The always prescient Peter Drucker said at the beginning of this decade that among the challenges facing management, “… the greatest will be in distribution channels, not in new methods of production or consumption.” Clearly, distribution is no longer the muddy backwater of business. The process of getting services and products to customers, once deemed to be unworthy of senior executive time, is now at the heart of some of the most innovative and disruptive strategies of this era.
The design and management of distribution channels is increasingly critical across all sectors. It is a high-stakes game where winning can bring huge riches and mistakes can be extremely costly. Witness the titanic struggle for supremacy in the self-service investment market between Fidelity Investment of Boston and Charles Schwab of San Francisco. Although Schwab’s initial claim to fame was as a discount stockbroker, it took a serious run at Fidelity’s market-leading mutual fund position by creating OneSource in 1992. OneSource revolutionized fund trading by offering 580 no-load funds from a variety of fund companies without charging customers transaction fees. As such, Schwab positioned itself as a master distributor and changed fund companies’ share of the assets (from 25 percent to 35 percent) sold through OneSource.
As a distributor offering broad assortment, efficient transactions and low cost, OneSource accumulated $33 billion in assets in just four years. While both Fidelity and Schawb continue to create new financial services products, their greatest competitive intensity is in creating newchannels of distribution via securities firms, insurance agents and banks. As Fidelity CEO Edward Johnson has said, “It’s like the difference between making movies and distributing them. It’s better to be in the distribution business, given that you have access to everybody else’s pictures.”
The stock price of Quaker Oats after its $1.7 billion purchase of Snapple Beverage Co. in late 1994 declined 10 percent in a period in which the Standard & Poor’s 500 stock index rose 41 percent. Most analysts agree that the cereal company paid too much for Snapple. However, the enduring performance problems are rooted in Quaker’s inexperience with Snapple’s system of independent distributors. Arrogance, mixed signals and other miscalculations badly damaged Quaker’s relations with distributors.
Watching well-respected brand names botch their market opportunities along the paths to their customers leaves us shaking our heads. But what’s more disturbing is that the cost of such channel mismanagement is growing significantly. Over the next 10 years, two trends will turn what used to be minor distribution miscues for many companies into significant, and possibly fatal, blunders: ever-increasing consolidation of channel participants and sweeping technological change. The former will put even greater clout in fewer hands. The latter will result in even more efficient channel systems, as well as direct selling and distribution to consumers for a growing number of product categories
The marketplace is changing so rapidly that the management of distribution channels now requires ongoing monitoring of the needs of customers and channel partners, as well as new technologies for answering those needs. There are four ways for managers to ensure their distribution channels become a conduit and not a constraint to growth: 1) design and manage channels based on understanding the buying needs of end customers – and not allowing channel partners to control one’s destiny via greater knowledge of end users; 2) master the intricacies of distribution; 3) view the Internet realistically and yet creatively in planning new channels; and 4) prepare for the inevitable channel conflict.