Posted on February 7, 2019 by Daivd Yovich
Technology has dramatically impacted many sectors of business. Whether it’s productivity or sales, the past twenty-five years has seen dramatic changes in the business landscape. Distribution and logistics has always been a major element of the go to market strategy for any business. Most industries have developed some form of distribution ecosystem that begins with the manufacturer, flows through distribution channels, arrives at the retailer, and finally ends up in the hands of the customer. Technology has dramatically affected many of the traditional distribution ecosystems over the years, and those companies who saw the changes coming and positioned themselves to take advantage of the shifts have been able to flourish. But there are certain industries which remain untouched. For example, the building products industry has undergone relatively little change specific to distribution.
The lack of change in the building products market has to do with many root causes. It is a mature industry, one which is very slow to accept change. There are many decision makers in the distribution chain before products even reach the end users, and at nearly every step there are hurdles and challenges to overcome. Large manufacturing conglomerates are able to force distributors into exclusive agreements that tend to inhibit competition from new entrants or new, innovative products. Likewise, large building products distributors are able to force smaller manufacturers into exclusivity arrangements, which tends to hamstring a manufacturer’s growth potential over the long-term, and this growth limitation is especially apparent when the distributor brings very little value-add to the equation. To further complicate things, the distributor sells to the retailer, the retailer sells to the contractor, and the contractor sells to the end-user. Because of the complexity of the two-step distribution model change simply tends not occur.
Another, maybe even more significant reason for the lack of change is that the building products market has only recently recovered from the building bubble of ten years ago. When the market collapsed in 2007 many building product manufacturers went out of business in rapid succession. Small contractors went out of business, others had to seek and take part-time employment just to make ends meet. Large architectural firms were bidding on small projects they wouldn’t have even considered merely a year before. The industry found itself in survival mode. Sometimes drastic shifts in market conditions can force industries into different, more efficient (distribution and selling) models, but in the case of the building products industry, it didn’t. The building products market is once again facing the potential of another bubble in 2019/20. So how can building product manufacturers turn the upcoming slowdown into an opportunity?
It’s time that building product manufacturers change strategy. The industry has relied heavily on a push strategy, i.e. sell to a distributor who sells to another distributor who sells to an installer who sells to the end-user. When time and money allows, manufacturers the might market to architects who might “specify” their product, although due to the many complexities of the distribution process, the manufacturer could very well have their specifications changed to the bottomless pit of the “or equal” designation.
Successful manufacturers will pivot, utilizing technological advances in direct communication and value-add services to move from a “push” marketing mentality to create and initiate a far more effective and engaging “pull” strategy. The pull strategy simplifies the distribution process by eliminating the multi-level decision making system. Once the pull strategy is put in place, options appear. It allows manufacturers to decide if distributors are adding value or just eroding margins. Manufacturers have a choice to sell direct, which creates leverage over distributors. Product innovation can flourish without the traditional push back along the distribution chain.
A company that dominated the photographic film market throughout most of the last century. Engineers at Kodak actually developed the world’s first digital camera in 1975, but for fear of its negative effects on the film market, Kodak executives refused to introduce or launch the product. They could have eschewed in, created and in fact owned the digital camera market, but instead chose to concentrate on incremental improvements in film technology, pretty much quashing the company’s pipeline for any real leaps in innovation.
This was an iconic American brand in electronics retailing since 1921. In 2015 the company filed for bankruptcy protection, and currently the retailer has only 28 stores remaining in operation. Competition with Amazon and Walmart led to RadioShack’s demise, but more importantly it was the retailer’s failure to up its game and innovate new marketing strategies and distribution models. RadioShack never embraced e-commerce and certainly did not take advantage of its enormous footprint of stores to use as a means of distributing and delivering unique, on-demand products effectively. RadioShack’s collapse was a result of a wholesale failure to recognize innovation as key in differentiating itself from any other store (big box or virtual) selling electronics.
Shakey’s was the first franchised pizza chain in the U.S. It was founded in 1954 and at its peak boasted 350 units. In the 1980s, competition from cheaper competitors, including Domino’s, Pizza Hut, Little Caesars, began to encroach on the brand’s market share. Shakey’s was suffering from a lack of innovative marketing, offering little in the way of differentiation or uniqueness from the other fast-growing national chains. The company (and brand) had built its reputation on the consumer experience, offering a festive in-store atmosphere, complete with live Dixieland jazz. A failure to change and adapt to consumer preferences, and a hyper-focus on the competition kept the chain from building upon its early roots of innovating the experience. It lost its culture of innovation, and marketing became more focused on price competition. Today, the brand still exists with a loyal following, but it is a scant representation of its former self, with a mere 60 units in regional operation.
The Borders Group opened its first bookstore in 1971 and grew into a formidable national chain into the early-2000s. Borders simply failed to adapt to new technologies, viewing then online upstarts like Amazon as fads and something that would never grow beyond the early adopter phase. Borders held fast to “brick and mortar”, continuing to invest in new physical locations well after the dot com boom. The retailer stood on the sidelines as its key competitors, like Barnes & Noble, embraced emerging digital technologies. In 2007 Amazon introduced the Kindle, while in 2009 Barnes & Noble launched the Nook. In 2011 Borders filed for bankruptcy and closed nearly 400 stores.
Although we could look at each of the referenced brands and suggest that they in no way resemble the brand strength and vitality that Apple has built, there is a commonality revolving around a lack of innovation. We can choose to believe that a brand as ubiquitous as Apple could never fall, but then we could easily have thought the same thing about Kodak at its height. And certainly, not one of us alive in the 80s or 90s would have foretold the end of RadioShack. Innovation is the key to success and longevity. Innovation in new products or services, innovation in marketing, innovation in distribution are vital in ensuring growth and dominance. Hopefully, Mr. Cook can show us something truly innovative in the near-term beyond his concept of a "virtuous ecosystem.""