How companies can disintermediate to loosen an existing distribution-based source of strategic control):
One often made mistake in business is thinking no one can replace you – after all, no one wants to be the next Blockbuster. This is particularly true for companies that believe they own unique competencies in areas of strategic control. The objective in owning a point of strategic control isn’t the “end game,” rather it gives you the opportunity to leverage this advantage to an adjacent market while others try to “catch up” in your primary market.
This is particularly true today since creative ways around company’s distribution dominance (“disintermediation”) have become much more prevalent in recent years. There is often a common theme across many of the examples of industries being disrupted through disintermediation: dissatisfaction with the current offerings and companies in that industry (e.g., the high cost of eyeglasses and men’s razors, poor performance and lack of availability of taxi cabs). Examples that parallel the earlier discussion of distribution-related sources of strategic control include the following:
• Disintermediate through alternative “points of access”: Warby Parker. Two Wharton students were on a camping trip when one lost a recently purchased – and very expensive – pair of eyeglasses. After much consternation, the pair (pun intended) set out to revolutionize the eyewear industry. On their website, they explain their rationale as follows:
“Every idea starts with a problem. Ours was simple: glasses are too expensive … It turns out there was a simple explanation. The eyewear industry is dominated by a single company that has been able to keep prices artificially high while reaping huge profits from consumers who have no other options … We started Warby Parker to create an alternative.”
They didn’t attack incumbent rivals directly through traditional retail outlets. Instead, they sell exclusively online, using “pop-up” (temporary stores located in prominent locations) stores and traveling busses to help promote the brand. Their business model is straight forward: a customer picks out 5 frames online and Warby Parker sends a package with these frames for you to try on at home via Federal Express. Pick out the one that you like, order online and send the package back (prepaid) – or send the package back and order a different set of 5 frames. You can try it on at the location of your choice, with your spouse, partner or friend to provide feedback (“Did you really chose THAT frame?!”), all at your convenience. The finished product is then delivered in a few days to your home. As a result, online sales of eyewear products in the United States has almost doubled from 2011 to 2016 and Warby Parker was valued at $1.75 billion in a pre-IPO investment of $75 million.
• Disintermediate by sidestepping regulatory authorities: Uber, Lyft. Airbnb. The story of Uber, Lyft and Airbnb have been told so many times, there is no need to repeat them here. However, one could argue that each of these companies has been able to succeed because they have found ways to circumvent government regulation: Uber was able to “ride share” so that they would not (at least in theory) be subject to medallion restrictions and Airbnb found a way around regulations that would have required room sharing to be regulated (and taxed) under municipal hotel codes.
Much like dissatisfaction in the market for eyewear that led to the rise of companies like Warby Parker, had taxicabs met customer needs with good service, low prices and high satisfaction, there would never have been an opening for ride sharing services such as Uber and Lyft. As noted earlier, there is a common theme here –incumbents doing a poor job meeting customer needs often opens the door for a new entrant using a new business model or a new offering the disrupts/disintermediates incumbents.
• Disintermediate by going online and employing a subscription model: Dollar Shave Club and Harry’s. Dollar Shave Club was founded by Mark Levine and Michael Dubin in 2011 after they met at a party and spoke of their frustrations with the cost of razor blades. There had to be a better way they argued. Launched online in 2012, they developed a subscription model with three tiers whereby razors are delivered to your door monthly rather than purchasing at a brick-and-mortar retailer. Note, as in the previous examples, dissatisfaction with the high price of men’s razors led many to try the new player in the market. Once trial happened, the ease of re-ordering created stickiness – easy repeat behavior is often a recipe for success in consumer goods markets.
Five years and over three million subscribers later, the company was acquired by Unilever for more than $1 billion (from Unilever’s perspective, “If you can’t beat them, joint them”). Harry’s founded in 2013, uses both a direct delivery and retail approach to addressing the same concerns (high cost of men’s razors) that prompted the founding of the Dollar Shave Club. Recently, Harry’s has been valued at just under $1 billion. Disintermediation through a “Judo Strategy” (not attacking larger rivals directly) pays – in men’s razors to the tune of $1 billion+!
• Disintermediate via a multi-faceted approach to distribution: Globe Union. Sometimes, competing effectively in the face of a dominant distribution presence can be accomplished through more traditional means. For example, in order to overcome traditional distribution brand concentration, Globe Union employs a multi-faceted approach. They use two private branded products, Danze and Gerber to sell outside of big box retail (these two brands, by design, do not do sell to big box stores). Instead, these two brands sell almost exclusively through two-step distribution (distribution to wholesalers to plumbers or builders). In big box, Globe Union’s parent company, Industrial Corporation in Taiwan, manufactures and sells private label products for big box stores, giving them access to both big box (via the private labels) and plumbers/builders (via Gerber and Danze). It also uses Gerber (“the plumber’s brand”) to focus on the service plumber market. Thus, via this multi-pronged approach, they are able to compete effectively across multiple traditional distribution channels, enabling them to grow in ways a single branded/single channel approach could not.
There are many ways to disrupt an existing distribution-based point of strategic control; these are just a few. Playing the “game’ of strategic control is the playing field of today’s competitive markets. Use this to your advantage – and to your competitor’s peril!