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Be First on the Battlefield

Design for Manufacture (DFM)

Be Where the Enemy Isn't

Attacking Established Market Shares

Avoid Marketing Vietnams

Shorten the Distribution Chain


More about this book: The Way of Strategy: home page

Read the Introduction online

Excerpts from The Architect of Victory

Excerpts from Managing the Organization

The Art of Marketing
Excerpts from The Way of Strategy


In business, the marketplace is the battlefield. People often speak of marketing battles and price wars. Businesses capture market share instead of territory. Advertisements and articles talk about wars between products. There is glory in winning marketing wars, but profit in winning without fighting. General Wu Ch'i wrote the following.
      One who gains five victories suffers calamity; one who gains four is exhausted; one who gains three becomes Lord Protector; one who gains two, a King; one who gains one, the Emperor. Thus he who by countless victories has gained an empire is unique, while those who have perished thereby are many. [Sun Tzu, Appendix I, Ch. 1]
Anything worth having requires effort. How can we get what we want without fighting for it? This chapter discusses ways to gain market share without fighting. It also shows what to do when we must fight to capture or hold market share. The Art of War provides some very specific guidelines.
      1. Get new products to the battlefield (marketplace) before competitors do.
      2. Seize market segments and niches that competitors have overlooked.
      3. Do not attack established products and services. This is like attacking an opponent who holds a fortified position. Bypass these positions unless you have a special, overwhelming advantage.
      4. Avoid price wars, or "marketing Vietnams." Trying to gain market share in a mature market is like fighting a protracted war.
      5. Shorten the distribution chain, or supply line. Cut out unnecessary middlemen.
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6-1 Be First on the Battlefield
The first market entrant gains a competitive advantage. Design For Manufacture (DFM) and Quality Function Deployment (QFD) are useful tools for rapid product introduction. Product quality begins in the design phase. 
In King of the Hill, it helps to start at the top of the hill. We occupy the position without having to fight. Later arrivals must attack uphill. Sun Tzu wrote that the first side to get to the battlefield is at ease. [Sun Tzu, Ch. VI] The first company to introduce a product gains a huge advantage over potential competitors. Competitors can attack the first market entrant, but they are at a disadvantage. They don't have something new to offer customers. They have to show they have a better or less expensive product.

The product life cycle shows the role of new or introductory products.

6-1-1 The Product Life Cycle

Most products go through the following life cycle. The table shows the life cycle and the Boston Consulting Group (BCG) definitions. [Rowe, 1985, pp. 194-195]

Table 6-1 The Product Life Cycle
Life Cycle Phase /BCG Definition

(1) Introduction: Question mark ?
-High growth, low market share

(2) Growth: Star *
-High growth, high market share

(3) Maturity: Cash Cow $
-Low growth, high market share

(4) Decline: Dog 0
-Low growth, low market share

The subsequent section will discuss this further. For now, we will focus on the introductory stage.

6-1-2 Design for Manufacture (DFM)

Design for Manufacture is a tool for getting products to the marketplace quickly. 
We want to get to the marketplace first. Design For Manufacture (DFM) is a tool for reaching this goal. Under the traditional system, Research gets an idea from Marketing. They do the basic research and hand it over to Development. The product idea goes through process development and product design. The designers then hand it over to Manufacturing. The problem with this approach is that it is sequential. It does not promote rapid product development and introduction. Sometimes there are other problems. Manufacturing may get a new product and find that the existing tooling can't make it.

Cross-Functional Teams


DFM relies on cross-functional teams for success. This requires a porous organization. 


DFM uses cross-functional teams to make sure the product is manufacturable. It adopts a parallel approach. The teams include representatives from R&D, Design, Manufacturing, Field Service, and Marketing. Tom Peters says, "Use multi-function teams for all new-product/service development activities." "--- the single most important reason for delays in development activities is the absence of multi-function (and outsider) representation on development projects from the start." [Peters, 1987, Section I-2] It can greatly cut the product or service development cycle time. Peters says a 75% cut is achievable.

Peters cites Chaparral Steel as an example. Engineers and researchers work in the manufacturing shop with tool operators. They experiment in the mill itself. The successful Ford Taurus was another product of the DFM approach. Ford involved the Design, Engineering, Marketing, Manufacturing, and Service functions from the beginning. The company also consulted insurance companies about accident damage. By doing this, Ford learned how to make a car cheaper to repair after a collision. Ford consulted auto dealers to learn what customers wanted. This happened during the design phase. [Peters, 1987, Section I-2]

DFM and Quality Function Deployment 


Improvements during the design phase have the biggest payoffs. 


The DFM philosophy is part of Quality Function Deployment (QFD). A study at Ricoh Copier showed that an improvement during the design phase has a 100:1 payoff. A process improvement has a 10:1 payoff. Correcting a manufacturing problem has a 1:1 payoff. Fixing a problem in the field has a fractional payoff. However, fixing field problems has high visibility and rewards. Design improvements have low visibility in most companies. [Lorenzen, 1992] Engineering design has strong leverage on quality, cost, and cycle time. Quality starts in the design phase. "Inspecting quality into the product" doesn't work.

Most American firms do not use the best design practices. [Hoover, 1991] Bruno Wenschel, President of Wenschel Engineering Company, reiterates this point. Japan and Germany emphasize DFM. In the United States, about 2/3 of product design emphasis is on design and 1/3 on manufacturability. In Japan and Germany, 2/3 of the emphasis is on manufacturability. Wenschel says, "Design quality into the product, instead of trying to inspect it into the product." Prevention is better than correction, and correction is better than field failures. [Wenschel, 1991]

Recall the story about the obscure Chinese doctor who cured diseases in their infancies. His brother was famous for treating seriously ill patients. Today we prefer vaccines over treatment for the illnesses they prevent. We must become equally wise in product development. DFM will assure our victory over competitors who cling to outmoded approaches. We will not have to fight them for market share. We will occupy the market while they are still mobilizing for the contest.

The next section treats a similar concept. However, using it does not require a new product. We can win with existing products and services by delivering them where no one opposes us.

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6-2 Be Where the Enemy Isn't

It is easy to capture market share where no competitors oppose us. Look for undefended market niches and segments. 
Sun Tzu said you can always capture what the enemy does not protect. You can easily hold what the enemy does not attack. You can march without trouble by traveling where there is no enemy. The commentator Ts'ao Ts'ao said to go into emptiness and strike voids. Bypass the enemy's strong points. Hit the enemy where he does not expect you. [Sun Tzu, Ch. VI]

This approach sounds attractive and easy. If no competitor holds a market share, just walk in and take it! The concept is very simple, but it needs effort to make it work. General Clausewitz said everything is simple, but the simplest matter is difficult. To put the idea into practice, we must examine market segments and niches.

6-2-1 Niche Markets


To capture a niche, satisfy the customer. 


A market segment is a subgroup of customers who have specific needs. For example, consider the market for Florida vacation trips. Students who visit Florida during Spring Break are a segment of this market. Families who visit Florida during the winter are another. [Holtje, 1981, Chapter 2] A market niche is similar. It is a set of special customer requirements that an organization can meet. A segment is a group of similar customers. A niche is a specialized set of customer requirements.

The underlying idea is very simple. Meet the customer's requirements. Don't be like Ford in its early days. Henry Ford told customers they could have any color they wanted, as long as it was black. This works well when we have a monopoly. Today, like Burger King, we must tell customers, "Have it your way."

Adding Value at Elgin Corrugated Box


We can even customize commodities to satisfy customers. 


Dull, boring commodities can become profitable, value-added products. The Elgin Corrugated Box Company is expanding in a nominally declining marketplace. The traditional competitors have been fighting a price war because of excess capacity. Meanwhile, Elgin had to buy more capacity in 1987 to meet demand for its products. What are Elgin's success secrets?
  1. Elgin makes a higher quality box. It uses a more expensive, but stronger, corrugation method. It uses better ink for labeling the boxes.
  2. The company consistently ships orders on time.
  3. The company is very responsive to customer needs. It will accept small orders its competitors won't touch. [Peters, 1987, Section C-1]
The last item shows another principle from The Art of War. We can avoid battle by drawing a line on the ground. This means taking a position it is inconvenient to attack. Attacking would divert the enemy from his priorities. [Sun Tzu, Ch. VI] Elgin goes after small orders its competitors won't fill. Maybe the competitors could use their economies of scale to underprice Elgin. However, they'd have to disrupt their rigid mass-production systems to do it. This diverts them from doing what they want. They want to use their economy of scale to make many identical boxes very cheaply. They don't want to rearrange their factories and production schedules to meet specialized customer orders. The competitors' own setups are Elgin's best defense.

Niche Penetration/Infiltration Tactics


Niche penetration is a way to infiltrate a market. 


Massive frontal attacks are rarely effective in business or war. During the First World War, they produced high casualties- for the attacker. Then the British developed infiltration tactics. These were more effective.

Niche penetration of a market is often more effective than a frontal attack. The Japanese have used this approach in most new markets. Instead of launching massive frontal efforts, they address small, application-oriented niches. They offer cars with ceramic engine parts, four-valve engines, lightweight nonmetallic body panels, and other features. Few American cars offered these options in 1987. American automakers wanted to "leapfrog" the Japanese with huge technological breakthroughs. Meanwhile, the Japanese incremental improvements kept widening the gap the Americans had to leap. [Peters, 1987, section I-1]

Canon and Savin infiltrated the copier market in the 1970's. Xerox paid attention to its large rival, Kodak. It ignored "little stings" from Savin and Canon in "pipsqueak market segments." Patton's skunks got under the front porch. The frog didn't notice the water heating around him. Machiavelli's physician didn't recognize the early symptoms. Suddenly, "--- these mice moved out of their corners and became lions; Xerox lost more than half its market share before it stemmed the tide." [Peters, 1987, section I-4]

6-2-2 Attack Where No One Opposes You 


Use innovative distribution channels to bypass competitors' defenses. 


During the 1950's, Bulova, and Swiss watch makers, controlled the marketplace. Swiss watches had reputations for excellent quality. The Swiss sold their watches through jewelry stores. Rather than face the Swiss in the jewelry market, Timex began selling its watches in drugstores. The Swiss did not recognize Timex as a threat for some time. By the time they did, Timex had a good start toward market leadership. The Swiss could not easily follow Timex into this new distribution channel. Doing so would have alienated their traditional retailers, the jewelers. [Porter, 1985, p. 522, p. 533]

Peters cites, "--- oddball forays through distribution channels and from competitors you wouldn't expect (e.g. TV home shopping, and the explosion of catalogers in retailing)." [Peters, 1987, section I-4] We can add home computer services that allow subscribers to buy products electronically. Be innovative in looking at distribution channels. New, short, and efficient channels can bypass a competitor's defenses.

6-2-3 Guerrilla Marketing [Ries and Trout, Chapter 10] 


A company can be the big fish in a small pond. 
Ries and Trout list several aspects of guerrilla marketing. These are tactics for smaller competitors. The tactics include many aspects of light troops and small business units. Ries and Trout prescribe them for small firms. We extend these prescriptions to the light troops (entrepreneurial small business units) of larger firms.
Note that guerrilla marketing does not require guerrillas or partisans. The guerrilla company is similar to the guerrilla employee in its familiarity with a specific competitive environment. However, its employees are likely to be the light infantry/cavalry type. They will have a high level of training. Their orientation and organization will be entrepreneurial and flexible. The key aspect of guerrilla marketing is focus on a specialized competitive environment. This means focusing on a niche or market segment.

The segment or niche may be geographical, economic, or specialized product. For example, Rolls-Royce occupies a luxury car niche. None of the big automakers think it is worthwhile to go after this relatively small segment. If they did, they would be at an enormous disadvantage because of Rolls-Royce's reputation.
American Motors Corporation's Jeep has been very successful. AMC sells about 100,000 Jeeps each year. It is not worth GM's while to attack this product niche. Ries and Trout think AMC is making a mistake by challenging Chevrolet with Alliances and Encores. AMC actually loses much of what it makes on the Jeep by competing with GM. Instead, AMC should produce only the Jeep and its relatives, like the AMC Eagle.
Inc. magazine is a "demographic guerrilla." Instead of competing with Business Week, it addresses the needs of small business owners. Business Week's main orientation is big business. Its circulation is about 800,000. There are more than 5 million corporations in the United States. Most are small businesses. This is another example of the principle of attacking where no one opposes you.

Crain's Chicago Business is a geographic guerrilla. Again, it does not meet big publications like Business Week head-on. Addressing a local market garners a circulation of 40,000. In Chicago, Business Week's share has 36,000 subscribers. While Business Week is 20 times as big as Crain's Chicago Business nationally, Crain's is the local leader.

Triod Systems is an industry guerrilla. It specializes in a computerized inventory management system for automotive part wholesalers. The automotive part wholesaling industry is Triod's special market niche.
Ries and Trout emphasize the need to keep the organization lean and agile. We have already covered the idea of avoiding excessive hierarchy and staff. Bureaucracy is expensive, and it reduces the flexibility of the organization.

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6-3 Attacking Established Market Shares

Do not attack established market shares without a special advantage. 
The previous sections showed the merits of getting to the marketplace first and occupying a strong position. What should a company do when it faces an opponent with an established market position? A simple frontal attack is a poor idea. We need a special advantage to win.

The Art of War lists four strategies for waging war. In descending order of preference, they are: [Sun Tzu, Ch. III]

    1. Attack or thwart the enemy's strategy.
    2. Disrupt the enemy's alliances.
    3. Fight the enemy army.
    4. Besiege the enemy's fortresses and cities.
Sun Tzu describes the progress of a siege. The attacker must prepare shielded wagons, arms, and equipment. His engineers must build a ramp up the enemy walls. This takes time, and uses supplies. If the general is impatient and attacks without these preparations, he will lose a third of his troops without succeeding. [Sun Tzu, Ch. III] The same principle is true in the field. If the enemy occupies a high position, it is foolish to attack him there. [Sun Tzu, Ch. X]

This principle was true until about a century ago. In the 17th century, the military engineer Sebastian Vauban developed a formula for capturing fortresses. The procedure relied heavily on the pick and shovel. Vauban's formula guaranteed capture of the fort. However, it also guaranteed spending weeks or months on the siege. Defenders did not rely on fortresses to stop an enemy. They relied on them to cost the attacker precious time. If the attacker bypassed a fort, he had to leave troops behind to contain the garrison. If he tried to cut corners with a frontal assault, the result was a massacre. (C.S. Forster's The Gun gives an example of a premature frontal attack on a fort.)

Reducing and Bypassing Strongpoints


To reduce an opposing strong point, we need a special advantage. Otherwise, we can bypass it. 


At the start of the First World War, the Germans had to reduce several Belgian fortresses. They were in a hurry, since the Schlieffen Plan called for a rapid march through Belgium. An infantry assault on one of the positions was disastrous. Then the Germans used giant siege guns. These ranged from 21 cm (8.2 inch) to 42 cm (16.5 inch). Some of them were apparently loans from Austria-Hungary, whose Skoda Works made excellent artillery. These weapons made short work of the Belgian positions. At the start of World War II, the Maginot Line actually stopped those Germans who attacked it. Germany won by bypassing it.

These historical examples show that we have two viable choices against a strong position. If we have a special advantage, we can overcome it. A castle full of archers and spearmen was very formidable to a medieval army. However, it would offer little resistance to modern artillery. (A Data General commercial showed a scenario like this several years ago.) We also can bypass the position.

Special advantages include the following.

  1. A new product can make the existing one obsolete. This is like having a cannon against bows and catapults. Most mature, well-established products eventually succumb to new ones. An innovative company will make its own products obsolete. Remember that passive market barriers do not offer permanent security. Constant improvement and innovation provide an active defense.
  2. Strong advantages in product quality, cost, or service can win. This is how the Japanese displaced American automakers from their market share. Recall Tom Peters' advice to make manufacturing a marketing weapon. The manufacturing system dictates product costs and product quality. A superior manufacturing system is a decisive competitive weapon.
  3. A short distribution chain can win by reducing the customer's costs. For example, mail-order personal computers have overwhelmed computer retailers.
Section 6-5 discusses the distribution chain.

Bypassing the position means capturing unprotected market segments and niches. We can always consider markets in complementary and substitute goods. A complementary product is something the customer uses with the product. For example, tires and oil are complementary goods for cars. A substitute is something the customer can use instead of the product.

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6-4 Avoid Marketing Vietnams 
Avoid price wars in mature and declining markets. The low-cost, high-quality producer has a decisive edge in these markets. Quality and productivity improvement techniques help achieve this. 
A marketing Vietnam is a protracted conflict over a mature or declining market. We need to recognize and avoid these situations. The Vietnam War was an obvious example of a protracted conflict.

Sun Tzu and Clausewitz; "We Told You So."


Sun Tzu and Carl von Clausewitz told us exactly why we would lose the Vietnam War. LBJ didn't listen. 


Why did the United States lose the Vietnam War? How could we win every round, but lose the fight? Our Armed Forces didn't lose even one major battle. We inflicted massive casualties among the enemy's troops. Our Air Force swept his planes from the sky. We had total command of the sea. Nonetheless, the enemy won. Had Lyndon Johnson read the second chapter of The Art of War, this disaster would not have happened. Sun Tzu devotes most of the chapter to warnings against protracted wars.

The Art of War cites the following specific effects of a protracted war. [Chapter II]

    1. Your soldiers lose their morale.
    2. You deplete your treasury, and impoverish your country.
    3. Your economy suffers inflation.
President Johnson also could have read Clausewitz' On War. "Wearing down the enemy in a conflict means using the duration of the war to bring about a gradual exhaustion of his physical and moral resistance." [Clausewitz, Book One, Ch. 2] "All campaigns that are known for their so-called temporizing, like those of the famous Fabius Cunctator ["The Delayer"], were calculated primarily to destroy the enemy by making him exhaust himself." [Book Six, Ch. 8] Retreat to the interior of the country (as the Russians did in the Second World War), is a form of indirect resistance. It "destroys the enemy not so much by the sword as by his own exertions." [Book Six, Ch. 25]

The United States suffered these effects during the Vietnam War. Many men of military age looked for ways to avoid fighting. Popular sentiment eventually forced the government to abandon its foreign policy goals. Vietnam was a gross blunder that even a novice student of the art of war would have avoided. It was the Fool's Mate of American foreign policy. (The Fool's Mate is a checkmate in two moves. It requires almost deliberate self-destruction by the victim.)

The Soviets suffered the same fate in Afghanistan. Since Russia was North Vietnam's ally, this is especially surprising. We would have expected them to learn from our mistakes and their ally's success. The Soviets are supposedly ardent students of The Art of War. [Sun Tzu, Clavell translation, Foreword]

Other Forms of Protracted War


A protracted campaign often helps the weaker side. However, this is not true in business. 


In actual war, one side can benefit from a protracted campaign. [Clausewitz, Book One, Ch. 1] This side usually cannot defeat its enemy in the field. Commerce raiding, submarine warfare, and mines are the weapons of a weak navy. The stronger navy usually seeks a decisive engagement. The weaker side in a lawsuit also likes delays. Usually, the defense tries to delay the trial. They hope the hostile witnesses' memories will fade. Time also affects the defense witnesses. However, the plaintiff or prosecutor has the burden of proof. They must win the case. The defense succeeds by not losing. "--- the very lack of a decision constitutes a success for the defense." [Clausewitz, Book Six, Ch. 8]

In business, we are not trying to wear down and destroy the competitor. We are trying to make money. Protracted market conflicts are not consistent with this goal.

6-4-1 Mature and Declining Markets

A mature market is no longer growing. The pie is not getting bigger. The only way to get a bigger piece of pie is to take someone else's. This means a zero-sum game or win-lose situation. If one organization wins, someone else must lose an equal amount. Clausewitz refers to this as polarity. A declining market is even worse. We have to take someone else's share to stay even.

Polarity and the Prisoners' Dilemma 


A declining market looks like a no-win situation. There is no profit in contribution pricing. 


Mature and declining markets can cause devastating price wars. If the industry has excess capacity, each competitor will resort to contribution pricing. This means making as much as they can sell as long as they cover their direct costs. (Remember that we have fixed costs and overhead whether we run the plant or not.) This keeps their people and machinery working. It also keeps anyone from making a profit. However, it is the most profitable course (excepting illegal agreements to restrain trade). It is the old Prisoners' Dilemma problem, without the cooperation option. ... Cooperation is possible when the players can exchange information. However, cooperation by restraining trade is illegal. Even where antitrust laws don't exist, cartel members often cheat on quotas.

Options in a Declining Market


Don't fight price wars. Get out, or become the low-cost producer. 
What choices do we have? We can divest by selling our assets and getting out. Per the discussion on exit barriers, this may not be easy. No one wants specialized equipment for making a mature or declining product. This is an argument against buying inflexible, special-purpose equipment in the first place. However, suppose this is our situation. The only hope for survival and prosperity is to be the low-cost, high-quality producer. This is in fact the preferred course in a mature or declining market. The organizational and human resource techniques we discussed earlier can help. A lean organization with minimal bureaucracy and highly skilled employees is in a good position. Techniques like Statistical Process Control (SPC) and Quality Improvement Teams (QIT's) are helpful in reducing costs. For example, multifunctional QIT's can discover and implement ways to cut costs. Product quality is a selling point. If we can sell on quality, we don't have to sell on price. This helps avoid the casualties of an all-out price war.

Downsizing as a Last Resort


Downsizing often fails to solve our problems. 


Is downsizing an option? Suppose we close a plant and discharge the workers. This rarely solves our basic problems. The equipment will be worthless or have value. Specialized equipment for making a mature product is almost worthless. So is obsolete equipment. We won't get much for it. If it has value, someone can use it. They may use it against us. (Remember that a competitor can turn automation, or artillery, against its original owner.) For example, General Motors plans to close its Tarrytown, New York plant. Who will they sell it to? Toyota, Honda, or Nissan might buy it. Then they can make even more cars in the United States. Since American workers will make them, even "Buy American" sentiment won't help GM. The Japanese can even hire the experienced auto workers GM discharges. This is like selling the enemy a battery of artillery and letting him hire the gun crews in the bargain. GM's alternative is to close the plant and get nothing for it. Toyota is actually considering buying a GM plant to make midsize pickup trucks.

Discharging workers is contrary to the Way of Lord and Retainer. It hurts commitment and morale. Companies like IBM and Matsushita avoided layoffs even during the Depression. It is a last resort, like gnawing off a leg to get out of a trap. While staying in the trap may mean death, losing a leg will probably just delay it a while. It means accepting a permanent loss of competitive capability. The company loses the experienced workers. If it wants to expand later, it must hire and train new workers. High turnover, whether from layoffs or resignations, is characteristic of noncompetitive organizations.

Flexible Automation Lets Us Get Out 


Flexible automation lets us "get out of Vietnam." 


Ideally, the plant and equipment will have some flexibility. This gives us the option of switching to a more profitable product line. It also lets us fill specialized niches and satisfy individual market segments. A flexible plant lets us "get out of Vietnam." We don't have to stay in the jungle and waste our assets in a protracted price war. This is how Elgin Corrugated Box Company thrives in an industry with excess capacity. (Section 6-2)

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6-5 Shorten the Distribution Chain 
Every link in the distribution chain must justify itself. A short distribution chain is a competitive advantage. 
Sun Tzu pointed out the expense of transporting supplies to a distant front. The commentator Chang Yu added that transportation costs could exceed the value of the supplies. [Sun Tzu, Chapter II] Sun Tzu later warns against fighting a distant enemy. [Sun Tzu, Chapter X] The same lesson applies to business competition.

6-5-1 Distributors and Middlemen

Each middleman adds economic distance to a transaction. Each entity in the distribution chain has to make money on the transaction. The manufacturer's goal is to deliver value to the customer. Sun Tzu warned that transporting supplies to a distant army used most of the supplies. Transporting goods through several middlemen can consume most of their value. Here is the key question. What value does the middleman add to the transaction? Is it more than he consumes?

Middlemen as "Hidden Plant"


Distributors, wholesalers, and retailers are hidden plant. When we use them, we pay for their capital investment and overhead. 


The term "hidden plant" usually refers to the portion of a factory that fixes nonconforming products. The hidden plant concept helps show managers the real cost of poor quality. A manager might not care about a 5% scrap rate. He or she will care that 5% of the fixed capital and labor are there to replace bad parts. We can apply this concept to the distribution chain. The manufacturer pays for the middlemen's fixed assets and personnel. What costs does the distribution chain add to each transaction?
  1. Each middleman must pay salaries, wages, and benefits for personnel.
  2. The middleman has fixed assets with their associated costs (overhead).
  3. Each middleman must earn a profit.
  4. A long distribution chain delays and suppresses feedback from customers. This is an intangible cost. However, it affects the company's ability to adapt its products and services to customer needs.
Distribution costs hurt the Compaq and Apple computer companies. These companies sell personal computers through authorized retail dealers. The dealer adds a markup of 20-40 percent. Dozens of companies now sell computers by mail order. The Computer Shopper lists hundreds of ads for computers, and complementary products. Shipping costs may be 2-3 percent of the item's price. The dealers' advantage of local service is disappearing. Some mail-order companies service their warranties by sending a service representative to your site. Others ship replacement parts, sometimes by overnight mail. It is easy to open a computer case and replace a part. (However, the dealers do get business from people who are uncomfortable working on their own machines.) Even IBM is now selling some computers by mail order.

YKK, a Japanese zipper company, captured market share from Talon by shortening its distribution chain. YKK bypassed wholesalers and sold zippers directly to clothing manufacturers. [Porter, 1985, p. 522]
DAK (Drew Alan Kaplan) Industries, Inc.'s catalog has an ad that shows how shortening the distribution chain saves the customer money. [DAK catalog, Summer 1992, p. 17] The ad shows "fat-cat middlemen with their expensive warehouse overhead and commissions." The ad says the retail price for a push-button direct-access world band radio ranges from $179 to $500. However, DAK can offer this product for $69.90 by buying directly from the manufacturer. Again, someone has to pay for the middlemen's fixed costs, personnel, and inventory cost. DAK gains a competitive advantage by cutting out these distribution costs. The mail-order firm itself is a middleman. However, it plays a useful role in getting the product from the manufacturer to the customer. It provides a marketplace for several manufacturers, and convenience for the buyer. [INSERT DAK "WHY SO CHEAP?" PICTURE. CREDIT, "DAK Industries Incorporated, 8200 Remmet Ave., Canoga Park, CA 91304-4182"]

Innovative Distribution Strategy for Cars 


Detroit should stop discharging autoworkers. The automakers should sack their dealers.

[Side note, 1997: online services like "Auto-by-Tel" are seeking to cut the salesman out of the loop. The author stands by this prediction.] 


Here is a venture for an innovative car manufacturer that likes the Just-In-Time (JIT) philosophy. The idea is to make cars to order instead of making inventories. The current practice is to make cars and put them on dealer lots. The manufacturer usually floor plans the cars. This means loaning the dealer money to carry the inventory. Interest on the loans adds to the customer's cost. The dealer also must earn a profit on each sale. Most of us know about some shady tactics car dealers use to do this.

General Motors' recent problems include plant closings and layoffs. We contend that General Motors is laying off the wrong people. They are trying to cut costs by severing productive assets like factories and autoworkers. They need to ask the following questions. How much value does a car factory create for the customer? How much value does a car dealership create for the customer? Maybe GM should lay off its dealerships. The obvious objection is that dealers sell the cars. This is how traditional "push" marketing works. We make a product and pay someone to peddle it. If no one wants the product, we are out of luck. This is why there are so many incentives and rebates at the end of a car's model year.

Why do automakers need a showroom to sell cars? Any reputable service station can provide the warranty service. Consider the following arrangement. To keep the production line running, the manufacturer makes subassemblies like engines, bodies, and transmissions. Instead of showrooms, the manufacturer has retail outlets that take orders. Authorized service stations could perform this function. Customers could specify their cars on minicomputers. For example, a CD-ROM (Compact Disk, Read-Only Memory) could contain every car, and every option. The customer also could get descriptions of each option, and its price, from the computer. The computer also shows each body and upholstery color. A representative would be available to answer technical questions. When the customer finishes his or her selections, the computer generates an order. The customer signs a contract and makes a down payment.

Now the factory puts the subassemblies together to make the car. The customer gets exactly the options and colors he or she wants. The manufacturer does not have to store inventories of complete cars. (Ideally, a steady stream of orders will keep the subassembly stocks low.) Look at the competitive advantages the manufacturer gains.

  1. It cuts out the salesman's commission and salary. The only sales cost is the cost of processing the order.
  2. It cuts out the expensive showroom (fixed asset). The service station can warehouse one of each model for test drives. Compare this to a parking lot-full of inventory.
  3. It avoids ending the model year with inventories of cars with colors and options no one wanted. Every car that leaves the factory has a buyer.
  4. The customer gets exactly what he or she wants, not what the dealer wants to push off his lot.
Adopting this JIT strategy could give an automaker a decisive advantage over its competitors. By selling directly to the customer, the manufacturer can offer a lower price and earn a larger gross margin. This money doesn't come from nowhere. It was the middleman's share. General Motors, Ford, and Chrysler should pay attention and consider the following line from the musical comedy Pippin. [King Charlemagne, discussing war plans] "[If the plan works] We won't have just a victory, we'll have ourselves a massacre." [Hirson, 1975]

Utility of Distributors and Retailers 


Middlemen CAN add value to marketing operations. We just need to be sure they justify their cost. 


Do distributors and retailers have any redeeming features? Sometimes they can give value to the manufacturer and consumer.
  1. Retailers and distributors are convenient. It is inconvenient to buy food directly from a farmer or a food company. The farmer gains an economy of scale by selling his crops in large lots. The consumer gains convenience through one- stop shopping at a grocery. He or she does not have to go to a dairy, meat packer, and miller for their products. Retail clothing stores offer similar convenience. However, catalog companies like L.L. Bean and Land's End offer one-stop clothing shopping. These companies do not have to pay for floor space, and sales personnel, the way Sears does. The Computer Shopper is a one-stop shopping resource for computer buyers. A mail-order catalog can provide much of the retailer's convenience without the costs.
  2. The distribution system is a source of market intelligence. A company's own sales force often provides the best feedback. It has no divided loyalties. However, it can be expensive. [Carr, 02/15/88] The sales force also can get ideas from customers for new products and services.
  3. Agents and distributors may have access to a widespread distribution system.
  4. Distributors and retailers know their local environments. Small retail businesses may have a regular clientele. The owners' personal contacts in the community are a valuable marketing asset. This factor becomes even more critical in international marketing.
In summary, we must ask the following questions about each level of the distribution chain. [Carr, 02/15/88] (1) What value does it add to our marketing operations? (2) Does its cost justify its existence?

6-5-2 Physical Distance and Transportation Costs


The nature of the product affects its transportation costs. What is the ratio of the shipping cost to the product's value? 


Transportation costs are the other part of "distance" from the marketplace. For some goods, they are negligible. A $20-30 shipping charge for a $1000 computer or plotter is minor. A delivery charge of $500 for a $20,000 automobile is still not a big problem. What is the transportation cost versus the value of the item?
We often call a soft drink or beer plant a bottler. Why is there always a bottle-making or can-making plant at the drink packaging site? The same is true for liquid detergents and similar products. Why don't they buy their containers from somewhere else?

We can buy corrugated boxes for delivery to our factory. The box maker folds the boxes almost flat. Many will fit in a truck or rail car. Once we make a can or bottle, we can't fold it. If we put empty bottles in a truck, the truck transports mostly air. Cans and bottles are worth very little by themselves. The transportation costs are very high in comparison to the value of the containers. Putting the drink (or detergent) in the container adds value to the product. It costs little more to ship full bottles than empty ones. We don't have to make the liquid product at the bottling site. The liquid can get there by tank car. It is the containers that can't travel empty.

The same argument applies to "popcorn" packing material and bubble wrap. These packing materials are mostly air. It makes sense to make the packaging material at the point of use. The key point is to ship product, not air.

Price-to-Weight Ratio


A product with a high price to weight ratio can compete anywhere in the world. 


Menlo Tool Company cites price-to-weight ratio in its exporting successes. The company makes small carbide tools. No tool is more than 6 inches long, or an inch in diameter. However, the company adds a lot of value to its products. The tools sell for about $100 per pound. Even overseas shipment costs don't add a big percentage to the cost. The President says, "We can put 60 lb of product- worth $6000- into a 14 by 12 by 8 inch box, give it to any air-freight carrier, and ship it quickly and economically overseas overnight." A UPS shipment can leave Warren, Michigan on Friday, and arrive at a customer in England by Monday morning. "If we have it in inventory here and a competitor over there does not, we will beat them every time." [Kastelic, "Exporting is Easy!" Manufacturing Engineering, August 1993] In summary, distance is a critical factor in marketing. Distance includes distribution and transportation costs. Distribution and transportation do not add value to the product or service. We must cut them to an absolute minimum. However, a product with a high price-weight ratio can compete anywhere in the world.
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