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HALLMARKS OF HOSTILITY

by Donald V. Potter

The majority of industries have channels of distribution, which take product from the manufacturer and deliver it to the end user. Manufacturers’ sales forces sell both to dealers, who then sell to end users, and to distributors, who sell to smaller dealers or outlets, who in turn, make the final sale to an end user.

Companies whose industries are in hostility will have to confront several symptoms of this hostility that show themselves in the channels of distribution. And each of these symptoms challenges cherished traditions.

Rapid Growth of Low Value Added Channels

The price discounting that starts hostility often encourages fast growth of retailers who emphasize a limited selection of products at low prices. Failure to anticipate this development will leave a company with an outmoded distribution strategy and slow its growth. Compaq suffered from, and then overcame, this difficulty in the personal computer industry of the early ‘90s.

High Levels of Supplier Changes by Average-Sized Customers

Average-sized channel customers come under severe pressure from both large competitors’ low prices and small competitors’ high service levels. These customers are quick to conclude that their suppliers are giving better prices or service levels to someone else and to experiment with another supplier. This market share volatility raises the demands on all suppliers because so many relationships must be resold or calmed down. Yet the volatility often arrives just as a company is trying to reduce its cost of marketing and sales in order to improve margins.

Consolidation of Customer Volume Among Three or Fewer Suppliers

Most customers quickly learn that they must concentrate their buying volume in order to get better prices and service levels. As this realization takes hold, the customer will often place more than two-thirds of his volume with his primary supplier. This actually raises the stakes from volatility in the customer relationship. The incumbent primary supplier has to understand how to protect his position. While a would-be challenger must decide whether to attempt to enter the relationship with the customer, and, if so, how.

Emergence of Competition Between Buying Groups and Distributors

As if competing for the customer were not enough, a company in a hostile industry must often have to deal with “channel conflict”, where two or more channels, or channel members, compete with one another. The most difficult of these conflicts is that between buying groups and distributors. Buying groups are associations of smaller dealers who pool their buying power for better prices. These groups usually do not carry inventory and may not do much to promote a company’s product. Distributors, on the other hand, will both carry inventory and push their suppliers’ products.

The Evolution of a Group of Permanently Weak, Price-Oriented Customers

In the average hostile market, roughly 15% of the customer base will buy strictly on price – that is, the vast majority of the purchases these customers make will come from the supplier who offers the lowest price in the market. We have rarely found these kinds of customers to be strong. It seems their “price first” mentality toward suppliers overflows into their offerings to their own customers. But the average end user, the channel’s customer, buys on price last, not first. So price oriented channel customers commonly struggle in their own markets. Unfortunately, “price only” buyers do control enough volume to capture a supplier’s attention. They are an important factor to consider.

Any, or all, of these five developments can clash with a company’s value system and way of doing business. When that battle is joined, the market development always wins.

Closing Thought

The more hostile an industry becomes, the more the winning competitors focus on their choice of customers. The process of making that choice responds to these developments.

(Note: This Perspective was written in the context of the economy in 1993. While some of the companies may have changed their policies or indeed no longer exist, the patterns they exhibit still hold today.)