Are you tough enough to manage your channels

Too often emotion triumphs over reason Some improvements, like fixing incentives, can be made quickly But emerging channels are hard to spot Distribution channels typically account for 15 to 40 percent of the retail price of goods and services in an industry (Exhibit 1) and there is every reason to expect that they could represent a commensurate opportunity for boosting profits and competitiveness. Indeed, the potential payoff from thoughtful and innovative management of channels could be even greater, given that many organizations have already lavished attention on the reengineering of internal operations, while channel issues tend to suffer from neglect. The challenges and opportunities presented by channel management are likely to multiply over the next few years as technological developments accelerate channel evolution. Data networks are already enabling end users to bypass traditional channels and deal directly with manufacturers and service providers. The use of online capabilities instead of travel agents in booking airline reservations is one example of this disintermediation. In addition, logistics innovations such as reliable overnight delivery services or information systems that track the inventories of all the dealers in a market are beginning to make local inventories of products or parts obsolete, paving the way for the restructuring of distributor networks. [TABULAR DATA OMITTED] At the same time, new channels are continuing to emerge in industry after industry, opening up opportunities for companies to cut costs or improve their effectiveness in reaching specific market segments. Mail order, warehouse clubs, and online ordering are all becoming increasingly important to consumer goods manufacturers. In electronics and telecommunications, value-added resellers (VARs) are capturing a rising share of surplus. Direct response marketers and discount operators are becoming formidable players in personal financial services. Despite the scale and importance of these opportunities, few companies manage to take full advantage of them. For every successful channel innovator, there are a dozen companies that either fail to recognize an opportunity in time or make a botched attempt to improve channel performance. Why does an area of such strategic and tactical significance have such a poor management track record? Two factors stand out: first, channel opportunities are extremely difficult to identify; second, channel decisions tend to be governed not by reason, but by emotion. Opportunities hard to spot There are several reasons why detecting channel opportunities is so difficult. For one, consumer buying habits do not change overnight; they shift glacially over time. Consumers in most countries were slow to accept ATMs in banking, for instance, and the move to paying bills by phone or PC still looks uncertain. Warehouse clubs now represent over $25 billion of US spending on groceries and packaged goods, but it has taken them nearly two decades to reach this level. The few manufacturers that spotted their potential early were able to capture tens of millions of dollars of incremental revenue without cannibalizing more profitable business from traditional channels. Industrial consumers change their habits equally slowly. Buying groups are evolving only gradually among hospitals, for example, despite the enormous pressures on healthcare costs. Other factors compound the intrinsic difficulty of recognizing market shifts. Since companies that use external channels lack contact with end users, they often have to rely on these channels to feed them information about the market. This makes them dependent on their intermediaries' sensitivity to emerging consumer trends. A conflict of interests may arise, with channels understandably reluctant to share information about market developments that do not favor them. For companies seeking a comprehensive, detailed, and up-to-date understanding of market developments, there is no substitute for direct consumer contact. …