Beginning in the early 1980’s, innovative manufacturers permitted, either consciously or subconsciously, outsiders into their companies. They allowed those outsiders to gain increasing control over sales and distribution activities. Innovative firms and the people who led them were responding to the hype about organizational transformation – emphasizing things like resources, capabilities, innovation, technology and operational effectiveness. “Total quality management,” “lean manufacturing,” and “zero defects” were just a few of the solutions preached by the business gurus to companies of all sizes. Drinking this elixir, thousands of companies that once had been in control of their innovative development began to lose interest in sales and distribution, preferring instead that big customers take over this “business function,” It continues pretty much unabated today.
The concept of “core competencies” was provided as the justification for letting loose control after the producing firm had exercised its unique set of value-adding activities. Why manage a string of dealers if your core competency – your basis of differentiation- is in research and development or manufacturing? Taking this advice, companies divested themselves as activities that were not perceived as value added. Sales and distribution were pushed aside.
My newest book The Customer Trap: How to Avoid the Biggest Mistake in Business details what happens when concentration is centered on one or a few Mega-Customers. Control gets wrestled away and power inexorably shifts toward the customer, reseller, or distributor. The growing dependency on a single customer- or a few really big ones- dramatically reduces the ability of the innovating company to influence what happens to its products in the value chain.
Still- and this is critical- resellers, intermediaries, and distributors are not by nature hostile and to be avoided at all costs. When properly managed, resellers, intermediaries, and distributors serve critical functions in helping to build the brands of their suppliers. If a customer continues to represent 10% or less of a company’s total revenue – even if it is the dominant player in a given sector- the power balance remains tipped in favor of the innovator, which is the way capitalism is supposed to work. The biggest gains should go to those who take take the biggest risks. Other partners should benefit as well if they add value. Nevertheless, the largest share of profits should go to those with the most skin in the game. The Customer Trap occurs when this principle is violated, and those who have invested little capture the lion’s share.
CDM as a Way to Avoid The Customer Trap
Chandran Sankaran is the founder and CEO of Zyme Solutions – a pioneer in the emerging field of channel data management. Sankaran recognized early on that manufacturers were more than willing to give away control over the sales and distribution of their innovations to Mega-Customers in exchange for greater volume. This, he observed, has frequently allowed the path to market to become muddied and transparency to be lacking. Sankaran notes that the rise of dominant middlemen has forced companies to explore how to connect to the true customer of their product.
Sankaran recognizes the important roles that an intermediary can play, observing that few companies can become completely vertically integrated. He states: “It makes sense for there to be a shared economy. And that’s what a distribution channel is supposed to be, a shared economy for sales.”
Sankaran explains how innovators are finally waking up to the fact that data is fundamental to their businesses. And getting it from their channels is vital. Channel visibility- as he calls it- is a relatively new phenomenon for manufacturers and brand owners. In the past, on a regular basis, distributors would use various pretexts to refuse to provide sales information and visibility to their suppliers. Sankaran notes that producers are now starting to show much greater resolve in demanding this transparency.
This development is one that is gaining increasing momentum. It bodes well for the future prospects of companies to regain control over their lost innovations. And, for the much needed realignment of the American business landscape towards those who innovate.