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Friday, August 5, 2011

Role of Distribution Channels in Value Creation

Earlier, it was proudly claimed that human capital was the non replicable asset. But now, with the free agent mentality firmly in place, it is 'real assets' which act as the entry barrier to competition. Even if competitors pay top dollar for the skilled/experienced employee, they may not have the deep pockets to pay superior margins to retailers for stocking the product/service in preference to the incubent. Competition laws intervene, and then the prospect of customer revolt at not getting his/her favorite product/service, would make even the strong hearted wilt. Investors/companies have both identified this trend and that is why
  1. Network economics focuses on building that infrastructure first to obtain captive customers(though regulators may defeat it later by imposing open access) and dealers. 
  2. Telecom companies are leveraging their vast dealer network(point of prescence) and payments expertise, to vye for mobile banking permits
  3. Fertilizer showrooms are turning into FMCG godowns+All in 1 agricultural supermarkets, leveraging that fixed infrastructure in now desired locations(like DCM hariyali)
  4. FMCG entry barriers are high because of the costs, time and issues in setting up distribution network-which would often overlap with the competition's incubent.
  5. Insurance companies/Mutual funds are desperately trying to strike that golden mix between online and offline, as the regulators(SEBI for MF entry load, IRDA for ULIP commissions) are clamping down on commissions and imposing firmer entry conditions for the distributors. 
  6. NPS(New pension scheme) despite being one of the best designed scheme in the globe, is not getting attention/subscribers because of demotivated distribution channels(banks/post offices etc)
  7. Pharma is trying to secure its distribution chain to avoid the estimated 30% fake drugs in India.
  8. Amul's strength is in its lakhs of dealers and milk collectors, who religiously supply milk daily. Besides the supply chain(milk), the distribution chain(showrooms, shops) is also efficient.
As marketing students know(and the above examples illustrate), distribution affects product design, success and company image. The company which cracks the puzzle, may take the ultimate prize of becoming the natural monopolist. So next time you analyze a company, pay attention to this aspect. B2B companies may not have so much issues, but B2C companies directly are impacted.

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