Distribution Chain Strategies in the Internet Age

Long, long ago in a galaxy far, far away, things were orderly, following rules that had existed for ages. Goods were passed from manufacturers to end users in carefully constructed distribution chains that looked something like this:

Manufacturer
|
Wholesaler/Distributor
|
Retailer
|
End User

Then came an alien race of Internet entrepreneurs who reinvented the distribution chain, skipping the intermediate layers, and causing "disintermediation" (in case you needed a great word to impress your boss with). These earthlings called the process by the strange idiom "upsetting the apple cart." One of these applecart-upsetters was Dell Computer Corp. Since they didn't have any existing distribution system to protect, they went direct:

Manufacturer
|
End User

This threw the IBMs and Compaq Computers of this world into a frenzy. Should they sell direct, too? Could they afford to alienate the distribution system they had so carefully put together? Or is Dell's operation still pretty small? Maybe this won't affect our business that much. Wrong. Dell is now the top manufacturer of PCs, leaving the competition in the dust. Since they do not need to allow two levels of price mark-ups, they can afford to offer computers to end-users at lower prices and still maintain a good margin. To save even more money, they don't manufacture the computers until they are ordered, saving the costs of inventory storage for finished goods. Tough competition.

Dell's example, among others, is causing great pain to manufacturers and their middlemen. Can they afford to sell directly? Can they afford not to? Here are the five ways most common ways that businesses are dealing with the distribution chain disruption caused by the Internet:

1. No Sales on the Internet. Website points to retail stores only.
   Example: Thomasville furniture. http://www.thomasville.com/
2. No sales from company site. Points to online and physical stores.
   Example: HarperCollins publishers. http://www.harpercollins.com/
3. Sales on Internet pay commissions to regional sales organizations.
   Example: IBM http://www.ibm.com/ and Ethan Allen furniture. http://ethanallen.com
4. Sales on the Internet are at list prices only. Retailers are allowed to discount prices.
   Example: John Wiley & Sons publishers. http://www.wiley.com/
5. Sales direct on the Internet to end users. No middlemen.
   Example: Dell Computer Corp. http://www.dell.com/

It remains to be seen which models will survive over the long term -- that is, which models allow manufacturers to be competitive at the same time as providing excellent customer service to end users.

Exercise: If you are a manufacturer, which of these distribution models will you use? Of course, if you're a web-only company, you'll be using #5. But if you were an existing business in pre-Internet days, chances are you'll be looking at #1 through #4. Make this explicit in your Internet Marketing Plan.