The distribution model is moving from the two-tier model to the ecosystem digital distribution model.

June 8, 2017

5 Min Read
Business Model


Sergio Farache

**Editor’s Note: Distributor Report is a recurring column featuring thought leadership from IT and cloud distributors. We’re looking for insights into evolving business models in this new era of distribution, product and technical service offerings, education and training, marketing/branding, credit and a myriad of other services.**

By Sergio Farache

In the last few years, the distribution industry has experienced several sea changes and challenges, as dynamics such as technology commoditization, margin pressure and the slowdown of the classic IT market growth alter the evolution of the channel. Distribution has been employing approaches like scale, efficiency and services to continue its intended journey toward providing value to the suppliers and partners — both critical components of the current two-tier model that has defined the industry for many years.

The two-tier model presumes that value is created by a linear process from the suppliers to the distributor to the partner to the end user. The model provides, and will continue providing, value through this linear structure, but the value creation is limited to the players and by fact that each member relies on their capabilities and investment power. Technology has been a fundamental element of this model as a support layer of the business, providing efficiency, scale and control. Several technology features, such as the e-commerce and brokerage platform, have played the same role for a new set of offerings and services, but both technologies are following the same linear two-tier business model.

The next-generation technologies enable disruption in many industries, and the deep integration between technology and business models creates the opportunity to transition the value-creation process to a broader group of players. Today’s disruptors such as Uber, Airbnb and Amazon, for example, have demonstrated that enabling this value creation to all possible participants maximizes the network effect — creating additional value to all participants, expanding their offerings and services, but moreover producing an opportunity for that disrupting flywheel effect that spurs growth in an exponential manner.{ad}

Analysis performed by consulting firm Deloitte described the “business ecosystem” as coming of age in the following way: “Ecosystems are dynamic and co-evolving communities of diverse actors who create and capture new value through increasingly sophisticated models of both collaboration and competition.”

I took the liberty of using the Deloitte approach to define the Digital IT Distribution Ecosystem. This ecosystem is a dynamic and co-evolving community of IT B2B actors, i.e. producers and consumers, who create, provide, consume and capture current and the new value (intellectual property, products, software and services) through commercial interactions, collaboration, enablement, exchange and competition.

The IT distribution industry is beginning to realize that the two-tier model will limit its ability to capitalize on the total market opportunity available, and some disruptors are expanding their models to a new value-creation paradigm. The industry is perfectly positioned for this transition, but it should move, adapt fast and invest in a deep integration between a new business model that enables the value creation across the ecosystems that they serve and a new generation of digital platforms that support and enable the new approach.

The rationale is simple — a two-tier model provides scale but limits the value-creation aspect, and the ecosystem model offers the possibility to all the members, i.e. producers and consumers, to participate and provide additional value. The new role of distribution should be to position itself as the center part of those ecosystems, making it simple for its members to aggregate or combine value. The new distribution era posits that distribution will work on a multi-point or n-tier schema and bidirectional transactional model, providing value on the core competencies that each ecosystem needs. As such, the value creation is enabled across the ecosystem, eliminating pain points, friction points and generating trust through content curation and compliance checking.

The previous vision is possible because a new generation of digital platforms will continue expanding their functionality to enable “the economy of connections.” As described by Gartner in its special report, “Unlock Digital Business Value Through the Economics of Connections.”

The new ecosystem digital platforms will utilize some foundational elements to accomplish this transition:

  • Enable end-to-end digital transactions between all members of the ecosystem.

  • Eliminate friction and pain points across the interactions.

  • Create and facilitate entanglement and instant satisfaction.

  • Enable and capitalize on the use of data to improve the ecosystem, anticipate the needs, and maximize the value creation.

  • The actors of the ecosystem can easily bundle their products and services to deliver a better solution and customer experience.

  • Enable content curation and filtering as consequences of the real value provided and ecosystem member participation.

  • Satisfy the needs that consumers and producers have in order to use, cooperate and integrate into the value-creation process.

The deep integration of technology and new business process to enable the different ecosystems and the value creation across producers and consumers that participate in them will allow for a positive flywheel effect with exponential economic consequences. A new generation of distribution will challenge the status quo and disrupt the traditional approach to the business.

IT distribution is entering a unique chapter to transition from the middle position on a two-tier model to the center position of an ecosystem model. The players who adapt, understand and expand their capabilities will lead the next distribution era; the players that remain on the current models will continue dealing with the erosion of their profitability and limited ability to leverage all the opportunity available. We are leaving incredible times, and to paraphrase Kevin Kelly in his book, “The Inevitable,” we are just starting to see the changes that next-generation technologies will create.

Sergio Farache is an IT channel professional with more than 25 years of technology sector experience.

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