerks are finding they are packaging hundreds of online orders per day. While it may provide better margins for Macys because items would otherwise be marked down, is much more sophisticated. uses robots to pull orders in its fulfillment centers; in fact, it recently acquired Kiva Systems, a manufacturer of robots (see

Marketing Ethics: Slow Motion Video Movie and television program distribution technology is changing fast. Consumers can now watch movies and TV shows on demand on TVs, computers, tablets, and smartphones. This has caused a surge in demand for online video streaming services such as Netflix and Hulu. However, its causing problems for subscription-TV services such as Comcast Cable, which offer scheduled programming and are facing increased competition from the video streaming services. Interestingly, however, as one of the countrys largest Internet service providers, Comcast is also the distribution channel for competitors such as Netflix and Hulu. The fact that Comcast has control over its competitors distribution channel causes some uncomfortable conflicts. It has invested billions building its scheduled programming network, and it doesnt want to become a mere conduit as its subscribers drop cable in favor of streamed programming from one of the competing services. And because it controls the Internet channel, it can cause problems for those competitors. For example, the U.S. Justice Department is investigating whether cable companies such as Comcast are attempting to squash competition from video streaming providers such as Netflix by limiting the amount of data their Internet service subscribers can download. Comcast has also countered with its own online video streaming app called Xfinity, by which subscribers can stream programming using Xbox game consoles. Video content streamed through Xfinity is not counted against Comcasts data limits the way that videos streamed through other services such as Netflix are. 1. What types of channel conflict is present in this channel of distribution? Explain. (AACSB: Communication; Reflective Thinking) Answer: There are two types of channel conflict: horizontal and vertical. Horizontal conflict occurs among firms at the same level of the channel. Since Comcast has entered into the video streaming business, this could be considered horizontal conflict because Comcast is now at the same level as other online video providers such as Netflix and Hulu. Vertical conflict is conflict between different levels of the same channel. Because Comcast is also the Internet service provider and is slowing or blocking the distribution of Netflixs product to consumers, vertical conflict is also present.

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Marketing by the Numbers: Expanding Distribution Lightco, Inc., manufactures decorative lighting fixtures sold primarily in the eastern United States. Lightco wants to expand to the midwest and southern United States and intends to hire ten new sales representatives to secure distribution for its products. Sales reps will acquire new retail accounts and manage those accounts after acquisition. Each sales rep earns a salary of $50,000 plus 2 percent commission. Each retailer generates an average $50,000 in revenue for Lightco. Refer to Appendix 2: Marketing by the Numbers to answer the following questions. 1. If Lightcos contribution margin is 40 percent, what increase in sales will it need to break even on the increase in fixed costs to hire the new sales reps? (AACSB: Communication; Analytical Reasoning) Answer: Hiring 10 new sales reps increases fixed costs by $500,000 ($50,000 x 10 = $500,000) increase in fixed costs $500,000 Increase in sales = = = $1,250,000 contribution margin 0.40 2. How many new retail accounts must the company acquire to break even on this tactic? What average number of accounts must each new rep acquire? (AACSB: Communication; Analytical Reasoning) Answer: Each retailer generates an average of $50,000 for Lightco, so to break even, 25 new retail accounts must be acquired ($1,250,000 $50,000 per retailer = 25 new accounts). Thus, each new sales rep needs to acquire at least 2.5 retail accounts to break even (25 accounts 10 reps = 2.5 accounts per rep).


Pandora: Disintermediator or Disintermediated? Synopsis There are many examples of companies that have played a role in disintermediating existing distribution channels. Priceline helped to create a new channel for planning air travel and related services, rendering the travel agency business almost completely obsolete. Netflix played a role in creating a new channel for renting movies, pushing the traditional movie rental stores out of the market. Now theres Pandora. Pandora pioneered a new way to listen to music online. Instead
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of selecting the exact music one wants to hear, or simply tuning in to a radio station, Pandora takes certain input from the listener (suggested song or band) and produces a playlist of music it thinks that person will like. With additional inputs from the listen as they listen, Pandora becomes smarter with respect to each individuals tastes and preferences. Pandora has grown quickly 94 million registered users in just 10 years time. Pandoras rise has coincided with the decline of traditional or terrestrial radio listenership. So the question is, had Pandora successfully chosen the right path as one format disintermediates another? Or does Pandora itself risk being disintermediated, even after only being in business for 10 years? Facing similar issues that other disintermediators face, this case discusses the successes that Pandora has experienced while also considering the challenges that lie ahead. Teaching Objectives The teaching objectives for this case are to: 1. 2. 3. 4. Illustrate a value delivery system in action. Help students understand why and how companies use value delivery systems. Expose students to issues of channel conflict and conflict management. Illustrate how value can be added through different aspects of supply chain management.

Discussion Questions 1. As completely as possible, sketch the value chain for Pandora from the production of content to the listener. As students do this, it should become apparent that the manner in which Pandora distributes music is not entirely up to Pandora. There are many parties involved, and most of them are very concerned about maintaining profits. The following is a simple sketch of a value chain. It in no way is intended to be exhaustive. Musicians Someone has to actually play the music. Musicians from small independents to blockbuster bands churn out the tunes, recording them in ways that they can be distributed to customers. Record Labels/Producers producers of music are the ones that make the content happen. These are the men and or companies that represent musicians. Some musicians do everything by themselves, even distributing the music. But most musicians that gain any kind of large listenership are represented by a record label, small or large. Such labels play valuable roles, including covering costs and assuming risk associated with recording, editing, mixing, marketing, and distributing the content. Royalty collectors Companies like the non-profit SoundExchange negotiate and collect royalties on behalf of copyright owners. Ownership Groups this is more for traditional radio. But similar groups hold multiple online music services. Music service companies Pandora fits in here. But so do terrestrial radio stations, satellite stations, and other Internet music services. One could also include new
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cloud-based services that allow clients to upload all their own music, essentially storing it in the cloud, giving them access to it from multiple locations. 2. How do horizontal and vertical conflict impact Pandora? Vertical one of the most notable examples is briefly mentioned in the case. In the cost structure section, it is mentioned that a few years ago, Pandora almost went out of business because SoundExchange doubled the cost of royalties to Pandora and other Internet radio services. There is also the issue of granting rights to use the music, separate and apart from cost. Some producers may have reasons other than cost for entering into contractual agreements that allow a company like Pandora to play their music. In some cases, such agreements may be affected by contracts with other companies that exclude new companies from gaining access. Horizontal Both issues above have a horizontal component. For cost structure, different royalty fees are set for terrestrial radio, Internet radio, and satellite radio. That in essence may cause conflict among participants at the same level of distribution. Additionally, the right to play music is affected by what agreements other outlets have. Thus, some producers may not grant rights to Pandora because they have an exclusive agreement with another music service. 3. How does Pandora add value for customers through its distribution functions? Students should look to Pandoras unique features. Most all of them are designed to add value. For example, Pandoras service is similar to most any Internet radio. And in certain respects, it is similar to terrestrial radio. In other words, turn on a station, hear the type of music that you want to hear. That provides convenience and availability. But the Pandoras key feature is its predictive software. Terrestrial, satellite, and most other Internet radio services dont have anything like this. Just gaining access to music is only part of what listeners value. But often, listeners dont want to have to think about choosing something (e.g, What song or album should I listen to?). Thats why they turn to radio in the first place. With Pandora, listeners get the ease of not having to make so many choices with the bonus of getting music that is customer picked for them. Value is extended with all the little things like skipping, liking/disliking, etc. As well, customers can opt out of commercials entirely by paying a fee. Thus, it can be said that Pandora fulfills the following: Physical distribution Pandora has a larger library of titles (over 850,000 songs) than any other radio service. Its expanding automotive and home services also provide alternatives. Either way, Pandora provides the convenience of listening without going anywhere or buying anything. Information Customers can read descriptions of artists and songs, all production details, and even comments from other listeners. Negotiation Pandora has taken care of negotiating with SoundExchange and the producers. They, in turn, make the music available to customers in exchange for subscription fee or for listening to ads. Matching Pandora makes it easy for customers to find the right music. Risk taking Customers dont have to incur the risk of buying music only to find that
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they dont like it. They can try it out. 4. Will Pandora be successful in the long term? Why or why not? There seem to be many factors on Pandoras side. The company is young and dynamic. The company is innovative. It has demonstrated that it can shift with trends. It has demonstrated itself to be a formidable competitor. However, the uncertainties in the industry make it too difficult to predict which services will be at the top of the heap in a decade or two. The case sketches out all the substantial threats that Pandora faces now and in the future. In spite of the fact that the company has almost 100 million listeners and has recently been valued at $2.6 billion, it has yet to make a profit. A lot of that has to do with its cost structure (royalties). But it also has to do with what customers are willing to pay, which is, in most cases, nothing. So, it relies on advertising revenues, which have yet to emerge as a profitable source of revenue for online radio services. Thus, in order for Pandora to be successful in the long-term, something has to change. Either it has to develop a more sustainable revenue stream, or it has to reduce the cost of goods by negotiating lower royalty rates, something that is not likely to happen. Teaching Suggestions This case is well-suited for small group discussion. In fact, question 4 is good to serve as the basis for strategy and recommendations. After discussing the first three questions, have groups discuss the final question, develop plans, then present them to the rest of the class. This case goes well with the customer value chapter (Chapter 1) and the online marketing chapter (Chapter 17).


1. How do channel members add value? Give specific examples. (Objective 1) 2. Why do some manufacturers establish contractual relationship with their dealers instead of owning them? (Objective 2) 3. Draw the diagram of the channel of distribution for Green Giant canned corn and Rolex watches. (You may have to do a little Internet research, if youre not familiar with the brands.) How does distribution differ between these two products? (Objective 3) 4. Interview a manager of a retail store with regard to the channel of distribution that is used to bring one of the stores products to the marketplace. (Objective 3) 5. College students frequently want food late at night, and many of them dont have cars to go get it. You are going to launch a business that picks up and delivers food to on-campus dormitories. Using the information in the text, design your channel of distribution. What are the needs of the consumer? What are your channel objectives? Do you want to use any intermediaries? (Objective 3)
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Small Group Assignments

1. Form students into groups of three to five. Each group should read Real Marketing 12.1: Working with Channel Partners to Create Value for Customers. Each group should then answer the following questions and share their answers with the class. (Objective 2) a. Describe the key philosophy behind Caterpillars dealer partnerships. What makes them so successful? b. How are Toyotas supplier relationships fundamentally different from those of its American competitors? c. What specific advantages does LOreal gain through the collaborative approaches it takes with its supplier network? 2. Form students into groups of three to five. Each group should read Real Marketing 12.2: UPS: We Love Logistics. Each group should then answer the following questions and share their answers with the class. (Objective 5) a. Discuss the major advantages that UPS offers its business clients in the logistics process. Why wouldnt businesses simply decide to handle the logistics themselves? b. Which advantages can UPS logistics management sell to its business clients, which business clients can then turn around and sell to customers? c. As the CEO of or Toshiba, would you feel comfortable allowing UPS to manage such an important part of your business? Explain.

Individual Assignments
1. Mobile phone manufacturers largely distribute their products through service providers like T-Mobile and AT&T and not directly to the customer. Why do you believe this is so? Do you think this is the most efficient method? (Objective 1) 2. Channel conflict may arise when there is a disagreement among marketing channel members on goals and roleswho should do what and for what rewards. Take a look at Tommy Bahama ( From their Web site, find a merchant (or merchants) close to you that carry their products. Discuss possible channel conflicts that you can see arising. (Objective 2)

Consider the following questions, formulate an answer, pair with the student on your right, share your thoughts with one another, and respond to questions from the instructor. 1. What is a distribution channel? (Objective 1) 2. What is the difference between an upstream channel member and a downstream member? (Objective 1) 3. Explain the difference between horizontal and vertical channel conflict. What is generally the remedy to channel conflict? (Objective 2) 4. What are the major channel alternatives open to a company? (Objective 3)
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5. What are some of the ways that companies have to evaluate channel members? (Objective 3) 6. The term supply chain seems pretty limiting. What phrase would you use to replace it? Why? (Objective 5)

Outside Examples
1. Read about Starbucks commitment to helping out indigenous farmers in underdeveloped countries ( After reading, write up your interpretation of the full distribution channelfrom beans in the field to company headquarters. (Objective 2) Possible Solution: Starbucks has gone to great effort and expense to develop sustainable relationships with indigenous farmers in underdeveloped countries. A review of Starbucks Corporate Social Responsibility Annual report provides the information needed to fully address this question. In fiscal 2007, Starbucks purchased 352 million pounds of coffee (2 percent of total world production). The coffee was grown in 25 countries, with the majority being from Guatemala, Colombia, and Indonesia. Here is an example of the supply chain for Guatemalan coffee purchases in fiscal 2007. Starbucks paid $1.37 per pound for coffee from a local Guatemalan coffee exporter. The exporter paid $1.32 per pound to the producer who grew and milled the coffee. The exporter retained 5 cents per pound for financing, documentation, and profit. Starbucks supply chain is diverse and complex, so the price distribution varies around the globe. This is due to different purchase and delivery structures, production costs, quality premiums, and the margin distribution within each country. 2. There are many online travel intermediaries that have popped up since the Internet went public in the mid-1990s. Travelocity, Orbitz, Cheaptickets, Hotwire, Priceline, and a host of others have succeeded in disintermediating the travel business and darn near extinguishing the traditional travel agent. But what happens when an intermediary comes along that disintermediates the same intermediaries who have just dissed some other intermediary? Enter Kayak. Rather than checking multiple travel sites to see who has the best deal on airfare, one can go to, type in their departure and destination locations, and in a matter of seconds, view the fares available on all airlines servicing the route. Actually, this is not true disintermediation. Kayak is not taking away business from the online travel sites as a whole. Rather, it is a referral site. Once customers have found the fare and carrier they prefer, they can then click on that fare and be taken to directly to the suppliers site (e.g. Expedia, Delta, Continental, CheapTickets, etc.) to complete the transaction. But the effect of this new intermediary is increasing price competition among
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the intermediaries (and airlines). Whew! So, the result is likely to be a shift in which travel sites and airlines get any given customers business, rather than a decrease in the category of travel Web sites. (Objective 2) a. Discuss the activities of Kayak in the context of disintermediation. How is this new service affecting the disintermediated travel agents, the disintermediated travel Web sites, and the airlines? b. How might Kayak be contributing to channel conflict? c. How is Kayak adding value for customers? Possible Solution: a. Disintermediation occurs when product or service producers cut out intermediaries and go directly to final buyers, or when radically new types of channel intermediaries displace traditional ones. In this example, Kayak has helped to finish off the disintermediation of the traditional travel agent. Traditional travel agents book only a very small percentage of air travel today, given the proliferation of available booking options on the Web. b. Kayak may be viewed as contributing to channel conflict by providing the consumer with a new source of unbiased information with which to make their travel purchase decision. By doing this, Kayak is contributing to pricing transparency, thus making significant pricing variations among suppliers even more difficult. c. The consumer is the clear winner here. Kayak is providing the consumer with additional information with which to make an informed decision. Kayak is proving a source of one-stop information shopping for consumers.

Web Resources
1. This is the link to the Prentice Hall support link. 2. Here is Netflixs home page. 3. Explore Whole Foods and learn about how they work with their suppliers in the channel of distribution. 4. Learn more about franchising by taking a look at Subway. 5. To better understand Real Marketing 12.1, read more about Zara here. 6. The Rolex site provides a good example of a company using exclusive distribution.
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