Published with due permission
A large portion of what drove us into the Great Recession is rooted in this dysfunctional pattern of distribution.Sell more and more through a mega-distributor-with much of the proft split by distributors and overseas manufacturers. Earnings obtained by the latter are reinvested into the United States, and then are lent to consumers so they can continue to spend beyond their means-thereby propping up the global economy.
Discussions are abundant about out-of-control lending,consumer spending, the impact of outsourcing and the lack of sustainability. But little attention is paid to the harmful impact that the distribution strategies employed by mega-distributors have played-not only on innovators, but on the overall economy. As we talk to business leaders around the world, it is clear that many of them realize a fundamental shift has occurred: Power has transferred from those who create innovative productsand services to mega-distributors, who are increasingly incontrol of the global marketplace.
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 proft 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.
The Blame Game
Before you think that this is merely another attempt to blameWal-Mart Stores, Inc., GE Capital, AutoNation, The 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.
One of the people who understood the ramifications of the new transformational thinking was Sam Walton. He and a raft of imitators stepped in to fill the power vacuum that the strategy gurus had helped create. The result was the evolution of massive distributors, which ultimately drove the sales and distribution of innovative products and services in the United States.