Hi everyone. In our last session, we talked about what a channel is and what it does. Today, we want to look at how channels create and make value. So let's consider a trend that we see a lot of these days and that's the sharing economy. The sharing economy is based on the simple premise that we all have lots of stuff with actual capacity. This capacity could be used more productively as in creating cash. So think about your car. You may use your car to drive to work and then the car sits in a garage or a parking lot all day until you return at six or seven o'clock to use it to drive home. Your car is a depreciating asset whose capacity is being used unevenly. What if, instead of being unused all day, the car could be accessed by someone who would pay you for the loan and use the car? In other words, the car's unused capacity by you generates economic rents. Your car could become profitable. So if you have a drill, that's often unused, if you have designer shoes, a house or a yard, or even tools, there's a market for this capacity. Essentially, whatever you need, whether it's a ride, food, or access to a game or a location, it's all often better borrowed or used temporarily from someone who has these excess resources. It's like flexible running. The overall effect is for goods to be used and needs to be met more efficiently. Now, how [inaudible] even come up with an idea like this? Trial and error. Maybe a little luck happens to stumble upon it. But let me give you something a little bit more robust, a framework for thinking about how to create channel value. So there's been a lot of research on channel strategy management. In fact, there's been decades of it. A lot of this points to a set of fairly robust options, as you see here. The first is adding a new route to market to an existing system. Maybe changing the current channel structure. Number three is adding costly value increasing activities to your current channel approach or reducing the current route to market activities and costs associated with it. Now, the sharing economy is an example of creating a new route to market. One that accomplishes what buyers and sellers both need more efficiently. Well, this is often done via technology-enabled middlemen. We'll be looking at Uber this semester and you'll see that the combination of technology and analytics is key here. These options then grow revenues by either leading to the acquisitions of new customers or segments or by increasing the purchase volume and usage of existing customers. That, my dear friends, is how you create explosive channel value. So let's keep thinking this through. Have you ever noticed that restaurants are getting smaller? That's right. The footprints are shrinking. If a restaurant makes money from serving people food, then how could a smaller footprint help make more money? It turns out that restaurants are under increasing pressure to control labor and infrastructure costs, plus people are time challenged and would prefer to pick up their food through a drive-through than sit and eat it. So restaurants are getting smaller. In essence, the current channels structures are being changed for a leaner route to market. One more for the road. India has the problem that only 11 percent of the food that the country produces actually reaches the consumers who need it. This is because some regions are sparsely populated. They're difficult to get to. There are entrenched middlemen cartels and, frankly, the country lacks the proper storage and refrigeration facilities that it needs for a food distribution. Anyone who can solve this problem accesses a retail sector worth $490 billion. That is a huge chunk of change. How does the channel strategists see opportunity in this situation? By being willing to make costly investments, and that is exactly what Walmart is currently doing in India. They are spending hundreds of millions of dollars in warehouses and storage facilities. If they can't get existing middlemen to do the work, they have to create their own route to market. It's expensive, all right? But sometimes, that's how channel value is created. The last option which is more of a supply side option is to think about how to make your current route to market leaner and less expensive. It's important to note that none of these strategic options are without risk. So one of the biggest downsides of the sharing economy is creating and maintaining trust between buyers and sellers. This is the problem with Airbnb. Can you trust, as a buyer, that the room you get, upon arrival, will actually stand up to the pictures that you viewed online? If you are the channel strategist who is captaining this effort, your challenge is to address this trust issue. If a restaurant owner downsizes its footprint, it might also limit the range and the assortment of food that it offers. So the challenge she faces is, which items do I offer? Because meeting one segment's desire for convenience might mean losing another segment's business if a favorite item goes away. Finally, Walmart's investments in India could go massively wrong, if they can't beat or work around the entrenched channels structure that's already in place. So this is the framework that puts you down the path to recognizing how and where channels can create value. This is the path to the revenue growth that Wall Street expects from firms. Now, all of these examples involve a key ingredient that you should not miss; how the channel structures meet a desire or a benefit that customers value? So this leads us to an important conclusion, and you'll want to lean in for this one channel strategists think about market opportunities and harnessing market value in a broader way than only with a product or a price reduction focus. Product and price responses is a marketing 101 kind of focus. This is an advanced elective class. We think differently here.
