In his classic article, Arch W. Shaw explores Some problems in market distribution (Shaw, 1912). He describes how production is only one half of industry; having produced the product it needs to be distributed. The choice of method to distribute the product needs careful consideration. Selling direct to customers, using one’s own salespeople, using wholesalers, and other intermediaries all have an impact on the value that the producer receives that the consumer receives and that the middlemen receives.
In many ways Shaw’s model of distribution pre-dates Porter’s value chain (Porter, 1980) or value system in showing how organisations are linked together. It is often assumed that the most value is obtained by those people who are closest to the customer. For example a farmer growing coffee beans in South America gets very little value for his beans compared with the price the final consumer pays for a cappuccino. Where, in this chain of distribution, is the most value being appropriated by the various middlemen?
This does not always mean those his best to be selling direct to the customer. Sometimes this is wholly impractical or cost inefficient. Using the example above, is it realistic for the farmer growing the beans to sell his produce to the end-user i.e. the coffee drinker? The same is probably also true for the manufacture of baked beans does a consumer actually what I baked beans as a distinct purchase from the producer, or would they rather purchase than baked beans as part of a collection of products at the same time at the supermarket? Similar examples can be found for when it is best to sell through wholesalers, distributors, or other middlemen.
Shaw also makes the point that the needs and wants of such middlemen are almost always different to those of the end consumer; they have different conceptions of what is valuable. For example a wholesaler may only be interested in selling a product if they believe it is in some demand at the right price by retailers. Whereas retailers may only be interested in selling the product if they believe that the consumer values the product over other products. As an aside, Shaw’s article is also interesting in explaining the development of modern distribution systems.
Porter, M. E. (1980). Competitive strategy: Techniques for analyzing industries and competitors (pp. xx, 396). New York: Free-Press.
Shaw, A. W. (1912). Some problems in market distribution. Quarterly journal of Economics2(4), 703–765.