978-0134492513 Chapter 12 Lecture Notes Part 1

Chapter 12

MARKETING CHANNELS:

DELIVERING CUSTOMER VALUE

MARKETING STARTER: CHAPTER 12

UBER: Radically Reshaping Urban Transportation Channels

Synopsis

In just seven years, Uber has revolutionized the urban transportation industry. Once the domain solely of taxicabs,

car services, and public transportation, such as trains and buses, Uber allows passengers to call for a ride, choose the

driver and type of car, know the fare in advance, and track the vehicle as it approaches. Uber now books more than

$10 billion in rides, and operates in hundreds of cities in 67 countries. In addition to traditional competitors, Uber’s

success has attracted numerous other ride-hailing services, but Uber is taking full advantage of its first-to-market

leadership position. Traditional transportation services are known for the close relationship between cab companies

and local governments, high fares, poor service, and little accountability. Uber’s model is changing the industry, and

it will never be the same.

Discussion Objective

The chapter-opening Uber story shows how a company employing a unique online distribution strategy has

disrupted an entire industry and become the dominant market leader. Uber took on an industry of well-entrenched

competitors (such as taxis and buses) by breaking ranks from the standard industry distribution model of renting

cars, calling taxis, or riding buses. 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 Uber’s groundbreaking channel innovation, visit

the Uber website at www.uber.com. Click on the “Help” link to view the basic offerings from Uber. Ask students

whether they have used Uber or a competitor, such as Lyft. What was the experience like? As the discussion

progresses, help students to understand how Uber changed the rules in urban transportation.. Use the questions

below to focus the discussion.

Discussion Questions

1. Describe the key elements behind Uber’s innovative channel distribution strategy. (In essence, it

personalizes the urban transportation model by giving both the driver and the passenger more control than

in traditional choices, such as taxis and car services. The driver and the passenger each rate the other,

which enhances the behavior of each. The fare is known in advance, so there are no surprises. The

passenger knows when the vehicle will arrive for pick-up, providing more certainly on schedules and

timing.)

2. Despite its recent successes, what threats does Uber face in the future? (As baseball great Yogi Berra said,

“The future ain’t 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 urban transportation industry is

especially volatile right now. The biggest threat may not be any given competitor, but the fact that the dust

is far from settled on what the regulatory environment will be for businesses such as Uber. Uber can only

expand so quickly and into certain countries. Will driverless cars change the market?

3. How does the Uber 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 doesn’t mean much unless it’s accessible to customers where and when they need it and in a way

they can use it. For Uber, it’s been all about groundbreaking channel innovation that meets the needs of

targeted customers.)

CHAPTER OVERVIEW

Use Power Point Slide 12-1 Here

This chapter deals with distribution.

An individual firm’s 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 marketer’s

channel design and management decisions.

We then examine physical distribution—or logistics—an area that is growing dramatically in

importance and sophistication.

CHAPTER OBJECTIVES

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.

CHAPTER OUTLINE

p. 332 INTRODUCTION

In just seven years, Uber has revolutionized the urban

transportation industry. Once the domain solely of taxicabs,

car services, and public transportation, such as trains and

buses, Uber allows passengers to call for a ride, choose the

driver and type of car, know the fare in advance, and track

the vehicle as it approaches.

Uber now books more than $10 billion in rides, and

operates in hundreds of cities in 67 countries. In addition to

p. 333

Photo: Uber

traditional competitors, Uber’s success has attracted

numerous other ride-hailing services. However, Uber is

taking full advantage of its first-to-market leadership

position.

Traditional transportation services, such as cab and bus

companies, are known for having close relationships with

local governments, high fares, poor service, and little

accountability. However, Uber’s model is changing the

transportation industry. Uber’s CEO sees other applications

in the company’s future, which may provide the opportunity

for growth beyond Uber’s ride-hailing origins.

Opening Vignette Questions

1. How did Uber become the leader in the urban

transportation business?

2. What has been the secret of its distribution

strategy? How has Uber managed to provide

value to its clients and stay ahead of the

competition?

3. How does Uber adding delivery services fit into

its distribution strategy?

4. Do you believe that Uber will be successful in

the long term? Why or why not?

p. 334

PPT 12-3

PPT 12-4

PPT 12-5

Explain why companies use marketing channels and

discuss the functions these channels perform.

SUPPLY CHAINS AND THE VALUE DELIVERY

NETWORK

The supply chain consists of “upstream” and “downstream”

partners.

Upstream from the company is the set of firms that supply

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 chain—on the marketing channels (or

distribution channels) that look forward toward the

customer.

The supply chain has a “make and sell” view as it includes

the firm’s raw materials, productive inputs, and factory

capacity.

Demand chain suggests a sense-and-respond view of the

Learning Objective

1

p. 335

PPT 12-6

PPT 12-7

p. 335

p. 336

PPT 12-8

PPT 12-9

p. 336

PPT 12-10

market; planning starts with the needs of the target

customer.

As defined in Chapter 2, a value delivery network is made

up of the company, suppliers, distributors, and ultimately

customers who “partner” with each other to improve the

performance of the entire system.

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.

The role of marketing intermediaries is to transform the

assortments of products made by producers into the

assortments wanted by consumers.

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

buyer’s 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.

Others help to fulfill the completed transactions:

p. 335

Key Term: Value

delivery network

p. 335

Photo: Pepsi

p. 335

Key Term:

Marketing channel

(distribution

channel)

p. 336

Figure 12.1: How a

Distributor Reduces

the Number of

Channel

Transactions

p. 336

p. 337

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.

The question is not whether these functions need to be

performed, but who will perform them, at what cost.

Assignments, Resources

Use Discussion Question 12-1 here

Use Marketing by the Numbers here

Use Additional Project 1 here

Use Think-Pair-Share 1 and 2 here

Troubleshooting Tip

Students will probably not have previously

considered the complicated nature of getting

products to consumers, and the concepts of “supply

chain” and “value delivery network” will most likely

be new. Figure 12.1 is excellent for showing how

complex delivery networks could become without

intermediaries, and an early focus should be placed

on this figure.

p. 337

PPT 12-11

PPT 12-12

PPT 12-13

Number of Channel Levels

A channel level is a layer of marketing intermediaries that

performs some work in bringing the product and its

ownership closer to the final buyer.

A direct marketing channel has no intermediary levels; the

company sells directly to consumers.

An indirect marketing channel contains one or more

intermediaries.

The number of intermediary levels indicates the length of a

channel. (Figure 12.2)

From the producer’s point of view, a greater number of

levels mean less control and greater channel complexity. All

members in the channel are connected by flows which

include physical flow, flow of ownership, payment flow,

information flow, and promotion flow.

p. 337

Figure 12.2:

Consumer and

Business Marketing

Channels

p. 337

Key Terms:

Channel level,

Direct marketing

channel, Indirect

marketing channel

Review Learning Objective 1: Explain why companies use

marketing channels and discuss the functions these channels

perform.

Assignments, Resources

Use Discussion Question 12-2 here

Use Individual Assignment 1 here

p. 338

PPT 12-14

PPT 12-15

PPT 12-16

PPT 12-17

p. 339

PPT 12-18

PPT 12-19

Discuss how channel members interact and how they

organize to perform the work of the channel.

CHANNEL BEHAVIOR AND ORGANIZATION

Channel Behavior

A marketing channel consists of firms that have partnered

for their common good. Each channel member depends on

the others.

Each channel member plays a specialized role in the

channel. The channel will be most effective when each

member assumes the tasks it can do best.

Disagreements over goals, roles, and rewards generate

channel conflict.

Horizontal conflict occurs among firms at the same level of

the channel.

Vertical conflict occurs between different levels of the same

channel.

Vertical Marketing Systems

A conventional distribution channel consists of one or

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.

A vertical marketing system (VMS) consists of producers,

wholesalers, and retailers acting as a unified system. One

channel member owns the others, has contracts with them,

or wields so much power that they must all cooperate.

(Figure 12.3)

There are three main types of vertical marketing systems:

Learning Objective

2

p. 338

Key Term: Channel

conflict

p. 338

Photo: McDonald’s

p. 339

Key Term:

Conventional

distribution channel

p. 339

Figure 12.3

Comparison of

Conventional

Distribution

Channel with

Vertical Marketing

System

p. 339

Key Terms:

Vertical marketing

PPT 12-20

PPT 12-21

p. 340

PPT 12-22

PPT 12-23

p. 340

1. A corporate VMS integrates successive stages of

production and distribution under single ownership.

2. A contractual VMS consists of independent firms

at different levels of production and distribution who

join together through contracts to obtain more

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

system—for example, Ford and its network of

independent franchised dealers.

2. The manufacturer-sponsored wholesaler franchise

system—Coca-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

system—examples are found in the auto-rental

business (Avis), the fast-food service business

(McDonald’s), and the motel business (Hampton

Inn).

In an administered VMS, leadership is assumed not

through common ownership or contractual ties but through

the size and power of one or a few dominant channel

members.

system (VMS),

Corporate VMS

p. 340

Key Terms:

Contractual VMS,

Franchise

organization,

Administered VMS

p. 340

Photo: Franchising

Systems; Two Men

and a Truck

Assignments, Resources

Use Critical Thinking Exercise 12-7 here

Use Additional Projects 2 here

Use Individual Assignment 2 here

Use Outside Example 1 here

Troubleshooting Tip

Vertical marketing systems can be difficult to

understand. It might help to begin a discussion of

the contractual VMS with the illustration of

franchises. Most students understand that

McDonald’s is a franchise organization, 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 with Walmart, whose

marketplace power continually makes news.

p. 341

PPT 12-24

PPT 12-25

p. 342

PPT 12-26

PPT 12-27

p. 342

Horizontal Marketing Systems

A horizontal marketing system is a channel arrangement

that occurs when two or more companies at one level join

together to follow a new marketing opportunity.

Multichannel Distribution Systems

A multichannel distribution system occurs when a single

firm sets up two or more marketing channels to reach one or

more customer segments. (Figure 12.4)

Changing Channel Organization

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.

Review Learning Objective 2: Discuss how channel

members interact and how they organize to perform the

work of the channel.

p. 341

Key Term:

Horizontal

marketing system

p. 341

Photo: Horizontal

marketing systems;

Star Alliance

p. 341

Key Term:

Multichannel

distribution system

p. 342

Figure 12.4:

Multichannel

Distribution System

p. 342

Key Term:

Disintermediation

p. 342

Photo:

Disintermediation;

Spotify

p. 343

Photo: Netflix

Assignments, Resources

Use Small Group Assignment 1 here

Use Real Marketing 12.1 here

Use Think-Pair-Share 3 here

Use Outside Example 2 here

p. 344

PPT 12-28 Identify the major channel alternatives open to a

company.

CHANNEL DESIGN DECISIONS

Learning Objective

3

p. 345

Key Term:

p. 345

PPT 12-29

p. 345

PPT 12-30

PPT 12-31

p. 345

PPT 12-32

p. 346

PPT 12-33

PPT 12-34

Marketing channel design calls for analyzing consumer

needs, setting channel objectives, identifying major channel

alternatives, and evaluating them.

Analyzing Consumer Needs

The company must balance consumer needs not only

against the feasibility and costs of meeting these needs but

also against customer price preferences.

Setting Channel Objectives

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 company’s 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.

Identifying Major Alternatives

Types of Intermediaries

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.

Three strategies are available:

1. Intensive distribution is ideal 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 distribution is when producers purposely

limit the number of intermediaries handling their

products. The producer gives only a limited number

Marketing channel

design

p. 345

Photo: Customer

channel service

needs; Wegmans

p. 346

Key Term: Intensive

distribution

p. 347

Photo: Selective

distribution; Stihl

p. 347

Key Term:

Exclusive

distribution,

p. 347

PPT 12-35

p. 347

PPT 12-36

p. 347

PPT 12-37

of dealers the exclusive right to distribute its

products in their territories.

3. Selective distribution involves the use of more than

one, but fewer than all, of the intermediaries who are

willing to carry a company’s 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

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 they can adapt to

environmental changes.

Designing International Distribution Channels

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 customs or government regulation can greatly

restrict how a company distributes products in global

markets.

Review Learning Objective 3: Identify the major channel

Selective

distribution

p. 348

Photo: KFC

alternatives open to a company.

Assignments, Resources

Use Video Case here

Use Discussion Question 12-3 and 12-4 here

Use Critical Thinking Exercise 12-6 here

Use Additional Projects 3, 4, and 5 here

Use Think-Pair-Share 4 and 5 here