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The Distribution Trap: Keeping Your Innovations from Becoming Commodities | SalesAndMarketing.com

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The Distribution Trap: Keeping Your Innovations from Becoming Commodities

There is a right answer for how firms should distribute their innovative products and services
ARTICLE | SUN, 02/06/2011 - 12:16

by: Andrew R. T homas and T imothy J. Wilkinson

The American model of business is dy sfunctional. Along with small and medium-sized companies, the backbone of the U.S. economy , large multinational firms hav e been lured into a misconceiv ed form of producing and selling. It goes like this:
Inv est blood, sweat, tears, and m oney to innov ate a new product or serv ice Sell it through the largest distributor possible Maxim ize the v olum e of sales through that distributor Deal with the inev itable cost-cutting dem ands Com prom ise brand integrity Export capital, jobs, quality control, and pollution to dev eloping m arkets Watch the innov ation becom e a com m odity Lose m oney Begin to dev elop new innov ations Start all ov er again

Mistakenly , many marketing departments see deals with Mega-distributors as the way to boost sales and market share. In reality , the Megas liv e by high v olume and low prices. They use their powerful lev erage to demand price cuts and other concessions from suppliers. Companies end up with razor thin or nonex istent profit margins, ev en as their innov ativ e products and serv ices are treated like commodities by both the Megas and the buy ing public. Surprisingly , this transformation of the business landscape has occurred with little fanfare or real analy sis. Before y ou think that this is merely another attempt to blame Wal-Mart, GE Capital, AutoNation, Home Depot, and others for the ills of the world, let us be clear: We do not blame the Megas for the Distribution Trap and what it has caused. As far as we know, no one has ev er been forced to sell their products or serv ices to someone else. Megas rarely , if ev er, trav el to v isit potential suppliers. They wait for would-be v endors to show up. And, boy do they in great numbers, each hoping to strike it rich! Beginning in the early 1 980s, innov ativ e firms permitted, either consciously or subconsciously , outsiders into their companies. They allowed these outsiders to gain increasing control ov er sales and distribution activ ities. Innov ativ e firms and the people who led them were responding to what management theorists were say ing at that time. The business gurus talked about organizational transformation emphasizing things like resources, capabilities, innov ation, technology , and operational effectiv eness. Total quality management, lean manufacturing, and zero defects were just a few of the solutions preached by business elites to companies of all sizes. Drinking this elix ir, thousands of companies that once had been in control of all aspects of their innov ativ e dev elopment began to lose interest in sales and distribution, preferring instead that other companies take

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The Distribution Trap: Keeping Your Innovations from Becoming Commodities | SalesAndMarketing.com

ov er this business function. The concept of core competencies was prov ided as the justification for letting loose of control after the producing firm had ex ercised its unique set of v alue-adding activ ities. Why manage a string of dealers if y our core competency y our basis of differentiation is in research and dev elopment or manufacturing? Taking this adv ice, companies div ested themselv es of activ ities that were not perceiv ed as v alue added. Sales and distribution were pushed aside. There is a right answer for how firms should distribute their innov ativ e products and serv ices. We believ e that American businesses should create superior v alue by producing high-quality products and then by pass the Megas to get those goods into the hands of customers. Taking a product to market with the intention of av oiding the mass market may mean slower growth in the short run, but it will translate into greater profitability , satisfaction, and freedom y es, freedom ov er the long term. In some circumstances, the best way for a firm to fully ex ploit an innov ation is to sell directly to customers. As tools like customer relationship management software, database management pro- grams, and Web-based customer serv ice become more affordable to businesses of all sizes, the possibility of directly targeting a company s micromarket comes well within reach. The benefits of customer intimacy , loy alty , and word-of-mouth adv ertising that are achiev able with effectiv e direct marketing should make it a top consideration in efforts to av oid the trap of losing control ov er innov ated products. Dav id Oreck, the founder of the Oreck Corporation, purposely eschews the Megas in fav or of dealing directly with customers. He strongly adv ocates that business create and sell premium- priced products while av oiding mass-market channels. According to Oreck, Any manufacturer who does not control distribution, will ev entually be controlled by the distribution channel.Orec sells his v acuum cleaners online and through company -owned and franchise stores. Direct marketing, especially online selling, requires lots of adv ertising to direct people to a Web site or an 800 number. Oreck has masterfully personalized his product through ex tensiv e telev ision and radio adv ertising. Manufacturers often employ regional distributors responsible for dev eloping local dealerships, which then sell products directly to the public. Distributors frequently prov ide training, logistics, and marketing and sales support for these dealerships. For companies with high-end products, especially those requiring a serv ice component, authorized dealerships may be the best way to distribute the product and retain v alue from the transaction. Specialty stores, whether operating as chains or as independents, are still found across the United States. Companies like STIHL Inc. hav e av oided the Distribution Trap and hav e operated through serv icing dealerships for their entire ex istence Andrew R. Thomas is assistant professor of international business at the Univ ersity of Akron (art@uakron.edu), and Timothy J. Wilkinson is professor of marketing and interim dean of the College of Business at Montana State Univ ersity -Billings (timothy .wilkinson@msu-billings.edu). To purchase their book, v isit http://distributiontrap.com.

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