Oct 19, 2009

Nobel Award Recognizes Distribution Theory

The reputation and status of the Nobel awards has been weighted down under controversy for the past week because of the Committee's decision to award the Peace prize to U.S. President Barack Obama after being in his position for what many refer to as 'only nine months'. That controversy is a shame, because awardees in other categories are less controversially accepted for the brilliance of their work and accomplishments. One of them is someone near and dear to my own narrow field of business management study - Distribution Strategy.

Oliver Williamson, a retired Berkeley professor, has just been awarded the Nobel Prize for Economics, for his study of commercial border lines. When does it make sense for a company to do activities itself and when is it preferable to contract with supply or distribution partners to do the job? In the real world, Williamson observed, figuring out the answer can be difficult. Getting a handle on your own costs is hard enough, but to understand another company’s you either have to make educated guesses or trust the other guy to be honest and accurate.

In the broad area of corporate strategy, Oliver Williamson was a contributor of great significance, and the issues he looked at (when distribution was much less fashionable than it is today) had a profound impact on the evolution of modern theory in the subject area. His work on understanding transaction costs, as well as his coining of the idea of "information impactedness", pushed the envelope on how to think about Distribution Strategy, but was work that received little recognition outside a small circle of devotees.

From what little I’ve read, however, the Nobel Committee is unambiguously spotlighting the challenges of Distribution Strategy. Many strategists are tempted to limit distribution to ideas about 'getting material products from point A to point B' (or 'physical distribution'). And for much of modern business history, that has not always been easy to do (think of getting petroleum from the North Slope to the Lower 48 or reliably getting a package from one of thousands of small producers to a specific consumer over night).

But moving stuff is often the easiest strategy element of distribution in its totality. The hardest part is typically in the design of the total end-to-end value chain of activities from upstream suppliers to assemblers to retail channels to final customer/consumer, then hammering out the relationships needed to make that value chain work both cost-efficiently and consumer satisfaction-effective.

Mentally, most employees, even most executives, live inside their own company. But as the Nobel people and Oliver Williamson know, it’s how well a company manages at its borders – its work in conjunction with other companies – that will increasingly make it or break it. For that, the Nobel Committee rightly recognized a genuine pioneer for his fantastic work!

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