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Changing Channels: The I m p a c t of the I nternet on Distribution Strategy
Leyland Pitt, Pierre Berthon, and Jean-Paul Berthon
I n s i m p l e m a r k e t s o f old, p r o d u c e r s o f g o o d s o r services dealt directly with the c o n s u m e r s o f those offerings. In s o m e m o d e r n business-
to-business markets, suppliers also interact o n a
face-to-face basis with their customers. In m o s t c o n t e m p o r a r y markets, h o w e v e r , m a s s p r o d u c - tion a n d c o n s u m p t i o n h a v e lured intermediaries into the junction b e t w e e n b u y e r a n d seller. T h e s e
intermediaries h a v e either t a k e n title to the g o o d s or services during the flow f r o m p r o d u c e r to customer, or in s o m e w a y facilitated this b y spe- cializing in o n e or m o r e o f the functions that m u s t b e p e r f o r m e d for such m o v e m e n t to occur. T h e s e flows o f title a n d functions, a n d the inter- mediaries w h o h a v e facilitated them, h a v e gener- ally c o m e to b e k n o w n as distribution channels.
For m o s t m a r k e t i n g decision makers, dealing with the c h a n n e l for a p r o d u c t or service ranks as
o n e o f the k e y m a r k e t i n g quandaries. In m a n y cases, d e s p i t e w h a t the t e x t b o o k s suggest, there is frequently n o real decision as to "who" should constitute the channel; rather, the question is h o w best to deal with the i n c u m b e n t channel. Market- ing c h a n n e l decisions are critical also b e c a u s e they intimately affect all o t h e r marketing a n d
overall strategic decisions, Distribution c h a n n e l s generally involve relatively long-term commit- ments, b u t if m a n a g e d effectively o v e r time, they create a k e y external resource. Small w o n d e r , then, that they exhibit p o w e r f u l inertial t e n d e n - cies, for o n c e they are in place a n d w o r k i n g well, m a n a g e r s are reluctant to fix w h a t is not broken.
H e r e w e c o n t e n d that a n e w m e d i u m - - t h e Internet a n d the World Wide Web---will c h a n g e distribution like n o o t h e r e n v i r o n m e n t a l force since the industrial revolution. Not only will it m o d i f y m a n y o f the a s s u m p t i o n s o n w h i c h distri- bution c h a n n e l structure is based, in m a n y cases
it will transform a n d e v e n obliterate c h a n -
nels themselves. As a result, m a n y intermedi- aries will die out, while n e w channels a n d n e w
intermediaries will take their places.
W h a t i s t h e P u r p o s e
o f a D i s t r i b u t i o n
S t r a t e g y ?
In 1958, Wroe Alderson s u m m a r i z e d the impor-
The n e w electronic V , ' m e d i u m is ra aging
traditional distribution philosophy, rendering m a n y conventional intermediaries a n d channels obsolete.
tance o f distribution, stating that the "goal o f
marketing is the matching o f s e g m e n t s o f s u p p l y a n d d e m a n d . " T h r e e d e c a d e s later, Stern a n d E1-
Ansary d e f i n e d a distribution c h a n n e l as "sets o f i n d e p e n d e n t organizations involved in the pro- cess o f m a k i n g a p r o d u c t or service available for use or c o n s u m p t i o n . " Quite simply, the p u r p o s e o f a distribution c h a n n e l is to m a k e the right quantities o f the right p r o d u c t or service available at the right place, at the ~ght time. What m a k e s distribution strategy u n i q u e vis-:~-vis o t h e r mar- keting mix decisions is that it d e p e n d s almost entirely o n physical location. T h e old saying a m o n g retailers is that the three k e y s to success are the "three Ls": location, location, location.
Alderson a r g u e d that intermediaries p r o v i d e e c o n o m i e s o f distribution b y increasing the effi-
ciency o f the process. T h e y d o this b y creating time, place, a n d p o s s e s s i o n utility--right product, right place, right time. H e m a i n t a i n e d that inter- mediaries fulfill three basic functions, w h i c h Stern a n d EI-Ansary h a v e distilled into the following three essential p u r p o s e s o f distribution channels:
Changing Channels: The Impact of the Internet on Distribution Strategy 19
1. Intermediaries s u p p o r t e c o n o m i e s o f s c o p e b y adjusting the d i s c r e p a n c y o f assortments. Pro-
d u c e r s s u p p l y large quantities o f a relatively small a s s o r t m e n t o f p r o d u c t s or services, while c u s t o m - ers require relatively small quantities o f a large
a s s o r t m e n t o f p r o d u c t s a n d services. T h r o u g h the p r o c e s s o f e x c h a n g e , intermediaries create p o s - session utility, in addition to creating utility o f time a n d place. Such activities, referred to as r e a s s o r t m e n t / s o r t t n g , c o m p r i s e the following:
• sorting, which consists o f arranging p r o d - ucts or services according to class, kind, or size;
• s o r t i n g out, w h i c h w o u l d refine sorting by, for e x a m p l e , grading p r o d u c t s or output;
• a c c u m u l a t i o n , w h i c h involves aggregating stocks f r o m different suppliers, s u c h as h o u s e h o l d
e q u i p m e n t m a n u f a c t u r e r s or b o o k publishers; • a l l o c a t i o n , which is really distribution ac-
cording to a p l a n - - w h o will get w h a t the pro-
d u c e r has p r o d u c e d . This typically involves a n
activity such as "breaking bulk." • assorting, w h i c h m e a n s putting an a p p r o -
priate " p a c k a g e " together. Thus, a m e n ' s outfitter
might p r o v i d e a n a s s o r t m e n t o f suitable clothing - - s h i r t s , ties, trousers, socks, shoes, underwear.
2. Intermediaries r o u t i n i z e transactions so
that the cost o f distribution c a n b e minimized. B e c a u s e o f this, transactions d o not n e e d to b e b a r g a i n e d o n an individual basis, w h i c h w o u l d
t e n d to b e inefficient in m o s t markets. Routiniza- tion facilitates e x c h a n g e b y leading to standard- ization a n d automation. Standardizing p r o d u c t s a n d services e n a b l e s c o m p a r i s o n a n d assessment,
w h i c h in turn a b e t the p r o d u c t i o n o f the m o s t highly v a l u e d items. By standardizing issues such
as lot size, delivery frequency, p a y m e n t , a n d c o m m u n i c a t i o n , a routine is created to m a k e the e x c h a n g e relationship b e t w e e n b u y e r s a n d sellers b o t h effective a n d efficient. In c h a n n e l s w h e r e it has b e e n possible to a u t o m a t e activities, the costs o f such tasks as reordering c a n b e m i n i m i z e d - - an o r d e r is p l a c e d automatically w h e n inventories r e a c h a certain m i n i m u m level. In essence, auto-
m a t i o n involves m a c h i n e s or systems p e r f o r m i n g tasks previously p e r f o r m e d b y h u m a n s , t h e r e b y eliminating errors a n d reducing labor costs.
3. Intermediaries facilitate the s e a r c h i n g p r o c e s s e s o f b o t h p r o d u c e r s a n d c u s t o m e r s b y structuring the information essential to b o t h par-
ties. Sellers are searching for b u y e r s a n d b u y e r s are searching for sellers; at the simplest level, intermediaries p r o v i d e a place for these parties to find e a c h other. Producers are not sure a b o u t c u s t o m e r s ' needs, a n d c u s t o m e r s are not sure their n e e d s can b e satisfied. Intermediaries re- d u c e this uncertainty for b o t h parties.
We shall use these three functions to c o n - struct a grid called the I n t e r n e t D i s t r i b u t i o n M a - mix. With this matrix, w e can p i n p o i n t the effects o f t e c h n o l o g y o n c h a n g i n g distribution functions.
THE INTERNET AND THE WORLD WIDE WEB:
WHAT DOES TECHNOLOGY DO?
A lthough their origins can b e traced b a c k m a n y years, the Internet a n d its multi- m e d i a platform, the World Wide Web,
h a v e attracted c o n s i d e r a b l e attention since 1995, particularly f r o m marketers. Understandably, at this early stage the focus has b e e n o n the tech- n o l o g y either f r o m a general m a r k e t i n g p e r s p e c -
tive or as a m a r k e t i n g c o m m u n i c a t i o n m e d i u m . Such attention is important a n d warranted, but too little attention has b e e n g i v e n to the tech- n o l o g y ' s i m p a c t o n distribution channels, w h i c h m a y turn out to b e e v e n m o r e significant than its impact o n c o m m u n i c a t i o n . I n d e e d , distribution m a y switch f r o m c h a n n e l s to m e d i a in the future.
We discern three m a j o r effects that the tech- n o l o g y loosely k n o w n as the Net a n d the Web will h a v e o n distribution. It will kill distance,
h o m o g e n i z e time, a n d m a k e location irrelevant.
T h e D e a t h o f D i s t a n c e
In the mid-1960s, an Australian n a m e d G e o f f r e y Blainey w r o t e a classic s t u d y o f the i m p a c t o f
g e o g r a p h i c isolation o n his h o m e l a n d entitled The T y r a n n y o f D i s t a n c e . H e a r g u e d that Austra- lia a n d its n e i g h b o r s w o u l d find it far m o r e diffi- cult to s u c c e e d in terms o f international trade
b e c a u s e o f the vast physical distances b e t w e e n the c o u n t r y a n d the w o r l d markets. Recently,
Frances Cairncross (1997) w r o t e a s t u d y o n the c o n v e r g e n c e o f three t e c h n o l o g i e s - - t e l e p h o n e , television, a n d c o m p u t e r - - a n d c h o s e to recast
Blainey's title b y calling h e r b o o k The D e a t h o f D i s t a n c e . She c o n t e n d s that "distance will n o longer d e t e r m i n e the cost o f c o m m u n i c a t i n g elec- tronically." For the distribution o f m a n y p r o d - u c t s - - t h o s e that can b e digitized, such as pic- tures, video, sound, a n d w o r d s - - d i s t a n c e will
thus h a v e n o effect o n costs. T h e s a m e is true for services. And for m o s t products, distance will h a v e substantially less effect o n distribution costs.
Th e H o m o g e n i z a t i o n o f Ti me
In the physical market, time a n d s e a s o n p r e d o m i - nate trading and, b y definition, distribution. We see e v i d e n c e o f this in the f o r m o f hours o f o p -
e r a t i o n - a c t i v i t i e s that o c c u r b y time o f d a y and in social a n d climatic seasonality. T h e virtual m a r k e t p l a c e is atemporal; a Web site is always o p e n . T h e seller n e e d not b e a w a k e to serve the buyer. Often, the b u y e r n e e d not b e a w a k e , o r e v e n physically present, to b e s e r v e d b y the seller. T h e Net a n d the Web are i n d e p e n d e n t o f season. In fact, they m a y e v e n create seasonality, such as in the case o f T h a n k s g i v i n g Web b r o w s - ers. Time can thus b e h o m o g e n i z e d - - m a d e uni-
20 B u s i n e s s H o r i z o n s / March-April 1999
formly consistent for all buyers a n d sellers. This
is akin to what McKenna (1997) has called "real
time": "our sense o f ultracompressed time and
foreshortened horizons .... [that] occurs w h e n time
and distance vanish, w h e n action and response
are simultaneous."
T h e I r r e l e v a n c e o f L o c a t i o n
Any screen-based activity can be o p e r a t e d any-
place o n earth. The Internet bookstore Amazon.
corn (www.amazon.com), o n e of the most famous
o f the n e w Web-based firms, supplies b o o k s to
customers located anywhere, from b o o k suppli-
ers located anywhere. The location o f Amazon.
corn matters neither to the b o o k buyers nor to
the b o o k publishers.
No longer wilt location be key to most busi-
ness decisions. Indeed, o n e can dispute w h e t h e r
the term even has meaning in the case of firms
such as Amazon.corn, for defining location itself
b e c o m e s onerous. Is it the address where the
firm is officially registered? Is it w h e r e most of
the p e o p l e e m p l o y e d by the firm work? Or is it
where the server is physically situated? None of
these alternatives really answers the question; the
very necessity for an answer itself is questioned.
Rayport and Sviokla (1994) characterize this
p h e n o m e n o n as a m o v e from marketplace to
"marketspace." They point out that to c o m p a r e
marketspace-based firms to their traditional mar-
ketplace alternatives, o n e needs to contrast three
issues: c o n t e n t (what the buyer purchases); c o n -
t e x t (the circumstances in which the purchase
occurs); and i n f r a s t n t c t u r e (simply what the firm
needs in order to do business). The best w a y to
understand a firm like Amazon.corn '.~s a market-
space firm is simply to c o m p a r e it to a conven-
tional bookstore on the basis of these three crite-
ria. Conventional bookstores sell books: Amazon.
corn sells information about books, with a vast
selection and a delivery system. The interface in
a conventional b o o k s t o r e situation is in a shop
with b o o k s on the shelves: in the case of Ama-
zon.com, it is through a screen. Conventional
bookstores require a building with shelves,
p e o p l e to serve, a convenient location, and most
o f all, a large stock of books: Amazon.corn re-
quires a fast, efficient server and a big database.
Try as they might, conventional bookstores can
never stock all the b o o k s in print: A m a z o n . t o m
stocks no (or very few) books, yet paradoxically
stocks them all. The location of a conventional
bookstore matters a great d e a l - - c o n v e n i e n t spot,
high traffic, pleasant surroundings: Amazon.corn's location is immaterial.
T e c h n o l o g y is creating many "marketspace"
firms. In doing so, cynics may observe, it is en-
acting three n e w rules o f retailing: Location is
irrelevant, irrelevant, irrelevant.
Fn.I.ING IN THE BLOCKS: ~ EFFECTS OF
TECHNOLOGICAL CHANGES ON THE
FUNCTION OF DISTRIBUTION CHANNELS
C ontrasting the three effects o f t e c h n o l o g y
vertically with the three basic functions
of distribution channels horizontally per-
mits the construction of a three-by-three grid,
which w e call the Internet Distribution Matrix
( s h o w n in F i g u r e 1). We believe it can be a
powerful tool for managers w h o wish to identify
opportunities for using the Net and the Web to
improve or c h a n g e distribution strategy. It can
also assist in identifying competitive threats by
allowing managers to concentrate o n areas w h e r e
other actors might use t e c h n o l o g y to perform
distribution functions more effectively. Often,
competition may not be from acknowledged,
existing competitors, but from upstarts and play-
ers in entirely different industries.
Each cell in the matrix permits the identifica-
tion of an effect of t e c h n o l o g y o n a distribution
function. A manager can ask what effect the
death o f distance will have on the function of
reassortment and sorting in a company, or what
effect the irrelevance o f location will have on the
activity o f searching.
Figure 1
Th e I n t e r n e t D i s t r i b u t i o n Matrix
Reassortment/ Sorting Routinization Searching
Changing Channels: The Impact of the Internet on Distribution Strategy 21
To stimulate t h o u g h t in this regard, a n d to aid w h a t Bandura (1977) calls "vicarious learn- ing," w e n o w offer several e x a m p l e s o f organiza- tions using their Web sites to exploit the effects
o f t e c h n o l o g y o n distribution functions. We
s h o u l d point out that neither the technological
effects n o r the distribution functions are entirely d i s c r e t e - - t h a t is, u n i q u e l y identifiable in a n d o f
"The virtual c a t a l o g c a n b e 'delivered" instantaneously, regardless of distance. Customers c a n obtain the latest product descriptions, specifications, a n d prices, a n d c a n even quiz the site on the best type of plastic or lubricant for the job. "
themselves. In
o t h e r words, it is not possible to say that a particular
Web site is o n l y a b o u t the d e a t h o f distance a n d not a b o u t time h o m o g -
enization, or loca- tion irrelevance.
Nor is it possible
to say that just b e c a u s e a Web site c h a n g e s reassort-
m e n t a n d sorting,
it d o e s not affect routinization a n d
searching. Like m o s t c o m p l e x organizational p h e -
n o m e n a , the forces all interact with e a c h o t h e r in reality. So at best w e h a v e s u c c e e d e d , w e h o p e , in identifying cases that illustrate interesting best practices, or a g o o d e x a m p l e , in e a c h instance.
T h e D e a t h o f D i s t a n c e
a n d R e a s s o r t m e n t / S o r t i n g
Music M a k e r ( w w w . m u s i c m a k e r . c o m ) is a Web site that allows c u s t o m e r s a n y w h e r e to create CDs o f their o w n b y sorting t h r o u g h vast lists o f
recordings b y various artists o f e v e r y genre. The
Web site charges p e r song, t h e n allows the cus-
t o m e r to personalize the CD b y designing, color- ing, a n d labeling it. T h e c o m p a n y then presses the CD a n d delivers it to the customer. Rather
than c o m p i l e a collection o f music for the aver-
age listener, as traditional recording c o m p a n i e s do, or attempting to carry an a c c e p t a b l e inven- tory, like a g o o d conventional record store, Music Maker lets c u s t o m e r s d o r e a s s o r t m e n t a n d sorting for themselves, regardless o f h o w far a w a y they
m a y b e from the firm. A c u s t o m e r w h o w a n t s B e e t h o v e n ' s Fifth a n d G u n s ' n ' Roses o n the s a m e CD can h a v e them.
Distance is currently o n l y a p r o b l e m for de- liver3,, not for reassortment/sorting. However, in the fairly n e a r future, e v e n distance will not b e an i m p e d i m e n t . As the costs o f digital storage con- tinue to p l u m m e t a n d b a u d rates increase, cus- t o m e r s m a y simply d o w n l o a d the p e r f o r m a n c e s they like, rather than h a v e the CD delivered to t h e m physically. T h e y m a y then press their o w n CD, or just store the s o u n d o n their hard drives.
T h e D e a t h o f D i s t a n c e a n d R o u t i n i z a t i o n
A p r o b l e m frequently e n c o u n t e r e d b y business- to-business m a r k e t e r s with large p r o d u c t r a n g e s
is that o f routinely u p d a t i n g their catalogs. A
c o m p a n y m u s t accurately reflect the availability
o f n e w p r o d u c t s a n d features, modifications to existing products, a n d price changes. O n c e all these c h a n g e s h a v e b e e n m a d e , the catalog m u s t
b e printed a n d physically delivered to c u s t o m e r s w h o m a y b e located quite far away, with all the i n c o n v e n i e n c e a n d cost such activity incurs. T h e p r o b l e m is c o m p o u n d e d b y a n e e d for frequent updates, p r o d u c t complexities, a n d the p o t e n - tially large n u m b e r o f geographically d i s p e r s e d customers.
Du Pont Lubricants ( w w w . l u b r i c a n t s . d u p o n t .
c o m ) m a r k e t s m a n y different lubricants for s p e - cial applications to c u s t o m e r s in m a n y parts o f
the world. Its catalog has always b e e n subject to c h a n g e with regard to n e w products, n e w appli-
cations o f existing products, c h a n g e s to specifica- tions, a n d price raises. GE Plastics ( w w w . g e . c o m /
plastics), a division o f G e n e r a l Electric that offers a w i d e r a n g e o f plastics with uses in m a n y fields, has faced similar p r o b l e m s . But b o t h c o m p a n i e s
n o w use virtual routinization b y w a y o f their Web sites to replace the physical routine o f u p d a t i n g printed catalogs. T h e virtual catalog can b e "de- livered" instantaneously, regardless o f distance. Customers can obtain the latest p r o d u c t descrip- tions, specifications, a n d prices, a n d can e v e n
quiz the site o n the best t y p e o f plastic or lubri- cant for the job.
Th e D e a t h o f D i s t a n c e a n d S e a r c h i n g
A n y o n e w h o has e x p e r i e n c e d b e i n g a traveler in
Country A w h o wants to p u r c h a s e an air ticket to travel from Country B to Country C k n o w s the frustration o f b e i n g at the m e r c y o f travel agents a n d airlines, b o t h at h o m e a n d abroad. Prices o f such tickets v e r g e o n extortion, a n d the c u s t o m e r
is virtually p o w e r l e s s in trying to deal with par- ties in foreign countries, especially w h e n u n a b l e to s h o p o n the g r o u n d locally a n d obtain the best deal.
N o w the G e r m a n airline Lufthansa ( w w w . lufthansa.com) has a global reservation s y s t e m o n its Web site that lets travelers b o o k fares from a n y w h e r e in the w o r l d to a n d f r o m a n y w h e r e in the world, p r e p a r i n g their tickets for p i c k - u p at the airport. Unlike the Web sites o f m a n y airlines, w h i c h tend to b e dedicated, Lufthansa's site al- lows c u s t o m e r s to access the timetables, fares, a n d routes o f its competitors. In this way, dis- tance n o longer presents a n obstacle to c u s t o m - ers in their search for n e e d satisfaction, a n d Lufthansa is able to interact directly with c u s t o m - ers all o v e r the world.
22 B u s i n e s s H o r i z o n s / March-April 1999
T h e H o m o g e n i z a t i o n o f T i m e a n d R e a s s o r t m e n t / S o r t i n g
In a conventional setting, students w h o wish to
complete a degree n e e d to be in class to take the
courses they want. The faculty w h o will teach the
classes and the other students w h o will attend
must also be there, all at the same time. W h e n
the time slots of two desired courses conflict, or
the classes are taught o n e after the other at o p p o -
site ends o f the campus, students generally can-
not attend more than o n e at a time.
This problem is particularly prevalent in
m a n y MBA programs w h e n it c o m e s to elective
courses, and students have to c h o o s e a m o n g
appealing offerings in a w a y that generally results
in satisficing rather than optimizing. Traditional
distance learning programs have attempted to
o v e r c o m e these problems, but they have been
only partly successful. Students miss the live im
teraction real-time classes provide.
The Global MBA (GEMBA) program at Duke
University's Fuqua School of Business (www.
fuqua.duke.edu) allows its students to take the
elective course lectures, anywhere, anytime, over
the Internet. Using this medium, a student can
interact with faculty and fellow students. As the
online brochure states, "Thanks to a unique for-
mat that combines multiple international program
sites with a d v a n c e d interactive technologies,
GEMBA students can work and live a n y w h e r e in
the world while participating in the program."
Students enroll in the courses from m a n y differ-
ent parts o f the world and in many time zones,
yet can n o w self-assort the MBA program they really want.
The H o m o g e n i z a t i o n o f T i m e a n d R o u t i n i z a t i o n
Every two months, British Airways mails person-
alized information to the millions of members of
its Executive Club. But by the time the informa-
tion arrives, it is out of date. A club nlember w h o
wishes to redeem miles for free travel must either
call the membership desk at the airline to deter-
mine the n u m b e r of available miles, or request a
travel agent to d o so for him. There is also the
problem o f determining h o w far the m e m b e r can
travel o n the miles available.
Nowadays, members can obtain online, up-
to-the minute information on their status on the
airline's Web site (www.british-airways.conl). F~\
entering their frequent flyer m e m b e r n u m b e r and
a security code, they can get a report on the num- ber o f miles available to them and check on the
latest transactions that have earned miles. They
can also obtain a color map of the globe, with
the preferred city of departure at tile center and
other cities to which they might flv on the avail-
able miles highlighted as well. They can also pose
"what-if" questions to the site, determining, say,
the cost and possibility of more passengers, or of
upgrading the class o f travel.
Thus, time is h o m o g e n i z e d and transactions
routinized because m e m b e r s can perform these activities w h e n it suits them, without having to
wait for a mailed report or for a travel agent's
office to open..What was once a highly custom-
ized activity is reduced to a routine by a system.
T h e H o m o g e n i z a t i o n o f T i m e a n d S e a r c h i n g
In m a n y markets, the need to reduce uncertainty
by searching is c o m p o u n d e d b y the problem that
buyer and seller operate in different time zones
or at different hours of the day or week. Even
simple activities such as routine communication
b e t w e e n the parties are problematic. Employee
recruitment presents a g o o d example o f these
i s s u e s - - c o m p a n i e s search for e m p l o y e e s and
individuals search for jobs. Both parties often rely
on recruitment agencies to enter the channel as
intermediaries, not only to simplify the search
processes but also to m a n a g e their time, such as
setting up interviews convenient for both.
A n u m b e r o f enterprising sites for recruitment
have b e e n established o n the Web. O n e of these,
Monster Board (www.monster.com), lists a r o u n d
50,000 jobs from more than 4,000 companies,
including blue-chip employers rated a m o n g the
best. Monster Board keeps potential e m p l o y e e s
informed by providing customized email updates
for job seekers. Meanwhile, potential employers
can access details and even resumes of suitable
candidates online, at any time.
The recruitment market also provides excel-
lent examples of "getting it wrong" and "getting it
right" on the Web as a distribution medium. For
many years, the Higher Education Supplement of
the London Times has of_
fered tile greatest market for
jobs in higher education in
the United Kingdom anti
the British Commonwealth.
Almost all senior positions
and many lower-level jobs
in universities and tertiary
institutions are advertised.
In 1996, the "Times Higher"
set up a Web site (www.
THES.co.uk) on which job
seekers could conveniently
Brovtse and sort through all
the available positions. This apparently affected sales,
"Students enrofl in the courses from m a n y different parts of the world a n d in m a n y time zones, yet c a n now self-assort the MBA program they really want."
for within a short time the Web site began to
require registration and subscription, probably in
an attempt to shore up revenues affected by a decline in circulation.
Changing Channels: The Impact of the Internet on l)istribution Strategy 23
As Schwartz (1997) has p o i n t e d out, k n o w i n g w h a t to charge for a n d h o w o n the Web are is- sues with w h i c h m o s t m a n a g e r s are still grap-
pling. Web surfers, p e r h a p s e n a m o r e d o f the fact
that m o s t Net c o n t e n t is free, s e e m unwilling to
p a y for it unless it p r o d u c e s real, tangible, i m m e -
diate, a n d direct benefits. Universities in the U.K.
m a y h a v e b e g u n to s e n s e that their recruiting w a s less effective, o r s o m e o n e m a y h a v e h a d a bright idea. At a n y rate, at the s a m e time the Times H i g h e r w a s attempting to charge surfers for ac- cess to its job pages, a c o n s o r t i u m o f universities set u p a Web site ( w w w . j o b s . a c . u k ) to w h i c h t h e y all p o s t available positions. Not o n l y are job s e e k e r s able to specify a n d search b y criteria, but o n c e a potential position is found, they can link directly to the h o m e p a g e o f the institution to obtain further information o n s u c h issues as the
student body, research, facilities, a n d faculty. J o b s . a c . u k d o e s not n e e d to b e run at a
profit, as d o e s the Times Higher. T h e benefits to
the institutions c o m e in the f o r m o f r e d u c e d ad- vertising costs a n d b e i n g o n a site w h e r e job s e e k e r s will o b v i o u s l y c o m e to l o o k for positions.
This is similar to the w a y s h o p p e r s r e d u c e their
search in the real w o r l d b y s h o p p i n g in malls that h a v e m o r e t h a n o n e store o f the t y p e t h e y intend to patronize.
In traditional markets, w h e r e search requires a physical p r e s e n c e , b o t h b u y e r a n d seller n e e d to interact at a mutually suitable time. O f course,
"But what if c a p a c i t y could b e ascertained a n d then reserved automatically? A n d what if a shipper h a d spare c a p a c i t y it urgently wished to sell?"
this time is not necessar- ily suitable to the parties in a real sense, a n d is
typically the result o f a c o m p r o m i s e . T h o s e w h o wish to transport large
quantities o f g o o d s by sea either n e e d to wait until a s h i p p e r in a n o t h e r c o u n t r y o p e n s the office b e f o r e placing a tele- p h o n e call, or c o m m u n i - cate b y facsimile and wait for an answer. But
w h a t if capacity could b e ascertained a n d t h e n r e s e r v e d automatically? And w h a t if a s h i p p e r h a d s p a r e capacity it urgently w i s h e d to sell?
SeaNet ( w w w . s e a n e t . c o . u k ) is a n e t w o r k serving tile global maritime i n d u s t r y - - 2 4 hours a day, regardless o f time z o n e s b y facilitating the search for b u y e r s a n d sellers. Reports indicate that this a w a r d - w i n n i n g site w a s cash positive within a year, e x p e r i e n c i n g subscription r e n e w a l s at a rate o f 90 percent. Shippers can post their o p e n positions, orders, a n d sale a n d p u r c h a s e information o n t o the site. T h e information is u p d a t e d almost instantly a n d can b e a c c e s s e d by a n y s h i p p i n g c o m p a n y a n y w h e r e in the world
searching the Net to d o b u s i n e s s - - n o t just sub- scribers. C o m p a n i e s c a n t h e n contact the seller b y email or b y m o r e c o n v e n t i o n a l m e t h o d s . With the h e l p o f SeaNet's Maritime Sites, s h i p p e r s can find the information t h e y n e e d quickly a n d easily.
T h e I r r e l e v a n c e o f L o c a t i o n a n d
R e a s s o r t m e n t / S o r t l n g
Conventional c o m p u t e r stores a t t e m p t to serve the a v e r a g e c u s t o m e r b y offering a r a n g e o f stan- d a r d p r o d u c t s f r o m c o m p u t e r manufacturers. Manufacturers rely o n these intermediaries to tell t h e m w h a t the a v e r a g e c u s t o m e r requires, t h e n p r o d u c e a n a v e r a g e p r o d u c t for this market. T h e c u s t o m e r travels to a n e a r b y store to p u r c h a s e the product. In this market, location matters; the store must b e easily accessible to c u s t o m e r s a n d large e n o u g h to carry a r e a s o n a b l e selection o f g o o d s , as well as p r o v i d e access a n d parking.
Dell C o m p u t e r ( w w w . d e l l . c o m ) is o n e o f the real success stories o f electronic c o m m e r c e . Esti- m a t e s o f daily sales off its Web site n e e d to b e
u p d a t e d o n a daily basis, b u t in February 1998 t h e y w e r e r e c k o n e d to b e in excess o f $4 million a day. T h e c o m p a n y has b e e n a sterling per- f o r m e r t h r o u g h the latter half o f the 1990s, a n d m u c h o f this a c h i e v e m e n t has b e e n attributed to its trading o v e r the Internet. Using Dell's Web site, users can c u s t o m i z e their o w n c o m p u t e r s by clicking o n such attributes as p r o c e s s o r s p e e d , RAM size, hard drive, CD-ROM, a n d m o d e m t y p e
a n d s p e e d . A h a n d y calculator instantly u p d a t e s c u s t o m e r s o n the cost o f w h a t they are specify- ing, so they c a n adjust their b u d g e t s accordingly.
O n c e a c u s t o m e r is satisfied with the speci- fied p a c k a g e , h e can place a n o r d e r a n d p a y online. Only t h e n d o e s Dell c o m m e n c e w o r k o n the machine, w h i c h is delivered just o v e r a w e e k later. Dell only places orders for such items as Sony monitors or Seagate hard drives. T h e cur- rent rate o f stock turn for C o m p a q , the PC indus- try leader, is 12 times p e r year; Dell's is 30. This m a y s e e m like m e r e l y attractive a c c o u n t i n g per- f o r m a n c e until o n e realizes the t r e m e n d o u s stra- tegic a d v a n t a g e it gives Dell: W h e n Intel launche~
a new, faster processor, C o m p a q effectively has to sell s i x - w e e k - o l d stock b e f o r e it c a n launch
m a c h i n e s with the n e w chip; Dell o n l y has to sell ten days' worth. O n c e again, location is irrelevant to customers; the c o m p a n y is w h e r e they w a n t it to be. Meanwhile, c u s t o m e r s actually d o s o m e o l Dell's w o r k b y getting to d o the reassortment a n t sorting themselves.
T h e I r r e l e v a n c e o f L o c a t i o n
a n d R o u t i n i z a t i o n
Typically, location has b e e n vital to the estal)lish- m e n t o f routines, efforts to standardize, a n d auto-
24 Business Horizons / March-April 199
mation. It is easier a n d less costly for m a j o r b u y - ers to set u p p u r c h a s i n g p r o c e d u r e s with suppli-
ers w h o are n e a r b y if not local, particularly w h e n
the p u r c h a s i n g p r o c e s s requires lengthy face-to- face negotiation o v e r such issues as price, quality, a n d specification. Recent e x a m p l e s o f major busi- ness-to-business p u r c h a s i n g off Web sites, h o w - ever, t e n d to n e g a t e this c o n v e n t i o n a l w i s d o m .
Caterpillar m a d e its first a t t e m p t at serious
online p u r c h a s i n g in J u n e 1997, w h e n it invited p r e a p p r o v e d suppliers to bid o n a $2.4 million
o r d e r for hydraulic fittings---simple plastic parts that cost u n d e r a dollar but can bring a $2 million b u l l d o z e r to a standstill w h e n they g o wrong.
T w e n t y - t h r e e suppliers elected to m a k e bids in an online p r o c e s s o n Caterpillar's Web site. T h e
first bids c a m e in high, b u t b y lunchtime only nine w e r e still left revising offers. By the time the session closed at the e n d o f the day, the l o w bid w a s 22 cents. T h e p r e v i o u s l o w price p a i d o n the c o m p o n e n t b y Caterpillar w a s 30 cents. T h e c o m - p a n y n o w attains an a v e r a g e savings o f 6 p e r c e n t t h r o u g h its Web site s u p p l i e r b i d d i n g system.
GE w a s o n e o f the first major c o m p a n i e s to exploit the Web's potential in purchasing. In 1996, the c o m p a n y p u r c h a s e d $1 billion w o r t h o f g o o d s f r o m 1,400 suppliers o v e r the Net. As a result, it reports that the b i d d i n g p r o c e s s has
b e e n cut f r o m 21 days to 10, a n d the cost o f g o o d s has declined b e t w e e n 5 a n d 20 percent. Previously, GE h a d n o foreign suppliers; n o w 15 p e r c e n t o f its suppliers are from outside North America. T h e c o m p a n y also e n c o u r a g e s suppliers to put their Web p a g e s o n the GE site, w h i c h has b e e n f o u n d effective in attracting o t h e r business.
T h e I r r e l e v a n c e o f L o c a t i o n a n d S e a r c h i n g
In the past, m o s t b u y e r s h a v e p a t r o n i z e d proxi- mal suppliers b e c a u s e the costs o f searching fur-
ther afield generally o u t w e i g h the benefits o f a possible l o w e r price. This also creates o p p o r t u n i - ties for intermediaries to e n t e r the channel. T h e y serve local m a r k e t s b y searching for suppliers o n
their behalf, while at the s a m e time serving pro- d u c e r s b y giving t h e m access to m o r e distant a n d disparate markets. Travel agents a n d insurance b r o k e r s are typical e x a m p l e s o f this p h e n o m - e n o n ; t h e y search for suitable offerings for cus- t o m e r s f r o m a large range o f potential suppliers, while finding c u s t o m e r s for these suppliers that the latter w o u l d not h a v e b e e n able to reach directly in a n e c o n o m i c a l fashion. As a result, the intermediary "owns" the c u s t o m e r a n d c o m m a n d s the p o w e r in the channel.
S o m e years ago, Blattberg a n d Deighton (1991) s u g g e s t e d presciently that interactive mar- keting w o u l d e n a b l e suppliers to win b a c k p o w e r f r o m the channel. By interacting directly with customers, suppliers w o u l d learn m o r e a b o u t
them. T h e British insurance Cofnpany Eagle Star
I n s u r a n c e ( w w w . e a g l e s t a r d i r e c t . c o . u k ) n o w al-
lows c u s t o m e r s to obtain q u o t e s o n a u t o insur-
a n c e directly off its Web site. It offers a 15 per-
cent discount o n p u r c h a s e a n d allows
credit card p a y m e n t . T h e c o m p a n y re- ports selling 200 policies p e r m o n t h
in the first three
m o n t h s o f this o p - eration, generating
£180,000 in p r e m i - u m s a n d m a k i n g 40,000 quotations.
Although o n e could argue that these n u m b e r s are minus- cule c o m p a r e d to
"The Net has the potential to go beyond passive distribution of products and services, to b e c o m e an active (and central) creative element in the production of the product or service, n
the b r o k e r market, it s h o u l d b e r e m e m b e r e d that this t y p e o f distribution is still in its infancy. Cus- t o m e r s m a y p r e f e r dealing directly with the c o m - pany, regardless o f its or their location, t h e r e b y creating o p p o r t u n i t i e s for the c o m p a n y to interact with t h e m e v e n further.
LONG-TERM EFFECTS OF THE IMPACT OF
T E C H N O L O G Y O N D I S T R I B U T I O N CHANNELS
T h e l o n g - t e r m effects o f the d e a t h o f dis-
tance, h o m o g e n i z a t i o n o f time, a n d irrel- e v a n c e o f location o n the evolution o f
distribution c h a n n e l s will b e manifold a n d c o m - plex. However, three effects are already b e c o m - ing a p p a r e n t , a n d will u n d o u b t e d l y affect distri- bution as w e k n o w it in p r o f o u n d ways.
First, in the future, w e m a y talk o f distribu- tion m e d i a rather than distribution c h a n n e l s for most services a n d m a n y products. A m e d i u m can variously b e d e f i n e d as:
• something, such as an intermediate c o u r s e o f action, that o c c u p i e s a position or represents a condition m i d w a y b e t w e e n extremes;
• an a g e n c y b y which s o m e t h i n g is a c c o m - plished, c o n v e y e d , or transferred; or
• a s u r r o u n d i n g e n v i r o n m e n t in which s o m e - thing functions a n d thrives.
The k e y distinction b e t w e e n a channel and a m e d i u m in this context c o n c e r n s the notion o f interactivity. Electronic m e d i a such as the Net are
intrinsically interactive. Thus, w h e r e a s c h a n n e l s w e r e typically conduits for products, the Net has the potential to g o b e y o n d passive distribution o f p r o d u c t s a n d services, to b e c o m e an active ( a n d central) creative e l e m e n t in the p r o d u c t i o n of the p r o d u c t or service. It c a n create virtual m a r k e t s (www.firefly.com, w w w . p r i c e l i n e . c o m ) , virtual c o m m u n i t i e s (Firefly), o r virtual worlds (www. t h e p a l a c e . c o m ) . T h e m e d i u m is thus the central
Changing Channels: The Impact of the [nternet on Distribution Strategy 25
element that allows consumers to co-create a
market in the case o f Priceline, their o w n service
and p r o d u c t in Firefly, and their o w n virtual world
in The Palace. Critically, in each instance the
primary relationship is not b e t w e e n customers,
but rather with the mediated environment with
which they mutually interact. In the case o f inter-
active electronic media like the Web, McLuhan's
w e l l - k n o w n adage "The m e d i u m is the message"
can be c o m p l e m e n t e d with the a d d e n d u m that,
in s o m e cases, the m e d i u m is the product.
A s e c o n d effect o f these forces o n channel
functions m a y be a rise in commoditization as
channels have a diminished effect o n marketers'
ability to differentiate the p r o d u c t or service.
Commoditization can be seen as a process by
which the c o m p l e x and the difficult b e c o m e so
simple and easy that a n y o n e can d o them. It m a y
be a natural o u t c o m e of competition and techno-
logical advances, with prices plunging and essen-
tial differences vanishing. Commoditization will
"In the c a s e o f interactive electronic m e d i a like the Web, McLuhan's well- known a d a g e 'The m e d i u m is the message" c a n b e c o m p l e m e n t e d with the a d d e n d u m that, in some cases, the m e d i u m is the product. "
be accelerated by the
evolution o f distribu-
tion media that will
speed information
flow and thus make
markets more effi-
cient. The only anti-
dotes to it will be to
identify a niche mar-
ket too small to be
attractive to others,
innovation sufficiently
rapid to stay ahead of
the pack, or a mo-
nopoly. No o n e needs
to be reminded that
the last option is even
more difficult to establish than the first two. How-
ever, as m u c h as these forces impel c o m m o d i -
tization, they are paradoxically permitting--in-
deed, d r i v i n g - - m a s s customization, which is the
very antithesis of commoditization.
Dell lets customers build their o w n comput-
ers (albeit with commoditized components);
Priceline allows customers to pay the price they
want to pay (albeit for a commoditized air ticket);
Yahoo ( w w w . y a h o o . c o m ) gives customers the
opportunity to create their o w n interface ("My
Yahoo"). T h o u g h commoditization may present a
g l o o m y picture, recent reports in the business press s h o w a fortuitous flipside to the Web---tl-~e
m e d i u m b e c o m e s the ultimate tool for mass
customization, or personalization. As stated in
Business Week, "If personalization takes hold, it
could transform the w a y all retailers, both online
and off, d o business" ("Now It's Your Web" 1998).
Disintermediation and reintermediation com- prise the third effect we discern. As networks
c o n n e c t e v e r y b o d y to e v e r y b o d y else, they in-
crease the opportunities for shortcuts. So w h e n a
b u y e r can c o n n e c t straight from the c o m p u t e r o n
his desk to the c o m p u t e r o f an insurance com-
p a n y or an airline, insurance brokers and travel
agents begin to seem slow, inconvenient, and
overpriced. The marketing of products, as op-
p o s e d to more intangible services, is also being
driven by cheap, convenient, and increasingly
universal distribution networks such as FedEx
and UPS. No longer does a c o n s u m e r have to
wait for a retailer ( w h o d o e s n ' t carry a g o o d in-
ventory of the latest products) to open, drive
there, attempt to find a salesperson w h o is gener-
ally ill-informed, and then pay over the o d d s to
purchase a product• Products a n d prices can be
c o m p a r e d o n the Web, and lots o f information
can be gleaned. If o n e supplier is out o f stock or
too expensive, there is n o n e e d to drive miles to
a competitor; competitors abound, and all are
e q u i d i s t a n t - - a mere m o u s e click away.
All o f these opportunities will lead to disinter-
mediation, w h e r e b y traditional intermediaries are
s q u e e z e d out of channels. As networks b e c o m e
increasingly mass market, there is a continuous
contest o f disintermediation.
However, the Web also creates opportunities
for reintermediation, w h e r e b y intermediaries ma)
enter channels facilitated electronically. This
could occur w h e n an intermediary performs o n e
o f the three fundamental channel functions o f
reassortment/sorting, routinization, and searching
more effectively than a n y o n e else. Thus, n e w
intermediaries are beginning to set u p sites that
facilitate simple price searches. Consider a site
like Cheapflights (www.cheapflights.co.uk),
which enables a customer to search for the least
expensive flight o n a route. Or a more a d v a n c e d
site like Priceline, which actually purchases the
cheapest fare w h e n a customer states what he is
prepared to pay. In a world w h e r e n e w and un-
k n o w n brands may face an uphill battle to estab-
lish themselves, there may be opportunities for
sites set up as honest brokers, merely to validate
brands and suppliers on Web sites.
Reintermediation could also occur for reason
other than the fulfillment o f traditional channel
functions. The online music site MP3 (www.mp3.
corn) was set up to give airtime to lesser-known
artists and avail the music c o n s u m e r o f an outlet
to listen to and acquire the output o f exciting nex
talent. However, through its "Top 40 Downloads. it also acts indirectly as a venue, or "virtual agent.
for large recording companies to identify and
meet n e w talent. The site has p r o v e d so success-
ful that established stars such as The Beastie Boy
and Sheryl Crow have placed their o w n songs o,
it. In India, w h e r e levels o f education and Englisi
literacy are high and labor is relatively inexpen-
sive, c o m p a n i e s have b e e n established to serve as sites that act b e t w e e n customer and firm to
26 Business Horizons / March-April 19'
deal with online queries and " c o n s u m e r flak."
Customer email queries and complaints are re-
ceived at a c o m p a n y ' s Web site, then redirected
to a site in India, w h e r e they are dealt with tact-
fully, immediately, and seamlessly (the customer
is not aware o f the issue or complaint being dealt
with in this manner). In such constant games o f
disintermediation and reintermediation, customer
relationships will be the winner's prize.
T he Internet Distribution Matrix can be
used by existing firms and entrepreneurs to identify at least three things. First, h o w
might the Internet and the World Wide Web offer
opportunities to a c o m p a n y to perform its exist-
ing distribution functions o f reassortment/sorting,
routinization, and searching m o r e efficiently and
effectively? Cases o f other organizations using the
m e d i u m to perform these activities, such as those
we have identified, can stimulate thinking. Sec-
ond, the matrix can enable the identification of
competitors poised to use the media to c h a n g e
distribution in the industry and the market. Fi-
nally, it m a y enable managers to brainstorm ways
in which an industry can be vulnerable.
Neither a c o m p a n y n o r its immediate com-
petitors m a y be contemplating using the m e d i u m
to achieve radical change. However, that does
not m e a n a small startup is not doing so. And the
problem with such small startups is that they d o
not operate in a visible way, or at the same time.
In m a n y cases, they might not even take an in-
dustry bv storm. But they might very well deprive
a market of its most valuable customers, as they
exploit t e c h n o l o g y to c h a n g e the basic functions
o f distribution, ffl
R e f e r e n c e s
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Wroe Alderson, "The Analytical Framework for Market- ing," in Proceedings---Co~g'erence of Marketing Teach- ers from Far Western States (Berkeley, CA: Universig, of California Press, 1958): 164-173.
Wroe Alderson, "Factors Governing the Development of Marketing Channels," in Richard M. Clewett (ed.), Marketing Channels fi~r Manufactured Products (Homewood, IL: Richard D. Irwin, 1954): 34-43.
J. Anthes, "Roadwork: Building the Infobahn," Com- puteru,orld, December 26, 199'i, pp. 20-21.
A. Bandura, Social Learning Theo o, (Englewood Cliffs, N J: Prentice-Hall, 1977).
P.R. Berthon, L.F. Pitt. and R.T. Watson. "The World Wide Web as an Advertising Medium: Towards an Understanding of Conversion Efficiency." Journal o f Advertising Research, January-FebmarT 1996, pp. 43-53.
Geoffrey Blainey, The Tyranny o f Distance (Sydney: Pan MacMillan, 1966).
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Changing Channels: The Impact of the Internet on Distribution Strategy 27
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Leyland Pitt is a professor of marketing a t the Cardiff Business School, the Uni- versity of Wales, Cardiff, U.K. Pierre Berthon is a professor of marketing at the University of Bath, England. Jean- Paul Berthon is a research associate, also at the Cardiff Business School of the University of Wales,
28 Business Horizons / March-April 199'
