Distribution channels typically account for 15 to 40 percent of the retail price of goods and services in an industry (Exhibit 1) and there is every reason to expect that they could represent a commensurate opportunity for boosting profits and competitiveness. Indeed, the potential payoff from thoughtful and innovative management of channels could be even greater, given that many organizations have already lavished attention on the reengineering of internal operations, while channel issues tend to suffer from neglect.

The challenges and opportunities presented by channel management are likely to multiply over the next few years as technological developments accelerate channel evolution. Data networks are already enabling end users to bypass traditional channels and deal directly with manufacturers and service providers. The use of online capabilities instead of travel agents in booking airline reservations is one example of this disintermediation. In addition, logistics innovations such as reliable overnight delivery services or information systems that track the inventories of all the dealers in a market are beginning to make local inventories of products or parts obsolete, paving the way for the restructuring of distributor networks.

At the same time, new channels are continuing to emerge in industry after industry, opening up...