Can someone do my Week 1 & Week 2 Discussion in Principles of Marketing?

4 The Marketing Mix: Place People working in a warehouse distribution center. simonkr/E+/Getty Learning Outcomes After reading this chapter, you should be able to Recognize the goal of place strategy in terms of the customer value equation. Describe the strategic issues facing retailers that affect place strategy. List three challenges for marketers in developing a distribution channel strategy. Recall two concerns of manufacturers affected by place strategy. Summarize the challenges facing marketers who pursue global place strategies. Discuss five strategies for entering global markets. Introduction The topic of how goods and services reach customers makes up one of the four Ps of marketing management, the "marketing mix" of product, place, price, and promotion. This chapter covers the issues related to place, including physical logistics and distribution channel strategy. Although place is a nice mnemonic, this P has evolved considerably since the four Ps structure was first introduced in the 1960s. Today any organization’s success depends not just on its own performance but on that of a complex web of business partners that make up the company’s supply chain, each delivering value that (hopefully) improves the performance of the entire system. When we say "place strategy," we’re really talking about a set of mutually supporting organizations, each with a part to play in making goods or services available to an end user—a consumer or business. Distribution issues are central to the place concept. 4.1 Why Place Matters Place strategy answers the question "How do I get what I sell to people who will buy it?" Marketers must concern themselves with place issues to make strategic decisions. Place strategy is also important to marketers because the promises made in advertising and promotions must be supported. If advertising claims that "you’ll receive your order in 48 hours," a system must be in place that can get the order to the customer in 48 hours. That system is part of the firm’s place strategy in its marketing mix. Today goods originate in locations all around the world, travel through distribution channels that may be physical or virtual, and arrive where customers can take possession of them physically or virtually. Place strategy has evolved from a simple matter of "where shall we put the business?" to an interdependent system that involves trade-offs between cost-efficiency and customer satisfaction. In a simpler time, when goods originated, were purchased, and were consumed or used within the same community, the place element of the marketing mix really was mostly a location question. A grain mill on Main Street America circa 1900 occupied a location close to farmers, their crops, and a stream. This put the business in a location close to its customers, the raw materials of production, and a power supply. The mill opened its doors, and farmers rolled up with their horse-drawn wagons full of grain. The mill owner applied a specific industrial process to it (grinding between millstones), and down the chute came flour. The farmer paid for the service and drove off with sacks of flour to use or sell. In this scenario, the mill business delivered customer value through a simple specialized service, available at a time and place convenient to customers. In the 21st century, place still matters, but our access to more distribution options has allowed that concept to expand. Farmers still produce grain, but their raw materials are shipped greater distances for processing, made into more different products for a wider array of uses, and transported to customers using rail, river barge, and roadways. Interdependent systems characterize place issues and always have. As you have learned in earlier chapters, marketing involves developing an offering and pricing it in such a way that its value attracts customers and makes a profit for the company. When customers perceive a suitable balance between the price and the goods or services they receive, they consider the purchase a good value. That balance is what we have termed the customer value equation (see Chapter 1). Place strategy is one of the ways a company delivers value to customers. Most firms cannot create and deliver that value all by themselves. Instead, they must work closely with other firms to create a system that delivers the value. With minimal monthly fees, Amazon Prime members have free delivery on over 100 million items (Business Wire, 2018). That collaboration is what gets goods and services into the hands of those customers who deem them a good value. Getting the partners in place to make that sale—profitably—is why place matters. The Changing Language of Place Definitions of place as part of the marketing mix often start with the proposition that the company must "get the right goods in the right quantity to the right place for the lowest possible cost without sacrificing customer service" (White, 2003, p. 36). This definition includes aspects of product and price, revealing the interdependence of the four elements of the marketing mix. Place is integrally connected with the other marketing mix decisions; it cannot be considered in isolation. Place is a fundamental component of marketing strategy, but that term has fallen out of favor among marketers. Replacing it is the word distribution and a suite of related concepts, including the following. Logistics: Strategies for physical distribution of raw materials or products. Channel partners: The organizations involved in making a product or service available to end users. Distribution channel: The relationships through which channel partners add value in a river-like flow that delivers goods and services from their source (raw materials) downstream toward their end users. The AMA defines a distribution channel as "an organized network (system) of agencies and institutions which, in combination, perform all the functions required to link producers with end customers to accomplish the marketing task" (American Marketing Association, 2017). The distribution channel (also referred to as a marketing channel) covers "the who and the how" of getting value from producers to consumers. The various channel partners—manufacturers, intermediaries, and retailers—are the "organized network of agencies and institutions" that the AMA definition refers to. Many marketers refer to this group of businesses as a supply chain. An effective supply chain integrates marketing, sourcing, logistics, operations, and customer service. An entire field of specialization exists around supply chain management. This chapter is organized to emphasize the centrality of customers in place strategy. Thus, we will begin with the various ways offerings meet potential buyers, and then follow the distribution channel upstream to where the goods originate. In the language of place strategy from the customer’s perspective, every supply chain is also a demand chain. A person needs a solution to a problem, which creates demand for retailers, which in turn creates demand for suppliers, and so on up the channel toward raw materials. In Chapter 1 the example of Betty needing to repair a broken chair was used to illustrate how people seek solutions to problems. Betty had a need for a 3/8-inch drill bit because she needed a 3/8-inch hole in order to insert a dowel that would repair the chair. Betty sought out a retailer of drill bits—her local hardware store—and thus initiated a demand chain. The retailer has assembled an array of related products to solve problems like Betty’s, perhaps through several channel partners. Up the channel from the hardware store are merchandise distributors responding to the demand of their customers, hardware store buyers. And up the channel from distributors are the manufacturers, located all over the world, responding to demand by making all kinds of drills and bits. Upstream from manufacturers are the providers of raw materials, component parts, manufacturing equipment, and business support services, just so that manufacturers can make those drills and bits. Looking at distribution strategy from the demand perspective, we see that all decisions are guided by the service-dominant logic that says all offerings derive their value from the service they give to their end users. End users (customers) require a specific service utility, which drives product development and distribution to fill that demand, creating a demand-driven supply chain populated with intermediaries focused on meeting customers’ requirements. Logistics Logistics concerns the physical flow of products from the point of origin to the point of consumption. Physical distribution strategy (logistics) involves how many and what types of storage and transportation resources are needed and where the storage should be located. Although advances in Internet technology have made possible exchange of information around the globe—in many cases instantaneously—most companies still face physical distribution challenges to get products to their customers at the right time, in the right place, in the right assortment. Three types of businesses come together to create physical distribution channels: manufacturers, who take delivery of raw materials and other purchases to make products; distributors, who provide storage and transportation functions, among other services; and retailers, who sell to consumers for personal, usually nonbusiness use. A retailer may choose a store or a nonstore strategy such as in-home sales, direct sales, or online retailing. For a musical tour of the topic of logistics, follow the link in Field Trip 4.1 to a popular UPS television commercial that aired in 2010. Field Trip 4.1: Logistics "Logistics makes the world work better," begins this commercial created by UPS in 2010. Follow this link to view the TV spot. https://www.youtube.com/watch?v=VCh6HnXHKRc Strategies concerning logistics have two main goals: to maximize customer service and to minimize distribution cost. If, for example, Sandra is looking for a new refrigerator or an artist-made carrying case for her iPhone, she’ll create a demand to balance customer service with cost-efficiency in the companies she buys from. As a customer, she might want Sears to bring her new refrigerator now, before everything in her failed fridge spoils. However, a significant rush charge might convince her to accept some spoilage in return for free delivery on Sears’s schedule. As the iPhone-toting customer of an artist on Etsy, she might want her new bead-embroidered case as fast as a musical download. But when she finds that her artist has orders backed up and won’t be able to create and ship her customized case until next month, she has a decision to make. If she likes the artist’s work well enough, she’ll wait—and if she’s really impatient, she may even be willing to pay a rush fee to bump her order to the head of the line. Consider the same purchases from the sellers’ side instead of the buyers’. Sears handles the logistics of refrigerator distribution through grouping orders headed to the same side of town, charging a fee to customers unwilling to accommodate their cost-efficient strategy. The Etsy artist has chosen hand production over mechanization, accepting that the logistics of balancing supply and demand may occasionally cause an order backlog. Holiday Shopping: Grocery Logistics Grocery stores prepare for increased demands for specific foodstuffs during the Christmas holidays. Describe this holiday food rush from the perspective of a demand chain. What impact might online grocery retailers, which allow shoppers order online and receive doorstep delivery, have on the grocery logistics profiled in this video? Consumers are seldom aware of all the aspects of logistics affecting the availability of goods at the right time, in the right place. Similarly, many companies are less aware than they should be of the aspects of the customer value equation affected by logistics factors—willingness to pay more for overnight shipping or to switch brands to avoid out-of-stock delays, for example. Successful firms evaluate all logistics with customers’ perspectives as well as internal operational goals in mind. Walmart’s response to Amazon’s purchase of Whole Foods Market in 2017 provides an example. Walmart introduced curbside grocery pickup in some markets, a logistics strategy designed to give it an edge against Amazon’s conquest of the grocery business. Walmart customers select their groceries on its website, then choose a 1-hour window when they want to pick up their order. Walmart employees shop the store, assembling bags of items for customers who never have to leave their cars. But industry observers see a risk in Walmart’s new logistics strategy: The company has used low grocery pricing to bring customers into the stores, where it can promote higher priced items. If the customers don’t go into the stores, that advantage could be lost (Corkery, 2017). Walmart could address that concern by moving the pickup location inside the store—but the further customers have to walk, the less value Walmart’s logistics strategy offers them. Trade-offs like this one are common in developing a logistics strategy. Adding Value Through Logistics The logistics strategy a company chooses can enhance its customer value equation. Consider two potential strategies: hub-and-spoke (used by FedEx) and distributed manufacturing (used by the New York Times). FedEx created considerable value when it pioneered overnight delivery—a promise the company could meet consistently, due to its development of a hub-and-spoke logistics strategy in the 1970s. Even packages destined for relatively close cities, such as Boston and New York, travel first to the FedEx hub in Memphis. While this might seem inefficient, in fact the airplane headed from Boston to Memphis carries packages for many destinations, and the plane heading from Memphis to New York carries packages from many points of origin. Use of a hub-and-spoke logistics strategy gives FedEx a competitive edge in package delivery. Follow the link in Field Trip 4.2 to view a time-lapse representation of the movements of FedEx’s fleet over 24 hours. Field Trip 4.2: FedEx Hub-and-Spoke Logistics Strategy The use of Memphis as a central hub is clearly demonstrated by this time-lapse video showing one 24-hour period. https://www.youtube.com/watch?v=hrL5IeE5rgM The New York Times uses a distributed manufacturing logistics strategy to get printed copies of its paper across the nation every morning. A resident of Chicago receives a paper that was printed in a Chicago plant, from files shipped electronically when the day’s edition closed in New York. The newspapers travel the last leg of their journey by truck to distribution points where delivery drivers collect and bag them, soon to fling them at doorsteps in a several-hundred-mile radius of the printing plant. Use of a distributed logistics strategy allows the New York Times to compete with local papers across the United States. A new technology for mass customization has created another way to add value through logistics: additive manufacturing, also known as 3-D printing. In this process, three-dimensional solid objects are produced from a digital file. A mechanical device lays down successive layers of material until the object coded in the digital file is completed. The range of materials that can be printed includes a wide array of metals and polymers (3Dprinting.com, 2018). Additive manufacturing is used to make parts closer to where they will be needed, thus reducing shipping logistics. Generating parts on-demand when and where they are needed also replaces the need for physical inventory "Look for cloud-based ‘virtual inventory’ to be 3D printing’s first killer app for the supply chain," writes Rick Smith (2016, para. 6). Companies are also looking to other emerging technologies, like drones and driverless cars, to conquer "the last mile"—the logistics of the final leg from a delivery hub to the end user. Today this task falls most frequently to commercial delivery services and the U.S. Post Office. The rise of e-commerce has increased consumer demand for delivery of physical goods at speeds rivaling that of digital downloads (Joerss, Neuhaus, & Schröder, 2016). All this means that Walmart’s curbside pickup may have to compete with drone grocery deliveries in the future. While use of 3-D printing technology is growing, and autonomous vehicles may soon provide "last mile" delivery, goods are still rarely needed at precisely the moment they’re manufactured and in precisely the location where they are made. Companies develop place strategies to manage how items will be stored and transported to achieve a balance of supply and demand. Marketers get involved (consulting with operations managers and other key decision makers) to ensure the balance of cost and customer service delivers an acceptable customer value equation. Reverse Logistics Physical distribution is not a one-way street. Logistics must accommodate flows in both directions. On the surface, a distribution channel flows only one direction, from producers toward end users, but that is not always the case. Not only do goods have to reach customers; sometimes they have to move from the customer to the manufacturer or from the customer to the provider for processing or repair. For example, sometimes distributors, retailers, or customers need to return broken, unwanted, or excess products to the manufacturer. In some cases, companies accept discarded products for recycling as a customer service. A logistics strategy is not complete until there is a plan in place accommodating the flow of goods in both directions. The return trip, or reverse logistics—defined as all activity associated with a product or service after the point of sale—seeks to optimize postsale activity to save money and environmental resources. Many retailers treat merchandise returns as individual transactions with few implications for operating efficiency or marketing impact. Companies that can shorten the link from return to the time of resale, by following best practices in returns management, can achieve gains in both operations and customer retention. The fundamental goal of place strategy is to add value without increasing the price customers must pay. Finding a distribution strategy that reduces cost or adds to customer service is one way to achieve that goal. Questions to Consider UPS claimed that "logistics makes the world work better" in its 2010 commercial (see Field Trip 4.1). UPS identifies logistics as a relevant business idea to firms of every size; all must get their products from here to there. UPS is hoping companies will make its services part of their distribution channel. However, the examples of FedEx and the New York Times show that logistics can be accomplished without outsourcing to channel partners like UPS. Describe how owning versus buying physical distribution affects the aims of physical distribution strategy: greater customer service and/or reduced distribution cost. 4.2 Retail: Where Customers Meet Sellers Retailing has been with us since peddlers roved among our ancestors, hawking their wares. Today retailing takes highly diverse forms, including bricks-and-mortar stores, ranging from specialty shops to discount houses, and nonstore retailers selling online, in homes, and through various forms of direct marketing. What all retailers have in common—what makes them retailers by definition—is that these businesses sell their wares directly to the consumer. Retailing can be extremely competitive. Wise strategic marketing mix decisions are essential to survival. All retailers, regardless of their sales approach, face three strategic issues that affect place strategy. market niche location merchandise assortment Location is the essence of place strategy for bricks-and-mortar retailers, sitting as they do at the mouth of the distribution channel where the goods pour out. But the market niche a retailer targets influences what makes a good location. The distribution channels’ ability to deliver the merchandise assortment the market niche wants influences location as well. These interdependent strategic issues of niche, location, and merchandise assortment are driven by the precise nature of the retail business—that is, how the business delivers value to customers. Market Niche as Part of Place Strategy Businesses choose to target a market niche to avoid trying to be all things to all people, a strategy too costly to maintain because of its lack of focus or a compelling value proposition. A useful way of categorizing the world of retailing is to assess the amount of service a retailer provides in support of the sale. As shown in Figure 4.1, retailers fall somewhere on the axes of cost and service. As service increases, costs almost always go up; few businesses can manage to offer both low cost and high service. Likewise, few businesses operate with low service and high cost; it’s too hard to deliver customer value in that equation. Figure 4.1: Retail characteristics Retailers fill a market niche somewhere on a continuum from low cost/low service to high cost/high service. There are not a lot of outliers exhibiting low cost/high service or low service/high cost characteristics. A graph of businesses that provide low or high services and low or high cost. Other ways of classifying retailers include consumer purchasing behavior (convenience, shopping, specialty, or unsought); organizational format (for example, wholly owned or franchised); merchandise line(s) carried by the store (for example, specialty stores versus general-line stores); capital requirements in terms of displaying merchandise (stores selling perishables have equipment requirements not found in other retail settings); and human resource requirements in terms of expertise (for example, the staff of an automobile dealer needs knowledge about financing, registering, and licensing issues not relevant in other retail industries). Systems of classification like these are important to retail marketers because different kinds of retailing require different marketing strategies. Decisions about market niche, location, and merchandise assortment, as well as branding and advertising promises, will all be based on the class in which a retailer fits. Each type of retail business will have specific requirements for its location, which brings us to the next strategic issue. Retail Location as Part of Place Strategy The location a retailer chooses can make or break a business. The cost of a good retail location will be one of the business’s highest expenses. A wholesaler or distributor can save money by locating where rents are cheap, but a retailer typically cannot. Bricks-and-mortar retailers require a location close to a sufficiently dense population center to provide a steady stream of customers. But not just any population will do. The demographics of the people around the location must present a good fit between the retailer and the chosen market niche. Traffic patterns in the area are a concern; something as basic as a difficult left turn can spoil a retail location. Time of day matters: A breakfast restaurant will want to locate on the right-hand side of the road that most people take to work. The physical building a retailer occupies becomes part of its brand image. A location in a shopping mall projects one kind of image. Locations on urban Main Streets or in revitalized warehouse districts present different images. A location decision is not just about where the store should be, but what types of retail activity are going on nearby. For decades, shopping malls have promoted the advantage of strong central management, combined marketing muscle, and typically a major retailer that attracts high traffic—a benefit to smaller stores in the mall. A few retailers function as destinations in themselves, like Bass Pro and IKEA, by featuring tremendous breadth in the product assortment available, as well as restaurants and attractions that encourage shoppers to spend more time there. Downtowns, once the center of American retailing, offer some of the same advantages of a mall location if businesses cooperate on issues like parking and store hours. Old industrial areas often find new life when creative people repurpose them for artists’ studios, dance clubs, and the like, chiefly because of inexpensive rents. Each type of location—mall, downtown, or industrial district—conveys a specific impression, a branding decision that must be part of marketers’ location strategy. A final factor of retail location, in addition to market demographics, traffic patterns, complementary businesses, and brand image, is what goes on inside the store. Layout of the facility, from the display windows to the traffic flow to the way merchandise is displayed, must support the company’s positioning and facilitate sales. The appearance of "trend zones" in CVS stores—areas where "better for you" snack and beverage items are displayed together—reflects the company’s push for healthier food products since 2016. Within the trend zone, items are grouped by diet types, including vegan and organic. This reconfiguration is designed to respond to consumers’ interest in both convenience and health (Foland, 2017). Because all these bricks-and-mortar location factors affect businesses’ ability to sell their wares to consumers, they are of concern to marketers and must be considered as part of the place strategy. The Brownstone Woman (http://www.thebrownstonewoman.com/) is a bricks-and-clicks business—owner Princess Jenkins retails both online and in a store in Harlem, New York. Jenkins has built a local shopping destination with a national following by focusing on elegant women’s wear for an older customer base (40–75 years old, sizes 12–20). Jenkins’s choice to locate in Harlem reflects her inspiration to create a boutique of ethnically inspired fashions. "I lived in Harlem many years but there were no places I could shop. I realized that Harlem would be an incredible place to start a retail business," said Jenkins (personal communication, January 5, 2011). Her boutique is situated on a typical urban Main Street block in one of Harlem’s dense retail neighborhoods. The narrow storefront provides adequate but not abundant display space. Inside, Jenkins has created an upscale environment for display of clothing, accessories, cosmetics, and gifts. Outside, a courtyard garden provides space for customer events and fashion shows. Jenkins could choose to pay a higher rent and locate in a larger space or among more upscale, complementary stores. Jenkins has chosen instead a location that meets her strategic need to balance providing an appealing customer experience with control of cost. Jenkins also conducts business through an online store and a printed catalog that she mails twice a year. "It’s been a great vehicle for us" (personal communication, January 5, 2011) Jenkins said, but she expressed surprise that people often mention viewing her products in the catalog or online when they come into the store to purchase. Like the Brownstone Woman, many retailers now blend a bricks-and-mortar strategy with an online strategy. For retailers, an online "location" functions like a storefront. Whether online or in a physical location, the retail "place" must attract traffic from the right demographic groups, project a consistent and appealing brand image, and be laid out in a way that makes it easy for shoppers to find what they’re looking for and talk themselves into buying. Retail Merchandise Assortment as Part of Place Strategy Selection of the retail merchandise assortment is where the P of place connects to the marketing mix P of product, discussed in Chapter 3. Retailers decide which items (individual products) and lines (closely related products) will become part of the merchandise assortment in their stores or on their websites. If a business carries too much inventory at any one time, it has paid for more than it needs, raising operating costs. This is bad for the bottom line, but good for business—customer satisfaction is the result when people find what they’re looking for in stock. If a business cuts back on inventory, it enjoys lower costs but runs the risk of disappointed customers who find products unavailable. Balancing supply and demand is an important aspect of a retailer’s merchandise strategy. Retailers must also manage shelf space allotment to maximize sales, juggling the number of facings (how many items are visible at one time) as well as vertical and horizontal placement on the shelves. In some industries (primarily groceries and chain stores), manufacturers pay slotting fees for placement of their product in a specific location on retailers’ shelves (for example, at eye level). The fees vary greatly, depending on the placement requested, market conditions, product, and manufacturer. Another part of that merchandise strategy relates to the company’s brand image, a component of its promotion strategy (which illustrates the interdependent nature of the four Ps). The use of private label products can attract consumers’ attention and stimulate demand. Retailers who contract with manufacturers to offer their own private label product line gain an edge in differentiating their products from competitors’ products by extending consumers’ good feelings about the store’s brand to the products on its shelves. Trader Joe’s specialty grocery chain has made a core marketing strategy out of producing private label products—such as the Candy Cane Joe Joe’s discussed in Chapter 3—contracting for a large assortment of products that it can purchase cost-effectively and thus sell for much lower prices than comparable name brands. Private label products have helped Trader Joe’s differentiate itself from other grocers in a similar price bracket (Sustainable Industries, 2010). What’s on the shelves, and where, is as integral to place strategy as the location of the store itself. Field Trip 4.3: Retailers’ Strategic Issues Call to mind a retail store where you’ve shopped recently. Visit its website; look for evidence of its market niche, location, and merchandise assortment strategies. If your own recent experience fails to produce a store to visit, go to the website of Trader Joe’s. http://www.traderjoes.com Lowe’s store. RiverNorthPhotography/iStock/Getty When specialty superstores like Lowe’s enter a market, smaller stores find it hard to compete with the giants’ inventory depth, breadth, and pricing. Retail Challenges and Opportunities Retail is a challenging business model. Specialty superstores, nonstore alternatives, and intermediaries increasingly compete with traditional retailers. Specialty superstores like Best Buy and AutoZone, offering a vast inventory of a specialized product assortment, first challenged traditional retailers in the late 20th century with a "buy it cheap and stack it deep" strategy that traditional retailers found hard to compete with. When home center chains like Lowe’s and Home Depot entered a market, smaller hardware stores found it difficult to compete on price (Sinderman, 1997). Then came the nonstore alternatives, competing with almost every product category found on bricks-and-mortar store shelves, disrupting the disruptor superstores. The bookselling industry experienced a drastic reorganization from nonstore competition in the early 2000s as the online retailer Amazon (which opened for business in 1995) drew sales away from bricks-and-mortar retailers. Independently owned bookstores were the first to feel the pain. A decade later, even the large chain booksellers were forced to find new ways to compete or face closure. But Amazon was still growing. In 1998 it expanded into CDs and DVDs; in 1999 into toys and electronics; and in 2000 it launched Amazon Marketplace, its third-party seller service, and whole consumer categories suddenly felt the earth shift (Quinn, 2015). In 2017 Amazon purchased upscale grocery chain Whole Foods Market, transforming itself into a hybrid business model with physical locations in hundreds of communities across the United States (Wingfield & de la Merced, 2017). Wholesalers and distributors represent other nonstore alternatives that compete with retailers in the bricks-and-mortar world. When these companies sell direct to consumers, online or through mail order, retailers who had previously counted on performing that role are cut out of the picture. One way traditional retailers have responded to these challenges is through increasing use of technology. The right technology can give a retailer a competitive advantage, through better sales forecasts, inventory control, staffing, and improved communication with customers. An example? Retailers are now offering promotional discounts to customers in or near their stores through coupons sent to shoppers’ smartphones. For the "mom and pop shops" that were once the mainstay of American retailing, emphasizing their small size and personal touch has become a means of competitive differentiation. Many consumers still value face-to-face transactions and trust businesses with local roots for better support after the sale than impersonal megaretailers or nonstore alternatives. Many small retailers target a specialty niche to fill a customer need, as the Brownstone Woman boutique has done. By emphasizing trustworthiness, specialization, and the personal touch, bricks-and-mortar retailers can turn consumers’ longing for meaningful dialogue and engagement (Marketing 3.0) into a competitive advantage. While these would seem puny weapons with which to fight the Goliaths, the death of retail has not yet been declared. The companies hurt worst have been those with no meaningful competitive differentiation, such as chain apparel stores. Retail spending overall has been growing, which in 2017 the National Retail Federation attributed to continued stock market strength and low unemployment (Wahba, 2017). The companies that have evolved with their customers are faring better, such as Best Buy, which has reinvented itself as a provider of expert advice and redesigned its retail floor to feature branded in-store kiosks offering Apple, Microsoft, and even Amazon consumer electronics, in a strategy borrowed from department stores (Roose, 2017). To succeed, retailers must constantly search for superior marketing mix strategies, tinkering with decisions about each of the four Ps—product, place, price, and promotion. Absolutely key is maintaining a marketing orientation, with customers at the center of all marketing mix decisions. "The way consumers spend has changed, perhaps irrevocably. And for stores that can’t adapt, there’s likely to be more pain ahead," writes Forbes’s Phil Wahba (2017). Other Retail Models Some retailers generate sales without any kind of physical place for consumers to visit. In direct marketing, sellers bypass intermediaries (wholesale and retailers) to sell directly to end users. QVC, the direct marketer known for its television programs as well as its extensive online store, is one example. The factor that differentiates direct marketers from other types of retailers is the absence of face-to-face interaction in the buying exchange. Customers of direct marketers shop through an impersonal medium, such as television, catalog, or website, and complete their purchase transactions without interacting with salespeople. Direct marketers face some of the same place issues that bricks-and-mortar retailers do—they must still choose a market niche, a location for their business headquarters and distribution centers, and a merchandise assortment—but these issues take on a different dimension. Direct marketers don’t depend on specific geographic area(s) to provide sufficient customers in their market niche. They can locate the business anywhere that’s practical in terms of the logistics of receiving and delivering goods. Their merchandise assortment can be as small as one item or as broad as Amazon’s. Many direct marketing companies combine the functions of the entire distribution channel into one business without the use of any intermediaries. Others choose to emphasize the distributors’ role of breaking bulk and assembling lots, buying from many manufacturers to offer a broad merchandise assortment. Consider Harry & David, the mail-order company whose roots go back to its Oregon fruit orchards. The company has shifted over time from the no-intermediaries model, selling only the fruit it grew, to a broad line that includes chocolates, wine, baked goods, and giftware coming from many sources. Direct marketers’ success depends on their ability to generate sales through impersonal media. They do so by focusing on strategic marketing mix decisions around the P of promotions. In fact, the term direct marketing carries a second meaning—it is a promotional technique that seeks direct action from recipients, with a focus on measurable results. A close cousin to direct marketing is multilevel marketing, also called network marketing or referral marketing. Home-sales businesses such as Tupperware, Avon, or Creative Memories are examples of multilevel marketers that sell through independent agents who contact potential buyers personally. These nonsalaried agents earn money through sales of their company’s products and through recruiting other individuals and helping them get started selling the product line. Agents receive a portion of the income their recruits generate. Because of the tight relationship between sales agent and parent company, multilevel marketing has more in common with direct marketing than with physical or online retail establishments. Multilevel marketers and direct marketers get their goods from manufacturer to end user with few to no intermediaries and no retail location. The type of business model a retailer chooses—physical or online stores, direct marketing, or multilevel marketing—matters to marketers. As mentioned earlier, most marketing mix decisions reflect the classification into which a retailer fits. In conclusion, fundamental to all retail place decisions is the customer’s perspective, specifically the customer segment targeted as part of marketing strategy. (Market segmentation and targeting are discussed in depth in Chapter 7.) The three strategic issues for retailers—market niche, location, and merchandise assortment—must be addressed with target customers’ needs foremost in mind. Classifying retail businesses by market niche and other attributes helps sellers select appropriate marketing strategies. Bricks-and-mortar stores must make physical location decisions, balancing cost and other factors against customers’ perceptions of the fit of location to brand image. All retailers, regardless of whether they are location based, a nonstore alternative, or a hybrid, must decide what items to make part of their product assortment and how they will be displayed to customers. Retail trends include the increasing blend of physical stores and nonstore alternatives, and the use of technology to create an omnichannel user experience, which offer seamless shopping no matter whether the consumer is considering a purchase online or in a store. But perhaps the most interesting retail experiment underway is a return to the century-old idea of the showroom, where shopping is done in person and the purchase transaction is completed in the store, but the purchase is delivered later. Showrooms combine a face-to-face experience (humanity-centric Marketing 3.0) with the economic advantage of efficiency in supply chains and logistics. Furniture and home goods stores were among the first to use a showroom approach. Joining them are sellers of branded fashion apparel and electronic devices—goods that are highly differentiated and/or are new to the consumer and thus benefit from in-person sales support (Hodson, Perrigo, & Hardman, 2017). This twist on the place strategy imperative to "get the right goods in the right quantity to the right place for the lowest possible cost without sacrificing customer service" (White, 2003, p. 38) shows promise for retailers with sufficiently differentiated goods. Questions to Consider Men’s clothing retailer Bonobos has adopted a showroom approach with its Guideshops. Visit the company’s website and then read an industry article about that development. Describe ways in which a clothing store you like could adopt a showroom strategy. https://bonobos.com/guideshop Bonobos is opening retail stores—but you can’t actually take any of the clothes home. http://www.businessinsider.com/bonobos-opened-a-store-where-you-cant-physically-buy-anything-2015-7 4.3 Intermediaries: The Distribution Channel You learned earlier about the storage and transportation functions distributors provide—their contribution to the logistics strategy of other companies. It’s time to learn about the other services that businesses in the distribution channel provide. Between retailer and manufacturer are intermediaries that help their customers—businesses up and down the distribution channel—bring value to the final consumer. As we discussed earlier, intermediaries working together in a distribution channel constitute a supply chain—a network of interdependent entities linked by their roles in serving the same customers. In that chain are vendors who supply raw materials, producers who convert materials into products, storage centers that warehouse and transport products to retailers, and retailers who display and sell products to end users. Manufacturers choose the type of intermediaries they need depending on their channel strategy. Other ways of looking at the supply chain include the concept of the distribution channel, with its emphasis on the flow of goods and services from source to consumer and the flow of payments from consumer to source, and the value chain, focusing on value-adding activities that convert inputs into outputs, contribute to an organization’s bottom line, and help create competitive advantage. A value chain, supply chain, or distribution channel—the term used depends on which aspect of the function is the focus of attention—typically consists of a logistics system to source and deliver inputs, a manufacturing operation, outbound distribution, retail marketing and selling, and finally, after-sales service, including reverse logistics for merchandise returns. Many businesses use more than one distribution channel because their products or services are used in different ways by different niches of buyers. For example, Kellogg’s breakfast cereals are packaged in boxes ranging from 12 ounces to 36 ounces for grocery store distribution, and in single-serving 0.75-ounce bowls for cafeteria feeding operations. (http://www.kelloggs.com). One supply chain carries raw materials from the farm field through the flake manufacturing process, but at the packaging plant it splits. Two different flows carry the packaged flakes through different distribution channels to their end users. Procter & Gamble’s Head and Shoulders shampoo on a store shelf. Associated Press Wholesalers provide the service of breaking bulk and assembling smaller lots because manufacturers make a few products in large quantities, but consumers buy many products in small quantities. Breaking Bulk, Assembling Lots, and More Intermediaries provide a solution to retailers who need goods available in the right quantity, at the right time, and in the right place, to serve their customers. In terms of the four utilities of customer value discussed in Chapter 1, intermediaries add value by delivering ease of possession. To serve retailers, they break bulk, assemble lots, provide financing, and/or assume risks of spoilage, storage, and uncertain demand. Manufacturers typically make limited assortments of products in large numbers (e.g., Procter & Gamble factory making shampoos). But consumers demand broad assortments of products and brands, each in small quantities (e.g., groceries). This creates the need for wholesalers to buy in bulk from manufacturers and sell in smaller assortments to retailers or industrial buyers, thus providing the service of managing supply to meet demand. Additional functions of various intermediaries (channel partners) include the following. Consulting: Providing services, including sales forecasts, market research, industry information, and advice. Marketing: Communicating persuasive messages to generate demand for items. Promoting: Using sales incentives, special pricing, and other techniques to stimulate greater demand. Logistics: Shipping and transport, warehousing, and inventory control. Materials handling: Packaging items for safe transport. Order processing: Creating systems to track the order by generating a pick list, packing slip, and invoice. Financing: Using funds to cover the costs of intermediary functions. Risk taking: Assuming the risk of intermediary functions (e.g., a fire in the warehouse). Support: Providing support when products are complex. A channel strategy may include a mix of these functions, depending on the demands of different product lines. For example, a medical device manufacturer may sell its weight-loss products through a wholesaler to retail pharmacies but sell its physical therapy products through sales agents who can provide more support and training than a retail channel partner could. Intermediaries in the distribution channel create flows of information, of marketing messages, and of goods. There may also be multiple changes of ownership, with an accompanying flow of transaction records—orders, invoices, account statements, and payments. All these intermediary functions are necessary. Wholesale distributors make their income on the difference between the price of goods purchased and the price of goods sold. Sales agents make their income from the percentage points of a sales commission. Distributors’ customers pressure them to carry a full line, stocked deep enough to support immediate delivery when an order comes in. But purchasing inventory in advance of demand is expensive. Distributors’ customers also exert considerable pressure to keep prices low, affecting their price strategy. Distributors can look to other marketing mix factors like place and promotion strategies to break the deadlock between customers’ pressures to carry deep product inventory but keep prices low. Distribution Channel Strategy and Competitive Advantage All businesses—retailers, intermediaries, and manufacturers—must commit to some form of distribution channel strategy. They either need the services distributors offer or they choose to provide those services as intermediary channel partners. Because relationships in the distribution channel tend to be long-term, each company’s choice of channel partners will be a crucial factor in overall business strategy. In this way, too, place strategy has a significant impact on other aspects of the marketing mix. One strategic response is to organize a vertical market system—a coordinated distribution channel in which channel partners commit to working together. A vertical market system can achieve greater efficiency and economies of scale and eliminate conflict arising from competing business objectives among the partners. Three common types of vertical market systems are administered: the size and influence of a dominant firm leads to coordination in the distribution channel, without a formal agreement or ownership; contractual: independent channel partners formally agree to integrate their resources, as in the franchise business model; and corporate: a manufacturing firm owns and controls a retail chain (forward integration), or a retail chain owns a manufacturer firm (backward integration). The number of channel partners in a company’s distribution system affects cost and complexity of operations. So why would a business develop a channel strategy that involves many partners? To broaden its reach, serve more customers, and thus make more sales. However, increasing the number of businesses involved in the distribution channel creates more difficulty in controlling those businesses. The flow of information, promotional messages, goods, and transaction records becomes more complex. A fumble in any part of the flow can directly affect customer service. Also, as the number of relationships multiply, it becomes harder to keep prices low, since each strives to operate at a profit. Increasing complexity in the distribution channel makes both management and cost containment more challenging. These risks argue against complex distribution channel strategies. There will always be a need to make trade-offs between the mutually exclusive goals of customer service and cost containment. This is fundamental for marketers, since how the distribution channel functions affects a company’s ability to compete. Consider the example of Luke’s Lobster restaurants. Luke Holden opened the first Luke’s Lobster in New York’s East Village in 2009, a Maine-style lobster shack that competes with a value proposition of serving sustainably sourced seafood and a strategy of vertical integration to make sure it could keep that promise by controlling its supply chain. By 2016 the business operated 19 Luke’s Lobster restaurants and two food trucks and had expanded globally with five lobster shacks in Japan. The firm first bought into a co-op of Maine fishers, which made it possible to trace every pound of seafood to the harbor where it was caught and allowed greater control over quality and pricing. Then Holden purchased a seafood processing plant that is the main supplier for the restaurants, completing a vertical market system that reaches from ocean to table (Morrissey, 2016). Figure 4.2 demonstrates the dynamic relationship of distribution channel characteristics. The ideal (great value at low cost) can be difficult to achieve. Luke’s Lobster is an example of a business that has achieved delivering great value (with its superior product) while controlling costs via its corporate vertical market system. Figure 4.2: Distribution channel characteristics The relationship between number of channel partners and cost of operations is directly proportional, making it difficult to keep customer service high and prices low as the distribution channel becomes more complex. Graph that shows the direct relationship between cost and distribution channel. Every business strives to find a way to use its distribution strategy to add value. The company that succeeds in doing so will find itself able to compete on more than just price. Taking the idea of the vertical market system to its logical extreme leads to the direct channel system, in which a company distributes directly to the final customer or end user without the help of outside intermediaries. This is similar to the direct marketing retail model discussed earlier but with a distinct difference. Direct marketing is defined by its sales approach—the lack of personal interaction between seller and buyers. The direct channel system is defined by its business model, in which each intermediary in the supply chain is owned by the parent company. (If a company owned all intermediaries AND sold through impersonal media, it would be a direct marketer using the direct channel system.) This approach allows greater control, as the example of Luke’s Lobster shows, and may deliver cost savings through efficiency and the elimination of intermediaries’ markups. Advantages of the direct channel system include control of the marketing mix decisions and closer contact with customers. This strategy is particularly useful if suitable supply chain partners are not available, as can be the case with the introduction of a new product, where distributors may simply decline to take a chance on unproven customer demand. However, the company choosing a direct channel system must assume responsibility for producing the value added by supply chain partners (such as breaking bulk, assembling lots, and assuming risk, as discussed earlier). Where that is not feasible, using intermediaries is the better strategy. Tracking Technology As the UPS "Logistics" commercial in Field Trip 4.1 emphasizes, tracking technology has become an integral part of physical distribution strategies and a potential source of competitive advantage. The UPC (Universal Product Code) bar code, developed by a grocery industry committee in 1973 bent on automating inventory control to cut labor costs, standardized the representation of consumer product information (Fox, 2011). Use of bar codes achieved the goal of cutting labor costs by reducing the time and effort needed to input tracking data manually. It also improved data accuracy. The technology soon spread to almost every aspect of modern life, from product distribution to airline luggage handling. Tracking technology took another step toward greater efficiency and cost control with the development of radio frequency identification (RFID) tags, which rely on a microchip to broadcast information. While bar codes require a person to manually scan a label to capture data, RFID enables devices to capture data from tags and send it to a computer system without any manual labor. At first, the cost of RFID technology slowed its adoption (Bragg, 2011). Usage of RFID technology spread where the cost could be justified, typically in situations in which the amount of product being moved is large enough to absorb the expense. By 2017 major apparel retailers were the highest adopters of RFID because a clear case could be made for return on investment. "Retailers can drive higher sales by making sure they have the right product on the shelf, in the correct size and color, and at the same time lower their inventory costs due to a more accurate supply chain" (Zaino, 2017, para. 7), according to RFiD Journal. Manufacturing industries are also adopting RFID, where the technology enables greater control of manufacturing processes. The technology is at its most mature in the transit and banking sectors, where monitoring location and access are crucial business functions (Zaino, 2017). A company’s approach to logistics can create competitive differentiation. In the case of iMemories, a digital film transfer and hosting company, differentiation in the crowded field of film transfer services is achieved through promoting the use of RFID tracking technology. Customers for film transfer services must send their original home movies to a service for digitization, expecting to receive the end product on hard drive, DVD, or Blu-ray disks. However, the fear of losing the original movies in transit stops many customers from acting or drives them to a competitor offering a local pickup/delivery option. To compete, iMemories introduced a SafeShip Kit + GPS option. Customers order the kit, which arrives as a crush-proof box ready for packing with home movies, complete with shock-resistant padding and waterproof lining. Also included is a GPS tracking unit (essentially an RFID tag), which the customer activates before shipping. Customers can then log on to the iMemories website to see the location of their packages in real time. When iMemories ships a completed product back to the customer, along with the original home movies, the tracking unit is again activated. While technically not necessary—the customer could use any shipping service offering tracking, such as FedEx or UPS, for the same purpose—iMemories has created a value proposition that brands tracking technology as part of its superior service, thus standing out among competitors. Field Trip 4.4: Distribution as Competitive Advantage Compare the websites of iMemories and YesVideo, focusing on their promises concerning sending your home movies to be transferred and receiving the finished product. While iMemories uses RFID tracking to establish a competitive point of difference based on physical logistics, YesVideo partners with local retailers like drug stores, Walmart, and Costco to provide a location for customers’ drop-off and pickup. As a consumer, which logistics strategy do you find more compelling? Now consider the two strategies from a marketing perspective. Which strategy do you think provides the most advantages? Explain your answers. http://www.imemories.com http://www.yesvideo.com Distribution Channel Challenges and Opportunities Doing business in a Marketing 3.0 world has several effects on distribution channel strategies. Advances in technology facilitate communication, making it easier to manage the complexity of multiple channel partners. As a result, more companies are finding it feasible to expand into more markets. Plus, the ability to conduct secure financial transactions online has enhanced the flow of transactional information. E-commerce and the Internet have had a profoundly positive impact on channel strategy. Decisions about distribution channels are among the most complex and challenging facing marketers. Once set, they are difficult to change—and yet in the 21st century, business evolves rapidly and requires capacity for nimble response. Channel systems don’t stand still. Like river channels, they’re always under pressure to change due to influences around them—both upstream and down. To summarize, intermediaries (channel partners) work together as a supply chain providing functions (supplying, converting, storing, transporting, marketing, selling, and servicing) within a distribution channel. Retailers benefit from intermediaries’ function of breaking bulk and assembling lots, so they can offer goods in the right quantity, at the right time, and in the right place. Businesses seek competitive advantages through distribution channel strategies such as vertical marketing systems, merchandise assortments, and tracking technology. Developing a distribution channel strategy is a significant challenge for marketers for three major reasons: the sheer number of intermediaries that may be involved, the difficulty of assembling channel partners who extend a company’s reach without increasing the complexity of managing them to an unsustainable degree, and the need for a reasonably flexible channel strategy that adds value but constrains costs. Channel design requires keeping the demand chain in mind—what do consumers need? It requires assessing distribution channel needs and identifying alternatives: Few or many intermediaries? In what roles? With what responsibilities? And finally, channel design requires evaluating alternatives to choose a strategy that can deliver value and adapt to changing conditions. Questions to Consider Technology that facilitates communications and financial transactions has a positive impact on a company’s distribution channel strategy. However, Marketing 3.0 tells us that the same technology that helps one company also reduces barriers to entry for competitors who may challenge that company. Think about Internet applications for distribution channel management. How might technology assist the functions of inventory management, consulting, marketing, promotions, logistics, order processing, and financing? Pick one to discuss. 4.4 Manufacturing: Where the Goods Originate Canned and dry organic dog food on store shelves. Jupiterimages/Creatas/Getty Images Plus For manufacturers, issues of place concern delivery of the products and services needed to make products and the services necessary to get products to market. No retailer would exist, nor any intermediary, without manufacturers to produce the stuff that flows down the distribution channel toward consumers. In the industrial parks where manufacturers operate, a vast range of activity is taking place—not just making the goods that consumers buy but also making the machines and process materials required to make the goods that go downstream to consumers. For every can of dog food that appears in a pet supply retailer’s merchandise assortment, there’s a group of companies providing goods and services to the dog food manufacturer. One company manufactures canning supplies, another sells meat by-products, another sells industrial food processing installations, and another provides the printed labels to apply to the cans. All that happens before the dog food gets shrink-wrapped onto pallets (requiring two or three more suppliers) and hits the truck that carries the product to the retailers. All that activity means that manufacturers face logistics issues, just as retailers and intermediaries do. For manufacturers, these issues center around the services required to take delivery of the products and services necessary for their industrial processes, as well as the services necessary to get goods from the factory floor to the end user’s door. Place strategy also puts manufacturers face-to-face with the P of product strategy (discussed in Chapter 3) in that the demand for the products they manufacture flows from retailers’ strategic decisions about their merchandise assortments—another example of the interdependence of the elements of the marketing mix. Manufacturers must either promote their output to channel partners or create relationships that guarantee buyers for what they sell. Private Label Strategy Boosts Profit Margins Private label products, also known as house brands, represent a relationship between manufacturers and retailers that increases profit margins for the retailer. Private label products that are comparable in features and quality to recognized name brands can reduce the cost to retailers by 40% to 50% (Hariharan, 2016). As private label products have improved in terms of their product quality and packaging, consumer acceptance has increased. This trend has been positive for retailers who contract with manufacturers for their own house brands. Most manufacturers, except for direct marketers, sell to channel partners—the intermediary businesses they’ve selected to be part of their distribution channel, as discussed earlier. Channel partners take ownership from manufacturers, add value through shipping and warehousing, and then sell to other channel partners or to the retailers at the mouth of the channel. But in the case of private labeling, manufacturers sell directly to retailers, who have contracted for specific products to be manufactured for sale under their own store brands. Several benefits accrue for the manufacturer, besides increased profit margin, including reduced costs and increased stability. Costs are reduced because the distribution channel becomes shorter and more straightforward; the contractual relationship between manufacturer and retailer reduces or eliminates channel partners to buy, sell, or add value through other services. The primary distribution issue is the physical logistics of moving goods from the point of production to the point of sale. Manufacturers gain a steady customer base that can be more profitable than relying on wholesale distribution, even with the lower price paid by the retailer taken into account. There is some cause for concern that stores’ private label brands are a competitive threat to manufacturers’ brands, since many consumers perceive private label products to be a better value. On the surface, manufacturing private label products on contract and producing manufacturer brand products put the producer in a position of conflict of interest. However, manufacturers who participate in private label supply chains are finding the relationship mutually beneficial. Most manufacturers have been able to separate how they manage their branded products from any private label products they produce well enough to avoid the potential for competitive threat or conflict of interest. Private label products increased in popularity during the economic downturn of 2007–2009. "Consumers have come to feel less like they are ‘sacrificing’ quality for lower prices," says Ken Sawka (2011, para. 3), managing partner for Outward Insights, a competitive intelligence firm. Industry analysts expect continued growth in the use of private label strategies. The industry surged during the recession of 2007–2009, as consumers sought the bargains private label products offered. That growth plateaued in 2014–2015 and then ticked upward again as house brands began to appear in more premium and specialty categories, in response to consumer demand. Millennials, whose purchase patterns tend to be "brand agnostic," are expected to drive future growth in the demand for private label products (Blair, 2016). Push or Pull? Strategy Affects Promotion Private Label Products and Consumer Demand Private label products (referred to as own brand in the United Kingdom) cost at least 20% less than brand products, but brand cereals still capture 80% of the U.K. market. Do you believe private label products offer inferior quality? Why? Do you agree that consumer purchasing of private label goods disrupts branding as a marketing strategy? Manufacturers’ place strategy affects their promotional strategy decisions, more evidence of the interdependence of the four Ps of the marketing mix. To get products flowing down the distribution channel, manufacturers must make a choice whether to concentrate on convincing channel partners to buy their goods or to focus on reaching potential consumers and persuading them to create demand for the goods by asking channel partners for them. In a "push" strategy, manufacturers offer incentives that encourage intermediaries to carry the products. These can range from volume discounts to sales rewards like travel packages. Incentives can increase profits for both retailers and manufacturers. In a "pull" strategy, manufacturers use communication channels ranging from mass-market advertising to social media to reach end consumers with messages about features and benefits of the product for sale. Once consumer demand has been stimulated—individuals are requesting that retailers stock the advertised goods—demand flows up the channel to the manufacturer. Manufacturers with sufficient budgets for promotion may combine the strategies, designing promotions for both channel partners and consumers. For an example of push versus pull, look no further than the nearest television or glossy magazine, where drug manufacturers advertise to potential consumers, hoping to persuade them of the benefits of various medicines and stimulate them to ask their doctors about them—a pull strategy. At the same time, but less visible to the consumer, drug manufacturers address marketing strategies directly to doctors, hoping to convince them to prescribe their products—a push strategy. Field Trip 4.5: Direct-to-Consumer Drug Ads Pull advertising by drug manufacturers, legal since 1985, took off in 1997 when the U.S. Food and Drug Administration eased its rules about listing side effects. In 2015 the American Medical Association began calling for a ban on these ads, citing concerns that they were driving demand for expensive treatments despite the existence of effective, lower cost alternatives. This issue could be an example of Marketing 3.0’s view of customers as collaborative partners in their medical treatment decisions. Read pros and cons of the argument in the article "Should Prescription Drugs Be Advertised Directly to Consumers?" http://prescriptiondrugs.procon.org This article, "The Untold Story of TV’s First Prescription Drug Ad," tells the story of the first direct-to-consumer "pull" drug advertising: http://www.statnews.com/2015/12/11/untold-story-tvs-first-prescription-drug-ad Opting for a private label relationship transfers the responsibility for promotions from the manufacturer to the retailer, making push or pull strategies irrelevant. The goal of place strategy is, at its most fundamental, to balance customer service with cost—to find the greatest efficiency in physical logistics and channel partner relationships without sacrificing customer service, thereby doing damage to the customer value equation. As has been shown, two place concerns affect manufacturers—physical logistics and distribution channel relationships that either guarantee a buyer or require a promotional strategy to create demand. Questions to Consider The manufacturer is considered the beginning of the distribution channel. But B2B companies produce goods and services that are sold to manufacturers. Where does the distribution channel really begin? Describe a distribution channel from the point of view of a baked goods manufacturer and from the perspective of a flour manufacturer. What marketing strategy would make sense for either the bakery or the flour manufacturer—a private label production contract, a push strategy, or a pull strategy? 4.5 Place Strategy: A Global Approach It is now more feasible than ever to do business across national borders. Two aspects of Marketing 3.0 make this so: Consumers’ demand for meaningful engagement does not stop at borders, nor does technology’s ability to reduce barriers and expand reach. Taking advantage of international markets for a company’s offerings can be good for business in many ways. For example, a company can extend its customer base, counter market saturation in the home country, or minimize the effect of home-market economic downturns by focusing on growth in other markets with more promising economic climates. Having overseas operations can also increase the intrinsic value of the business, which could make good strategic sense (Grant Thornton UK, 2015). Let’s look at how global place strategies affect a business’s ability to achieve the goals of place: getting the right goods, in the right quantity, to the right place, for the lowest possible cost without sacrificing customer service. Doing business across borders can mean exporting products and services, importing them, or a mix of both. Joint ventures and direct investment offer additional ways a firm can have an international presence. Each brings with it supply chain and logistics considerations. A closer look at these ways to enter global markets follows. But first, let’s review the components of place strategy through the lens of multinational business. We began our examination of global place with logistics—the physical flow of goods from manufacturers through distributors to customers, either through bricks-and-mortar retailers or nonstore alternatives. The more complex the supply chain, the more vulnerable the businesses in it become. A business model that wraps around the world is by its nature complex and vulnerable. Each country will have its own physical distribution system, and it may be difficult for global marketers to adapt their channel strategy from the home market to work in each new country. In developed countries, those systems may be hard to penetrate, due to existing business relationships and cultural differences. In some developing countries, distribution systems may be weak, inefficient, or nonexistent (while in others, they may be highly developed but unfamiliar compared to that in the home country). Designing a distribution channel strategy that works across borders can be challenging. Swedish furniture giant IKEA entered the U.S. market in 1985 and began retail operations in China in 1998. Each new country/market required adaptation if its strategies. In the United States the company discovered that it needed to customize products—American consumers demanded bigger beds, which affected the supply chain all the way to the manufacturing source. China required smaller products, reflecting smaller apartment sizes. IKEA responded with slight modifications to its furniture and store layouts that reflected the typical sizes of apartments (Chu, Girdhar, & Sood, 2013). Day in and day out, the flow of goods adapts to hiccups and setbacks, from flooding of the Mississippi that halts interstate trucking, to volcanic eruptions that ground air travel, to disasters like the hurricane that flooded Houston in 2017, disrupting the routes of tankers bringing oil, gasoline, and other products, as well as container ships bearing products both into and out of the area’s ports (Phillips & Baskin, 2017). What keeps marketers committed to global place strategies, in spite of the challenges of adapting to new markets and maintaining complex supply chains? The potential to reach less saturated markets and increase profits. Retailing in global markets can call for a strategy that Sylvia Vorhauser-Smith (2002) has named "going glocal"—adapting to local tastes, consumer attitudes, and values. Given what we understand about consumers’ increasing interest in cocreation and personalization, it makes sense that retailing far from a company’s home market would require adapting products—Starbucks offering Cinnamon Horchata Frappuccino in Mexico, for example. Location decisions should reflect retailing strategies in the target country and region: Do customers typically shop in downtowns, suburbs, or shopping malls? Manufacturing may call for a variety of "glocalization" strategies as well, such as 3-D printing or private labeling of goods produced near the point of sale. Strategic decisions about merchandise mix and use of intermediary channel partners will reflect how a firm plans to do business across borders, including the following aspects. exporting importing international joint ventures direct investment licensing Let’s take a closer look at each. Starbucks coffee shop in Shanghai, China. SeanXu/iStock Editorial/Getty Images Plus Global markets offer new opportunities. A successful U.S. company can become a global company by exporting its existing business model. Exporting Retailers with deep pockets can expand into new markets to escape intense competition in the home market. Intermediaries can grow their business by providing retailers with the distribution channel solutions needed to establish themselves in new markets. Manufacturers can increase overall production by developing or adapting products for the needs of new customer groups in other countries. Businesses are seeing opportunity everywhere the middle class is expanding, including countries in Europe, Asia, and South America. Starbucks realigned its top management in 2011 to prepare for a corporate growth strategy calling for greater presence worldwide. At the time, Starbucks, based in Seattle, had nearly 11,000 stores in North America and 6,000 elsewhere. According to founder Howard Schultz, the company intended to focus on opportunities in markets in countries such as China, Brazil, and India (Associated Press, 2011). The strategy is working: For example, in China alone, by year-end 2015 Starbucks had 1,811 stores (counting both company-operated and licensed stores), compared with 496 stores in 2011. The number worldwide had reached 23,043 (Statista, 2016). In January 2016 Forbesreported that [Starbucks] believes that China represents its most important and exciting opportunity with the potential of becoming its largest market. . . . Since its launch in China, Starbucks has ensured that it adapts itself to the local environment and this strategy has been instrumental to its growth in the region. (paras. 1–2) Exporting a business model that brought success in the United States is one option to create a global company, as Starbucks did taking its cafes stocked with private label consumer products into new markets. Starbucks and other U.S. brands like Kentucky Fried Chicken and McDonald’s have succeeded in China by introducing and selling their American-style products, counting on the Chinese to develop a taste for "exotic" fare such as coffee, hamburgers, and fried chicken. But purchasing a company in the target country is another global business model. Nestlé, the Swiss food-products giant, purchased the Chinese manufacturer Hsu Fu Chi International, a maker of popular candy, chocolate, and pastries, to give it greater presence in China (Wassener, 2011). General Mills achieved a successful global acquisition and merger with its purchase of the dominant supplier of dumplings in China—Wanzai Matou. Dumplings are a staple of the Chinese diet, eaten at any time of day, at home and away. General Mills quietly gained control of Wanzai Matou in 2001 when it acquired its U.S. rival Pillsbury from the British company Diageo. (In 1997 Pillsbury had purchased a majority stake in the dumpling maker.) General Mills foresaw that fewer Chinese would find time to make dumplings at home, something that had once been a time-consuming daily chore. Not only did General Mills gain an estimated 50% share of the existing frozen dumpling market in China, it gained access to a growing market as more Chinese became willing to switch to the supermarket frozen version of the traditional dumplings (Fuhrman, 2014). Access to new, less saturated markets is an attractive proposition, as these examples show. However, global distribution channels can be difficult to negotiate. Global marketers must navigate carefully to maximize opportunities and reduce risk from difficult-to-foresee threats. Field Trip 4.6: Expanding Middle Class Wherever the middle class is expanding, so is the potential for marketers to develop place strategies to increase sales. Follow this link to a brief article from the Pew Research Center, titled "6 Key Takeaways About The World’s Emerging Middle Class," which explores global economic population trends. http://www.pewresearch.org/fact-tank/2015/07/08/6-key-takeaways-about-the-worlds-emerging-middle-class Importing Just as retailers, distributors, and manufacturers can find opportunity by targeting new markets, they can also find new profits by bringing new products to the home market. And while entering new markets beyond U.S. borders typically requires deep pockets, importing offers potential for smaller entrepreneurs. Thousands of relatively small import businesses emerge from Marketing 3.0–style expectations for meaningful engagement, connecting producers and consumers in a business model known as Fair Trade. Fair Trade businesses in the United States import products from developing countries, offering assurance of fair trading conditions and higher environmental and social standards for producers as part of their customer value equation. Bali & Soul (https://www.facebook.com/balisoulartistry/info), a Wisconsin-based distributor of indigenous crafts from Bali and other developing countries, presents an example of a Fair Trade importer on a small-business scale. The company was founded by a couple with family ties in both Indonesia and the Midwest. The company’s first product line offered their relatives’ traditional woodcarvings from Bali to retailers in the United States. As the company grew, it expanded into jewelry, metalwork, basketry, fabrics, and art objects sourced from artisans in Ghana, India, and beyond. The business model of Bali & Soul is to break bulk, assemble lots, and provide other services while making money on the margin between the wholesale purchase price and the retail sale price. What makes it Fair Trade is the founders’ commitment to sustainable development, better trading conditions, and high standards both where the goods originate and where they are sold. International Joint Ventures When two or more businesses pool their resources to work together toward a common aim, a joint venture is born. Joint ventures are similar to business partnerships but are typically formed for a defined purpose or specific project, within a specified scope and duration. A joint venture usually requires a big commitment and a joint plan from both partners. At the start of any joint venture, all the partners involved negotiate what each will contribute and how the risk and reward will be shared. The contributions of each partner differ and tend to be based on the capabilities each brings to the table (Stewart & Maughn, 2011). An international joint venture can reduce the investment required and speed the timetable for achieving operations in foreign markets, compared to alternatives like purchasing an existing company in the target country or investing directly in a new venture there. In 2012 the Kellogg Company entered into a joint venture with Singapore-based Wilmar International Limited for the manufacture, sale, and distribution of cereal and snacks in China. Wilmar contributed its infrastructure, supply chain scale, sales and distribution network in China, and local market expertise. The Kellogg Company (2012) brought its portfolio of globally recognized brands and deep cereal and snacks category expertise to the table. The venture has proven successful: In its 2014 annual report, Wilmar International Limited (2015) stated: The Group’s joint venture with Kellogg Company in China formed in 2012 has made good progress as Kellogg’s premium breakfast cereals and snacks gain popularity. Taking the partnership to the next level, another 50:50 joint venture was established in Kunshan to produce breakfast cereals and snacks. (p. 13) Direct Investment Companies can tap global markets and reap the benefits of a global approach by foreign direct investment, in which a company invests in business interests in another country, either by setting up a subsidiary in the target country, acquiring or merging with an overseas company, or through a joint venture as described earlier. A company may choose direct foreign investment with the intent to produce components abroad that become part of its core offerings, such as an automaker building transmissions in one country that are shipped for final assembly by a plant in another country. Or a firm may choose to invest in a foreign market by duplicating the business model it employs in the home market, in order to supply its offerings to the foreign market. Paris-based Danone’s purchase of YoCrunch, a U.S.-based yogurt topping company, is an example of direct foreign investment (Cruz, 2013). Setting up operations in this way can allow a company to avoid tariffs or other barriers to imports. Access to natural resources or low labor costs can influence the decision. Access to a pool of skilled employees and/or technology can also drive direct foreign investment, especially between equally advanced economies (Galeza & Chan, 2015). Licensing A potentially profitable business model for importers or exporters involves negotiating licensing arrangements that create a passive income stream. In this model, a business arranges for exclusive rights to market a product in a specific territory and then establishes trade relationships with channel partners, including manufacturers, distributors, and retailers. One licensing contract can result in ongoing profits for years, requiring little more than nurturing those partner relationships that keep the distribution channel flowing smoothly. Licensing functions well across borders, allowing U.S.-based firms to bring goods from around the world to their home market or take their products to new markets abroad. Either way—inbound or outbound licensing—this strategy gives firms new products without investing resources in a full global distribution channel strategy. Changing Business Models Around the world, economies and individuals have become more interconnected, as is reflected by the rapid growth of social media networks. New forms of doing business across borders are emerging. What kind of global company is Airbnb, with its 60+ million guests around the world connecting with hosts via an app? The company is headquartered in San Francisco. In early 2018 it boasted over 3 million listings in 65,000 cities in 191 countries (Airbnb, 2018). Airbnb is an example of a sharing economy business that takes advantage of the network effect (introduced in Chapter 3). A unique challenge of sharing economy businesses is the need to grow both suppliers and consumers of the service simultaneously (because each provides value to the other). Airbnb’s growth product manager, Rebecca Rosenfelt, gave a talk entitled "Going for Global" in August 2014 in which she summed up this problem: Part of Airbnb’s struggle to grow stems from its need to expand both the demand side (travelers) and the supply side (hosts) in every new market it attempts to enter. Airbnb discovered the supply side can be harder to establish, because getting people comfortable with the idea of opening their homes to strangers was a hurdle (Hook, 2016). The sharing economy’s two-sided marketplace demonstrates the network effect in action, since the amount of value available to exchange depends on the number of participants on each side. Airbnb and another sharing economy company—Uber—have encountered difficulty with local regulations, from local tax structure and restrictions on short-term apartment rentals in Airbnb’s case to taxi licensing and labor regulations in Uber’s (Hook, 2016). Some communities have opted to prevent Uber or Airbnb from operating. These sharing economy companies are writing a disruptive new chapter in global business models. To successfully market goods and services on a global scale requires meticulous planning. Above all, it is important to remember that as experienced by the consumer, all markets are local. "The key to success is a tremendous amount of local passion for the brand and a feeling of local pride and ownership," writes Gurcharan Das (2008, para. 7) in Local Memoirs of a Global Manager. As stated earlier, there is growing consumer spending power wherever the middle class is expanding around the globe, creating potential for manufacturers, intermediaries, and retailers who are willing to do business across borders. Questions to Consider The examples in this section lean toward the experiences of large companies. Do you believe opportunity exists for smaller business to follow a global approach profitably? Give an example of a small or medium-sized business you have recently purchased from that has a global strategy. Each year, two teams face off to compete for the title of National Football League (NFL) champion at the Super Bowl. Across the nation, distribution channel partners for fan merchandise stand at the ready, knowing that a tidal wave of consumer demand will soon erupt for T-shirts from the winning team. But which team will win? The distribution of imprintable activewear—that’s T-shirts and sweats—requires getting the right goods to the right place at the right time in a business where demand changes daily with the fortunes of sports teams. The channel partners who can do so while controlling costs will deliver customer value successfully. Millions of dollars are in play along the distribution channel that flows from manufacturers like North Carolina’s Pluma to retailers who sell to sports teams’ fans. Consider the supply chain for T-shirts destined for sale after the Super Bowl, where merchandising and licensing revenue is estimated to be a $1 billion business (Schrotenboer, 2014). Manufacturers like Pluma buy unprocessed cotton grown in Texas and apply manufacturing processes (spinning, knitting, cutting, stitching, and dyeing) until T-shirts come off the assembly line. Those shirts are purchased in bulk by wholesalers who provide the services (chiefly breaking bulk and assembling lots by size and color) that match supply with demand. Other channel partners buy the T-shirts from the wholesalers. An imprint operation takes delivery, counting on raking in sales to retailers who, on the day of a big game, measure every minute between the win and receiving the goods in hundreds of dollars of lost sales. For the Super Bowl, the imprint shop invests in inventory of shirts in both the competing teams’ colors. Until the early 1990s the imprinters dealt with the uncertain outcome of the big game by having workers standing by to silkscreen one or the other set of colored shirts with the winning team’s graphics the moment the big game ended. Wholesalers stood ready, deeply stocked with shirts of both colors, knowing that imprinters would soon be placing orders to augment their supply of one or the other. But consumer demand for immediate access to the winning team’s gear increasingly put pressure on that system. All up and down the supply chain, businesses strategized how to maximize the time-sensitive sales opportunity while minimizing the risks involved. Their answer, driven by the potential profits hanging on that insatiable consumer demand: The imprinters began producing two sets of T-shirts, hats, and other merchandise, declaring each of the two teams that year’s Super Bowl champion. Each year, apparel for the winning team is quickly released for sale, while the losing team’s merchandise is locked away, destined for donation to charities that will distribute the items in developing countries. Despite the obvious waste in creating merchandise for two teams when only one can win, the strategy succeeded in filling the distribution channel with the right goods at the right time in the right place, for the right price. For nearly 2 decades, the international humanitarian aid group World Vision collected the unwanted items from retailers and manufacturers licensed by the NFL to produce Super Bowl merchandise. In 2015 Good360 took over the relationship with the NFL (Soniak, 2018). As this example shows, the demand chain from consumers of imprintable activewear drove the industry to an unusual distribution channel strategy that relied not just on supplying what consumers wanted but on finding a suitable use for the waste by-products of that demand. Let’s review this chapter’s main points from the perspective of channel partners in this T-shirt distribution channel. The retailer targets the market niche of fans. The community in which they are located dictates which teams local fans follow; the merchandise assortment will need to reflect the sport teams that have recently won. This retailer needs a distribution channel strategy capable of extreme flexibility, delivering the colors needed within hours of the wins. Upstream, T-shirt manufacturers’ physical logistics must be up to the task of moving shirts around the United States from point of manufacture to point of sale. Manufacturers in the activewear industry use private label contracts with some brands. Pluma, for example, produces shirts for major branded sports companies like Adidas, Nike, and Starter. Others are sold under the Pluma brand name. To promote their brands, manufacturers typically use push promotional strategies. There is little need to use a pull strategy, since there is plenty of consumer demand without it. Challenge Question What have you purchased recently? Describe the distribution channel that brought that object to the retailer where you purchased it (at a store, online, or through a direct marketer or nonstore retailer). Use common sense to trace it back to its manufacturer—and even to the raw materials. Now identify alternatives to this distribution channel that could potentially add value without increasing cost. Key Ideas to Remember The goal of place strategy in terms of the customer value equation is to add value without increasing cost. Retailers face three strategic issues that affect place strategy: target market niche, location, and merchandise assortment. Developing a distribution channel strategy is a significant challenge for marketers for three major reasons: the number of intermediaries that may be involved, the difficulty of assembling channel partners who extend a company’s reach without increasing the complexity of managing them to an unsustainable degree, and the need for a channel strategy that adds value. Manufacturers deal with two concerns: physical logistics and distribution channel relationships that either guarantee demand or require promotion to stimulate it. Marketers are motivated to pursue global place strategies by the potential to reach less saturated markets and increase bottom-line profits, in spite of the challenge of adapting to new markets and maintaining complex supply chains. Manufacturers can do business across national borders via exporting, importing, international joint ventures, direct investment, or licensing. Critical-Thinking Questions Rainforest Café restaurants are designed to resemble a rain forest, mixing simulation with education to entertain and inform customers about imperiled ecosystems while delivering a fun, casual dining experience. In addition to the jungle-themed menu, the restaurants sell merchandise with a rain forest theme. What place strategies could the gift shops (known as "retail villages") undertake to add value without increasing cost, and thus enhance the customer value equation? You have learned that business models for companies wanting to pursue a global place strategy include exporting, importing, international joint ventures, direct investment, and licensing. Evaluate how these models could be applied to Rainforest Café to add value. Barry’s Bootcamp is an exercise chain based in Los Angeles that opened its first location in New York City in 2011. Explain three strategic place issues facing the business as it searches for a suitable space for its first gym in the new market area. Base your answer on the fact that Barry’s Bootcamp is a retail service business. Apply what you have learned about distribution channels to the automotive industry. Describe the channel partners required to get a Volkswagen from the assembly line in Germany or Mexico to a showroom in your community. How might Volkswagen’s marketers respond to the three major challenges of distribution channel strategy? Distribution issues vary across geographies, especially international boundaries. What should a U.S. company consider regarding its location and supply chain when attempting to replicate its success in a European Union country overseas? How would your answer differ if the target location were in India instead of Europe? Key Terms to Remember Click on each key term to see the definition. bricks-and-clicks  A location strategy that combines a physical retail location with an online catalog. bricks-and-mortar stores  A location strategy based on physical retail locations. channel partners  Businesses that help other businesses deliver value from the source of the goods, add value along the way, and bring value to the end user. demand chain  The supply chain viewed from the perspective of consumers, who need solutions to problems, which creates demand for retailers, intermediaries, manufacturers, and so on up the distribution channel toward raw materials. direct channel system  Distribution channel in which a producer supplies or serves directly to an ultimate user or consumer, without any middleman (agent, distributor, wholesaler, retailer). direct marketing  A form of nonstore retailing in which consumers shop through an impersonal medium and purchase their selections by telephone, mail, or online; a promotional technique that focuses on getting customers to take direct action, with measurable results. distributed manufacturing logistics strategy  A system in which manufacturing processes take place in multiple locations to achieve time and/or cost efficiency by placing production close to customers. distribution channel  A system of organizations involved in the process of making a product or service available to its end users; also known as a marketing channel. distributors  Providers of storage and transportation functions, including breaking bulk, assembling lots, providing financing, and assuming risks of spoilage, storage, and uncertain demand. Fair Trade  A market-based approach focusing on exports from developing countries to developed countries, working to improve trading conditions for producers by paying higher prices where the goods originate and holding producers to higher environmental and social standards. house brands  Products or services manufactured by one company for sale under another company’s brand; also called private label products. hub-and-spoke logistics strategy  A centralized, integrated logistics system in which distribution centers receive products from many origins, consolidate the products, and send them directly to destinations. intermediary  A businesses model designed to produce profits from helping other businesses to bring value to the final consumer; includes wholesalers, distributors, sales agents, dealers, and others. joint venture  A commercial enterprise undertaken jointly by two or more parties that otherwise retain their distinct identities. licensing  A business arrangement in which one company gives another company permission to manufacture its product for a specified payment. logistics  Physical distribution of products from the point of origin to the point of consumption. manufacturers  Businesses that take delivery of raw materials and other purchases to make products. marketing channel  A synonym for distribution channel; a system of organizations involved in the process of making a product or service available to its end users. multilevel marketing  A strategy used by some direct marketers in which existing distributors are given financial incentives for recruiting new distributors, known as their "downline." omnichannel  Retail consumer experiences that integrate the different methods of shopping available, such as online, in a physical store, or by mobile device. radio frequency identification (RFID)  Technology that relies on microchips to broadcast information, used to increase efficiency. retailers  Businesses that sell goods and services to consumers for personal, usually nonbusiness use. reverse logistics  All activity associated with a product or service after the point of sale. sharing economy  An economic model that creates value around sharing assets. Sharing economy organizations do not maintain ownership of assets; their customers are able to borrow or rent assets owned by someone else. Also referred to as the peer-to-peer economy or collaborative consumption. slotting fees  Fees charged for placement of a manufacturer’s product on retailers’ shelves. supply chain  An alternate term for distribution channel; the network of businesses that move goods from a manufacturer to an end purchaser/consumer. supply chain management  Management of a network of strategically aligned businesses with the goal of movement and storage of goods, including raw materials, inventory, and finished goods, from a manufacturer to an end purchaser/consumer. value chain  Interlinked value-adding activities of channel partners that convert inputs into outputs that, in turn, contribute to an organization’s bottom line and help create competitive advantage. vertical market system  A coordinated distribution channel in which channel partners commit to working together to achieve greater efficiency and economies of scale and eliminate conflict arising from competing business objectives among the partners. wholesalers  Marketing intermediaries buying in bulk from manufacturers and selling in smaller assortments to retailers or industrial buyers.