Marketing as Strategy: Understanding the CEO’s Agenda for Driving Growth and Innovation
By Nirmalya Kumar
Harvard Business School Press Boston, Massachusetts
ISBN-10: 1-4221-0268-8 ISBN-13: 978-1-4221-0268-8
Copyright 2006 Harvard Business School Publishing Corporation All rights reserved Printed in theUnited States of America This chapter was originally published as chapter 4 of Marketing as Strategy by Nirmalya Kumar, copyright 2004 Harvard Business School Publishing Corporation. No part of this publication may be reproduced, stored in or introduced into a retrieval system, or transmitted, in any form, or by any means (electronic, mechanical, photocopying, recording, or otherwise), without theprior permission of the publisher. Requests for permission should be directed to email@example.com, or mailed to Permissions, Harvard Business School Publishing, 60 Harvard Way, Boston, Massachusetts 02163.
From Declining to Growing Distribution Channels
Let us keep the cannibals in the family.
s a new channel, the Internet complicated distribution not only byfacilitating the delivery of digital goods and services like news and music but also by enabling dynamically priced transactions for just about any physical good or service—among perfect strangers. Electronic marketplaces have proliferated for business-to-business (B2B) sales (for example, FreeMarkets), business-to-consumer (B2C) retail, resale, and referrals (for example, Amazon), andconsumer-to-consumer (C2C) resale and services (for example, eBay). The Internet is but one of several technologies affecting distribution, and new channels inevitably startle managers at large, established ﬁrms. Should they rapidly develop new competences and exploit these emerging channels to reach new customers, often at lower costs, or should they wait until the format matures? Will they cannibalize currentrevenues or jeopardize long-standing reseller partnerships? Such incumbent dithering allows upstarts like Amazon, Charles Schwab, Dell, Direct Line, easyJet, and IKEA to seize
Marketing as Strategy
advantage and disrupt industry leaders through channel inﬂexions, or disruptions that overturn industry channel structure, in industries such as entertainment, ﬁnancial services, communications,computing, publishing, software, and travel. Charles Schwab has developed the ﬁnancial supermarket model by concentrating on distribution in a traditionally vertically integrated industry. Citigroup has aggressively shifted customers and transactions to ATM machines, while Direct Line has become the largest automobile insurance company in the United Kingdom by using telephonebased selling. Delland easyJet have developed cost-efﬁcient business models based on selling directly to consumers while disintermediating traditional retailers and travel agents, respectively. Michael O’Leary, CEO of Ryanair, notes, “Four years ago we sold 60 percent . . . through travel agents, who charged us about 9 percent of the ticket price. Then computerized reservations added about another 6 percent. So wewere paying about 15 percent for distribution. Today, 96 percent of our sales are sold across Ryanair.com, and the cost is about a cent per ticket.”1 Observing the success of these new entrants, incumbents are ﬁnally realizing the strategic role of distribution and the need to adjust their channel strategies. Under pressure to generate top-line growth in a tough economic and competitive environment,senior executives cannot overlook innovative channels that reach new segments and signiﬁcantly cut costs. But channel migration from the old to the new rarely happens without turmoil and top management support. Line marketing managers will simply not challenge entrenched internal and external constituencies without top management’s support. Reconﬁguring channels demands a CEO like O’Leary:...