Manage Consolidation in the Distribution Channel
In almost every business-to-business industry, companies are facing increasingly powerful intermediaries in their distribution channel. Industry consolidation is replacing a multitude of small “mom and pop” distributors with a handful of national, professionally managed, publicly traded corporations. Seeking to eliminate channel costs, these distributors make new demands on manufacturers and multiply service requirements. As distributors prune their supply base, market access for manufacturers is no longer guaranteed.
Traditional channel-management approaches rightly call for a manufacturer to identify strategies to maintain market position as value migrates down the channel. Consolidation complicates this effort, however, by creating uncertainty about the investments required to gain position if the channel structure changes. Which distributors will emerge as the winners? Which channel system will customers prefer? How should manufacturers manage relationships and investments during the transition period? How can these companies ensure that they will continue to be major players in the competitive landscape?
In this article, we provide a strategic primer on wholesale distributor consolidation for manufacturers. Our goal is to help man agers understand the dynamics of consolidation and the strategic options available to them. A company may be facing various stages of consolidation. Perhaps managers already realize that consolidation will soon overtake their channel. Or a manufacturer might find itself in a channel environment that is gradually moving from fragmentation to a few large players. Since much is known about channel relationships when there is a dominant intermediary, we focus our attention on the implications for manufacturers of the fragmentation-to-consolidation transition in the distribution channel.
We begin our discussion by describing consolidation and its drivers, which indicate when consolidation is impending. We contend that the dynamics of consolidating distribution channels call for manufacturers to rethink their approach to the trade. Drawing on more than a decade of research, interviews, industry case studies, and our own consulting experiences, we examine four strategic options available for a manufacturer facing the prospect of consolidation. Next we look at postconsolidation conditions, focusing on two critical challenges associated with the emergence of larger, more sophisticated distributors — supplier consolidation and increased service requirements. We conclude with some strategic questions for manufacturers and use an industry example to illustrate how companies make use of the strategic options.
References
1. M.E. Porter, Competitive Strategy (New York: Free Press, 1980).
2. “1998 M&A Profile,” Mergers & Acquisitions, volume 33, March–April 1999, pp. 42–67.
3. For a more complete discussion of the forces triggering consolidation, see:
A.J. Fein, Consolidation in Wholesale Distribution: Understanding Industry Change (Washington, D.C.: Distribution Research and Education Foundation, 1997).
4. See A.J. Fein, “Understanding Evolutionary Processes in Non-Manufacturing Industries: Empirical Insights from the Shakeout in Pharmaceutical Wholesaling,” Journal of Evolutionary Economics, volume 8, Fall 1998, pp. 231–270.
5. A.J. Fein, “Consolidation Prospects for MRO Distribution,” Progressive MRO Distributor, volume 3, March–April 1998, pp. 14–16.
6. F. Lynn & Associates, Integrated Supply 2: Shaping the Future of the Industrial Marketplace (Chicago: FL&A, 1998).
7. E.A. Anderson, G.S. Day, and V.K. Rangan, “Strategic Channel Design,” Sloan Management Review, volume 38, Summer 1997, pp. 59–69.
8. Carl Cullotta at Frank Lynn & Associates suggested the “pick the winners” approach to us.
9. S.D. Jap, “‘Pie-Expansion’ in Buyer-Supplier Relationships: The Strategic Payoffs of Dyadic Process,” Journal of Marketing Research, forthcoming.
10. S.D. Jap, S.M.J. van Osselaer, and B.A.Weitz, “Conflict Management Strategies and Channel Relationships: The Moderating Role of Perceived Mutual Commitment” (Cambridge, Massachusetts: MIT Sloan School of Management, working paper, 1997).
11. For a decision tree that can help to evaluate the decision, see:
E. Anderson and B.A. Weitz, “Make-or-Buy Decisions: Vertical Integration and Marketing Productivity,” Sloan Management Review, volume 27, Spring 1986, pp. 3–19.
12. B. Enslow, A. Mesher, and C. Smith, SCM and the Internet: Beyond Disintermediation and Product Commoditization (Stamford, Connecticut: Gartner Group, 1997).
13. “Comparison Shopping: Unable to Beat ‘em, Web Sites Join ‘em,” New York Times, 27 March 1998.
14. For additional sources of clout in a different context, see:
A. McGrath, “The Gatekeepers,” Across the Board, volume 29, April 1992.
15. For a description of this shift as a growing competitive disadvantage for direct sales by manufacturers, see:
A. Slywotzky, Value Migration (Boston: Harvard Business School Press, 1996).
16. L. Stern, A. El-Ansary, and A. Coughlan, Marketing Channels, fifth edition (Englewood Cliffs, New Jersey: Prentice-Hall, 1996).
17. “Does ECR Spell a New Era?” Progressive Grocer, April 1994. However, the net effects of this perceived power shift on profitability in the grocery industry have been harder to detect. See:
P.R. Messinger and C. Narasimhan, “Has Power Shifted in the Grocery Channel?” Marketing Science, volume 14, Spring 1995, pp. 189–223.
18. A.J. Fein, Developing Strategic Responses to Changing Channels (Alexandria, Virginia: Laboratory Products Association, 1998).
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20. See A. Brandenburger and B.J. Nalebuff, “The Added-Value Theory of Business,” Strategy & Business, number 9, 1997, pp. 4–6.
21. “McKesson’s Push into Managed Care,” In Vivo, volume 11, number 12, 1993.