[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. The fourth, P, place distribution, so let me just run through how we're going to address place as we go through. There is really just going to be two key themes. The first theme is, how do channels of distribution develop the structure that they do? Who is doing what, who is getting the product into 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 Proctor and Gamble, I'd love it if all Walmart did was 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 oftentimes, in a channel of distribution, there is inherent conflict, so we are going to look at the structure of channels and also how channels get coordinated. So, let me begin with some interesting things about distribution or Place. We call Place sometimes the Final Frontier, or the final P. Most people do not think about distribution as a place to innovate, but I think they should, and here are some reasons why. So, distribution can really be an important source of sustainable competitive advantage. Think about the kind of advantage like Apple has developed through the fact that it owns its own stores and it owns 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 may get 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 really need to really be sure about the return that you're going to get. Now, as I said earlier, I think distribution is often overlooked, but also it's a place where there could be tremendous value unlocked in terms of new business ideas, new services, and new products coming into play. So, think about a way that you can change the nature of a distribution channel by taking a hard good and turn it again into a soft good. Let me give you an example of that. So, when money is money and only cash, there's 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 where the movie can only be watched in the theatre that's very different than being able to stream a movie onto your mobile phone. So any time there's a hard good it can be changed into a soft good through an innovation in distribution that can really change the nature of markets. Given 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 at a particular time. Now, of course, it can be taught to be 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 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 Google 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 good or service and the end user. So let's imagine we have a market with three manufacturers on the left-hand side for 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 how the distributor, or a middle person, comes into this market through a store of 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 100,000. 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 that reduces the total number of transactions that were 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 type of barrier to entry for others in that market. So now for example that Apple is a manufacturer, goes direct to it's end customers through it's on retail store makes it difficult for other salers. Of hardware and related softwares do the same thing what 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 someone intermediary to tell you what customers really like, what variety and what prices, then maybe I'm willing to do so. So by going direct, you can kind of go around or cut out the middleman The third thing that you can do is that you can sometimes bundle other goods or services more efficiently. Higher margin products. 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 manufacturers controlling that channel and going direct to the the end consumer. So what I'm showing here now is a diagram that kind of explains in 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 is 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 here is in a channel of distribution 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 court case, Quidsi.com. So how did Quidsi change or disrupt this existing channel of distribution? Well In the pre-Quincy days if I wanted to buy some detergent, I had to go to a supermarket who received that product from a manufacturer via warehouses and distributers, pick it up myself and take it home. What Quincy did is innovating on the delivery to end customers by sending that 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 our home, if they're physical goods and services. Or, perhaps send them to intermediary places like existing stores where there are lock boxes and we can then and pick them up. The same thing also applies for services, not just 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 and you can see all of the hotels in New York City. Where you can stay for one night for 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 or 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 Dalted, way back in the 1990s, he realize that there was a physical flow of computers where the manufacturers like Hewlett Packard and IBM and so on, sold in to distributors, the product eventually ended up on the shelf of computer stores. But 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 a very 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 can make it and customize and ship it directly. So I can't really stress enough that distribution is a tremendous source of advantage, of new business ideas, and also of leverage. I'll just give one more example just so you can think about this in simple terms to complement the pervious 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. 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 understanding 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 to 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 in 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 or 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 is an 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 could they educate farmers that this was a good thing to use on their herd? How could 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 right and the colons are all of the activities that need to be performed. Everything from generating awareness all the way through to monitoring the vets and the farmers, sorry, that the farmers are using the product appropriately. On the column, sorry on the rows we see all of the entities or individuals who are responsible for various activities and where I've 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 is going to get the compensation or the 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 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 personal entity that's best at doing and also the personal 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]
