Consider Compaq’s current dilemma. It sells through dealers but knows that Dell’s build-to-order Internet sales model is much better. Compaq executives know that their current dealer network will stop selling their products if the company begins orienting more of its sales toward the Web. Because it takes time to prepare for selling online, such a shift could cost Compaq 6 to 12 months’ worth of sales. During the interim, customers that change suppliers might be lost forever, and Compaq’s stock price would be adversely affected by sharply falling sales. Compaq executives know where the company needs to be, but achieving this profit-maximizing point is difficult, expensive and perhaps impossible.
The problem is not peculiar to the computer industry; companies in other areas will be facing similar scenarios. Wal-Mart, the biggest customer for many retail suppliers, and other firms have announced that they will instantly quit selling any product that suppliers directly sell on the Internet. As the auto companies move to direct sales and build-to-order models to ensure their own survival, they face the same problems vis-à-vis their dealer networks.
To date, no major company has been gutsy enough to take the short-term losses in order to shift channels — and perhaps they shouldn’t.
Because losses will come early and gains much later, using discounted net present values, it is possible — perhaps likely —that the current... To read the complete article, login or sign-up using the form below.
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