Patterns: The Effect on Customers
power and influence shift downstream, closer to customers, distribution
channel players become more important. As new players create new,
more specialized channels, and as traditional players expand their
repertoire to serve customers better, the result is a rich profusion
of new ways to bring products to customers. Not all customer channels
continue to thrive as market conditions change.
variety of market conditions can trigger the channel multiplication
pattern. The first market condition is multiplication of customer
types. Today, customers want to buy in differnet ways. They look
for more buying options and have become far more varied in their
needs and preferences. Significant technological change is another
trigger. The rapid evolution of the Internet has created a new channel
for transactions and distributions globally.
economics due to channel dysfunctionality also encourages the multiplication
pattern. If a channel is poorly matched to how the customer wants
to buy, it creates inefficiencies, has high costs, and results in
low profitability. A channel very closely matched to how customers
want to buy can be asset-efficient and highly profitable.
manufacturers are uncomfortable with channel multiplication. It
disrupts their established market system and invades the comfort
of their existing channel relationships. Some companies hesitate
to adopt new, more customer-friendly channels for fear of angering
their traditional partners. Whether real or imagined, this channel
conflict holds them back. This can be well justified since traditional
distributors are often very turf-sensitive particularly when
the distributors' value added is weak. In the short term, avoiding
the issue earns peace for the manufacturer and the distributor,
but in the long term, it undermines the competitiveness of both.
To deal with the conflict, a two-pronged approach has been used
new programs that will address some of the key concerns of the
existing channel, and
pursue the new channel opportunities.
do you do when you're in a Multiplication pattern?
you're the manufacturer, use the new channels early. Be their
If you're a traditional channel, launch new channel business
designs that respond to
how your customers and prospects want to buy.
multiple dysfunctionalities of the fragmented system (inefficiency,
inconvenience and time lost) of many small-scale outlets are the
ideal preconditions for triggering the channel concentration pattern.
In this pattern, value shifts when a newcomer brings economies of
scale to a fragmented, high-cost market. The innovators consolidate
the small fragmented shops and service offerings into larger units.
A concentration pattern can fundamentally transform the retail landscape.
new pattern emerging in retail channels is called the "Customer
Occasion" channel format. It is based on an understanding of
the important purchasing occasions and activities consumers would
like to cluster together in their in their daily, weekly or less
frequent rhythms. By clustering these activities under one roof,
the channel creates a format that mirrors the combination and sequence
of a consumer's activities on that shopping occasion.
Occasion channel strategies are process reengineering on behalf
of customers. They use research to understand what processes consumers
would like to cluster, then they do the clustering for them. Customer
Occasion strategies show the value of segmenting customers by identifying
the intersection of identity-based and occasion-based attitudes.
do you do when you're in a Channel Concentration pattern?
the process. Always be thinking of what the next generation
model should be.
distribution systems functioned to break bulk and bring products
closer to customers, but their function was achieved at a price:
long cycles, high costs and low responsiveness to changing conditions.
Two forces put pressure on these multistep systems: consumers' search
for lower prices and greater convenience and manufacturers' search
for greater distribution efficience. As the gap between these two
priorities has widened, the channel compression pattern has been
triggered in many industries. The result has been the compression
or disintermediation of traditional distribution channels in favor
of more efficient, closer or even direct relationships between customers
compression removes steps in the distribution system. In its most
extreme form, channel compression leads to complete disintermediation:
low-value-added distributors are eliminated, and the direct link
formed between supplier and customer creates enormous benefits for
both. Costs fall, assets are reduced and the quality of mutual information
flow is vastly improved. In the future, sellers will make electronic
pathways their key distribution channels at an accelerating rate.
To gain the best information and the lowest prices, customers will
migrate to new channels or to direct relationships with the suppliers
do you do when you're in a Compression pattern?
buyer and manufacturer, create direct links early. If you
are still "the old channel," create new value-added
offerings, or disinvest, before you are disinvested by your
value chain neighbors.
channel compression, or disintermediation, pattern eliminates traditional
distributors and creates direct relationships between a company
and its customers. In a small but growing number of cases, however,
a pattern of reintermediation follows and allows the "ousted"
distributors or new players to come back into the picture in another
role. Companies that recognize the key gaps and unmet needs can
reenter the system as value-added intermediaries.
new intermediaries return to do one of two things: provide customers
with new, important value-added services not provided in the new
direct customer-supplier relationship; or provide customers with
significantly more efficient means of transacting business. With
either activity, the result is a new distribution channel built
on a meaningful new value proposition for the customer.
greater the number of sellers, the greater the need for buyers to
gather information about sellers, make decisions about which sellers
to use, and find ways to contact each one at each level. On the
selling side, having too many fragmented buyers means high marketing
costs, high distribution hurdles and complicated logistical issues.
this variant of the reintermediation pattern, the fundamental shift
that occurs is from a fragmented state to a highly organized switchboard
that magnetizes the loyalty of buyers and achieves the grudging
acceptance of sellers. In this pattern, there is an opportunity
for a farsighted player to move into the inefficient void between
buyers and sellers. The player becomes a high-value intermediary
by creating a switchboard or hub business design that significantly
increases the efficiency of both buyers and sellers. Being that
hub can lead to profitability and strategic control within an industry.
do you do when you're in a Reintermediation pattern?
buyer and supplier, use the new channel early. It will save
As the new channel, maximize the value added and accelerate
your investment program,
to minimize the window available for the number two entrant.
is based upon Profit Patterns, written by Slywotzky, Morrison, Moser, Mundt
and Quella, published by Times Business, Random House, copyright © 1999 Mercer
Management Consulting, Inc.