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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

The American model of business is dysfunctional. Along with small and medium-sized companies, the backbone of the U.S. economy, large multinational firms have been lured into a misconceived form of producing and selling. It goes like this:

  • Invest blood, sweat, tears, and money to innovate a new product or service
  • Sell it through the largest distributor possible
  • Maximize the volume of sales through that distributor
  • Deal with the inevitable cost-cutting demands
  • Compromise brand integrity
  • Export capital, jobs, quality control, and pollution to developing markets
  • Watch the innovation become a commodity
  • Lose money
  • Begin to develop new innovations
  • Start all over again…

Mistakenly, many marketing departments see deals with Mega-distributors as the way to boost sales and market share. In reality, the Megas live by high volume and low prices. They use their powerful leverage to demand price cuts and other concessions from suppliers. Companies end up with razor thin or non-existent profit margins, even as their innovative products and services are treated like commodities by both the Megas and the buying public. Surprisingly, this transformation of the business landscape has occurred with little fanfare or real analysis.

Before you 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 ever been forced to sell their products or services to someone else. Megas rarely, if ever, travel to visit potential suppliers. They wait for would-be vendors to show up. And, boy do they – in great numbers, each hoping to strike it rich!

Beginning in the early 1980s, innovative firms permitted, either consciously or subconsciously, outsiders into their companies. They allowed these outsiders to gain increasing control over sales and distribution activities. Innovative firms and the people who led them were responding to what management theorists were saying at that time. The “business gurus” talked about organizational transformation – emphasizing things like resources, capabilities, innovation, technology, and operational effectiveness. “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 elixir, thousands of companies that once had been in control of all aspects of their innovative development began to lose interest in sales and distribution, preferring instead that other companies take over this ‘‘business function.’’ The concept of ‘‘core competencies’’ was provided as the justification for letting loose of control after the producing firm had exercised its unique set of value-adding activities. Why manage a string of dealers if your core competency – your basis of differentiation – is in research and development or manufacturing? Taking this advice, companies divested themselves of activities that were not perceived as value added.  Sales and distribution were pushed aside.

There is a right answer for how firms should distribute their innovative products and services. We believe that American businesses should create superior value by producing high-quality products and then bypass the Megas to get those goods into the hands of customers. Taking a product to market with the intention of avoiding the mass market may mean slower growth in the short run, but it will translate into greater profitability, satisfaction, and freedom – yes, freedom – over the long term.

In some circumstances, the best way for a firm to fully exploit an innovation is to sell directly to customers. As tools like customer relationship management software, database management pro- grams, and Web-based customer service 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, loyalty, and word-of-mouth advertising that are achievable with effective direct marketing should make it a top consideration in efforts to avoid the trap of losing control over innovated products.

David Oreck, the founder of the Oreck Corporation, purposely eschews the Megas in favor of dealing directly with customers. He strongly advocates that business create and sell premium- priced products while avoiding mass-market channels. According to Oreck, ‘‘Any manufacturer who does not control distribution, will eventually be controlled by the distribution channel.’’Orec sells his vacuum cleaners online and through company-owned and franchise stores. Direct marketing, especially online selling, requires lots of advertising to direct people to a Web site or an 800 number. Oreck has masterfully personalized his product through extensive television and radio advertising.

Manufacturers often employ regional distributors responsible for developing local dealerships, which then sell products directly to the public. Distributors frequently provide training, logistics, and marketing and sales support for these dealerships. For companies with high-end products, especially those requiring a service component, authorized dealerships may be the best way to distribute the product and retain value from the transaction. Specialty stores, whether operating as chains or as independents, are still found across the United States. Companies like STIHL Inc. have avoided the Distribution Trap and have operated through servicing dealerships for their entire existence

Andrew R. Thomas is assistant professor of international business at the University of Akron (art@uakron.edu), and Timothy J. Wilkinson is professor of marketing and interim dean of the College of Business at Montana State University-Billings (timothy.wilkinson@msu-billings.edu). To purchase their book, visit http://distributiontrap.com.