In an earlier post, I discussed how Vanderbilt exerted a point of Strategic Control to dominate the railroad market during the Industrial Revolution. In my forthcoming book, The Carrot and the Stick: Leveraging Strategic Control for Growth (University of Toronto Press, June 2019), I discuss 6 potential points of strategic control that exist in today’s fast-paced business environment:
b. Data access, ownership and analytics
4. Raw material and input
5. IP and regulatory-based market access
6. Key manufacturing components
In this post, I overview the first of these, distribution.
Potential Sources of Strategic Control: Distribution.
Distribution is perhaps one of the most common sources of strategic control; lock up distribution and it can be exceedingly difficult for someone else to gain access to the market. Some classic examples:
• The market for eyewear. One major supplier of eyeglasses and sunglasses controls multiple brand names and owns most of retail distribution throughout many parts of the world. Milan-based Luxottica owned over 8,000 retail locations in over 150 countries.; it also owns a dominant 50% market share in sunglasses. French company Essilor owned 45% of the prescription lenses market and 15% of the sunglasses market in 2015. In January 2017, the two companies announced that they were merging (approved by US and EU regulators in March of 2018). The combined entity now owns over 50% of the prescription eyewear and over 65% of the sunglasses market. Add in the only other significant player, Safilo with a 14% market share in sunglasses and a 3.7% market share in prescription lenses, and the two companies own a staggering percentage of the retail eyecare market with tight retail distribution control. Significant new competitive entry through retail distribution would be exceedingly difficult and certainly fought tooth-and-nail.
• Men’s razors. Gillette’s and Schick’s traditional dominance of the men’s shaver market. For example, Gillette and Schick had a combined 78.5% market share back in 2011 and they routinely introduced relatively minor product variants to occupy most of the available retail shelf space. Entering the market with a new razor with an additional blade (who truly needs the fifth, sixth or seventh blade?) and push behemoth Gillette off of preexisting allocated shelf space has proven to be exceedingly difficult for any potential new entrant.
• Taxi cabs. The monopoly traditionally afforded taxi cabs by local municipalities vis-à-vis the medallion program (a system whereby a vehicle needs a “medallion”, often posted on the vehicle itself, in order to legally operate a taxi cab under local jurisdiction). In cities like New York and San Francisco, the right to own and operate a taxi cab has been historically tightly regulated by local governments. For example, in New York, the medallion program began in 1937 when the supply of taxi cabs was significantly greater than demand. Medallions in NY were selling for $2,500 in 1947 and peaked in 2013 at a hefty price tag of $1.3 million. Competition was limited to the number of medallions that were approved by the City of New York and competition – at least prior to ride sharing companies such as Uber and Lyft – was prohibited (obviously a very strong point of strategic control).
• Faucets, Windows. In DIY “big box” retail (e.g., Lowes, Home Depot and Menards), Anderson and Pella dominate windows, while Kohler, Moen and Delta dominate faucet shelf space. Combined, Kohler, Moen, Delta and American Standard own a 78% market share in the United States in the construction market. In retail, shelf space allocation is almost everything and manufacturers routinely pay “slotting allowances” (paying to get on the shelf) and are required to guarantee sales performance (vis-à-vis “failure fees).
Other examples of companies that have successfully locked up distribution and precluded entry by rivals is as long and as varied as there are markets. Examples ranging from Microsoft’s inclusion of Internet Explorer included in (or “tied” to) its Windows operating system to Vanderbilt’s bridge, have been covered in depth in antitrust law classes and business school MBA classes. Always use distribution as a “stick” under the advice of legal counsel for excluding competition via distribution can be viewed with admiration (in some business classes) and/or at your own peril (in some antitrust law classes)!
In a future posting, I’ll address some strategies for overcoming someone these distribution-based source of strategic control through disintermediation.