MARKETING MATERIAL
This chapter is very much of a ragbag of small topics, which are related to one another (to a greater or lesser extent) by the theme of distribution. Each of the topics, therefore, has its own section (and its own objectives - which are briefly summarized here).
1. To understand the fundamental importance of distribution/channel decisions, and the theories underlying these.
2. To understand what is involved in channel management, and the techniques which may be applied.
3. To understand how customer support should be provided.
Each of the sections should be taken separately. On the other hand, it is important to convey to students the fundamental importance of controlling your distribution channels.
[Acetate 8.01]
'Place' is almost the 'catch-all' for the 4Ps. It covers what seem to be very diverse elements. Indeed, this chapter divides into at least four separate parts (channel decisions, channel management, and customer support). But, as the chapter also shows, there is some (albeit occasionally tenuous) shared logic between these various aspects of moving the goods or services between various levels of supplier and the end user. Even so, it is probably more productive to look at each of these four parts in isolation; with them sharing this 'portmanteau' chapter only for convenience.
The exact nature of what channels and distribution methods are to be used is a fundamental, strategic decision for the organization.
Customer service levels (resulting in customer satisfaction), and the special needs of the 'inner market' in delivering these, are also investigated in some detail.
This chapter contains all the things that don't easily fit elsewhere. It is best to recognize this fact, and admit it to students (who will see it for themselves anyway), and teach each of the main sections as a stand-alone topic.
That said, there is some shared logic between most of the components, and that can be usefully described as 'distribution' (albeit in very general terms). In addition, these are not purely peripheral activities. The distribution infrastructure, in its most general sense, is now often a critical element of an organization's competitive advantage. For some, those in the retail sector say, it is everything. For many others successful achievement of their overall objectives may be crucially dependent upon obtaining adequate, and suitable, distribution.
[Acetate 8.02]
The essence of distribution is the employment of intermediaries to move the goods (or service) from the producer to the consumer. The relationship between these various partners in the chain is, however, very different from that we have been looking at in earlier chapters. At its heart is a commercial, transactional relationship. In general, the intermediaries have no interest in the product or service other than to fulfil their role in delivering it to the consumer - usually in return for a fee in one form or another.
The name given to these intermediaries, the 'distribution chain', is self-evident - since it is the linkages along the chain which represent its most distinctive feature. 'Channel', the other name, is simply short for 'channel of distribution'.
[Acetate 8.03]
This section explores the idea that there is a progression of members within the chain, each member doing a rather different job.
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You can perhaps get the students to help you draw a distribution chain (or ideally set of chains) for a consumer product.
This topic was important when distributors and wholesalers were a crucial feature of most distribution chains; as they still are in Japan. More recently, however, the organizations at either end of the chain have attempted (with some success) to cut out the 'middlemen' (as they literally are) to gain more control over what happens in the channel. At one extreme producers have been delivering direct to the retailer (or even owning that retail outlet - especially in the service industries). At the other, retailers have been dealing direct with the producers (and, in the case of own brands say, becoming their own producers) and even setting up deals with overseas suppliers.
Of the structures listed in the text, 'single transaction' means that in many respects this is a face-to-face transaction between vendor and the final consumer; with perhaps just one intermediary (for instance an estate agent) partly involved. In this case, therefore, the marketing embodied is very much that of vendor to customer described in earlier chapters - it does not, generally speaking, reflect the specific problems of dealing with intermediaries.
This then leaves the two extremes:
[Acetate 8.04]
CONVENTIONAL OR FREE FLOW - with the traditional middlemen, where these intermediaries control the channel; setting priorities to match their own needs.
VERTICAL MARKETING SYSTEM (VMS) - at the other end of the spectrum, producers or retailers use a variety of means (discussed later in this chapter) to ensure that they are in control of the channel; and that the priorities are set by them not by the intermediaries.
This is one of the 'ragbag'. Its position here is justified because one aspect of an internal market may be that of using other parts of the same organization as 'channel members' to move the product on its way to the final consumer. The crucial difference here is in the pricing. The 'transfer price' - the price at which the product is 'sold' to an internal intermediary - is not set by market mechanisms, but is decided by management to suit their own needs; which have more to do with deciding where they want the profit to be seen to be generated (for tax reasons, though that is more difficult to achieve since the tax authorities look very carefully for signs of this, or simply to prop some ailing, but still favoured, lame duck).
A more general point is also made in this section: that all departments within an organization (including accounts and administration just as much as production) should treat their internal customers (the departments which consume the services they offer) exactly as if they were external customers. This is an important point, albeit a simple one which takes no more than a paragraph to explain. Internal customers may be just as important to the effective (and profitable) running of the organization - and it is they (rather then the external customer) with whom the typical manager will come into contact.
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So it is important to stress this point to students; and preferably to complete the 'audit' (in the student text) in class.
[Acetate 8.05]
For most organizations such decisions are amongst the most important they will make, since they are typically much more long-lasting (lasting years and decades) than other decisions - though they are not taken very often. It is important therefore that any organization puts in the effort (and resources) to ensure that these decisions are correct - although may such decisions are (because of their infrequent nature) taken inexpertly (and often arbitrarily).
All of the factors shown in acetate 8.05 (which should be largely self-evident) have their role to play in the decision.
[Acetate 8.06]
This is another 'ragbag' (in that it arguably should be in with 'Pricing') - though it does encapsulate much of what intermediary relationships may be about.
We now return to the management of the specific channels of distribution which may be involved;
[Acetate 8.13]
As can be seen, there are a number of alternative channels available.
Using intermediaries always involves some degree of compromise. It is usually forced upon the vendor by cost considerations, but the trade-off is loss of control. All of these external channels thus have to be carefully managed - just as much as do the internal operations within the organization. But the necessarily indirect management of such external intermediaries is that much more difficult.
The key decisions involved in establishing, and maintaining, control are:
[Acetate 8.14]
This is a critical decision, one of the most important most organizations make, yet all too often it becomes a free for all; producers believe that the more distributors they have the better (which we will see may apply only, and then not always, in the case of intensive distribution, which is the exception rather than the rule). For most organizations quality of channel member is much more important than number.
Producers should, indeed, think of their distributors (especially agents and dealers who - ostensibly at least - are supposed to work on their behalf) as they would their own representatives - and choose them at least as carefully. The quality of service which the consumer sees (and by which he or she often judges the producer) is crucial. IBM slipped from the top place in the Fortune poll on most-respected organizations (a place it had consistently held since the poll was started) to seventh place in the year following the widespread emergence of its PC dealers as its main point of contact with user managers!
The the various levels of intensity of distribution are shown in the acetate:
[Acetate 8.15]
The quality of the highly selected retailers is clearly paramount in the case of exclusive distribution, where intensive distribution may demand only logistical support (so the maximum number may sometimes justifiably be sought).
This employs much the same range of techniques which are employed internally; producers must recognize that these should also be deployed in relation to channel members.
This again explores the penetration of channels from both ends - by producers, forward at one extreme, and retailers, backward at the other - in order to maximize control over the channel.
On the other hand this (rare) activity is a cooperative venture between a number of producers.
This, on the other hand, is a critical issue for almost all organizations. These days it may well be the one issue which determines whether you can retain your customers, and hence survive in business.
This is classically illustrated in the student text in terms of service levels, the percentage availability of a product - and the trade-off against the cost of providing this level. But even in terms of this very narrow approach, there are other features. Where a product is not available ex-stock the lead-time may give a similar measure to customer service level.
[Acetate 8.26]
What is often more important - but usually ignored - is the reliability of this lead-time. Better late than never (the motto of much of industry) is unfortunately not true - late may be just as unwelcome as never!
[Acetate 8.27]
Following the process a step further, most students recognize the problem of damaged or faulty goods (though they may not realize the bureaucratic difficulties and costs involved in rectifying them). They do not, however, usually recognize the potential paperwork errors, which are even more prevalent these days - and doubly annoying.
A useful introduction is given in David Maister's Laws of Service:
[Acetate 8.28]
SATISFACTION = PERCEPTION - EXPECTATION
This makes the important point that it is not just the perception of the service (which may be subjective) which counts but the prior expectation (which may have been very subjective - and may have been built up by foolish promises in your advertising).
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It could be worthwhile getting the students to provide their own examples; the hype which surrounded the launch of Clive Sinclair's electric car (making it seem almost as important as the invention of the wheel) and the subsequent let-down (when it turned out to be nothing more than an oversize toy) effectively destroyed his whole business empire.
The second law (of 'catch-up ball') is also very important. You get only one chance (except perhaps over the very, very long term), especially in the service industries - where everything depends on trust.
This is an essentially practical section but no less important for that. Complaints are generated by any organization's activities. The key to success is how they are handled - and first of all that they are handled.
[Acetate 8.29]
Indeed, in this respect the best advice to students is actively to encourage complaints. They usually see this as counter-intuitive - you should want to minimize complaints. But the real point is that the causes of complaints should be minimized. Once the problem has been caused, however, the resulting complaints need to surface as soon as possible - so that they can be dealt with. The main danger of complaints lies in the great majority which are never made.
Paradoxically, most complaints come from loyal customers (those who are involved enough to go through all the hassle) and, if properly dealt with, they will continue to be loyal customers. Again, students need to persuaded of this - since they, again, tend to find it counter-intuitive.
[Acetate 8.30]
The last stage should not be neglected. Complaints are symptoms of things which are going (badly) wrong.
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Perhaps the best way of introducing the subject is to let the students describe problems they have had in complaining - and, from these experiences, draw out the lessons to be learned from this section.
It may seem self-evident that organizations should track the level of customer satisfaction, but few do. This is due to ignorance, since it merely requires the use of one of the simplest forms of marketing research. Ideally, as with IBM, it should be based not only on statistical research but also on individual reports - so that the position with each of the customers (organiztions) can be addressed separately.
This represents a relatively new, and important, development in marketing. In its sphere of operation it reverses the traditional thrust of marketing theory and looks inwards not outwards.
It is an especially valuable addition to theory, for it optimizes the contribution of the organization as a whole (not just that of the marketing department) towards meeting the needs of the customer.
This aspect of marketing has already been recognized by managers in general. Our research shows, rather unexpectedly, that they see a primary function of marketing as being to integrate all the internal activities of the organization at the operational level. This is a view which marketing theory (and practice by marketing departments) has not traditionally shared; except in the guise of product/brand management, which takes it to its logical conclusion (but is now rarely implemented).
It also addresses the problems which TQM (Total Quality Management) seeks to resolve. This concept recognizes that the quality the customer sees (and sees as important) is not limited to the immediate product or service characteristics, but comes from all parts of the organization. It is a simple concept, and should be a powerful one, but it has been overlaid with all the paraphernalia and gimmickry which now tends to accompany the further development of new ideas - and in the process the main message has been confused, diluted and ultimately lost.
The one powerful element of TQM which remains is the concept that the quality which really matters is that seen by the customer. But, in an even wider context, this is exactly what marketing is all about!
Inner marketing, therefore, extends the role of marketing throughout the whole organization; where it has always belonged - imprisoning it in the rarefied atmosphere of the marketing department has always limited its effectiveness. Developing the inner market holds (much as it has for the external market) very powerful benefits.
The basis of the concept is that there are internal consumers just as much as there are external ones. The needs and wants of these internal consumers have to be addressed in exactly the same way (and using much the same range of tools) as the external ones. These internal consumers are those who provide the overall service - employees located throughout the organization (and, in the case of the service industries, often the majority of employees).
[Acetate 8.31]
Thus, the match between consumer needs and what the organization can provide has two elements, the second of which is often ignored in marketing theory. That of the consumer is discussed at length, but that of the organizational offering is assumed (and the employee needs are seen as irrelevant) - it is expected to be a product which can be modified at will (and its features pummelled into whatever shape is needed). In practice much of the offering is now human (the all-important service elements); and that cannot be as easily manipulated.
Dealing with these internal consumers follows exactly the same stages as for the external ones. The most important one is the first: the research to identify these (internal) needs and wants. What the organization can realistically hope to offer is, within a relatively narrow band, determined by what its employees want to offer. The internal research is, therefore, needed to establish what this basic offer will be.
Thereafter, the normal stages of (promotional) persuasion can be used to move the employee position nearer to that of the consumer - so that a complete match is ultimately achieved (though the time taken to achieve this should not be underestimated).
[Acetate 8.32]
As indicated by the acetate, in part this ultimate match will be achieved by modifying the external consumer position (though more typically in terms of their perception of the product/service rather than their basic needs). In the main, though, it will be most successfully achieved by moving the internal consumers' position. This may well be less difficult than it appears, since most employees will recognize their role in meeting customer demands and will want to fulfil this role - the frequently observed mismatch is too often the result of poor management rather than true employee bad will towards customers.
The many 'customer service programmes' attempt to address this gap. They all too often fail, largely because they miss out the essential first stage of marketing research. They do not establish the employees' needs; indeed they are usually not interested in them, and do not even see them to be relevant to the process. But, as we have seen in earlier chapters, a clear knowledge of the needs is required before they can be effectively addressed.
[Acetate 8.33]
The persuasion part of the process is rather different from that concerned with external consumers, because the internal processes can be much more direct and - to be effective - should make full use of management participation.
[Acetate 8.34]
INFORMATION - this is the one, key, element which is much the same as in external campaigns. In this case the internal customers must be given the facts about their role.
ATTITUDES - but the process must go further than this - further than can normally be achieved with external customers - to agree their role with them. This employee contract (a more formalized version of brand loyalty) is central to the task of meeting external customer needs. Employees must not only know the roles expected of them, they must willingly agree to fill them.
COORDINATION - all this can be, and should be, positively managed; this is, indeed, the element which offers a significant advantage over more traditional (external) marketing. It does, though, demand the involvement of the whole management structure; and this task (of overcoming the inertia traditionally caused by management's innate conservatism) should not be underestimated.
MANAGING CHANGE - thus, the prime task turns out to be managing the extensive changes usually required.
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In our experience this is a topic which works well in debate, not least because the participants (who usually agree with the points made above) come to realize that they are not part of an eccentric minority (as other management theory would suggest) but are in the majority - and this gives them the confidence to implement such policies.
As the text says, the ultimate extension is to build a corporate culture which integrates all the operations of the organization; with customer needs. In some of the most successful organizations (such as Toyota and IBM at its peak) such culture has been the most important aspect of the business. In Toyota the very success of the business is ascribed by senior management to 'the relationship with our employees'.
Unfortunately the importance of culture, and of its power to motivate the whole organization, is not recognized by most marketers; although it has been heavily featured by some of the most popular, and influential, writers on corporate strategy (most notably Peters and Waterman). The further problem is that when the need for a suitable culture is recognised, to establish one will probably take a decade or more - especially if a strong (but unsuitable) one is already in place. It is one of the mysteries of organizational management that it takes an individual only a matter of a few days to fully adapt to the new culture when he or she joins the organization - but the inertia within an organization means that the same process organization-wide takes as many years.
It helps if the target culture is one which the employees want (though even if it is totally in their best interests it will still take years to achieve). The process may also be speeded by a crisis (probably with the appointment of a new and charismatic CEO who firmly sets the agenda which leads to the new culture).
This is a difficult lesson to teach, partly because of the very long timescales involved but mainly because the 'culture' is difficult to pin down. It cannot be spelled out in the simplistic platitudes which populate much of management theory. It has to emerge from the soul of the organization itself.
[Acetate 8.35]
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