The Distribution Decade

For firms that see a cloudy marketing future, the only way out of the murkiness is to look deeper into their distribution systems.

March 1 1992 by Nancy Drozdow


The 1970s could be called the decade for products and markets, the 1980s called the decade for finance, and it looks like the 1990s may be the decade for distribution. Gaining, maintaining, and defending access to an appropriate customer base is increasingly the focus of strategic thinking in big and small businesses, both public and private. Every aspect of the business that could provide competitive advantage is coming under scrutiny for firms facing slow or no growth. For many firms, their distribution channels and processes have moved up on the list of priorities getting senior management attention. This has become especially true in the last few months as the impact of a substantially slowed economy sinks in. Corporate leaders are more aggressively attacking the development and execution of a clear, distinctive distribution strategy.

Throughout the last decade, a confluence of events has created a climate of transformation in the ways products and services move from production to delivery to their ultimate users. Here are just some of the current challenges to conventional thinking about distribution: increasing customer sophistication and demand for value; improvements in the application of information technology and the leveraging of information to gain power in the channel; and globalization, in which markets are becoming increasingly broad and increasingly narrow at the same time, demanding creative market segmentation and aggregation. The contribution of these shifts in relationships between producers, distributors, and consumers is leaving little room for business as usual.

DISTRIBUTION REVISITED

The changes precipitated by these challenges to the production and delivery of products and services demand a revisiting of a firm’s distribution strategy even if that firm has historically had great success selling through its current channels. Slogans such as “know the buyer better” or “the customer comes first” sidestep questions about how to deliver products/ services such that customers both get and recognize value. What does it really take to metabolize a marketing staff’s understanding of customer needs and shape that knowledge into a comprehensive and executable distribution strategy? For firms that sell through wholesalers, retailers, manufacturer’s reps, franchisees, even catalogues, the only way out of the murkiness surrounding products, markets, and channels is to look deeper into your distribution system.

This may sound obvious, but time and again we find that firms (including manufacturers and wholesalers) are surprised about some aspect of their distribution system once they begin to unwind the steps by which products/services get from their door to their customers. Consider one firm that is in the middle of deepening its understanding of just one aspect of its distribution system, and the results this work is producing:

ENLIGHTENED STRATEGY

Let’s call the firm Enlightened Manufacturing. Enlightened produces top of the line industrial products, which it sells through an independent dealer network. Enlightened is number one in its industry in sales and in most measures of profitability. It is a recognized leader, has been, and intends to be into the future.

Enlightened spent much of the 1980s devoted to product development and product innovation. It plowed back substantial and increasing sums into R&D. At the same time, its sales growth outpaced its nearest competitor for a five-year period. Enlightened’s results over this period were stellar.

Meanwhile, about four years ago, some major changes began to occur inside Enlightened’s dealer network. A number of dealers were looking to sell out. Because of some restrictive covenants in their dealer agreements, these dealers were coming to Enlightened for help to find buyers. Enlightened’s immediate response was to match up highly successful dealers with those looking to sell, and within a period of two years, Enlightened realized that almost 30 percent of its product was being sold through two megadealerships, with distribution in prime locations across the country. These two dealers were vastly outpacing the others.

Enlightened’s dealer network, like so many others serving all kinds of manufacturers, is composed primarily of privately owned entrepreneurships. These vary in size from sales of a few million to some with sales approaching $200 million. Taken individually, each of these firms has its particular idiosyncrasies, mirroring the idiosyncrasies of its owner or owners. And Enlightened, because it recognized long ago that its dealers were at the heart of its ability to deliver quality and service, took care to support each dealer’s particular needs. Being able to both standardize most dealer transactions and also make each dealership feel unique has been a highly prized feature of the relationship, but unfortunately, this situation has also produced fragmented thinking about the dealers, particularly around the question of dealer continuity and how that affected distribution.

Inside Enlightened, dealer operations were managed via a network of regional offices, organizationally separate from Enlightened’s staff, that were charged with planning strategy and in particular its distribution strategy. Enlightened had close to 1,000 dealers in the U.S. 10 years ago. It now has fewer than 500. While the staff concentrating on strategy considered whether independent dealers were the appropriate distribution channel for Enlightened or whether it might be prudent alternatively to sell direct or to take an ownership stake in some of its dealers, they were either unaware or not tuned in to the implications of the substantial reduction in the number of dealers distributing its products. Enlightened was not able to take full advantage of the attrition in its dealer network because the management of its distribution was splintered conceptually, and therefore, organizationally.

Fortunately, Enlightened recognized that something was missing. In fact, it found three things missing:

1.Its distribution strategy was not taking into account the current demographics of its dealers as a body.

2.Operational decisions about continuing dealerships, opening dealerships, or the sale of dealerships were driven more by day-to-day sales targets than a coherent plan for sustaining competitive advantage through distribution.

3.Information about distribution strategy and operations did not flow easily through the different departments inside Enlightened, so that thinking and decisions from one did not fully or even adequately inform the other.

By reviewing dealer demographics, Enlightened discovered that close to 70 percent were family businesses in which a parent and at least one offspring worked inside the business. In many of these cases, it was presumed by the current owner that the next-generation family member would become the owner of the dealership, though such a transfer of ownership would require the blessing of Enlightened. While some of these next-generation family members were highly competent, that was not true in all cases. Since many of these owners were approaching retirement age, Enlightened began to realize that at best it could have a challenging and at worst contentious time reconciling its interests with those of these dealer owners. All of this was taking place in a climate of slowed industry growth, where business for dealers was getting tougher.

What did Enlightened do?

1.Enlightened appointed an executive who had served in marketing and dealer support to head a high-level distribution continuity task force. The task force was cross-organizational, representing all segments of Enlightened having a stake in distribution, and included dealers.

2. The task force developed a program of dealer training that focused on issues of continuity: business strategy, ownership transfer issues including estate planning, management development, and for the family firms, family development. These programs now have been offered to dealers for more than two years. With a focus on continuity, the programs both contain and manage the entrepreneurial dealer/ owner’s anxiety of integrating his interests as the owner of assets that he wants to value appropriately with his interests as an executive of an ongoing business that needs to be managed or sold.

3. Enlightened’s task force developed a financial mechanism by which to support the ownership transfers. Approved buyers of dealerships (these can be next generation family members, current managers of the dealership, Enlightened employees, or outsiders), under certain conditions, can arrange favorable financing for the purchase. This has been especially helpful in today’s banking climate.

4.Enlightened is developing criteria for leadership for next-generation family members who are being considered as successors. These will include developmental hurdles that also can serve as training for potential managers. These developmental hurdles send a signal that succession is not an overnight anointment, but that it is a process that can take a decade or longer.

5. Enlightened has examined its distribution strategy and has recommitted to independent dealers. This fosters the increasing cooperation and dependence across the channel that its other programs are inducing.

6. Enlightened has begun to more explicitly integrate its thinking about dealers (number and size of dealerships, their location, evaluation of their performance) with its corporate strategy regarding, for example, growth, competition, and potential new lines of business.

While Enlightened’s focus on distribution continues, some results are worth mentioning. The company has been able to increase its market share as its market has undergone substantially increased competition. While margins industrywide have slipped, Enlightened has been able to hold its own in its best markets. Less tangible results include increasing and more systematic dialogue between dealers and Enlightened’s dealer support so information through the channel still includes the informal rumor mill but now is supplemented with solid information about performance that goes in both directions. This is creating and building a base of data to understand the distribution system in total and to better support ownership transfers and continuity of distribution.

A BETTER MOUSETRAP

Like any myth, the one that goes, “If you build a better mousetrap, people will beat a path to your door,” does have some truth to it. However, even for those for whom a customer base is established, there is the enduring question of keeping that path to them clear and flowing with products and services that they want to buy. The path has often played second fiddle to the product, and firms are only belatedly discovering a hidden or underleveraged asset that is their distribution system. III


Nancy Drozdow is a principal with the Wharton Center for Applied Research and directs its consulting practice for privately held firms.