Strategic Channel Design

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Accelerating technological change, heightened marketplace demands, more aggressive global competition, and shifts in the workforce and population demographics are affecting distribution channels, forcing companies to reconsider fundamental assumptions about how they reach their markets. The magnitude of change demands a strategic perspective that views channel decisions as choices from a continually changing array of alternatives for achieving market coverage and competitive advantage — subject, of course, to the constraints of cost, investment, and flexibility. Tactical responses, based on maintaining power balances, managing conflicts, and minimizing transaction costs to pursue greater efficiency, will not suffice.

Changes in distribution channels come slowly, partly because the inherent complexity of the many links that connect value-adding functions in a channel obscures the need for change. Distribution channels are also dauntingly rigid and stable because of powerful, persistent inertia. Faint-hearted managers, unwilling to disrupt existing channels and incur predictable short-run costs for less certain gains from a new configuration or approach, may become discouraged, resulting in a growing mismatch between the firm’s overall strategy and its means of distribution. Our main premise is that the pressures for change are overcoming the inertia in distribution channels. Customary and comfortable incremental approaches cannot cope.

Frequently, a firm’s distribution method is an appendage to its strategy — the result of opportunistic, reactive, one-by-one decisions accumulated over time and frozen by perceived barriers. Instead, the firm’s overall strategic direction must guide changes in channels. Therefore, we propose a process for incorporating a strategic perspective into decisions on the future configuration of channel functions, control of the functions, and resource commitments. This process requires firms to assess their current channels, identify alternatives based on creative combinations of value-adding channel functions, and evaluate the alternatives within a broad context that highlights potential competitive advantages.

First, we outline some forces for change in distribution channels. Next, we examine the implications of these changes for channels, including changing commitments, vertical compression, horizontal diversity, and the need to re-examine channel alliances. We also suggest how to design channels strategically.

Forces for Change

In the face of inertia, tradition, entrenched industry practice, and a lack of alternatives, most firms stayed with their established channels and seldom changed the way they exercised control.1 Three forces are now changing the customary rules of channel management: (1) proliferation of customers’ needs, (2) shifts in the balance of channel power, and (3) changing strategic priorities.

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The authors are listed in alphabetical order. The authors thank Adam J. Fein for many helpful comments and Barton Weitz for sharing perspectives.

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