Strategy Video Series: Episode 06
Distribution Strategy

 

Strategy: Episode 06 Transcript

Hi, I’m Jerry Thomas, President and CEO of Decision Analyst, and today we’re going to talk about distribution strategy. And this is often an unrecognized or unappreciated, or underappreciated, aspect of marketing strategy.

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  And when we talk about distribution strategy, first, distribution refers to ‘channels of distribution,’ like supermarkets are a channel of distribution, convenience/grocery stores are a channel of distribution, vending machines are a channel of distribution. So, distribution refers to these channels of distribution, to the logistics involved in building a distribution system, and to the processes around that. So, it’s a big part of getting a product; it is the totality of getting a product or service from where it’s manufactured or created to getting it to the ultimate user of that product or service.
  
  So, I’d like to start with some examples, and then we’ll generalize from those examples.

 

Starbucks is a good example of a company that used distribution as a key element of its strategy. It might have made more sense when Starbucks was starting out to just put it in the supermarket. That’s a simpler business model, but Starbucks probably didn’t have the financial wherewithal to get its product into supermarkets; they didn’t have the money for slotting allowances for, you know; hiring salespeople, and they didn’t have the brand reputation that would allow them to be competitive in that environment. So, they began to build their own stores, and that became a key element of their long-term strategy and one of the keys that made them successful.

Sam Walton, founder of Walmart and in the early years, saw that there was a big vacuum in the market for these big-box discount stores. These types of stores were prevalent in large metro areas, but virtually missing in rural America. So, Walmart initially pursued primarily a distribution strategy to go where no one else had gone before. So, they concentrated all of their stores, initially, in smaller towns and rural areas, while their major competitors sat and watched them spread over the forgotten landscape of the U.S. until they became so strong and so profitable, that they then entered the urban markets and became a formidable competitor in the urban areas as well. But, it was that initial distribution strategy that allowed Walmart to grow, penetrate the market and, ultimately, to succeed.

Hallmark Cards is another good example of where distribution played a key role in the growth and development of the company. Relatively fairly early on, Hallmark began to experiment with its own retail stores to sell greeting cards and they also concentrated their distribution in retail stores that were high-end, more luxurious, higher-end department stores, higher-end gift shops. And they also sought exclusivity within those distribution channels. So, this helped position Hallmark as a premium brand, which was a core element of its strategy. So, this distribution strategy played a really important role in the development of Hallmark, but if you look at the Hallmark website, it’s

Sears & Roebuck [is] another good example of a distribution strategy playing a key role. In 1893, when Sears and Roebuck was founded, the concept was to have a direct-to-consumer business model, and to take advantage of the emerging and improving postal system to distribute its catalogues. In 1863, the U.S. Postal Service began to deliver, began free home delivery of mail, and so, that began to create an improved distribution or communication system for Sears. And then after 1896, the U.S. Postal Service expanded free mail delivery to rural areas. So, this vastly expanded the share of the population that can be reached by mail and was a huge factor in the growth and development of Sears, but it was this distribution strategy of catalogs and mail order that really helped Sears succeed.

A hundred years later almost to the day, Amazon began in 1994, and they used a business model that was analogous to the old Sears model. A direct-to-consumer model, they were taking advantage of a new communication medium, the internet, instead of mail. And this new distribution system has played a key role in the development of Amazon.

And then, Uber is a more recent example of how distribution can be important in strategy; and, in fact, in Uber’s case, this enhanced distribution of taxi services is their business model, it is their business.

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  So, distribution is almost always an important element of strategy. So, we can go on with more examples, but what can we deduce from these examples? What role can distribution play in strategy?
  
  First, distribution can be used to open new markets, you may choose to go into new channels of distribution. For example, if you’re a coffee company, you may decide you’re going to offer your coffee in new geographic areas; or you could say “Ok, I’m going to offer my coffee to offices, hire sales people, and buy trucks, and deliver to workplaces,” that’s another way. Or you may decide, “Ok I’m going to put my coffee in vending machines,” another new channel of distribution in potentially new markets. So, opening new markets is one way distribution can be used in strategy.
  
  A second way is speeding up delivery, and this has been a key element in Amazon’s strategy as well. Not only to have this direct-to-consumer distribution system, but to, over time, continually speed up the rate of delivery; and often this is enough of a business advantage that it makes sense. And in a way, Uber also speeded up delivery of taxi services with its smartphone apps, and that was another element in its strategy.

 

Distribution strategy can play, or distribution can play a role, in reducing cost if you can have a more cost-efficient distribution system that can give a brand or a company an advantage in a marketplace.

Reducing out of stocks—perhaps your business is suffering from a severe problem of out of stocks. Well, you can revamp the distribution system, perhaps, to solve that problem. In trying to solve out-of-stock problems, however, you have to keep one eye on the marketing and the promotion activity, and one eye on the logistics and the supply chain, because very often what appears to be a logistics problem is actually a promotional problem. The promotions, perhaps, are too deep or too frequent, and it’s stripping all the product off the retail shelves.

[Another distribution strategy], if you’ve developed a great new product, but you don’t have a lot of money, you generally can’t get distribution in major stores. So, if you have a good product, you might go to a chain store and say, “I will give you exclusive distribution of this great new product and I won’t sell it to anyone else,” and so that’s kind of a unique distribution strategy, but it’s one that a small brand can often consider.

Or an alternative of that is to go to multiple retail chains and say to each one, “I will give you this unique product, but under your unique brand name, so that it appears to be different. So, you have exclusivity, or at least an exclusive brand.” So, you might say well it’s limiting your distribution to go to market in that way. That’s true, but limited distribution is better than no distribution.

And the last role that distribution can play in strategy is to block or blunt a competitor. So, if you have a major competitor moving into your marketplace or opening up a new channel of distribution, you may choose to open up that same channel of distribution as a way to block that competitor. Now, these are not the only ways that distribution can play a role in strategy, but these are the primary ways.

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  And we’ll talk about that in a moment, but we always begin with qualitative research; we want to talk to everyone in the supply chain, starting from the, you know, the end user, the consumer, the buyer, the retailer, and work back through the whole process, and talk to knowledgeable people. And that knowledgeable person might be someone driving the forklift in a warehouse, but all of these individuals have information that could help us build a more optimal distribution system. A second type—when I say qualitative research—I mean focus groups, depth interviews, ethnography, or observation, where we’re just really trying to keep an open mind and learn as much as we possibly can.

 

Another component, another type of research, is survey-based research, and the advantage of survey-based research is that it’s statistically projectable. So, we can have some statistical precision that we can attach to the hypotheses and observations that we developed in the qualitative phase. So, survey-based research has a role to play.

Thirdly, there’s a tremendous amount of secondary data that’s available, much of it free from the U.S. government, and, of course, there are many, many sources of secondary data, as well, that you can buy. And we’re talking about demographic and population data, economic data, down to the county level, or the Census block group level, consumer spending data, information on transportation and traffic congestion, competitive data, and the types of demographic or secondary data that are important for a particular product [it varies by product category], so there’s no one-size-fits-all here.

And then the last component is modeling and optimization; and there are many, many different types of simulation models, or mathematical models and optimization routines―everything from mixed integer, linear programming to agent-based modeling―that can be used to help create mathematical models so that we can run simulations. And in simulations, we’re trying to maximize, either some maximize sales or minimize cost, given certain inputs and constraints. So, all of these techniques can be used in various combinations depending on the product category and what you’re trying to achieve. So, an optimal distribution system can help shape and magnify the overall success of and value of a brand and a business, so keep distribution in mind as you’re formulating strategy.

Thank you.

Contact Decision Analyst

If you would like more information on Strategy Research, or if you have any questions, or about the videos, please contact Jerry W. Thomas by emailing jthomas@decisionanalyst.com or calling 1-817-640-6166.