Building the sales-company system: cutting out wholesalers to reach ~270,000 retailers directly (1964)

Management that pays the price up front

At the core of this decision was that it put holding the distribution channel in its own hands above defending near-term sales or the number-one spot. Cut out the wholesalers and shipments stall for a while and share falls; Kao did in fact surrender the lead in 1971. That it went after control of the channel anyway can be read as resting on the view that without visibility into what moves at the shelf, it could check neither price erosion nor shifts in demand. Pay the price first, and leave behind a mechanism that works over the long run — the hand Kao had shown by reworking equipment to fix a business conversion and using personnel to fix a retreat took the same form in the realm of distribution.

That said, the reform was no cure-all. The friction of making enemies of the wholesalers was not small, and it took several years of disorder before the sales companies found their footing. A strong power to hold prices was, turned around, the sort of thing that could draw the eyes of the market and regulators toward a maker that controlled distribution. Even so, building early a route that caught the movement of the shelf within the company worked over a long time across price, logistics, new products and information. What to hold at the cost of what — the sales-company reform was a decision that answered that question with a few years of market share.