New entrants are penetrating the distribution channels of the industry’s leading competitors

Symptom: New entrants have established themselves in the market with channels of distribution that also carry the products of the leading competitors.

Implications for the market:

  • In an industry where distribution channels maintain several sources of supply, customers tend to be more volatile than when the purchase decision is a single event. In such an industry, share can shift from one supplier or group of suppliers to another more quickly.

  • Companies that remain major players are able to reduce this volatility by developing and maintaining high penetration of the largest (e.g., top one quarter) distribution channel customers.

  • When leading suppliers let new entrants penetrate these valuable relationships (as they are doing today in the industry), their economic structure is at risk. While the large channel customers may appear unprofitable on a fully allocated cost basis, they provide the base load of volume that enables suppliers to serve the more profitable medium-sized and smaller customers.

  • Furthermore, the success of new entrants signals a likely fall in industry prices. While dominance of distribution channels is an important competitive advantage, it cannot for long support high prices without drawing in new competitors who will bring prices down.

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Perspectives: Conclusions we have reached as a result of our long-term study and observations.