12

OBJECTIVES OUTLINE
Marketing Channels
Delivering Customer Value

OBJECTIVE 12-1 Explain why companies use marketing channels and discuss the functions these channels perform.

OBJECTIVE 12-2 Discuss how channel members interact and how they organize to perform the work of the channel.

OBJECTIVE 12-3 Identify the major channel alternatives open to a company.

OBJECTIVE 12-4 Explain how companies select, motivate, and evaluate channel members.

­OBJECTIVE 12-5 Discuss the nature and importance of marketing logistics and integrated supply chain management.

CHAPTER We now look at the third marketing mix tool: We start by looking at Airbnb, a great example of a sig-
distribution. Companies rarely work alone nificant distribution trend: distribution channel disruption. In
PREVIEW in engaging customers, creating customer recent years, innovative companies in many industries have
value, and building profitable customer relationships. Instead, disrupted traditional channels by finding new ways to bring
most are only a link in a larger value delivery system. As such, a products and services to consumers. Amazon’s online selling
firm’s success depends not only on how well it performs but also turned traditional store retailing on its head. Netflix’s mail-order
on how well its entire marketing channel competes with competi- and video streaming channels put video rental stores out of
tors’ channels. The first part of this chapter explores the nature of business and now even threaten movie theaters. iTunes and
marketing channels and the marketer’s channel design and man- Spotify wiped out traditional music stores. And traditional taxi
agement decisions. We then examine physical distribution—or and limo services have suffered at the hands of car hailing
logistics—an area that has grown dramatically in importance and services like Uber and Lyft. In a similar way, Airbnb has radi-
sophistication. In the next chapter, we’ll look more closely at two cally transformed the way hotel and hospitality services are
major channel intermediaries: retailers and wholesalers. delivered.

AIRBNB: Disrupting Traditional Distribution Channels

N
ot long ago, when you thought about traveling and when compared to the size of the world’s largest hotel chain—
places to stay, you probably thought about standard 95-year-old Marriott International—with its 1.4 million rooms
hotel or motel chains—Motel 6, Hampton Inn, or across 7,600 properties in 131 countries. In fact, Airbnb boasts
maybe Marriott or Hilton. Airbnb has revolutionized more rooms than all global hotel groups combined.
Airbnb isn’t your traditional hotel experience. It all started
all of that. Without owning a single hotel, Airbnb is now the
when Airbnb founders Brian Chesky and Joe Gebbia decided
largest provider of rooms for overnight stays. to make some extra income to help pay the rent on their modest
In little more than 14 years, the tech startup that popular- San Francisco loft apartment by renting out three air mattresses
ized staying at the homes of strangers has built a global net- on the apartment’s floor at $40 a night each (hence the “air” in
work of more than 7 million listings by 2.9 million hosts in 220 Airbnb). Chesky and Gebbia quickly realized that people who
countries and regions throughout the world. That’s stunning booked their air mattresses got a lot more than just a cheap

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 CHAPTER 12 | Marketing Channels: Delivering Customer Value 363
place to stay. They got an authentic “live-like-the-locals” ex-
perience. The idea blossomed into Airbnb, an online lodgings
marketplace that matches people who need a place to stay with
people who have room to spare.
The basic Airbnb model is simple. It starts with hosts—
Airbnb’s official term for property owners with space to rent—
who register and are vetted for legitimacy. Listings can include
anything from a couch, a single room, a suite of rooms, or an apart-
ment to moored yachts, entire houses, or even a castle. Some hosts
even rent space in their yards for guests to pitch a tent. Each lo-
cation is as unique as its owner. For guests, using Airbnb is like
buying or booking almost anything else online. Registered users
search by city, room type, price range, amenities, host language,
and other options. Bookings are made through Airbnb, so money
changes hands only through a secure interface.
At first, Airbnb attracted mostly venturesome travel- Airbnb’s disruptive distribution model has shaken up the traditional
ers looking for cheap and cool places to stay. Other potential hotel and hospitality industries, challenging many age-old principles.
customers shied away, unwilling to accept the risk or discom- Whatever’s next, the company must continue to adapt and innovate.
fort of staying with strangers. But the concept caught on, and Ink Drop/Shutterstock
Airbnb grew rapidly. More than the cookie-cutter rooms and
impersonal travel experiences offered by conventional hotels,
people warmed to Airbnb’s authenticity and the unique expe- with hosts known for great reviews and attention to detail. For
riences that Airbnb lodgings offered. the really discerning customer, Airbnb Luxe offers a level of
Chesky and Gebbia came to realize that Airbnb provided premium luxury in extravagant homes with high-end options,
much more than just spaces to rent. Exhaustive research with such as booking a butler or personal chef. And for business
guests and hosts around the world found that the last thing travelers, Airbnb for Work offers rental properties that encour-
guests wanted was to be tourists. Instead, Airbnb customers age businesses to “reimagine how your employees travel, con-
wanted to be insiders—to engage with people and immerse nect, and collaborate.”
themselves in local cultures. In addition to lodgings, Airbnb also offers Experiences, a
According to the company, 86 percent of users picked platform that lets customers experience unique activities hosted
Airbnb because they wanted to live more like a local. They by inspiring local experts. Guests can sing in a Harlem gospel
wanted to belong. Accordingly, Airbnb’s mission is to help choir, make a from-scratch pasta meal with two chefs in Florence,
people belong anywhere, to live in a place instead of just trav- or create a sterling-and-turquoise ring in Scottsdale, Arizona.
eling to it. This mission inspired Airbnb’s tagline—“Belong For more immersive activities, there’s Airbnb Adventures, all-
Anywhere”—and its brand symbol, the bélo. Carefully con- inclusive multiday trips led by local experts. Beyond the big
ceived to contain the “A” in Airbnb, a heart, and a location cities in Morocco, for example, guests can book a four-day trek
pin, Airbnb casts the bélo as the universal symbol of belong- through the country’s Atlas Mountains, which takes them to
ing. “Belong Anywhere” drives everything Airbnb does, from guest houses in different villages where they take part in local
its travel offerings to its marketing campaigns. Airbnb sees it- traditions. In South Africa, beyond the wild animal preserves,
self not just as a rooms provider but as a curator of unique and guests can take a two-day “sleep under the stars” trip to explore
authentic “belonging” experiences. The overriding rule for late Stone Age cave art. “These aren’t tours,” says Chesky, “You
hosts: create belonging. Chesky tells hosts, “What’s special in immerse yourself; you join the local communities.”
your world isn’t just the home you have. It’s your whole life.” Airbnb’s disruption has shaken up the staid and tra-
Airbnb points out that “belonging” doesn’t have to be about ditional hotel and hospitality industry. Despite the threat,
having tea and cookies with the host. Many hosts don’t live in however, traditional hotel chains have been slow to respond.
the lodgings they share, and many guests don’t actually want Some have countered with new Airbnb-like home-sharing
to meet the host. More broadly, belonging means hanging out in alternatives of their own. For example, Marriott pushed back
someone else’s space and having a local experience “hosted” by with Marriott Homes & Villas, a luxury lodging service that
that person, even if the host is not present. It means venturing tries to compete with Airbnb Plus. Marriott has also launched
into local spots guests might not otherwise see and doing things new formats—such as Moxy Hotels—tech-forward, inexpen-
they might not otherwise do. Unlike sive, experiential formats that
a stay in a traditional hotel, Airbnb provide more of the convenience,
sees the optimal “belonging” expe-
Airbnb’s disruptive distribution model lower costs, and experiences that
rience as a transformational journey. has shaken up the traditional hotel and many Airbnb buffs seek. But over-
Airbnb offers an array of lodg- hospitality industries, challenging many all, such responses have been very
ing experiences. For example, you few and very modest.
age-old principles. Whatever’s next, the
can rent a room, a cabin, an igloo, The COVID-19 pandemic hit
or a castle. At the upper end, company must continue to adapt and the hotel industry especially hard.
Airbnb Plus offers a selection of innovate. During the coronavirus travel
high-quality, well-equipped homes lockdown, U.S. hotel occupancy

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 364   PART 3 | Designing a Customer Value–Driven Strategy and Mix
fell from an average of 66 percent to historic lows of less than by 25 percent. In contrast, the pandemic cut revenues in half
25 percent. The pandemic hit Airbnb hard, too—2020 revenues for Marriott International and Hilton Worldwide. And even as
were down by 30 percent over the previous year. But even in Airbnb’s business reached record levels this past year, business
that horrific environment, Airbnb continued to adapt and in- for the big chains is still down by an average of 35 percent com-
novate. For example, it launched “Go Near,” a social media pared to pre-pandemic heights.
campaign to promote safe, nearby, longer-term getaways. And What’s next in the hospitality industry? No one really
it designed a new virtual travel concept, Online Experiences— knows. But Airbnb’s disruption has significantly reshaped
virtual activities led by unique hosts that gave customers a get- the habits of many of the world’s vacation travelers, challeng-
away experience without ever leaving home. With online access ing many age-old principles of the hotel and hospitality busi-
to walking tours, cooking lessons, dancing lessons, and other nesses. Whatever’s coming, Airbnb must continue to adapt and
unique experiences, Online Experiences was an immediate hit. innovate, focusing on the thing that makes the experience so
These efforts helped Airbnb bounce back in 2021, nearly dou- special. With Airbnb, no matter the circumstances, you “Belong
bling its 2020 r­evenues and exceeding pre-pandemic business Anywhere.”1

AS THE AIRBNB STORY SHOWS, good distribution strategies can contribute

strongly to customer value and create competitive advantage for a firm. But firms cannot
bring value to customers by themselves. Instead, they must work closely with other firms
in a larger value delivery network.

Author These are pretty hefty

Comment terms for a really simple Supply Chains and the Value Delivery Network
concept: A company can’t create OBJECTIVE 12-1 Explain why companies use marketing channels and discuss the
customer value on its own. It must functions these channels perform.
work within a broader network of
partners to accomplish this task. Producing a product or service and making it available to buyers requires building relation-
Individual companies and brands do ships not only with customers but also with key suppliers and resellers in the company’s s­ upply
compete with each other but so do chain. This supply chain consists of upstream and downstream partners. Upstream from the
their entire value delivery networks.
company is the set of firms that supply the raw materials, components, parts, information,
finances, and expertise needed to create a product or service. Marketers, however, have tradi-
tionally focused on the downstream side of the supply chain—the marketing channels (or distri-
Value delivery network
bution channels) that look toward the customer. Downstream ­marketing channel partners, such
A network composed of the company,
suppliers, distributors, and, ultimately,
as wholesalers and retailers, form a vital link between the firm and its customers.
even customers—all of whom partner The term supply chain may be too limited, as it takes a make-and-sell view of the busi-
together to improve the performance of ness. It suggests that raw materials, productive inputs, and factory capacity should serve
the entire system in delivering customer as the starting point for market planning. A better term would be demand chain because it
value and driving profits. suggests a sense-and-respond view of the market that is customer-centric. Under this view,
planning starts by identifying the needs of target cus-
tomers, to which the company responds by organizing
a chain of resources and activities with the goal of creat-
ing and delivering customer value.
Yet even a demand chain view of a business may be
too limited because, much like links in a chain, it takes
a step-by-step, linear view of purchase-production-­
consumption activities. Instead, most large companies
today are engaged in building and managing a com-
plex, continuously evolving value delivery network.
As defined in Chapter 2, a value delivery network is
made up of the company, suppliers, distributors, and,
ultimately, customers who “partner” with each other to
improve the performance of the entire system. For ex-
ample, Ford makes great trucks. But to make and market
just one of its many lines—say, its best-selling F-150 truck
model—Ford manages a huge network of people within
the company, from marketing and sales people to folks in
Value delivery network: In making and marketing its lines of trucks,
finance and operations. It also coordinates the efforts of
Ford manages a huge network of people within the company plus
thousands of outside suppliers, dealers, and marketing service firms thousands of suppliers, dealers, and advertising agencies
that work together to create and deliver value and the brand’s “Built Ford and other marketing service firms. The entire network must
Tough” positioning. function together to create and deliver customer value and
REUTERS/Rebecca Cook establish the brand’s “Built Ford Tough” positioning.

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 CHAPTER 12 | Marketing Channels: Delivering Customer Value    365
This chapter focuses primarily on marketing channels—on the downstream side
of the value delivery network. We examine four major questions concerning marketing
channels: What is the nature of marketing channels, and why are they important? How
do channel firms interact and organize to do the work of the channel? What problems
do companies face in designing and managing their channels? What role do physical
distribution and supply chain management play in attracting and satisfying customers?
In the next chapter, we will look at marketing channel issues from the viewpoints of two
important channel members—retailers and wholesalers.

Author In this section, we look

Comment at the downstream side The Nature and Importance of Marketing Channels
of the value delivery network—the Few producers sell their goods directly to final users. Instead, most use intermediaries to
marketing channel organizations bring their products to market. They try to forge a marketing channel (or distribution
that connect the company and its channel)—a set of interdependent organizations that help make a product or service avail-
customers. To understand their value,
able for use or consumption by the consumer or business user.
imagine life without retailers—say,
without grocery stores, discount A company’s channel decisions directly affect every other marketing decision. Pricing
stores, or online sellers like Amazon. depends on whether the company works with national discount chains, uses high-quality
com. specialty stores, or sells directly to consumers online. The firm’s sales force and commu-
nications decisions depend on how much persuasion, training, motivation, and support
its channel partners need. Whether a company develops or acquires certain new products
Marketing channel (distribution may depend on how well those products fit the capabilities of its channel members.
channel) Companies often pay too little attention to their distribution channels—sometimes
­ set of interdependent organizations
A with damaging results. In contrast, many companies have used imaginative distribu-
that help make a product or service tion systems to gain a competitive advantage. Enterprise Rent-A-Car revolutionized the
available for use or consumption by the ­car-rental business by setting up off-airport rental offices. Apple turned the retail music
consumer or business user. business on its head by selling music via the internet on iTunes. FedEx’s creative and
sprawling distribution system made it a leader in express package delivery. Uber and
Airbnb, with their sharing models, have disrupted the taxi and hospitality businesses.
And Amazon.com forever changed the face of retailing by selling anything and everything
­online without using physical stores.
Distribution channel decisions often involve long-term commitments to other firms.
For example, companies such as Ford, McDonald’s, or Nike can easily change their
­advertising, pricing, or promotion programs. They can scrap old products and introduce
new ones as market tastes change. But when they set up distribution channels through
contracts with franchisees, independent dealers, or large retailers, they cannot readily
­replace these channels with company-owned stores or online sites if the conditions change.
Therefore, management must design its channels carefully, with an eye on not just today’s
selling environment but also on tomorrow’s possibilities.

How Channel Members Add Value

Why do producers give some of the selling job to channel partners? After all, doing so
means giving up some control over how and to whom they sell their products. Producers
use intermediaries because they create greater efficiency in making goods available to
target markets. Through their contacts, experience, specialization, and scale of operation,
­intermediaries usually offer the firm more than it can achieve on its own.
Figure 12.1 shows how using intermediaries can provide economies. Figure 12.1A
shows three manufacturers, each using direct marketing to reach three customers. This sys-
tem requires nine different contacts. Figure 12.1B shows the three manufacturers working
through one distributor, which contacts the three customers. This system requires only six
contacts. In this way, intermediaries reduce the amount of work that must be done by both
producers and consumers.
From the economic system’s point of view, the role of marketing intermediaries is to
transform the assortments of products made by producers into the assortments wanted
by consumers. Producers make narrow assortments of products in large quantities, but
consumers want broad assortments of products in small quantities. Marketing channel
members buy large quantities from many producers and break them down into the smaller
quantities and broader assortments desired by consumers.
For example, Unilever makes millions of bars of Dove Beauty Bar soap each week.
However, you most likely want to buy only a few bars at a time. Therefore, big food, drug,
and discount retailers, such as Safeway, Walgreens, and Target, buy Dove by the truckload

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 366 PART 3 | Designing a Customer Value–Driven Strategy and Mix
FIGURE 12.1
How a Distributor Reduces the Number of Channel Transactions

1
Manufacturer Customer Manufacturer Customer
2 1 4
3
Marketing channel
intermediaries make 4
buying a lot easier for 5 2 5
consumers. Again, Distributor
Manufacturer Customer Manufacturer Customer
think about life without
grocery retailers. How
would you go about 6
buying that 12-pack of 6
Coke or any of the 7 3
hundreds of other items 8
that you now routinely Manufacturer Customer Manufacturer Customer
drop into your shopping 9
cart?
A. Number of contacts without a distributor B. Number of contacts with a distributor

and stock it on their stores’ shelves. In turn, you can buy a single bar of Dove along with a
shopping cart full of small quantities of toothpaste, shampoo, and other related products
as you need them. And on the next visit, you could buy another brand of soap from the
same retailer. Thus, intermediaries play an important role in “breaking bulk” and match-
ing supply and demand.
In making products and services available to consumers, channel members add value
by bridging the major time, place, and possession gaps that separate goods and services
from those who use them. Members of the marketing channel perform many key func-
tions. Some help to complete transactions:
• Information. Gathering and distributing information about consumers, producers,
and other actors and forces in the marketing environment—information needed to
make effective manufacturing and marketing decisions.
• Promotion. Developing and spreading persuasive communications about an offer.
• Contact. Finding and engaging customers and prospective buyers.
• Matching. Shaping offers to meet the buyer’s needs, including activities such as
downstream manufacturing and assembly, grading, assembling, and packaging.
• Negotiation. Reaching an agreement on price and other terms so that ownership or
possession can be transferred.
Others help fulfill the completed transactions:
• Physical distribution. Transporting and storing goods.
• Financing. Acquiring and using funds to cover the costs of the channel work.
• Risk taking. Assuming the risks of carrying out the channel work.
The question is not whether these functions need to be performed—they must be—but
rather who will perform them. To the extent that the manufacturer performs these func-
tions, its costs go up; therefore, its prices must be higher. When some of these functions
are shifted to intermediaries, the producer’s costs and prices may be lower, but the inter-
mediaries must charge more to cover the costs of their work. In dividing the work of the
channel, the various functions should be assigned to the channel members that can add the
most value for the cost.

Number of Channel Levels

Companies can design their distribution channels to make products and services avail-
able to customers in different ways. Each layer of marketing intermediaries that performs
Channel level some work in bringing the product and its ownership closer to the final buyer is a channel
A layer of intermediaries that performs level. Because both the producer and the final consumer perform some work, they are part
some work in bringing the product and of every channel.
its ownership closer to the final buyer. The number of intermediary levels indicates the length of a channel. Figure 12.2 shows
both consumer and business channels of different lengths. Figure 12.2A shows several

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 CHAPTER 12 | Marketing Channels: Delivering Customer Value 367
Direct marketing channel common consumer distribution channels. Channel 1, a direct marketing channel, has
A marketing channel that has no no intermediary levels—the company sells directly to consumers. For example, Pampered
intermediary levels, with the producer Chef, Mary Kay Cosmetics, and Amway sell their products through home and office sales
selling directly to the consumer. parties and online websites and social media; companies ranging from GEICO insurance to
Quicken Loans to Casper Mattress sell directly to customers via internet, mobile, and tele-
Indirect marketing channel phone channels. The remaining channels in Figure 12.2A are indirect marketing channels,
A marketing channel containing one or containing one or more intermediaries. Complex channels and international channels may
more intermediary levels between the contain even more channel levels.
producer and the consumer. Figure 12.2B shows some common business distribution channels. The business mar-
keter can use its own sales force or the internet to sell directly to business customers. Or it
can sell to various types of intermediaries, which in turn sell to these customers. Sometimes
business marketing channels can have more levels, with intermediaries performing differ-
ent tasks. For example, the business distributor might sell to the business customer as in
Figure 12.2B, while a service agent is responsible for the product maintenance and perfor-
mance after the sale. From the producer’s viewpoint, a greater number of intermediary
levels means less control and greater channel complexity. Moreover, all the institutions
in the channel are connected by several types of flows. These include the physical flow of
products, the flow of ownership, the payment flow, the information flow, and the promotion
flow. These flows can make even channels with only one or a few levels very complex.
Ownership and control of these flows at different channel levels are an important issue
between channel members.

Author Channels are made

Comment up of more than just
boxes and arrows on paper. They
Channel Behavior and Organization
are behavioral systems consisting OBJECTIVE 12-2 Discuss how channel members interact and how they organize to
of real companies and people who perform the work of the channel.
interact to accomplish their individual
and collective goals. Like groups of Distribution channels are more than simple collections of firms tied together by various
people, sometimes they work well flows. They are complex behavioral systems in which people and companies interact to
together and sometimes they don’t. accomplish individual, company, and channel goals. Some channel systems consist of only
informal interactions among loosely organized firms. Others consist of formal interactions

FIGURE 12.2
Consumer and Business Marketing Channels
Using direct channels, a
company sells directly to Using indirect channels, the company uses one or
consumers (no surprise there!). more levels of intermediaries to help bring its products
Examples: GEICO and Quicken to final buyers. Examples: most of the things you
Loans. buy—everything from toothpaste to cameras to cars.

Producer Producer Producer Producer Producer Producer

Wholesaler Manufacturer’s
representatives
or sales branch

Business Business
Retailer Retailer
distributor distributor

Business Business Business

Consumer Consumer Consumer
customer customer customer

Channel 1 Channel 2 Channel 3 Channel 1 Channel 2 Channel 3

A. Consumer marketing channels B. Business marketing channels

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 368   PART 3 | Designing a Customer Value–Driven Strategy and Mix
guided by strong organizational structures and contracts. Moreover, channel systems
do not stand still—new types of intermediaries emerge and whole new channel systems
evolve. Here we look at channel behavior and how members organize to do the work of
the channel.

Channel Behavior
A marketing channel consists of firms that have partnered for their common good. Each
channel member depends on the others. For example, a Ford dealer depends on Ford to
design cars that meet customer needs. In turn, Ford depends on the dealer to engage cus-
tomers, persuade them to buy Ford cars, and service the cars after the sale. Each Ford
dealer also depends on other dealers to provide good sales and service that will uphold
the brand’s reputation. In fact, the success of individual Ford dealers depends on how well
the entire Ford marketing channel competes with the channels of Toyota, GM, Honda, and
other auto manufacturers.
Each channel member plays a specialized role in the channel. For example, Samsung’s
role is to produce electronics products that consumers will covet and create demand
through national advertising. Best Buy’s role is to display these Samsung products in con-
venient locations, engage in local advertising, answer buyers’ questions, and complete
sales. The channel will be most effective when each member assumes the tasks it can do
best.
Ideally, because the success of individual channel members depends on the overall
channel’s success, all channel firms should work together smoothly. They should under-
stand and accept their roles, coordinate their activities, and cooperate to attain overall
channel goals. However, individual channel members may not embrace such a broad view.
Cooperating to achieve overall channel goals sometimes means giving up individual goals.
Although channel members depend on one another, they often act alone in their own
short-run best interests. They often disagree on who should do what and for what rewards.
Channel conflict Such disagreements over goals, roles, and rewards generate channel conflict.
Disagreements among marketing Horizontal channel conflict occurs among firms at the same level of the channel. For
channel members on goals, roles, and instance, some Ford dealers in Chicago might complain that other dealers in the city steal
rewards—who should do what and for sales from them by pricing too low or advertising outside their assigned territories. Or
what rewards. Hampton Inn franchisees might complain about other Hampton Inn operators overcharg-
ing guests or giving poor service, hurting the overall Hampton Inn image.
Vertical channel conflict—conflict between different levels of the same channel—is
even more common. ­ For example, with nearly 40,000 independently owned outlets,
sandwich chain Subway is the world’s largest food
franchise by number of outlets. In recent years,
however, Subway has faced often-damaging con-
flict with its franchisees:2
A group of more than 100 anonymous Subway
franchisees recently published an open letter
­outlining a long list of issues with Subway’s man-
agement, ranging from lack of autonomy in raising
ingredient quality and choosing locations to unfair
franchise agreements that Subway could change
at will without notice. The most basic conflicts
are financial. Subway makes its money from an
8 percent royalty on franchisee sales. In contrast,
franchisees make money on margins—what’s left
over after their costs. Thus, franchisees have long
complained that Subway makes decisions that in-
crease sales but squeeze franchisee profits. They
assert that Subway forces them into money-losing
decisions—like opening unneeded new locations
right next to existing ones or offering unprofitable
menu items.
Channel conflict: A high level of franchisee discontent is worrisome Just one example of a long-running dispute
for both Subway and its franchisees. There’s a huge connection between involves Subway’s famous on-again-off-again “$5
franchisee satisfaction and customer service. footlong” promotion. First introduced nationally in
Kristoffer Tripplaar/Alamy Stock Photo 2008, the deal became a cultural phenomenon, and

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 CHAPTER 12 | Marketing Channels: Delivering Customer Value 369
sales soared. And with 2008 labor and material costs at low levels, the $5 footlong was initially
profitable for franchisees. But as costs inevitably rose, franchisee margins on the popular sand-
wich eroded. So in 2012, Subway yielded and raised the price to $6. But the story doesn’t end
there. In 2017, seeking sales growth, Subway reintroduced the $5 footlong. But by then, the costs
of making the footlong had risen to $4.85, making it impossible for franchisees to make a mean-
ingful profit. Facing franchisee disgruntlement, Subway again shelved the offer. The story’s still
not over. In 2020, to spur sales slowed by the COVID-19 pandemic, over the objections of many
franchisees, Subway launched a “ $10 for two footlongs” deal, causing yet another uproar. Such
conflicts are worrisome for both Subway and its franchisees. Studies show that there’s a huge
connection between franchisee satisfaction and customer service.

Some channel conflict takes the form of healthy competition. Without some such com-
petition, the channel could become passive and noninnovative. For example, Subway’s
conflict with its franchisees might represent normal give-and-take over their respective
rights. However, prolonged conflict can disrupt channel effectiveness and harm channel
relationships. Subway should ensure that all company and franchisee interests are aligned
in the long run.

Vertical Marketing Systems

Conventional distribution channel For the channel as a whole to perform well, each channel member’s role must be specified,
A channel consisting of one or more and channel conflict must be managed. The channel will perform better if it includes a
independent producers, wholesalers, firm, agency, or mechanism that provides leadership and has the power to assign roles and
and retailers, each a separate business manage conflict.
seeking to maximize its own profits, Historically, conventional distribution channels have lacked such leadership and
perhaps even at the expense of profits power, often resulting in damaging conflict and poor performance. One of the big-
for the system as a whole. gest channel developments over the years has been the emergence of vertical marketing
systems that provide channel leadership. Figure 12.3 contrasts the two types of
Vertical marketing system (VMS) channel arrangements.
A channel structure in which producers, A conventional distribution channel consists of one or more independent produc-
wholesalers, and retailers act as a unified ers, wholesalers, and retailers. Each is a separate business seeking to maximize its own
system. One channel member owns profits, perhaps even at the expense of the system as a whole. No channel member has
the others, has strong contracts with much control over the other members, and no formal means exists for assigning roles and
them, or has so much power that they all
resolving channel conflict.
cooperate.
In contrast, a vertical marketing system (VMS) consists of producers, wholesalers,
and retailers acting as a unified system. One channel member owns the others, has strong

FIGURE 12.3
Comparison of Conventional Distribution Channel with Vertical Marketing System

Producer
Producer

Retailer
Wholesaler Wholesaler

Vertical marketing system—here’s

Retailer another fancy term for a simple
concept. It’s simply a channel in
which members at different levels
(hence, vertical) work together in
a unified way (hence, system) to
accomplish the work of the channel.
Consumer Consumer

Conventional Vertical
marketing marketing
channel system

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 370   PART 3 | Designing a Customer Value–Driven Strategy and Mix
contracts with them, or wields so much power that they must all cooperate. The VMS can
be dominated by the producer, the wholesaler, or the retailer.
We look now at three major types of VMSs: corporate, contractual, and administered.
Each uses a different means for setting up leadership and power in the channel.

Corporate VMS
Corporate VMS A corporate VMS integrates successive stages of production and distribution under ­single
A vertical marketing system that ownership. Coordination and conflict management are attained through regular organiza-
combines successive stages of tional channels. For example, European eyewear maker EssilorLuxottica has a firm grip
production and distribution under single on the global eyewear channel from producer to consumer. It produces many famous eye-
ownership—channel leadership is wear brands—including its own Ray-Ban, Oakley, Persol, and Vogue Eyewear brands and
established through common ownership. licensed brands such as Burberry, Chanel, Polo Ralph Lauren, Dolce & Gabbana, DKNY,
Prada, Versace, and Michael Kors. It also produces and sells about 45 percent of the world’s
prescription lenses. It then controls the distribution of these brands through some of the
world’s largest optical chains—LensCrafters, Pearle Vision, Sunglass Hut, Target Optical,
Sears Optical—which it also owns. In all, through
vertical integration, EssilorLuxottica makes and
sells close to 1 billion pairs of lenses and frames
a year.3
A corporate VMS can give a company more
channel control and flexibility. Consider Tesla.
Unlike almost every other vehicle manufacturer,
Tesla does not sell and service its cars through in-
dependent franchise dealerships. Tesla reasoned
that dealerships selling gas-powered vehicles
profit substantially from ongoing servicing, but
its all-electric vehicles require little to no ongoing
service. Tesla also wanted to avoid the difficulties
of complex franchisee agreements and the thicket
of state-level regulations governing auto dealer-
ships. So instead, Tesla sells its cars online and
through a network of ­company-owned Tesla stores
or “galleries,” where customers can see sample
vehicles, get more information, and receive as-
Corporate VMS: Unlike other auto companies, to gain more control over sistance in configuring and ordering their Teslas.
its distribution channels, Tesla sells and services its cars online and through Customers can pick up purchased cars at the Tesla
a network of company-owned Tesla stores or “galleries,” where customers location or have them delivered to their door-
can see sample vehicles, get more information, and receive assistance in steps. In the rare instance that service is needed,
configuring and ordering their Teslas. customers can coordinate service activities, costs,
Chon Kit Leong/Alamy Stock Photo tracking, delivery, and pickup with a Tesla service
center through the Tesla service app. With its corporate vertical marketing system (VMS),
Tesla has challenged the channel distribution channel structure that has dominated the
auto industry for more than a century.4

Contractual VMS
Contractual VMS A contractual VMS consists of independent firms at different levels of production and
A vertical marketing system in which distribution that join together through well-defined contracts to obtain more economies or
independent firms at different levels of sales impact than each could achieve alone. Channel members coordinate their activities
production and distribution join together and manage conflict through contractual agreements.
through well-defined contracts. The franchise organization is the most common type of contractual relation-
ship. In this system, a channel member called a franchisor links several stages in the
Franchise organization ­production-distribution process. In the United States alone, some 753,700 franchise
A contractual vertical marketing system outlets account for $670 billion of economic output and employ 7.5 million people.5
in which a channel member, called a Almost every kind of business has been franchised—from motels and fast-food restau-
franchisor, links several stages in the rants to dental centers and dating services and from wedding consultants and repair
production-distribution process. services to funeral homes, fitness centers, moving services, and hair salons. Franchising
allows entrepreneurs with good business concepts to grow their businesses quickly

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 CHAPTER 12 | Marketing Channels: Delivering Customer Value    371
and profitably. For example, consider Planet
Fitness, which has grown rapidly by franchising
its unique gym and fitness approach:6

Planet Fitness’s unique selling point is a low $10

monthly membership fee, which allows access to
bright, clean, no-frills but well-equipped gyms
with a non-intimidating, “you belong” workout
environment—what it calls a “judgement free
zone” in which anyone and everyone can be com-
fortable. “No need to be gymtimidated,” says the
company. Its value proposition is designed to ap-
peal to a broad population, including occasional
gym users and the approximately 85 percent of
population who don’t have a gym membership. To
make average ­gym-goers feel more comfortable,
Planet Fitness’s purple-themed locations even
have a “Lunk Alarm,” which sounds loudly when
a member is overly exuberant in terms of grunt-
ing, dropping heavy weights, and exhibiting other
Franchising: Planet Fitness has grown rapidly to more than 2,250 locations
by franchising its affordable “judgement free zone” gym and fitness formula. behaviors that you might find in gyms targeting
more serious bodybuilders and committed ath-
Lars Hagberg/Alamy Stock Photo; Bernard Weil/Toronto Star via Getty Images
letes. Thanks to franchising, in less than 20 years,
Planet Fitness has grown rapidly to more than 2,250 locations in all 50 states and the District
of Columbia, Puerto Rico, Canada, Panama, Mexico, and Australia, with systemwide sales of
$3.4 billion.

There are three types of franchises. The first type is the manufacturer-sponsored retailer
franchise system—for example, Ford and its network of independent franchised deal-
ers. The second type is the manufacturer-sponsored wholesaler franchise system—Coca-Cola
­licenses bottlers (wholesalers) in various world markets that buy Coca-Cola syrup con-
centrate and then bottle and sell the finished product to retailers locally. The third type
is the service-firm-sponsored retailer franchise system—for example, Sonic Drive-In has more
than 3,500 franchisee-operated restaurants in the United States. Other examples can be
found in everything from auto rentals (Hertz, Avis), apparel retailers (The Athlete’s Foot,
Plato’s Closet), and motels (Holiday Inn Express, Hampton Inn) to supplemental educa-
tion (Huntington Learning Center, Kumon Math & Reading Centers) and personal services
(Planet Fitness, Two Men and a Truck, Great Clips).
The fact that most consumers cannot tell the difference between contractual and corporate
VMSs shows how successfully the contractual organizations compete with corporate chains.
The next chapter on retailing presents a fuller discussion of the various c­ ontractual VMSs.

Administered VMS
Administered VMS In an administered VMS, leadership is assumed not through common ownership or
A vertical marketing system that contractual ties but through the size and power of one or a few dominant channel mem-
coordinates successive stages of bers. Manufacturers of a top brand can obtain strong trade cooperation and support from
production and distribution through the ­resellers. For example, P&G and Samsung can command unusual cooperation from many
size and power of one of the parties. resellers regarding displays, shelf space, promotions, and price policies. In turn, large re-
tailers such as Walmart, Home Depot, Kroger, Best Buy, and Walgreens can exert strong
influence on the many manufacturers that supply the products they sell.
For example, in the normal push and pull between Home Depot and its suppliers, giant
Home Depot—the nation’s sixth-biggest retailer and largest home-improvement merchant—
usually gets its way. Take specialty coatings and sealants supplier RPM International, for
instance. You may never have heard of RPM International, but you’ve probably used one or
more of its many familiar do-it-yourself brands—such as R ­ ust-Oleum paints, Plastic Wood
and Dap fillers, Watco finishes, and Testors hobby cements and paints—all of which you
can buy at your local Home Depot store. The Home Depot is a very important customer to
RPM, accounting for a significant share of its consumer sales. However, The Home Depot’s
sales of close to $130 billion are more than 20 times RPM’s sales of $6.1 billion. As a result,
the giant retailer can, and often does, use this power to gain channel cooperation and sup-
port from RPM and thousands of other smaller suppliers.7

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 372   PART 3 | Designing a Customer Value–Driven Strategy and Mix
Horizontal Marketing Systems
Horizontal marketing system Another channel development is the horizontal marketing system, in which two or
A channel arrangement in which two more companies at one level join together to follow a new marketing opportunity. By work-
or more companies at one level join ing together, companies can combine their financial, production, or marketing resources to
together to follow a new marketing accomplish more than any one company could alone.
opportunity. Companies might join forces with competitors or noncompetitors. They might
work with each other on a temporary or permanent basis, or they may create a separate
company. For example, Target partners with CVS Health, which operates CVS phar-
macies and Minute Clinics in Target stores through a store-within-a-store format. The
partnership gives CVS Health more than nearly 1,700 pharmacies and 1,100 clinics at
prime locations inside Target stores. At the same time, it frees up Target to focus on its
core merchandising and marketing strengths while still offering customers the expert
pharmacy and h ­ ealth-care services they want. Best Buy partners with key retail com-
petitor Amazon by creating store-within-store areas featuring Amazon’s Alexa/Echo,
FireTV, and other home electronics products. The arrangement boosts Best Buy’s smart-
home product sales while giving Amazon a broader and more effective physical store
presence for its devices. And ride-sharing service Uber now teams up with taxi compa-
nies in New York City as well as in many over-
seas locations to make the taxi cabs available to
riders through its app. The cab companies gain
access to Uber’s huge customer base and Uber
supercharges the size of its fleet. Partnering with
taxi fleets also helps Uber to smooth relation-
ships with legislators and policy makers in those
locations.8
Horizontal channel arrangements also work
well globally. For example, Finnair partners
with British Airways, American Airlines, and
Iberia to provide customers with more choices,
better connections, and better pricing on transat-
lantic routes. This makes the global travel experi-
ence for the customer easier and more rewarding.
British Airways is part of the One World Alliance,
allowing for many connecting flights. Thus, the
airlines that are part of the alliance can increase
passenger volume through travel agents. The
Horizontal marketing systems: Finnair partners with British Airways, premise for the alliance is that the travel agent
American Airlines, and Iberia to their mutual benefit, as they provide their who books passengers on one airline will more
customers with more choices and better connections. likely book passengers on connecting airlines
TRISTAR PHOTOS/Alamy Stock Photo within the alliance.9

Multichannel Distribution Systems

In the past, many companies used a single channel to sell to a single market or market seg-
ment. Today, with the proliferation of customer segments and channel possibilities, more
Multichannel distribution system and more companies have adopted multichannel distribution systems. Such multi-
A distribution system in which a single channel marketing occurs when a single firm sets up two or more marketing channels to
firm sets up two or more marketing reach one or more customer segments.
channels to reach one or more customer ­Figure 12.4 shows a multichannel marketing system. In the figure, the producer
segments, coordinating channel sells directly to consumer segment 1 using catalogs, online, social media, and mobile chan-
strategies to maximize total profits nels and reaches consumer segment 2 through retailers. It sells indirectly to business seg-
across all the channels. ment 1 through distributors and dealers and to business segment 2 through its own sales
force. Multichannel marketing calls for the producer to coordinate its channel strategies to
maximize total profits across all the channels.
These days, almost every large company and many small ones distribute through
multiple channels. For example, John Deere sells its familiar green-and-yellow lawn and
garden tractors, mowers, and outdoor power products to consumers and commercial

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 CHAPTER 12 | Marketing Channels: Delivering Customer Value 373
FIGURE 12.4
Multichannel Distribution System Producer

Most large companies distribute

through multiple channels. For example, Distributors
you could buy a familiar green-and-yellow
John Deere lawn tractor from a neighborhood
John Deere dealer or from Lowe’s. A large
farm or forestry business would buy larger Catalogs,
Sales
John Deere equipment from a premium online,
full-service John Deere dealer and its Retailers Dealers force
social media,
sales force. and mobile

Consumer Consumer Business Business

segment 1 segment 2 segment 1 segment 2

users through several channels, including John Deere retailers, Lowe’s home improvement
stores, and online. It sells and services its tractors, combines, planters, and other agricul-
tural equipment through its premium John Deere dealer network. And it sells large con-
struction and forestry equipment through selected large, full-service John Deere dealers
and their sales forces.
Multichannel distribution systems offer many advantages to companies facing
large and complex markets. With each new channel, the company expands its sales
and market coverage and gains opportunities to tailor its products and services to
the specific needs of diverse customer segments. But such multichannel systems are
harder to control, and they can generate conflict as more channels compete for cus-
tomers and sales. For example, when John Deere first began selling selected consumer
products through Lowe’s home improvement stores, many of its independent dealers
complained loudly. To avoid such conflicts in its online marketing channels, the com-
pany routes all of its online sales to John Deere dealers. Today, firms must align chan-
nel goals, roles, and incentives so that all of the company’s channels work in harmony to
maximize total profits.

Changing Channel Organization

Changes in technology and the explosive growth of direct and online marketing have had
a profound impact on the nature and design of marketing channels. One major trend is
Disintermediation (or channel toward disintermediation or channel disruption—big terms with a clear message and
disruption) important consequences. Disintermediation and channel disruption occur when product
The cutting out of marketing channel or service producers cut out intermediaries and go directly to final buyers or when radi-
intermediaries by product or service cally new types of channel intermediaries displace traditional ones.
producers or the displacement of Thus, in many industries, traditional intermediaries are dropping by the wayside, as is
traditional resellers by radical new types the case with online marketers taking business from traditional brick-and-mortar retailers.
of intermediaries. For example, online music download services such as iTunes and Amazon pretty much put
traditional music-store retailers out of business. In turn, however, streaming music services
such as Spotify, Amazon Prime Music, and Apple Music are now disintermediating digital
download services. Streaming, both subscription based and ad supported, now accounts
for 80 percent of the music revenues. Worldwide, more than 500 million people pay for
digital music services.10
Disintermediation and disruption present both opportunities and problems
for producers and resellers. Channel innovators who find new ways to add value
in the channel can displace traditional resellers and reap the rewards. For exam-
ple, app-based ride-hailing services Lyft and Uber stormed onto the scene, rapidly

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 374   PART 3 | Designing a Customer Value–Driven Strategy and Mix
disintermediating traditional taxi and car-for-hire services by offering better cus-
tomer experiences at lower fares. In Southeast Asia, Grab is rapidly disintermediat-
ing conventional taxicab and car-for-hire services (see Real Marketing 12.1). In an
example from another industry, consider Anghami:
Founded in 2012, Anghami (“my tunes” in Arabic) is the first music-streaming platform in the
Middle East and rivals global brands such as Spotify and Deezer. Before it launched, music lovers
used traditional intermediaries such as radio channels, brick-and-mortar music retailers like Virgin
Megastores, and iTunes. With the coming of Anghami, the music business went mobile. Offering
more than 57 million Arabic and international songs and with around 70 million registered users,
Anghami generates approximately 10 billion streams
a year. In 2021, Anghami became the first technology
company from the region to list on the Nasdaq, with a
valuation of up to $230 million. High mobile penetra-
tion, the availability of cheaper smartphones, and high-
speed connectivity infrastructures in the GCC helped
Anghami—which initially launched as a mobile app—
to grow its adoption and consumption. As global play-
ers started entering the market, Anghami not only had
to maintain market leadership but also scale up. One of
the challenges at this growth stage was convincing peo-
ple to pay for music by subscribing. As credit card pen-
etration was low, Anghami partnered with local telecom
companies to encourage subscription through direct
mobile billing. Through its knowledge of the local Arab
ecosystem, Anghami was able to withstand competition
from international companies, and by offering an Arab
music catalog that none of the international streaming
applications could match, Anghami became a hub for all
things Arabic. Lovers of Arabic music could now search
for, download, and stream their music without resort-
ing to illegal sites or apps littered with ads that offered
no revenue to the artists. Anghami’s Live Radios feature
allows users to host online public and private listening
Disintermediation and disruption: Anghami and other innovative app-based sessions, promoting a unique Arab community feel.
music services are rapidly disintermediating conventional music distribution Anghami’s algorithms create automated customized
channels. playlists based on user preferences, but they also pro-
Timon Schneider/Alamy Stock Photo mote local talent to users.11

History brims with examples of companies that failed to recognize and respond to
channel disruptions and paid the price. For example, Toys“R”Us pioneered the superstore
format that once made it the go-to place for buying toys and baby products, driving most
small independent toy stores out of business. But in later years, Toys“R”Us failed to adapt
to major shifts in toy market sales, first toward big discounters such as Walmart and Target
and then toward online merchants like Amazon. Last year, an estimated 45 percent of toy
and baby product purchases were made online. Amazon leads in online toys sales, with
Walmart hot on its digital heels. As a result, Toys“R”Us ended up declaring bankruptcy
and shuttering its website and stores. A new owner has recently reignited the brand, focus-
ing on a more interactive model that allows customers to experience toys before buying
them. It’s new 20,000-square-foot flagship store in New Jersey’s American Dream mega-
mall features 10,000 toys, an ice-cream parlor, a café, and a two-story slide. However,
despite its iconic brand, reestablishing itself in today’s omni-channel retail environment
will present substantial challenges.12
The recent decade has seen the rapid rise of a new type of channel disrupter:
Direct-to-consumer (DTC) brands d
­ irect-to-consumer (DTC) brands. Rather than competing head-to-head with estab-
Brands that avoid direct competition with lished competitors in retail stores, DTC brands sell and ship directly to consumers through
established traditional brands by selling online and mobile channels. DTC brands have found success in categories ranging from
and shipping to consumers only through beauty and personal care, apparel, and food to pet care, home furnishings, and fitness. To
online and mobile channels. compete with this disruptive competitive threat, many established brands have developed
their own DTC channels.
Like resellers, to remain competitive, product and service producers must develop new
channel opportunities, such as the internet, mobile, and other direct channels. Going direct
to consumers, however, often brings brands into direct competition with their established
channels, resulting in conflict. To ease this problem, companies often look for ways to make
going direct a plus for the entire channel. For example, Stanley Black & Decker knows that

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 CHAPTER 12 | Marketing Channels: Delivering Customer Value    375

Real Marketing 12.1 How to Grab and Shake Things Up

Before it became possible to be on your way Grab. Originating in 2012 as Grab Taxi, oper- They also launched Grab Bike in cities such as
to a destination after little more than a few ating in Malaysia, Grab is now considered one Jakarta, Manilla, Bangkok, and Ho Chi Minh
swipes and taps on a phone, transport was an of Southeast Asia’s most important tech uni- to leverage the fact that many of the densely
industry ripe for disruption. Many local and re- corns, having reached a valuation of $6 billion populated Asian cities suffered from regular
gional companies operated in limited radii, and by 2018, even before going public. The term traffic jams and people would opt for bikes to
excess demand over a limited supply of taxis “unicorn” refers to private start-ups that reach circumvent this. This hyper-local approach com-
meant booking your own ride came at a fairly a valuation of over $1 billion; many of these are bined with Grab’s ability to leverage technol-
high cost. When a certain way of doing things technologically innovative and reflect an aware- ogy meant they could solve a problem for their
becomes entrenched in society, it can put a ness by investors that the company is on the customers and offer safer and more reliable taxi
halt to innovation, and this was certainly true of brink of bringing a major paradigm shift to the services in markets that were previously known
the transport industry. For a long time, the sta- industry they operate in. By 2014, just two to be unpredictable and unreliable. Simple fea-
tus quo was largely accepted, and taxis were years after starting up, Grab was expanding tures like being able to track the fare on the
seen as a more convenient luxury compared the company to other Asian markets such as app meant riders no longer had to worry about
to public transport or walking, with the asso- Singapore, Thailand, Vietnam, and Indonesia. fickle taxi meters, and the driver rating system
ciated costs accepted as a matter of course. The service grew to offer taxi-hailing, car hire, brought a new level of reassuring transparency.
Faced with a cartel-like market structure in and even bike hire in Vietnam and Indonesia, While consumers were no longer at the
urban transportation, consumers had only the where bike-sharing is common. mercy of government or private taxi compa-
options to buy their own cars or rely on car-hire A large part of Grab’s disruptive force came nies that controlled the supply of transport,
or taxi companies, with little middle ground. from the emphasis on both the riders’ and driv- drivers gained an unprecedented level of au-
That changed with the coming of the gig ers’ experiences. Convenience is one thing, tonomy and were both incentivized and em-
economy and app-based urban ride-hailing. but without the ability to offer a seamless and powered by the app’s rating system to pro-
Broadly speaking, the gig economy is char- pleasant experience, Grab would have strug- vide superior service. Grab’s meteoric growth
acterized by the supply of labor in the form of gled to acquire the same numbers of repeat is proof that their disruptive innovation in the
short-term contracts or freelance work instead customers or benefit from the abundant sup- Asian urban transport market really did set a
of permanent roles. This means the traditional ply of potential drivers. Stemming from Grab’s new standard. In 2018, Grab acquired Uber’s
hurdles to employment become virtually non- mission of “Charging Forward Together,” the Southeast Asian operations and is now the
existent, as all one needs is a vehicle to start app was able to connect everyday commut- leading ride-share company in the region, with
providing taxi services. However, this also en- ers with ordinary working individuals and allow 71 percent of the market share. Boasting over
tails a lack of job security or of consistency them to mutually benefit each other. From the 2.8 million drivers and over 6 million daily rides,
in earnings. The net effect has been that the supply side, initiatives such as the strategic the company soared to a valuation of over $40
supply of taxis has extended to anyone with partnership between Grab and Malaysian car billion for its public listing on the NASDAQ.
access to a car, leading to lower prices as de- retailer Carsome enabled rider-partners to buy The business has grown to offer much
mand no longer outstrips supply. These ser- their own cars more easily and be part of the more than ride-sharing. It has pivoted into be-
vices have disintermediated the conventional growing ride-hailing business. The “Own Your coming what is known as a superapp; that is,
taxicab and car-hire services by directly con- Ride” campaign included discounts, extended an app offering multiple services in one place.
necting people demanding rides with people after-sale service, and certification that the vehi- In Grab’s case, this covers ride-hailing, pay-
who can supply them. cles were up to safety standards. Additionally, ment processing, financial services and digital
The benefits to using ride-hailing services in Singapore, Grab runs the “GrabRentals Car wallets, as well as a series of auxiliary services.
are not hard to understand: they provide a Ownership” scheme, which gives people a GrabExpress offers live GPS tracking for a
straightforward online platform that connects means to rent and eventually own the car they courier service that offers substantially more
drivers and riders with the convenience af- become a driver-partner
forded by a smartphone. A live map display with. On the demand
shows nearby drivers and estimates the side, Grab focused on
amount of time it will take to be picked up, the specific issues that ailed
fare riders will have to pay, and the length of the local urban-transport
the journey. Rather than dealing with the cen- industries in the regions
tralized dispatch operator of a taxi company or where they operated.
needing to pre-book a private car, these mo- In fact, their competi-
bile apps offer an immediate solution that elim- tive edge over the likes
inates a lot of the guesswork and uncertainty of Uber in Southeast
that usually plagues urban transport solutions. Asia stemmed from
The added convenience of payments being their advanced knowl-
seamlessly handled through an online credit or edge of local culture.
debit card payment system has only added to For example, from the
the convenience to driver and rider alike. beginning, Grab allowed
The notable breakthrough company that cash payment for rides,
comes to mind in this area is Uber, which an important factor in
launched in the United States before spread- many Southeast Asian Grab disrupted the urban hired transport industry by opening
ing to many other markets around the world, economies that were doors to anyone with access to a car.
but another notable example is Singapore’s still heavily cash-based. Megapress/Alamy Stock Photo

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 376   PART 3 | Designing a Customer Value–Driven Strategy and Mix
convenience and peace of mind than local exist, centralizing the highly informal system of well as developing guidelines for the company
postal services or established private courier motorcyclists, or ojek, that would cluster in pub- to follow. If this trend continues, the competi-
services that charge a premium. GrabFood lic places and haggle with people for the use of tive edge that helped Grab expand so quickly
avails the abundant supply of drivers that their services. Grab also faces competition in will soon be eroded, and traditional transport
support the ride-sharing business to pro- Vietnam, where gojek has partnered with local companies may see a reversal of fortune.
vide a platform for food delivery from nearby firms to form GO-VIET, gaining around 35 per- Moreover, increasing scrutiny is being placed
restaurants. In fact, during the COVID-19 cent of the two-wheel ride-share market in key on the sustainability of the gig economy and just
pandemic, more than 149,000 driver- locations such as Ho Chi Minh City. Competition how fair it is for companies like Grab to benefit
partners from the ride-hailing service switched is even rising in Grab’s backyard, Singapore. from drivers without giving them the status of full-
to on-demand delivery for GrabFood. A crucial ComfortDelGro, which was the dominant fledged employees. In fact, this is such a looming
development in Grab’s offerings is GrabPay, urban transport company in Singapore for de- threat that in 2022 Grab formed an association
which allows users to create a digital wallet cades, saw severe losses in market share and with competing gig economy firms Deliveroo and
that can be used to store, pay, and transfer fleet size due to the boom in ride-share apps. Delivery Hero to join discussions with the gov-
money not only to other Grab services but also ComfortDelGro aims to combat this by develop- ernment on how policy on workers’ rights gets
to GrabPay users. The suite of financial ser- ing its own lifestyle-oriented app and emphasiz- shaped. This dialogue, in turn, is a response to
vices has even extended to insurance, short- ing the digital model, leveraging its taxi fleet and growing concerns over the rights of short-term
term credit schemes, and more. By becom- public transport assets. contract workers, the absence of welfare pack-
ing a one-stop shop for so many aspects of In fact, the likes of local services such as ages compared to full-time employees, and
a consumer’s life, beyond just helping people Singapore’s ComfortDelGro and Vietnamese where the line exists on freelancer exploitation.
get to where they needed to be, Grab is well start-up Be represent another unique and However, restrictions introduced to protect short-
placed to make more of their daily lives easier. emergent threat to Grab in those markets. term contract workers could hinder the cheap
The company’s growth has not gone un- Grab is a technology company and claims their supply of labor that made these companies as
noticed, and competition has been brew- primary product is an app; as such, it should disruptive as they were. Time will tell if this form
ing. Despite forcing a giant like Uber out of not be regulated by the standards of the in- of disruption is truly sustainable in the long run.
Southeast Asia, Grab now faces stiff competi- dustries their app facilitates. ComfortDelGro While the future may be uncertain for Grab
tion from locally grown competitors as well as its and Be are openly registered as transporta- as far as labor policy goes, the company has
closest counterpart, Indonesian ride-sharing firm tion companies. In recent years, an increasing been able to weather the onslaught of COVID-
gojek, also known as Indonesia’s first unicorn. In number of lawsuits have been filed by trans- 19. When people were suddenly confined to
Indonesia, their market shares are almost neck- port companies in response to the drastic loss their homes and cash payments were no longer
and-neck, with Grab owning between 55 per- of business resulting from the disruption by considered safe, Grab’s position as a superapp
cent and 60 percent and gojek holding steady ride-hailing apps. These companies claim that facilitated digital payments and contact-free de-
at 45 percent in 2021. Gojek’s growth is not dis- the latter have an unfair advantage as they do liveries of food, groceries, general goods, and
similar to Grab’s, as it too took a hyper-local ap- not need to acquire relevant licenses to op- more. The reactively launched GrabMart service
proach to the unique problems ailing Indonesia’s erate in the transportation market or pay the expanded their offerings to include grocery store
urban-transport market. More than just leverag- taxes the industry requires. In some cases, the basics. The company was clearly able to capi-
ing technology to streamline a market, gojek ef- courts have indeed ruled against Grab, such talize on the opportunity, achieving $550 million
fectively created a market that did not formally as in Vietnam, imposing financial penalties as in revenues in the second quarter of 2021.13

many customers would prefer to buy its power tools, outdoor power equipment, and small
appliances directly from the company online. But selling directly through its web and mobile
sites would create conflicts with important and powerful retail partners, such as The Home
Depot, Walmart, and Amazon.com. So, although Stanley Black & Decker’s online sites pro-
vide detailed information about the company’s products, you can’t buy a Black & Decker
cordless drill, laser level, leaf blower, power garden shears, stick vac, or anything else there.
Instead, the Black & Decker site refers you to resellers’ sites and stores. Thus, Stanley Black &
Decker’s direct marketing helps both the company and its channel partners.

Author Like everything else

Comment in marketing, good Channel Design Decisions
channel design begins with analyzing
customer needs. Remember, OBJECTIVE 12-3 Identify the major channel alternatives open to a company.
marketing channels are really
We now look at several channel design decisions manufacturers face. In designing market-
customer value delivery networks.
ing channels, manufacturers struggle between what is ideal and what is practical. A new
firm with limited capital usually starts by selling in a limited market area. In this case,
deciding on the best channels might not be a problem: The problem might simply be how
to convince one or a few good intermediaries to handle the line.
If successful, the new firm can branch out to new markets through existing intermedi-
aries. In smaller markets, the firm might sell directly to retailers; in larger markets, it might
sell through distributors. In one part of the country, it might grant exclusive franchises; in
another, it might sell through all available outlets. Then it might add an online store for

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 CHAPTER 12 | Marketing Channels: Delivering Customer Value    377
improved customer reach and convenience. In this way, channel systems often evolve to
meet market opportunities and conditions.
For maximum effectiveness, however, channel analysis and decision making should be
­Marketing channel design more purposeful. Marketing channel design calls for analyzing consumer needs, setting
Designing effective marketing channels channel objectives, identifying major channel alternatives, and evaluating the alternatives.
by analyzing customer needs, setting
channel objectives, identifying major
channel alternatives, and evaluating Analyzing Consumer Needs
those alternatives.
As noted previously, marketing channels are part of the overall customer value delivery network.
Each channel member and level add value for the customer. Thus, designing the marketing chan-
nel starts with finding out what target consumers want from the channel. Do consumers want to
buy nearby, or are they willing to travel to more centralized locations? Would customers rather
buy in person or online? Do they value breadth of assortment, or do they prefer specialization?
Do consumers want many add-on services (delivery, installation, repairs), or will they obtain
these services elsewhere? The channel has to gear up to provide a higher level of services if it
focuses on faster delivery, a wider assortment of goods, and an increased level of add-on services.
Providing the fastest delivery, the greatest assortment, and the most services, however,
may not be possible, practical, or desired. The company and its channel members may not
have the resources or skills needed to provide all the desired services. Also, higher levels of
service result in higher costs for the channel and correspondingly higher prices for consum-
ers. The success of modern discount retailing shows that consumers often accept lower service
levels in exchange for lower prices. For example, Walmart typically rates near the bottom in
rankings of grocery retailers on customer shopping experience and satisfaction compared to
the likes of Wegmans, Publix, Trader Joe’s, and Whole Foods. Yet 55 percent of American
adults shop at Walmart for groceries.14
Many companies, however, position themselves on
higher service levels, and customers willingly pay the
higher prices. For example, Four Seasons Hotels and
Resorts invests heavily in top-flight service that creates
customer delight:15
Four Seasons has perfected the art of high-touch, carefully
crafted service. Whether it’s at the tropical island paradise
at the Four Seasons Resort Mauritius or the luxurious sub-
Saharan “camp” at the Four Seasons Safari Lodge Serengeti,
guests paying $1,000 or more a night expect to have their
minds read. For these guests, Four Seasons doesn’t disap-
point. It spares no expense in the quality of the Four Seasons
staff and the high level of service they provide. Four Seasons
hires the best people, pays them well, orients them carefully,
instills in them a sense of pride, and rewards them for out-
standing service deeds. According to one travel rating service,
each Four Seasons property strives “to go above and beyond
every day for their guests.” As one Four Seasons Maui guest
Meeting customers’ channel service needs: Four Seasons Hotels
once told a manager, “If there’s a heaven, I hope it’s run by
and Resorts has perfected the art of high-touch, carefully crafted
Four Seasons.”
service. “If there’s a heaven, I hope it’s run by Four Seasons.”
fokke baarssen/Shutterstock Thus, companies must balance consumer needs not
only against the feasibility and costs of meeting these needs but also against customer
price preferences.

Setting Channel Objectives

Companies should state their marketing channel objectives in terms of targeted levels of
customer service. Usually, a company can identify several segments wanting different lev-
els of service. The company should decide which segments to serve and the best channels
to use in each case. In each segment, the company wants to minimize the total channel cost
of meeting customer service requirements.
The company’s channel objectives are also influenced by the nature of the company, its
products, its marketing intermediaries, its competitors, and the environment. For example,
the company’s size and financial situation determine which marketing functions it can handle
itself and which it must outsource to intermediaries. Companies selling perishable products,
for example, may require more direct marketing to avoid delays and too much handling.

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 378   PART 3 | Designing a Customer Value–Driven Strategy and Mix
In some cases, a company may want to compete in
or near the same outlets that carry competitors’ prod-
ucts. For example, Maytag and other appliance mak-
ers want their products displayed alongside competing
brands to facilitate comparison shopping. In other cases,
companies may avoid the channels used by competi-
tors. The Pampered Chef, for instance, sells high-quality
kitchen tools directly to consumers through its corps of
more than 55,000 consultants worldwide rather than
going head-to-head with other kitchen tool makers for
scarce space in retail stores. GEICO and USAA primarily
market insurance and banking products to consumers
via phone, the internet, and direct mail channels rather
than through agents. Responding to the growing de-
mand for convenient online shopping, L’Oréal Middle
East partnered with CNNB Solutions to start an innova-
tive direct-to-consumer e-commerce and e-distribution
Channel objectives: Responding to consumer trends in the Middle East, service. The partnership includes development and
L’Oréal has overhauled its online shopping experience to reach consumers optimization of websites, inventory management, mar-
directly. ketplace negotiations, stock planning and warehousing,
Dmitry Larichev/Alamy Stock Photo and delivery logistics. They also launched digital try-
ons where consumers can sample makeup virtually. Since 2018, L’Oréal Middle East has
seen an upsurge in online sales of 750 percent, which is believed to have been driven by this
initiative. Since the start of the partnership, L’Oréal Middle East has reported an increase in
average order value of 12 percent, a 17.5 percent improvement in delivery rates, and a 235
percent increase in customer lifetime value (CLV) across select brands.16
Finally, environmental factors such as economic conditions and legal constraints may af-
fect channel objectives and design. For example, in a depressed economy, producers will want
to distribute their goods in the most economical way, using shorter channels and dropping
unneeded services that add to the final price of the goods. During the COVID-19 pandemic,
companies adopted or boosted online order and delivery channels and services.

Identifying Major Alternatives

When the company has defined its channel objectives, it should next identify its major
channel alternatives in terms of the types of intermediaries, the number of intermediaries,
and the responsibilities of each channel member.

Types of Intermediaries
A firm should identify the types of channel members available to carry out its channel work.
Most companies can choose from many types of channel members. For example, Dell ini-
tially sold directly to final consumers and business buyers only through its sophisticated
phone and online marketing channel. It also sold directly to large corporate, institutional,
and government buyers using its direct sales force. However, to reach more consumers and
match competitors such as Samsung, Apple, and HP, Dell now also sells indirectly through
retailers such as Best Buy, Staples, and Walmart. It also sells indirectly through value-added
resellers, independent distributors and dealers that develop computer systems and applica-
tions tailored to the special needs of small and medium-sized business customers.
Using many types of resellers in a channel provides both benefits and drawbacks.
For example, by selling through retailers and value-added resellers in addition to its own
direct channels, Dell can reach more and different kinds of buyers. However, these entities
are more difficult to manage and control. In addition, the direct and indirect channels com-
pete with each other for many of the same customers, causing potential conflict. In fact,
Dell often finds itself “stuck in the middle,” with its direct sales reps complaining about
competition from online and store retailers, and its value-added resellers complaining that
the direct sales reps are undercutting their business.

Number of Marketing Intermediaries

Companies must also determine the number of channel members to use at each
level. Three strategies are available: intensive distribution, exclusive distribution,

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 CHAPTER 12 | Marketing Channels: Delivering Customer Value    379
and selective distribution. Producers of convenience prod-
ucts and common raw materials typically seek intensive
distribution—a strategy in which they stock their prod-
ucts in as many outlets as possible. These products must be
available where and when consumers want them. For ex-
ample, toothpaste, candy, and other similar items are sold in
millions of outlets to provide maximum brand exposure and
consumer convenience. P&G, Coca-Cola, Kimberly-Clark,
and other consumer goods companies distribute their prod-
ucts in this way.
By contrast, some producers purposely limit the num-
ber of intermediaries handling their products. The extreme
form of this practice is exclusive ­distribution, in which
the producer gives only a limited number of dealers the ex-
clusive right to distribute its products in their territories.
Exclusive distribution is often found in the distribution of
luxury brands. Conatural is a high-end, organic skincare and
haircare manufacturer that sells through its own website and
offline stores. Its main retail strategy is to sell through its
online store and through its own two physical, offline stores
in upscale malls and 10 high-end retailers in its home city of
Lahore, Pakistan.17
Between intensive and exclusive distribution lies selec-
tive distribution—the use of more than one but fewer than
all of the intermediaries who are willing to carry a company’s
products. Most consumer electronics, furniture, and home ap-
pliance brands are distributed in this manner. For example,
outdoor power equipment maker STIHL doesn’t sell its chain
saws, blowers, hedge trimmers, and other products through
national big box retailers such as Lowe’s and The Home Depot.
Selective distribution: STIHL sells its chain saws, blowers, Instead, it sells through a select corps of authorized local
hedge trimmers, and other products through a select corps of
hardware and lawn and garden dealers. By using selective
authorized local hardware and lawn and garden retailers. “We
count on them every day and so can you.” distribution, STIHL can develop good working relationships
STIHL Inc.
with dealers and expect a better-than-average selling effort.
Selective distribution also enhances the STIHL brand’s image
and allows for higher markups resulting from greater value-added dealer service. “We
count on our select dealers every day and so can you,” says one STIHL ad.

Intensive distribution
Stocking the product in as many outlets Responsibilities of Channel Members
as possible.
The producer and intermediaries need to agree on the terms and responsibilities of
each channel member. They should agree on price policies, conditions of sale, territory
Exclusive distribution rights, and the specific services to be performed by each party. The producer should
Giving a limited number of dealers establish a list price and a fair set of discounts for the intermediaries. It must define
the exclusive right to distribute the each channel member’s territory, and it should be careful about where it places new
company’s products in their territories.
resellers.
Mutual services and duties need to be spelled out carefully, especially in franchise and
Selective distribution exclusive distribution channels. For example, Subway provides franchisees with access
The use of more than one but fewer than to proprietary formulas and operational systems, promotional and advertising support,
all of the intermediaries that are willing to intensive training, site selection assistance, and general management guidance. In turn,
carry the company’s products.
franchisees must meet company standards for physical facilities and food quality, provide
requested information, buy specified food products, and cooperate with new promotion
programs. They also pay Subway a franchise fee of 8 percent of sales plus 4.5 percent of
sales as an advertising fee.18

­Evaluating the Major Alternatives

Suppose a company has identified several channel alternatives and wants to select the one
that will best satisfy its long-run objectives. Each alternative should be evaluated against
economic, control, and adaptability criteria.

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 380   PART 3 | Designing a Customer Value–Driven Strategy and Mix
Using economic criteria, a company compares the likely sales, costs, and profitability of
different channel alternatives. What will be the investment required by each channel alter-
native, and what returns will result? The company must also consider control issues. Using
intermediaries usually means giving them some control over the marketing of the product,
and some intermediaries take more control than others. Other things being equal, the com-
pany prefers to keep as much control as possible. Finally, the company must apply adaptabil-
ity criteria. Channels often involve long-term commitments, yet the company wants to keep
the channel flexible so that it can adapt to environmental changes. Thus, to be considered,
a channel involving long-term commitments should be greatly superior on economic and
control grounds.
A company must be careful about how it measures the profitability of adding new
channels. Suppose a company already operates three channels and is considering the ad-
dition of a fourth channel. Although the new channel might be profitable in itself, it might
erode the profitability of one or more of the other three channels. Or adding the new chan-
nel might facilitate dropping one of the existing channels. Therefore, rather than looking
just at individual channel profitability, the company must take a whole-channel view. It
must find the combination of channels that, working together, will maximize total com-
pany profitability.

Designing International Distribution Channels

International marketers face many additional complexities in designing their channels.
Each country has its own unique distribution system that has evolved over time and
changes very slowly. These channel systems can vary widely across countries. Thus, global
marketers must usually adapt their channel strategies to the existing structures within
each country.
There are large differences in the numbers and types of intermediaries serving each
country market and in the transportation infrastructure serving these intermediaries. For
example, whereas large-scale retail chains dominate the U.S. scene, much of the retailing in
other countries is done by small, independent retailers. In India or Indonesia, millions of
retailers operate tiny shops or sell in open markets.
Even in world markets containing similar types of sellers, retailing practices can
vary widely. For example, you’ll find plenty of Walmarts, Carrefours, Tescos, and other
retail superstores in major Chinese cities. But whereas consumer brands sold in such
stores in Western markets rely largely on self-service, brands in China hire armies of
uniformed ­in-store promoters to dispense samples and pitch their products person
to person. In a Beijing Walmart, on any given
weekend, you might find 100 or more such pro-
moters acquainting customers with products
from Kraft, Unilever, P&G, Johnson & Johnson,
and a slew of local competitors. “Chinese con-
sumers know the brand name through media,”
says the director of a Chinese retail marketing
service, “but they want to feel the product and
get a detailed understanding before they make a
purchase.”19
When selling in emerging markets, com-
panies must often overcome distribution infra-
structure and supply challenges. For example,
in Nigeria, Domino’s Pizza has had to dig wells
and install ­water-treatment plants behind many
of its restaurants to obtain clean water. Similarly,
after having difficulty sourcing quality beef in
South Africa, rather than buying scarce, poorer-
quality beef from local ranchers, Burger King
International distribution: To overcome distribution infrastructure finally invested $5 million in its own local cat-
problems in Brazil’s Amazon River basin, Nestlé even launched a floating tle ranch.20 And to serve northeast Brazil’s
supermarket to take goods directly to customers. Amazon River basin, which lacks a solid net-
Marcia Zoet/Bloomberg via Getty Images work of good roads, Nestlé even launched a

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 CHAPTER 12 | Marketing Channels: Delivering Customer Value    381
floating supermarket to take goods directly to customers. The boat served 800,000 con-
sumers in 18 riverside towns with 300 different Nestlé products, spending one day at
each stop.21

Author Now it’s time to implement

Comment the chosen channel
Channel Management Decisions
design and work with selected OBJECTIVE 12-4 Explain how companies select, motivate, and evaluate channel
channel members to manage and members.
motivate them.
Once the company has reviewed its channel alternatives and determined the best channel
design, it must implement and manage the chosen channel. Marketing channel manage-
Marketing channel management ment calls for selecting, managing, and motivating individual channel members and evalu-
Selecting, managing, and motivating
ating their performance over time.
individual channel members and
evaluating their performance over time.

Selecting Channel Members

Producers vary in their ability to attract qualified marketing intermediaries. Some produc-
ers have no trouble signing up channel members. For example, when Toyota first intro-
duced its Lexus line in the United States, it had no trouble attracting new dealers. In fact, it
had to turn down many would-be resellers.
At the other extreme are producers that have to work hard to line up enough qualified
intermediaries. For example, when Timex first tried to sell its inexpensive watches through
regular jewelry stores, most jewelry stores refused to carry them. The company then man-
aged to get its watches into mass-merchandise
outlets. This turned out to be a wise decision due
to the rapid growth of mass merchandising.
Even established brands may have difficulty
gaining and keeping their desired distribution,
especially when dealing with powerful channel
members. For example, Amazon has rapidly
expanded its own delivery and logistics capa-
bilities. This has put it in direct competition with
FedEx, UPS, and other important delivery giants
in its distribution channel. As a result, FedEx
recently declined to renew its Amazon contract
for expedited delivery services. In turn, Amazon
stopped using FedEx Ground for deliveries and
temporarily barred third-party sellers from using
FedEx to deliver Prime-eligible packages. The
channel feud between FedEx and Amazon risks
damaging both companies’ opportunities while
at the same time potentially inconveniencing
Selecting channels: The channel feud between FedEx and Amazon risks their mutual customers.22
damaging both companies’ opportunities while at the same time potentially When selecting intermediaries, the company
inconveniencing their mutual customers.
should determine what characteristics distinguish
Christopher Lee/Bloomberg via Getty Images
the better ones. It will want to evaluate each chan-
nel member’s years in business, other lines carried, location, growth and profit record,
overlap with competitors, cooperativeness, and reputation.

Managing and Motivating Channel Members

Once selected, channel members must be continuously managed and motivated to do their best.
The company must sell not only through the intermediaries but also to and with them. Most com-
panies see their intermediaries as first-line customers and partners. They practice strong partner
relationship management to forge long-term partnerships with channel members. This creates a
value delivery system that meets the needs of both the company and its marketing partners.
In managing its channels, a company must convince suppliers and distributors that
they can succeed better by working together as a part of a cohesive value delivery system.
Companies should work in close harmony with others in the channel to find better ways

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 382   PART 3 | Designing a Customer Value–Driven Strategy and Mix
to bring value to customers. For example, automaker Toyota forges beneficial relationships
with its large network of suppliers to gain mutual competitive advantage:23
Achieving satisfying supplier relationships has long been a cornerstone of Toyota’s stunning suc-
cess. Historically, Toyota’s U.S. competitors often have alienated their suppliers through self-serving,
heavy-handed dealings. By contrast, rather than bullying suppliers, Toyota partners with them and
helps them meet its very high expectations. It learns about their businesses, conducts joint improve-
ment activities, helps train supplier employees, gives daily performance feedback, and actively seeks
out supplier concerns. It even recognizes top suppliers with annual performance awards.
As a result, for 19 of the past 21 years, Toyota has received the top supplier relations score in
the respected North American Automotive Supplier Working Relations Index Study. The study rates
companies on financial dealings with suppliers, valuing suppliers and treating them fairly, open and
honest communication, and providing opportunities to make profits. The study suggests that Toyota
suppliers consider themselves true partners with the automotive giant. Creating satisfied suppliers
helps Toyota produce lower-cost, higher-quality cars, which in turn results in more satisfied custom-
ers. As Toyota puts it on its supplier website, “not everything our diverse suppliers do is easily seen . . .
but everything they do shows in every Toyota.”

Many companies are now installing integrated high-tech partnership relationship

management (PRM) systems to coordinate their whole-channel marketing efforts. Just as
they use customer relationship management (CRM) software systems to help manage rela-
tionships with important customers, companies can now use PRM and supply chain man-
agement (SCM) software to help recruit, train, organize, manage, motivate, and evaluate
relationships with channel partners.

Evaluating Channel Members

The company must regularly check channel member performance against standards such
as sales quotas, average inventory levels, customer delivery time, treatment of damaged
and lost goods, cooperation in company promotion and training programs, and customer
service quality. The company should recognize and reward intermediaries that are per-
forming well and adding good value for customers. Those that are performing poorly
should be assisted or, as a last resort, replaced. Finally, companies need to be sensitive to
the needs of their channel partners. Those that treat their partners poorly risk not only los-
ing their support but also causing some legal problems. The next section describes various
rights and duties pertaining to companies and other channel members.

Public Policy and Distribution Decisions

For the most part, companies are legally free to develop whatever channel arrangements
suit them. In fact, the laws affecting channels seek to prevent the exclusionary tactics of
some companies that might keep another company from using a desired channel. Most
channel law deals with the mutual rights and duties of channel members once they have
formed a relationship.
Many producers and wholesalers like to develop exclusive channels for their prod-
ucts. When the seller allows only certain outlets to carry its products, this strategy is called
exclusive distribution. When the seller requires that these dealers not handle competitors’
products, its strategy is called exclusive dealing. Both parties can benefit from exclusive ar-
rangements: The seller obtains more loyal and dependable outlets, and the dealers obtain
a steady source of supply and stronger seller support. But exclusive arrangements also ex-
clude other producers from selling to these dealers. This situation brings exclusive dealing
contracts under the scope of the Clayton Act of 1914. Provided that both parties enter into
the agreement voluntarily, such agreements are legal as long as they do not substantially
lessen competition or tend to create a monopoly.
Exclusive dealing often includes exclusive territorial agreements. The producer may
agree not to sell to other dealers in a given area, or the buyer may agree to sell only in its
own territory. The first practice is normal under franchise systems as a way to increase
dealer enthusiasm and commitment. It is also perfectly legal—a seller has no legal obliga-
tion to sell through more outlets than it wishes. The second practice, whereby the producer
tries to keep a dealer from selling outside its territory, has become a major legal issue.
Producers of a strong brand sometimes sell it to dealers only if the dealers will take
some or all of the rest of its line. This is called full-line forcing. Such tying agreements are

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 CHAPTER 12 | Marketing Channels: Delivering Customer Value 383
not necessarily illegal, but they violate the Clayton Act if they tend to lessen competition
substantially. The practice may prevent consumers from freely choosing among competing
suppliers of these other brands.
Finally, producers are free to select their dealers, but their right to terminate dealers is
somewhat restricted. In general, sellers can drop dealers “for cause.” However, they can-
not drop dealers if, for example, the dealers refuse to cooperate in a doubtful legal arrange-
ment, such as exclusive dealing or tying agreements.

Author Marketers used to call

Comment this plain-old “physical
Marketing Logistics and Supply Chain
distribution.” But as these titles Management
suggest, the topic has grown
in importance, complexity, and
OBJECTIVE 12-5 Discuss the nature and importance of marketing logistics and
sophistication. integrated supply chain management.
In today’s global marketplace, selling a product is sometimes easier than getting it to cus-
tomers. Companies must decide on the best way to store, handle, and move their products
and services so that they are available to customers in the right assortments, at the right
time, and in the right place. Logistics effectiveness has a major impact on both customer
satisfaction and company costs. Here we consider the nature and importance of logistics
management in the supply chain, the goals of the logistics system, major logistics func-
tions, and the need for integrated supply chain management.

Nature and Importance of Marketing Logistics

To some managers, marketing logistics means only trucks and warehouses. But modern lo-
Marketing logistics (physical gistics is much more than this. Marketing logistics—also called physical distribution—
distribution) involves planning, implementing, and controlling the physical flow of goods, services, and
Planning, implementing, and controlling related information from points of origin to points of consumption to meet customer re-
the physical flow of materials, final quirements at a profit. In short, it involves getting the right product to the right customer
goods, and related information from in the right place at the right time profitably.
points of origin to points of consumption In the past, physical distribution planners typically started with products at the plant
to meet customer requirements at a and then tried to find low-cost solutions to get them to customers. However, today’s
profit.
customer-centered logistics starts with the marketplace and works backward to the factory or
even to sources of supply. Marketing logistics involves not only outbound logistics (moving
products from the factory to resellers and ultimately to customers) but also inbound logistics
(moving products and materials from suppliers to the factory). It also involves reverse logis-
tics (reusing, recycling, refurbishing, or disposing of broken, unwanted, or excess products
returned by consumers or resellers)—the importance of which has grown with the increased
emphasis on corporate sustainability. That is, marketing logistics involves the entirety of
Supply chain management supply chain management—managing upstream and downstream value-added flows
Managing upstream, downstream, and of materials, final goods, and related information among suppliers, the company, resellers,
reverse value-added flows of materials, and final consumers, as shown in Figure 12.5.
final goods, and related information The logistics manager’s task includes coordinating the activities of suppliers, pur-
among suppliers, the company, resellers, chasing agents, marketers, channel members, and customers. These activities include
and final consumers. forecasting, information systems, purchasing, production planning, order processing, in-
ventory, warehousing, and transportation planning.

FIGURE 12.5 Inbound Outbound

logistics logistics
Supply Chain Management
Suppliers Company Resellers Customers

Reverse logistics

Managing the supply chain calls for customer-centered thinking.

Remember, it’s also called the customer value delivery network.

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 384 PART 3 | Designing a Customer Value–Driven Strategy and Mix
Companies today are placing lots of emphasis on logistics for several reasons. First,
companies can gain a powerful competitive advantage by using improved logistics to
give customers better service or lower prices. In fact, these days, for many firms, competi-
tion is all about delivery and logistics. Today’s customers want and expect fast, accurate
delivery on just about everything they buy, whether it’s an online purchase or a local store
pickup. Long known in marketing logistics as the “last mile delivery problem,” fast and
efficient delivery has become a key competitive battleground. The “last mile” refers to the
last leg of the delivery chain in getting the product or service into the hands of customers,
whether it’s Amazon’s same-day delivery, Wegmans’ curbside pickup and home delivery,
Spotify’s streaming music to listeners instead of downloads or CDs, or Walmart’s experi-
ments with drone package delivery. In this digital age, the nature of “last mile” delivery
solutions and the logistics behind them has changed dramatically. Companies in every
industry are now reshaping their logistics and distribution systems to meet the changing,
more-demanding delivery expectations of customers (see Real Marketing 12.2).
The second reason for today’s increased emphasis on logistics is that improved lo-
gistics can yield tremendous cost savings to both a company and its customers. As much
as 20 percent of an average product’s price is accounted for by shipping and transport
alone. American companies spend $1.6 trillion each year—about 7.6 percent of GDP—to
wrap, bundle, load, unload, sort, reload, and transport goods. That’s more than the total
national GDPs of all but nine countries worldwide. By itself, General Motors has hundreds
of millions of tons of finished vehicles, production parts, and aftermarket parts in transit at
any given time, running up an annual logistics bill of about $8 billion. Shaving off even a
small fraction of logistics costs can mean substantial savings. For example, GM announced
a logistical overhaul that would save nearly $2 billion over two years in North America
alone.24
Third, improvements in information technology and automation have created oppor-
tunities for major gains in distribution efficiency. Today’s companies are using sophisti-
cated supply chain management software, internet-based logistics systems, point-of-sale
scanners, RFID tags, satellite tracking, and electronic transfer of order and payment data.
Such technology lets them quickly and efficiently manage the flow of goods, informa-
tion, equipment, and finances through the supply chain. For delivery companies like
UPS and FedEx, for example, dynamic truck routing can make big differences in time
spent on delivery and miles driven. When UPS first implemented its On-Road Integrated
Optimization and Navigation technology (ORION), it saved eight miles of driving per
driver per day across its delivery fleet of more than 125,000 vehicles. That trimmed fuel
consumption by 10 million gallons while also reducing carbon dioxide emissions. An
updated ORION now automatically reoptimizes driver routes based on changing traffic
conditions and new pickup requests, providing
drivers with turn-by-turn directions and saving
an additional two to four miles per driver per day.
In all, ORION saves UPS an estimated more than
$400 million per year.25
Fourth, the explosion in product variety has
created a need for improved logistics manage-
ment. For example, a Walmart Supercenter store
carries 120,000 products. Amazon.com carries
a bewildering 12 million products, or nearly
350 million products if Amazon Marketplace sell-
ers are included.26 Ordering, shipping, stocking,
and controlling such a variety of products present
a sizable logistics challenge.
Finally, more than almost any other market-
ing function, logistics affects the environment
and a firm’s environmental sustainability ef-
forts. Transportation, warehousing, packaging,
Logistics technologies: UPS’s ORION dynamic routing system
and other logistics functions are typically the
automatically reoptimizes driver routes based on changing traffic conditions biggest supply chain contributors to the com-
and new pickup requests, providing drivers with turn-by-turn directions and pany’s carbon footprint. Therefore, many com-
saving as many as 12 delivery miles per driver per day. panies are now developing sustainable supply
Justin Kase zsixz/Alamy Stock Photo chains.

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 CHAPTER 12 | Marketing Channels: Delivering Customer Value    385
Logistics and the “Last Mile”: It’s All about
Real Marketing 12.2 Delivery
In marketing logistics, much of the focus demands of Amazon Prime, these delivery time reducing labor costs for providers. While
has always been on what’s called the “last services invested in ever-improved logis- self-service technologies sometimes lessen
mile” delivery problem—forging solutions tics technologies. More recently, Amazon personal customer engagement, one recent
for the final step in the process of delivering has established its own Prime delivery fleet, study reports that 66 percent of consumers
products into the hands of customers. That which now delivers more packages than any prefer self-checkout to waiting in traditional
last mile has always been very important, not of its logistics suppliers. And in the wake lines and interacting with an employee. And
just from a customer service and satisfaction of Amazon Prime, most other online retail- self-checkout frees employees for more im-
viewpoint but also in terms of costs. Last- ers, and even traditional store retailers like portant types of customer engagement and
mile costs account for up to 58 percent of Walmart and Best Buy, now offer their own problem solving.
total transportation costs for a product’s jour- programs for free expedited shipping. Many retailers are taking self-service and
ney through distribution channels. The need for speed in delivery, combined checkout a big leap forward, offering the op-
In the good-old days, the last-mile prob- with the development of the “gig economy,” tion to select and purchase products with no
lem mostly involved efficiently and effectively has also given rise to a new breed of start- checkout at all. Grocery leader Kroger is test-
getting goods into and properly positioned ups that serve the logistics last mile. Over ing KroGO, smart shopping carts equipped
in retail outlets where customers could pick the past decade, innovative outfits such as with a video screen and small scanner.
them up and take them home. Or it involved Dispatch, Postmates, Instacart, DoorDash, Customers scan items as they put them in the
efficiently fulfilling phone and mail-order cata- and Grubhub have emerged to help match cart. Once finished, they pay by scanning their
log orders or selling direct door-to-door. But consumers who want things fast with inde- rewards cards and simply walk out the door.
with the dawn of the digital age and the mas- pendent drivers who make deliveries in their Amazon’s futuristic Amazon Go conve-
sive shift toward the convenience and imme- own vehicles for a fee. For example, last nience grocery stores, with “just walk out”
diacy of online buying, the last mile has taken year more than 110 million U.S. consumers technology, have no cashier or even self-
on a whole new significance. Today’s online ordered over $26 billion worth of food from checkout. Customers enable the Amazon
shoppers are an impatient bunch. When or- grocery stores and restaurants through gig Go app on their mobile devices. Then, as
dering something quickly and conveniently delivery services. Nonfood retailers, includ- they take items taken from shelves, cameras
online, whether for home delivery or store ing megaretailers like Amazon, Walmart, and sensors detect the selections and com-
pickup, they want it now. As a result, compa- and Target, also employ gig drivers to deliver municate them to the customer’s app. When
nies have developed a host of new last-mile products ordered through their shopping customers leave the store, purchases are
delivery options and technologies. apps. automatically charged to their accounts. So
Online giant Amazon led the way almost New last-mile logistics solutions go well far, Amazon has opened 24 Go stores. And
20 years ago with its far-sighted Amazon beyond home delivery. They now encom- although other retailers have yet to follow
Prime service. For a flat annual membership pass almost every touchpoint of the retail suit, various chains including Walmart, Target,
fee of $79.95, Prime members received un- experience. For example, retailers small and Kroger, ALDI, and 7-Eleven have hinted that
limited two-day shipping on Amazon.com large have developed curbside pickup sys- they will soon employ similar systems.
purchases, with an option of overnight ship- tems with dedicated
ping for only $3.99 per order. Before Prime, staff and staging
Amazon charged $9.48 for two-day shipping areas, providing
and $16.48 for overnight shipping on a single customers with
item. As Amazon put it at the time, “Two-day even more flexible
shipping becomes an everyday experience ways to take pos-
rather than an occasional indulgence.” session of goods
Launching Prime was a leap of faith purchased through
for Amazon. Many analysts thought it retailer apps. Inside
foolhardy—potentially a big money loser. their stores, retail-
But Amazon saw that Prime would help ers ranging from
it overcome one of the biggest last-mile grocery and mass
obstacles to online buying—delivery waits merchandise stores
and fees. And it reasoned that with in- to restaurants have
creased sales volume and advances in installed convenient
logistics systems and technologies, it self-checkout aisles.
could make Prime profitable. You’ll find self-serve
Time has proven Amazon right. Amazon’s check-in kiosks
sophisticated fulfillment centers employ the in airports, hotels,
latest IT and robotics technologies to speed medical offices, Some innovative last-mile logistics solutions—such as
things up and bring costs down. And to de- and salons. Such autonomous delivery bots and drones—were the stuff of science
liver on its Prime promises, Amazon part- systems deliver fast fiction only a few years ago. But Starship’s delivery bots have now
nered with package delivery carriers like UPS, and effective ser- traveled more than 2.2 million miles, successfully making more
FedEx, and the United States Postal Service. vice to customers than 2 million deliveries.
In turn, to up their game and meet the severe while at the same Chesky/Shutterstock

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 386   PART 3 | Designing a Customer Value–Driven Strategy and Mix
Some of the most intriguing new last- “That’s a significant amount of ground we’ve Zipline. So far, these ventures operate only
mile solutions were the stuff of science covered,” says Starship’s CEO. “And we do on a small scale in select regions. But ex-
fiction only a few years ago. For example, it 24/7, in the dark, in the snow, in heavy perts predict that autonomous drone delivery
more than a dozen U.S.-based startups, rain.” Coupled with self-driving vehicles, programs will play a much greater last-mile
along with existing companies like Amazon, such delivery technologies offer a promising role.
are now making deliveries via autonomous logistics future. Thus, the age-old but newly developing
delivery robots. Like most delivery bots, the Another head-turning last-mile tech- last mile is the latest frontier in logistics.
ones from San Francisco–based Starship nology is autonomous delivery drones. If marketing logistics is all about getting
Technologies resemble high-tech coolers on Although facing more hurdles than on- products to consumers in the right place
wheels. Weighing less than 100 pounds and ground autonomous bots and vehicles, at the right time, today the right place is
packed with ultrasonic sensors and cam- numerous veteran companies and startups often wherever customers happen to be,
eras, the bots move at pedestrian speeds, are partnering to make drone delivery a and the right time is pretty much right now.
delivering takeout food and groceries reality. Walmart partners with DroneUp to For sellers these days, speedy and effec-
within four miles from the point of pickup. deliver diapers and food within a 50-mile tive delivery isn’t just something that’s nice
Futuristic science fiction? No. During the radius of an Arkansas test store. FedEx and to have. It’s something that customers ex-
past five years, Starship bots have trav- Walgreens partner with Alphabet’s Wing, pect with every shopping experience. As
eled more than 2.2 million miles, success- CVS partners with UPS’s Flight Forward, a competitive necessity, companies must
fully making more than 2 million deliveries. and Novant Health partners with startup deliver.27

Sustainable Supply Chains

Companies have many reasons for reducing the environmental impact of their supply
chains. For one thing, if they don’t green up voluntarily, a host of sustainability regulations
enacted around the world will soon require them to. For another, many large customers—
from Walmart and Nike to the federal government—are demanding it. And most impor-
tantly, consumers are now demanding it. For example, one recent consumer survey found
that 70 percent of North American consumers think it is important that a brand is sustain-
able and eco-friendly.28 Thus, environmental sustainability has become an important factor
in supplier selection and performance evaluation. But perhaps even more important than
having to do it, designing sustainable supply chains is simply the right thing to do. It’s one
more way that companies can contribute to saving our world for future generations.
But that’s all pretty heady stuff. As it turns out, companies have a more immediate
and practical reason for turning their supply chains green. Sustainable channels are not
only good for the world, they can also be good for a company’s bottom line. The very
logistics activities that create the biggest environmental footprint—such as transportation,
warehousing, and packaging—also account for a
lion’s share of logistics costs. Greater supply chain
efficiency and sustainability mean lower costs and
higher profits.
In other words, developing a sustainable sup-
ply chain is not only environmentally responsible,
it can also be profitable. Consider Levi Strauss
& Co:29
­ ater is essential to every step in Levi Strauss’s
W
jeans-making process. Making just one pair of
Levi’s jeans consumes 3,781 liters of water—about
three days’ worth of water for one U.S. household.
To conserve water, Levi’s launched a series of inno-
vative techniques called Water<Less, which saves
up to 96 percent of the water in the denim finishing
process alone. So far, Water<Less innovations have
saved more than 2 billion liters of water. But more
than being good for the planet, Water<Less has also
been good for Levi Strauss’s bottom line, saving the
company more than $1.6 million. Says Levi’s vice
Green supply chains: Levi Strauss’s Project Water<Less innovations president of Sustainability, “Sustainability should
are good for the planet, consumers, and the company’s bottom line. actually cost less, because, by definition, if you’re
“Sustainability should actually cost less . . .” more sustainable, you’re consuming fewer re-
Levi Strauss & Co. sources, which means you have fewer input costs.”

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 CHAPTER 12 | Marketing Channels: Delivering Customer Value    387
Goals of the Logistics System
Some companies state their logistics objective as providing maximum customer service at
the least cost. Unfortunately, as nice as this sounds, no logistics system can both maximize
customer service and minimize distribution costs. Maximum customer service implies
rapid delivery, large inventories, flexible assortments, liberal returns policies, and other
services—all of which raise distribution costs. In contrast, minimum distribution costs
imply slower delivery, smaller inventories, and larger shipping lots—which represent a
lower level of overall customer service.
The goal of marketing logistics should be to provide a targeted level of customer service at
the least cost. A company must first research the importance of various distribution services to
customers and then set desired service levels for each segment. The objective is to maximize
profits, not sales. Therefore, the company must weigh the benefits of providing higher levels of
service against the costs. Some companies offer less service than their competitors and charge a
lower price. Other companies offer more service and charge higher prices to cover higher costs.

Major Logistics Functions

Given a set of logistics objectives, the company designs a logistics system that will mini-
mize the cost of attaining these objectives. The major logistics functions are warehousing,
inventory management, transportation, and logistics information management.

Warehousing
Production and consumption cycles rarely match, so most companies must store their
goods while they wait to be sold. For example, Snapper, Toro, and other lawn mower man-
ufacturers run their factories all year long and store up products for the heavy spring and
summer buying seasons. The storage function addresses differences in needed quantities
and timing, ensuring that products are available when customers are ready to buy them.
A company must decide on how many and what types of warehouses it needs and where
they will be located. The company might use either storage warehouses or distribution centers.
Distribution center Storage warehouses store goods for moderate to long periods. In contrast, distribution
A large, highly automated warehouse centers are designed to move goods along rather than just store them. They are large and
designed to receive goods from various highly automated warehouses designed to receive goods from various plants and suppli-
plants and suppliers, take orders, fill ers, take orders, fill them efficiently, and deliver goods to customers as quickly as possible.
them efficiently, and deliver goods to For example, Amazon operates more than 800 distribution and fulfillment centers
customers as quickly as possible. in the United States, which fill online orders and handle returns. Many of these centers
are huge and highly automated. For example, the Amazon fulfillment center in Tracy,
California, covers 1.2 million square feet (equivalent to 27 football fields). At the center,
3,000 employees control an inventory of
21 million items and ship out up to 700,000
packages a day to Amazon customers in
Northern California and parts of the Pacific
Northwest. On a big purchasing day, such
as Amazon Prime Day or Cyber Monday,
Amazon’s fulfillment center network fills
customer orders at a rate of more than 1,000
items per second globally. During the most
recent year-end holiday season, Amazon
delivered more than 1.5 billion packages to
customers worldwide.30
Like almost everything else these
days, warehousing has seen dramatic
changes in technology in recent years.
Outdated materials-handling methods are
steadily being replaced by newer, auto-
mated systems requiring fewer employees.
Computers and scanners read orders and
direct lift trucks, electric hoists, or robots
to gather goods, move them to loading
High-tech distribution centers: Amazon employs teams of super-retrievers—Day docks, and issue invoices. For example,
Glo–orange Kiva robots—to keep its fulfillment centers humming. Amazon uses an army of robots to make its
© 1996–2021, Amazon.com, Inc. or its affiliates fulfillment centers more efficient:31

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 388   PART 3 | Designing a Customer Value–Driven Strategy and Mix
When you buy from Amazon, the chances are good that your order will still be plucked and
packed by human hands. However, the humans in Amazon’s fulfillment centers are now assisted
by an army of more than 100,000 squat, ottoman-size, Day Glo–orange robots, developed by the
digital giant’s own Amazon Robotics division. At Amazon’s Akron fulfillment center, robots out-
number the 5,000 employees by a two-to-one ratio. The robots bring racks of merchandise to
workers, who in turn fill boxes with orders. The robots make warehouse work less tedious and
physically taxing for employees while also creating efficiencies that let a customer order some-
thing as small as dental floss and receive it within two days or even on the same day. Dubbed the
“magic shelf,” racks of items simply materialize in front of workers, with red lasers pointing to
items to be picked. The robots then drive off and new shelves appear. The s­ uper-efficient robots
work tirelessly 16 hours a day, seven days a week. They never complain about the workload or
ask for pay raises, and they are pretty much maintenance free. “The robot will work the same all
day long,” says an Amazon warehouse supervisor. And “their stomachs don’t grumble.”

Inventory Management
Inventory management also affects customer satisfaction. Here, managers must maintain
the delicate balance between carrying too little inventory and carrying too much. With too
little stock, the firm risks not having products when customers want to buy. To remedy
this, the firm may need costly emergency shipments or production. Carrying too much in-
ventory results in higher-than-necessary inventory-carrying costs and stock obsolescence.
Thus, in managing inventory, firms must balance the costs of carrying larger inventories
against resulting sales and profits.
Many companies have greatly reduced their inventories and related costs through
just-in-time logistics systems. With such systems, producers and retailers carry only small
inventories of parts or merchandise, often enough for only a few days of operations. New
stock arrives exactly when needed rather than being stored in inventory until being used.
Just-in-time systems require accurate forecasting along with fast, frequent, and flexible de-
livery so that new supplies will be available when needed. However, these systems result
in substantial savings in inventory-carrying costs.
When it comes to managing inventories, Walmart doesn’t mess around with its suppli-
ers. With the goal of having just enough but not too much inventory on its shelves, Walmart
demands “On-Time, In-Full” (OTIF) deliveries to its stores. Current Walmart guidelines re-
quire that 98 percent of a supplier’s shipments arrive OTIF within a designated delivery
window. Suppliers who miss the window pay the price. “Two days late? That’ll earn you
a fine,” says an analyst. “One day early? That’s a fine, too. Right on time but goods aren’t
packed properly? You guessed it—fine.” While this delivery policy seems severe, Walmart
pays a huge price for having too little inventory (lost sales) or too much (inventory carry-
ing costs). “Variability is the No. 1 killer in the supply chain,” says a Walmart operations
manager.32
Marketers are always looking for new ways to make inventory management more ef-
ficient. For example, many companies use some form of RFID or “smart tag” technology,
by which small transmitter chips are embedded in or placed on products, packaging, and
shipping pallets for everything from flowers, fashions, and razors to tires. Such smart tags
can make the entire supply chain—which ­accounts for up to 75 percent of a product’s
cost—intelligent and automated. Many large and resourceful marketing companies, such as
Walmart, Macy’s, P&G, and IBM, are investing heavily to make the full use of RFID technol-
ogy a reality.

­Transportation
The choice of transportation carriers affects the pricing of products, delivery performance,
and the condition of goods when they arrive—all of which will affect customer satisfaction.
In shipping goods to its warehouses, dealers, and customers, the company can choose
among five main transportation modes: truck, rail, water, pipeline, and air along with an alter-
native mode for digital products—the internet.
Trucks have increased their share of transportation steadily and now account for
65 percent of total tons transported in the United States. Trucks are highly flexible in their
routing and time schedules, and they can usually offer faster service than railroads. They
are efficient for short hauls of high-value merchandise. Trucking firms have evolved in re-
cent years to become full-service providers of global transportation services. For example,
large trucking firms now offer everything from satellite tracking, internet-based shipment
management, and logistics planning software to cross-border shipping operations.33

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 CHAPTER 12 | Marketing Channels: Delivering Customer Value    389
Railroads account for 10 percent of the total
tons shipped. They are one of the most cost-
effective modes for shipping large amounts of
bulk products—coal, sand, minerals, and farm
and forest products—over long distances. In
recent years, railroads have increased their cus-
tomer services by designing new equipment to
handle special categories of goods, providing
flatcars for carrying truck trailers by rail (pig-
gyback), and providing in-transit services such
as the diversion of shipped goods to other des-
tinations en route and the processing of goods
en route.
Although air carriers transport less than
1 percent of the of the nation’s goods, they are
an important transportation mode. Airfreight
rates are much higher than rail or truck rates, but
airfreight is ideal when speed is needed or dis-
tant markets have to be reached. Among the most
frequently airfreighted products are perishables
Transportation: In shipping goods to their warehouses, dealers, and
(such as fresh fish, cut flowers) and high-value,
customers, companies can choose among many transportation modes,
including truck, rail, water, pipeline, and air. Much of today’s shipping requires low-bulk items (technical instruments, jewelry).
multiple modes. Companies find that airfreight also reduces
DigitalPen/Shutterstock inventory levels, packaging costs, and the num-
ber of warehouses needed.
Pipelines, which account for 18 percent of the tonnage transported, are a specialized
means of shipping petroleum, natural gas, and chemicals from sources to markets. Most
pipelines are used by their owners to ship their own products.
Water carriers account for slightly more than 4 percent of goods transported within
the United States, using coastal and inland waterways. When it comes to global trade,
however, ocean-borne transportation is critically important, accounting for around
90 percent of all traded goods. Although water transportation is the slowest mode and
may be affected by the weather, the cost of water transportation is very low for shipping
bulky, ­low-value, nonperishable products such as sand, coal, grain, oil, and metallic ores.
Further, the invention of the standardized shipping container, which can be moved across
continents using different transportation platforms such as ships, rail, and trucks, has dra-
matically altered the nature of transportation. Today, even relatively high-value items are
packaged and shipped securely using shipping containers.34
Multimodal transportation Shippers also use multimodal transportation—combining two or more modes of
Combining two or more modes of transportation—accounting for 3 percent of the nation’s goods transported. Piggyback
transportation. describes the use of rail and trucks; fishyback, trucks and water; trainship, water and rail;
and airtruck, air and trucks. Combining modes provides advantages that no single mode
can deliver. Each combination offers advantages to the shipper. For example, not only is
piggyback cheaper than trucking alone, but it also provides flexibility and convenience.
Numerous logistics companies provide single-source multimodal transportation solutions.
The internet carries digital products from producer to customer via satellite, cable,
phone wire, or wireless signal. Software firms, the media, music and video companies, and
educational organizations all make use of the internet to deliver digital content. The inter-
net holds the potential for lower product distribution costs. Whereas planes, trucks, and
trains move freight and packages, digital technology moves intangible bits of information.
Logistics Information Management
Companies use information to manage their supply chains. Channel partners often link
up to share information and make better joint logistics decisions. From a logistics perspec-
tive, flows of information, such as customer transactions, billing, shipment and inventory
levels, and even customer data, are closely linked to channel performance. Companies
need simple, accessible, fast, and accurate processes for capturing, processing, and sharing
channel information.
Information can be shared and managed in many ways. But most sharing takes place
through electronic data interchanges (EDI), the digital exchange of data between organiza-
tions, primarily via the internet. Walmart, for example, requires EDI links with its more

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 390   PART 3 | Designing a Customer Value–Driven Strategy and Mix
than 100,000 suppliers through its Retail Link sales data system. If new suppliers don’t
have the required EDI capability, Walmart will work with them to find and implement the
needed tools.35
In some cases, suppliers might actually be asked to generate orders and arrange deliver-
ies for their customers. Many large retailers—such as Walmart and The Home Depot—work
closely with major suppliers such as P&G or Moen to set up vendor-managed inventory (VMI)
systems or continuous inventory replenishment systems. Using VMI, the customer shares real-
time data on sales and current inventory levels with the supplier. The supplier then takes
full responsibility for managing inventories and deliveries. Some retailers even go so far as
to shift inventory and delivery costs to the supplier by simply directing customer orders to
them and empowering them to directly take care of packaging and delivery. Such systems
require close cooperation between the buyer and seller.

Integrated Logistics Management

Integrated logistics management Today, more and more companies are adopting the concept of integrated logistics manage-
The logistics concept that emphasizes ment. This concept recognizes that providing better customer service and trimming distribu-
teamwork—both inside the company tion costs require teamwork, both inside the company and among all the marketing channel
and among all the marketing channel organizations. Inside, the company’s various departments must work closely together to maxi-
organizations—to maximize the mize its own logistics performance. Outside, the company must integrate its logistics system
performance of the entire distribution with those of its suppliers and customers to maximize the performance of the entire distribu-
system. tion network.

Cross-Functional Teamwork Inside the Company

Most companies assign responsibility for various logistics activities to many different
­departments—marketing, sales, finance, operations, and purchasing. Too often, each func-
tion tries to optimize its own logistics performance without regard for the activities of
the other functions. However, transportation, inventory, warehousing, and information
management activities interact, often in an inverse way. Lower inventory levels reduce
­inventory-carrying costs. But they may also reduce customer service and increase costs
from stockouts, backorders, special production runs, and costly fast-freight shipments.
Because distribution activities involve strong trade-offs, decisions by various functions
must be coordinated to achieve better overall logistics performance.
The goal of integrated supply chain management is to harmonize all of the company’s
logistics decisions. Close working relationships among departments can be achieved in
several ways. Some companies have created permanent logistics committees composed of
managers responsible for different physical distribution activi-
ties. Companies can also create supply chain manager positions
that link the logistics activities of functional areas. For example,
P&G has created product supply managers who manage all the
supply chain activities for each product category. Many compa-
nies have a vice president of logistics or a supply chain VP with
cross-functional authority.
Finally, companies can employ sophisticated, systemwide
supply chain management software, now available from a wide
range of software enterprises large and small, from Oracle and
SAP to Logility. For example, Oracle’s supply chain manage-
ment software solutions help companies to “gain sustainable ad-
vantage and drive innovation by transforming their traditional
supply chains into integrated value chains.”36 It coordinates every
aspect of the supply chain, from value chain collaboration to in-
ventory optimization to transportation and logistics management.
The important thing is that the company must coordinate its logis-
tics, inventory investments, demand forecasting, and marketing
activities to create high market satisfaction at a reasonable cost.
Integrated logistics management: Oracle’s supply chain
management software solutions help companies to “gain
Building Logistics Partnerships
sustainable advantage and drive innovation by transforming Companies must do more than improve their own logistics. They
their traditional supply chains into integrated value chains.” must also work with other channel partners to improve whole-
Oracle Corporation channel distribution. The members of a marketing channel are

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 CHAPTER 12 | Marketing Channels: Delivering Customer Value    391
linked closely in creating customer value and building customer relationships. One com-
pany’s distribution system is another company’s supply system. The ­success of each chan-
nel member depends on the performance of the entire supply chain. For example, furniture
retailer IKEA can create its stylish but affordable furniture and deliver the “IKEA lifestyle”
only if its entire supply chain—consisting of thousands of merchandise designers and sup-
pliers, transport companies, warehouses, and service providers—operates with high ef-
ficiency and customer-focused effectiveness.
Smart companies coordinate their logistics strategies and forge strong partnerships
with suppliers and customers to improve customer service and reduce channel costs. Many
companies have created cross-functional, cross-company teams. For example, Nestlé’s Purina
pet food unit has a team of dozens of people working in Bentonville, Arkansas, the home
base of Walmart. The Purina Walmart team members work jointly with their counterparts
at Walmart to find ways to squeeze costs out of their distribution system. Working together
benefits not only Purina and Walmart but also their shared, final consumers.
Other companies partner through shared projects. For example, many large retailers
conduct joint in-store programs with suppliers. The Home Depot allows key suppliers to
use its stores as a testing ground for new merchandising programs. The suppliers spend
time at The Home Depot stores watching how their product sells and how customers relate
to it. They then create programs specially tailored to The Home Depot and its customers.
Clearly, the supplier, the retailer, and the ultimate consumer all benefit from such partner-
ships. The point is that all supply chain members must work together to bring value to
final consumers.

Third-Party Logistics
Although most big companies love to make and sell their products, many loathe the associ-
ated logistics “grunt work.” They detest the bundling, loading, unloading, sorting, storing,
reloading, transporting, customs clearing, and tracking required to supply their factories
and get products to their customers. They hate it so much that many firms outsource some
Third-party logistics (3PL) or all of their logistics to third-party logistics (3PL) providers such as C.H. Robinson,
provider XPO Logistics, UPS Supply Chain Solutions, and J.B. Hunt.37
An independent logistics provider that Companies use third-party logistics providers for several reasons. First, because get-
performs any or all of the functions ting the product to market is their main focus, these logistics providers can often do it more
required to get a client’s product to efficiently and at lower cost. Second, outsourcing logistics frees a company to focus more
market. intensely on its core business. Finally, integrated logistics companies understand how to
manage complex logistics issues, including those related to transiting border customs and
inspection, paying tariffs, and claiming insurance payments in case of damage during
transit.
For example, UPS knows that, for many companies, logistics can be a real nightmare.
But logistics is exactly what UPS does best. To UPS, logistics is today’s most powerful force
for creating competitive advantage. To its supply chain customers, UPS stands for “United
Problem Solvers.” At one level, UPS can simply handle a company’s package shipments.
But on a deeper level, UPS can help businesses sharpen their own logistics systems to cut
costs and serve customers better. At a still deeper level, companies can let UPS take over
and manage part or all of their logistics operations. For example, consider premium mat-
tress maker Kingsdown, which sells its sleep systems through a network of more than
2,000 retailers worldwide:38
Kingsdown excels at producing innovative products. But in an increasingly competitive mar-
ketplace, Kingsdown’s delivery fleet was plagued by costly inefficiencies and delivery errors,
causing relationship problems with the firm’s very demanding retailers. UPS stepped in to help
manage Kingsdown’s logistics. Although Kingsdown still loads its own trailers, UPS now pro-
vides the trucks and drivers. But more than just vehicles and the people to drive them, UPS pro-
vides unmatched transportation technology, including handheld GPS-enabled scanning devices
at every turn. With UPS, each product is tagged and scanned when loaded and then again when
delivered. In between, UPS provides an optimized trip plan for each driver with directions for
each stop.
Near real-time data on individual products and entire loads let Kingsdown monitor
deliveries throughout the trip. The system handles unexpected delays as they occur via text mes-
saging between drivers and operations supervisors. The automated system even directs driv-
ers in filling empty trailers for return trips, either with raw materials for Kingsdown or with
third-party freight. Thus, UPS relieved Kingsdown from dealing with logistics issues, letting

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 392   PART 3 | Designing a Customer Value–Driven Strategy and Mix
it focus on what it does best—making and selling premium mattresses and managing dealer
relationships. In the process, Kingsdown’s fleet efficiency improved dramatically—overall
transportation costs went down and delivery errors virtually disappeared, to the benefit of both
Kingsdown and its retailer customers. “Customers are expecting the world from you,” says UPS.
“We can help you deliver.”

3PL providers like UPS can help clients tighten up sluggish, overstuffed supply chains;
slash inventories; and get products to customers more quickly and reliably. According to
one report, 90 percent of Fortune 500 companies now use 3PL (also called outsourced logis-
tics or contract logistics) services. General Motors, P&G, and Walmart each use 50 or more
3PLs. The 3PL market is expected to grow rapidly from about $1 billion in 2019 to about
$1.7 trillion by 2027.39

Reviewing and Extending the Concepts

Objectives Review
Some companies pay too little attention to their distribution should work together smoothly. They should understand and ac-
channels; others, however, have used imaginative distribution cept their roles, coordinate their goals and activities, and cooperate
systems to gain a competitive advantage. A company’s channel to attain overall channel goals. By cooperating, they can more ef-
decisions directly affect every other marketing decision. Man- fectively sense, serve, and satisfy the target market.
agement must make channel decisions carefully, incorporating In a large company, the formal organization structure assigns
today’s needs with tomorrow’s likely selling environment. roles and provides needed leadership. But in a distribution chan-
nel composed of independent firms, leadership and power are
OBJECTIVE 12-1 Explain why companies use marketing often not formally set. Traditionally, distribution channels have
channels and discuss the functions these channels lacked the leadership needed to assign roles and manage conflict.
perform. In recent years, however, new types of channel ­organizations—
such as vertical marketing systems—have appeared that provide
In creating customer engagement and value, a company can’t go stronger leadership and improved performance.
it alone. It must work within an entire network of partners—a value Changes in technology and the explosive growth of direct and
delivery network—to accomplish this task. Individual companies and online marketing have had a profound impact on the nature and
brands don’t compete; their entire value delivery networks do. design of marketing channels. One major trend is toward disinter-
Most producers use intermediaries to bring their products to mediation or channel disruption by which innovative new channels
market. They forge a marketing channel (or distribution channel)— emerge to displace traditional ones. Companies must continually
a set of interdependent organizations involved in the process of review, innovate, and update their channels or risk being left behind.
making a product or service available for use or consumption by
the consumer or business user. Through their contacts, experi-
ence, specialization, and scale of operation, intermediaries usu- OBJECTIVE 12-3 Identify the major channel alternatives
ally offer the firm more than it can achieve on its own. open to a company.
Marketing channels perform many key functions. Some help
Channel alternatives vary from direct selling to using one, two,
complete transactions by gathering and distributing informa-
three, or more intermediary channel levels. Marketing channels
tion needed for planning and aiding exchange, developing and
face continuous and sometimes dramatic change. Three of the
spreading persuasive communications about an offer, perform-
most important trends are the growth of vertical, horizontal, and
ing contact work (finding and communicating with prospective
multichannel marketing systems. These trends affect channel
buyers), matching (shaping and fitting the offer to the buyer’s
cooperation, conflict, and competition.
needs), and entering into negotiation to reach an agreement on
Channel design begins with assessing customer channel ser-
price and other terms of the offer so that ownership can be trans-
vice needs and company channel objectives and constraints.
ferred. Other functions help to fulfill the completed transactions
The company then identifies the major channel alternatives in
by offering physical distribution (transporting and storing goods),
terms of the types of intermediaries, the number of intermedi-
financing (acquiring and using funds to cover the costs of the
aries, and the channel responsibilities of each. Each channel
channel work), and risk taking (assuming the risks of carrying out
alternative must be evaluated according to economic, control,
the channel work). The company also coordinates with upstream
and adaptive criteria. Channel management calls for selecting
members of the supply chain to achieve its market-related goals.
qualified intermediaries and motivating them. Individual channel
OBJECTIVE 12-2 Discuss how channel members members must also be evaluated regularly.
interact and how they organize to perform the work
of the channel. OBJECTIVE 12-4 Explain how companies select,
motivate, and evaluate channel members.
The channel will be most effective when each member assumes the
tasks they can do best. The success of individual channel members Producers vary in their ability to attract qualified marketing inter-
depends on overall channel success. Therefore, all channel firms mediaries. Some producers have no trouble signing up channel

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 CHAPTER 12 | Marketing Channels: Delivering Customer Value    393
members, whereas others have to work hard to line up enough flows between suppliers, the company, resellers, and final users.
qualified intermediaries. When selecting intermediaries, the com- No logistics system can both maximize customer service and
pany should evaluate each channel member’s qualifications and minimize distribution costs. Instead, the goal of logistics man-
select those that best fit its channel objectives. agement is to provide a targeted level of service at the least
Once selected, channel members must be continuously mo- cost. The major logistics functions are warehousing, inven-
tivated to do their best. The company must sell not only through tory management, transportation, and logistics information
the intermediaries but also with them. It should forge strong management.
partnerships with channel members to create a marketing sys- The integrated supply chain management concept recog-
tem that meets the needs of both the manufacturer and the nizes that improved logistics requires teamwork in the form of
partners. close working relationships across functional areas inside the
company and across various organizations in the supply chain.
OBJECTIVE 12-5 Discuss the nature and importance Companies can achieve logistics harmony among functions
of marketing logistics and integrated supply chain by creating cross-functional logistics teams, integrative supply
manager positions, and senior-level logistics executive posi-
management.
tions with cross–functional authority. Channel partnerships can
Marketing logistics (or physical distribution) is an area of po- take the form of cross–company teams, shared projects, and
tentially high cost savings and improved customer satisfaction. ­information-sharing systems. Today, some companies are out-
Marketing logistics addresses not only outbound logistics but sourcing their logistics functions to third-party logistics (3PL)
also inbound logistics and reverse logistics. That is, it involves providers to save costs, increase efficiency, and gain faster and
the entire supply chain management—managing value-added more effective access to global markets.

Key Terms
OBJECTIVE 12-1 Contractual VMS OBJECTIVE 12-4
Value delivery network Franchise organization Marketing channel management
Marketing channel (distribution Administered VMS
channel) Horizontal marketing system OBJECTIVE 12-5
Channel level Multichannel distribution system Marketing logistics (physical
Direct marketing channel Disintermediation (or channel distribution)
Indirect marketing channel disruption) Supply chain management
Direct-to-consumer (DTC) brands Distribution center
OBJECTIVE 12-2 Multimodal transportation
OBJECTIVE 12-3
Channel conflict Integrated logistics management
Conventional distribution channel Marketing channel design Third-party logistics (3PL) provider
Vertical marketing system (VMS) Intensive distribution
Corporate VMS Exclusive distribution
Selective distribution

Discussion Questions
12-1 Why is the concept of the value delivery network becom- 12-4 How would you distinguish between exclusive and se-
ing increasingly important? Explain. (AACSB: Written lective distribution? (AACSB: Communication; Reflective
and Oral Communication; Reflective Thinking) Thinking)
12-2 Why is it often necessary and advantageous to have 12-5 How can distributors and retailers increase channel ef-
intermediaries in a marketing or distribution channel? ficiency? (AACSB: Written and Oral Communication;
(AACSB: Communication; Reflective Thinking) Reflective Thinking)
­12-3 How do decisions about marketing channels relate to 12-6 What are third-party logistics (3PL) providers, and what
other marketing mix decisions—for example, decisions value do they provide for companies? (AACSB: Written
about pricing, products, or promotion? (AACSB: Written and Oral Communication; Reflective Thinking)
and Oral Communication; Reflective Thinking)

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 394   PART 3 | Designing a Customer Value–Driven Strategy and Mix
Critical Thinking Exercises
12-7 Amazon and Best Buy form a horizontal marketing sys- How do Ford’s channel members help it compete with
tem to sell Amazon smarthome devices, as discussed other automobile manufacturers? (AACSB: Written and
in the chapter. What might their relationship look like if Oral Communication; Reflective Thinking)
they formed a conventional distribution channel instead? 12-9 It has been estimated that the top 100 third-party lo-
(AACSB: Written and Oral Communication; Reflective gistics companies worldwide control around a third of
Thinking) the estimated $270 billion outsourced logistics. Market
growth is between 6 and 8 percent. Do some research
12-8 Ford has nearly 3,000 automobile dealerships in the to find out why this logistics model is so successful.
United States and 10,000 dealer locations worldwide. (AACSB: Communication; Use of IT; Reflective Thinking)

APPLICATIONS AND CASES

Digital Marketing Members Only?
Instacart is an online grocery delivery and pickup service that part- 12-10 Why does Costco offer products for nonmembers
ners with more than 500 retailers across the United States and through Instacart? (AACSB: Integration of Real-World
Canada. Costco is a major membership-only big box retailer op- Business Experiences; Application of Knowledge)
erating in these two countries. Costco partners with Instacart for
12-11 What changes will Costco have to make if it offers
last-leg delivery of many grocery products. While membership is
same-day delivery for its in-store products? (AACSB:
required to shop in-store and online at Costco.com, membership
Integration of Real-World Business Experiences;
is not required when ordering from Costco via Instacart. While the
Application of Knowledge)
added convenience of big-box retail delivery is undeniable, this rela-
tionship creates a loophole in who has access to Costco products.

Marketing Ethics Ethical Sourcing

Lush, the fresh handmade cosmetics company, was launched in the ingredients used for the cosmetics be vegetarian, not tested
1994 and included the same creative team who designed many on animals, and have minimal impact as far as transportation is
amazing products for The Body Shop. In less than 20 years of its concerned. Today, the company indirectly supports 400 women
establishment, Lush has grown to a network of over 850 stores in Ghana who supply fair-trade shea butter and has stopped
in more than 50 countries worldwide and over 6,000 employees. using palm oil from Indonesia in order to protect the natural habi-
From the outset, the company was keen on ensuring that they tat of the orangutan. They also buy directly from small farmers in
sourced their product ingredients ethically. This has become Tunisia, Costa Rica, the Dominican Republic, and Laos.
their key proposition, and together with the anti-animal-testing ­12-12 Write a brief report on a business of your choice that
stance and the ethos of making fresh cosmetics, the business supports ethical sourcing. What criteria are being used
stands apart from most of its competitors. It does mean that the to establish the ethical standards under which they
prices of their products are marginally higher, but this is offset by operate? (AACSB: Written and Oral Communication;
the unique, minimalist packaging and general vibe of the brand. Reflective Thinking)
When Lush looks for suppliers, they consider the whole picture;
they take into account the conditions under which the workers 12-13 Should ethical sourcing be the default standard for all
may operate and also consider how the production of the in- businesses? (AACSB: Written and Oral Communication;
gredients affects the environment. For Lush, it is important that Reflective Thinking; Ethical Understanding and
Reasoning)

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 CHAPTER 12 | Marketing Channels: Delivering Customer Value    395
Marketing by the Numbers Drinking from the Source
The post-Prohibition “three-tier system” requires the sepa- beer poured is approximately $1.50 per glass. The standard
ration of the production, distribution, and retailing of alcohol in the bar industry is to have 19 percent liquor cost, mean-
in most states. That was not a major issue for craft brew- ing 19 percent of the price to consumers represents the bar’s
ers during the explosive growth years, such as 2011–2015, cost of goods sold, leaving 81 percent for the bar’s margin.
when craft beers doubled their beer-market share and had
trouble keeping up with demand. However, when craft beer 12-14 Calculate the price at which a bar will sell one 14.5-ounce
volume through the three-tier system declined steadily from glass of craft beer if the desired 81 percent margin is
2016–2020, craft brewers turned to direct distribution for based on selling price. What is the bar’s dollar markup on a
growth. Adding direct distribution, mainly through operation of glass of craft beer? Refer to Setting Price Based on External
taprooms and brewpubs, results in approximately 4 percent Factors in Appendix 2: Marketing by the Numbers to learn
volume growth. Taprooms are locations where consumers how to do this analysis. (AACSB: Analytical Thinking)
can buy beer, and brewpubs are restaurants with their own
breweries. Taprooms account for almost 8 percent of all U.S. 12-15 Determine the brewer’s cost per 14.5-ounce serving
bar traffic. Small craft brewers are excited about this—they (one glass). What price would a brewer sell that glass of
make higher margins selling direct compared to using an indi- beer for to achieve an 81 percent margin based on its
rect channel of distributors and bars. A brewer’s average cost selling price at its own taproom or brewpub? What dol-
per keg of craft beer is $70, and a keg sells to distributors for lar and percentage margin would a brewer realize if the
$120. The distributor then resells the keg to a bar for $150. glass of beer was sold for the same price as it is sold in
Each keg serves about 100 14.5-ounce glasses, the amount bars? Is the brewer better off using the direct channel
typically poured into a 16-ounce glass at a bar to accommo- compared to the “three-tiered system” indirect chan-
date a foam head. Therefore, a bar’s cost per glass of craft nel? (AACSB: Analytical Thinking; Reflective Thinking)

Company Case Weyerhaeuser: Riding Out the Supply Chain Storm

In the investment world, commodities are typically pretty boring. and lumber produced in the United States—$9.6 billion worth in
From livestock to grains to steel and other metals, commodities 2018. China-based companies use that lumber to produce ev-
have their ups and downs. But long term, the world will always erything from furniture to hardwood flooring. China then exports
need them. Even if demand goes down, it tends to return as most of those finished wood products to the rest of the world.
markets correct themselves. And the biggest buyer of those products? The United States. In
Take the lumber industry, for example. When the housing 2018, the United States imported more than $9 billion worth of
market crashed in 2007, demand for lumber plummeted. For finished wood products from China—roughly the same value as
Weyerhaeuser Company, the largest producer of lumber in the the raw wood exports from the United States to China.
United States and third largest in the world, the dramatic dive in So why doesn’t the United States simply make more of its
demand for its primary products resulted in a 50 percent drop own finished wood products rather than complicating matters
in revenues over a two-year period from 2007 and 2009. But the by exporting raw materials only to re-import those materials in
market slowly corrected, and over the following decade, things the form of finished goods? The answer is simple—wages. The
returned to business as usual for Weyerhaeuser. costs of wages to produce goods are so much lower in China
That is, until a few years ago. That’s when a perfect storm that they offset the costs of logistics to move products back and
of factors began to emerge, causing major supply chain dis- forth between the two countries. And since the demand for logs
ruptions that sent market prices for lumber—Weyerhaeuser’s and lumber is derived from the demand for finished wood prod-
primary product—skyrocketing by as much as five times. In a ucts, any decline in the latter negatively affects the former.
highly unusual manner, the factors that negatively affected the In 2018, the first of several factors disrupting the supply chain
supply of lumber did not negatively affect demand. In fact, de- of Weyerhaeuser’s products began to have a negative impact.
mand for lumber only increased. This left Weyerhaeuser with Reversing decades of trade policy, the United States increased
record surpluses of raw materials—trees waiting to be cut—in existing tariffs and imposed new ones on exports of various
the 26.4 million acres of timberlands under its management. products to other countries, with the stated purpose of reducing
But capacity constraints at sawmills and disruptions to down- the U.S. trade deficit and sparking an increase in domestic jobs
stream links in the supply chain have created bottlenecks. What and demand for goods made in the United States. The biggest
are these factors, and when will they stabilize, allowing the flow target of these tariffs was China, as the United States slapped a
of raw lumber to return to a predictable state? While these sup- 10 percent tariff on furniture and other finished wood products
ply chain factors have eased to some extent, the market remains imported from China. In retaliation, China imposed 25 percent
volatile, affecting the ability to rely on accurate forecasts. tariffs on U.S. logs and lumber. Essentially, finished wood prod-
ucts from China suffered a 35 percent tax practically overnight.
The Storm Begins The new tariffs produced predictable results. U.S. log and
The United States exports a lot of lumber to other countries. lumber exports to China dropped by 50 percent from 2018 to
China is by far the biggest foreign buyer of U.S. lumber. In fact, 2019. Prior to the levying of these trade taxes, analysts projected
through 2018, China purchased roughly 45 percent of the logs record increases of U.S. lumber exports to China. According to

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 396   PART 3 | Designing a Customer Value–Driven Strategy and Mix
one industry watchdog group, the growth of the Chinese lumber and homeowners pressed forward undeterred. “Not only has it
market was expected to be “unlike anything ever encountered in surprised me, it’s just surprised the whole industry,” said one
the industry.” But for many companies, Weyerhaeuser included, lumber industry executive of the building boom. “Housing and
lumber sales to China practically stopped overnight. As a result, construction, repair and remodel, that’s where so much money
Weyerhaeuser’s revenues decreased by 12 percent. was pointed by American consumers that the sheer scale of de-
mand was hard to fathom.”
The Storm Intensifies As the price of lumber soared, the social media meme ma-
As the United States and China made small steps toward re- chine climbed on board. “Not even one police escort,” noted
solving what can only be described as a trade war, the supply one Twitter photo of a truck stacked with lumber rolling down the
chain fire was suddenly stoked with a pile of dry kindling. As the highway. “Wow, neighbors just casually flaunting their wealth,”
COVID-19 pandemic took the world by surprise, corporations quipped another, alongside an image of a pile of boards in front
and organizations everywhere closed factories and facilities, of a home. The hysteria also spawned conspiracy theories—that
slowing and even halting the production of many goods. lumber companies, mills, and other powers that be of the forest
Weyerhaeuser initially kept facilities open, instituting numer- were hiding lumber in mass quantities. And customers in general
ous precautions such as sanitization, social distancing, and simply could not wrap their heads around the shortages faced at
mask-wearing procedures to safeguard the health of employees. lumber retailers. “Customers pressing me about why I don’t have
For the most part, the cutting and transport of lumber contin- lumber like I’m supposed to go out back and cut a tree down for
ued. Nonetheless, milling capacity at sawmills was dramatically them,” joked one Home Depot employee on social media.
reduced by pandemic closures and cuts to production based In time, markets absorb such disruptions and correct them-
on speculation that the pandemic would lead to a decrease in selves. But because of the magnitude of the disruption and the
demand. In a similar manner, the flow of milled lumber through large number of factors involved, the correction was slow in the
supply chains was also disrupted as factories told employees global supply chain for lumber and wood-related products. Even
to stay home and world governments mandated “stay-at-home” though Weyerhaeuser and its competitors had plenty of raw
orders. These factors temporarily but dramatically reduced material still growing in forests, the lumber processing and the
global production of finished wood and paper products. production of wood and paper goods were slow to ramp up.
But even as bottlenecks developed at every link in sup- Companies remained conservative about going full steam with
ply chains, something unexpected happened to the demand the pandemic still raging. Complicating matters, producers had
for wood. As people stayed home to work, they got online to dig their way out of a big demand hole, still constrained by lim-
and bought stuff. As the pandemic scare gripped people, they its of production. Companies at every stage of the supply chain
hoarded paper products such as toilet paper and paper tow- could invest in increasing capacity. But such investments require
els. What’s more, the demand for new homes spiked as home- long-term financial commitments at a time when there is little
owners stayed put and the supply of existing homes for sale certainty as to how long it will take before supply and demand
dropped. Additionally, many who remained at home with extra find an equilibrium. In such an environment, companies exhibit a
time on their hands dove into DIY projects that required lumber. In “wait-and-see” attitude toward long-term commitments.
other words, as the lumber supply took a hit in the wake of tariffs Although some relief in supply chain disruptions started to show
and the spread of the COVID-19 pandemic, demand stacked up. promise over the past year, new factors began to emerge, main-
As if a trade war and a pandemic weren’t enough, the assault taining the volatility of markets in general. For starters, worker ab-
on the global supply chain of lumber and wood products was fur- sences and departures resulted in an increase in average wages.
ther intensified by other unforeseen factors. The transportation Not only did this add to the strain on supply through the increase in
industry, including trucking and rail, suffered constraints as costs, but higher wages failed to add enough workers to make up
COVID-19 infections and associated shutdowns reduced the avail- for increased demand and limited supply. In the lumber industry,
ability of labor. In August 2020, Hurricane Laura made landfall as the mechanization has raised the required skill and training levels for
strongest storm on record for the state of Louisiana. On top of that, employees, making hiring new employees more difficult.
the 2020 wildfire season in the United States burned 8.8 million Making matters worse, floods, fires, and pine beetle infesta-
acres, 2.3 million acres more than the 10-year average and nearly tions in British Columbia and economic sanctions against Russia
double the area burned during 2019. Both events launched rebuild- have dramatically reduce the export of lumber from two major
ing efforts that further increased the demand for lumber. production centers, negatively affecting the global supply. With
similar supply chain factors affecting the petroleum industry, the
The Effects of the Lingering Storm price of fuel has risen steadily, more than doubling over the past
It doesn’t take a math genius to figure out what happened to two years. This has not only contributed to higher transporta-
the supply and price of lumber. Over a period of just 13 months, tion costs, it has also been a major factor in high levels of infla-
the commodity price of lumber exploded by a factor of six. Thus, tion, the likes of which have not been seen in decades. This has
if the cost of lumber for a new home in April 2020 was $10,000, prompted the Federal Reserve Bank to increase interest rates.
the same amount of lumber rose to $60,000 just over one year As customers and organizations at many different levels of
later. “Mills wanted to increase output, but they couldn’t find the supply chain pay the price financially, raw material produc-
workers,” said a forest industry analyst. “This is basic econom- ers like Weyerhaeuser are doing well. Unit sales may be down,
ics: when the supply curve shifts backwards and demand in- but prices are up. As a result, Weyerhaeuser’s revenues rose
creases, prices will go up.” 15 percent for 2020 and a whopping 26 percent for 2021.
Making matters worse, shortages left many individuals and After taking a net loss in 2019, Weyerhaeuser posted a profit of
companies scrambling to find the lumber they needed. Even as nearly $800 million for 2020, a number that more than tripled
the prices of homes spiked due to the low supply of homes on last year. “Each of our businesses delivered remarkable results
the market combined with record-low mortgage rates, builders in the face of unprecedented operating and market challenges,”

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 CHAPTER 12 | Marketing Channels: Delivering Customer Value    397
wrote Devin Stockfish, Weyerhaeuser CEO in a letter to share- 12-17 Is Weyerhaeuser a producer, a consumer, or an inter-
holders. Even as construction markets appear to be cooling as mediary in the value network? Explain.
inflation and interest rates rise, Weyerhaeuser remains bullish
12-18 Is integrated logistics management particularly impor-
on its future. Says Stockfish, “Looking forward, we remain con-
tant in a value delivery network such as the one for
structive on the demand fundamentals that will drive growth for
­finished lumber products? Explain.
our businesses and are well positioned to deliver superior long-
term value and returns for our shareholders.”40 12-19 Small group exercise: Looking forward beyond the
r­ecent disruptions, advise Weyerhaeuser’s top man-
Questions for Discussion agement on specific changes it should make to its
value creation and delivery network to lessen the im-
12-16 As completely as possible, sketch the value delivery net- pact of any similar future crises.
work for Weyerhaeuser, from tree to installed flooring.

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