To successfully defend against disruption, distributor leaders must avoid an “us versus them” mentality. Disruptors don’t compete on new terms that are different than yours. Rather, they redefine the terms that all businesses—yours, theirs and others—must acknowledge in their own strategies, tactics and business models. Successful leaders recognize the changing battlefield for what it is, think differently about their business and take actions to make it stronger and more competitive. Losing businesses fail to think differently and instead rely on legacy customer loyalty and business practices.
From a channels’ point-of-view, all new channels and disruptors win by taking a slice of the market. They focus on a specific customer need or purchase occasion and then focus obsessively on how to offer value that exceeds that of traditional sources. Market dominance is gained through specialized core competencies and a business model and financial structure that yield differentiated productivity and profits. This is true for today’s disruptive channels like Amazon, just as it was true at the launch of big-box retailers, integrated supply and other disruptive channels.
Legacy channels, like wholesaler-distributors, lose because they have established a business model to serve a spectrum of customer needs and create profits through blended margins and subsidized costs. Often, they fail to notice the impact of disruptive channels because only part of their business is threatened. Or, they deny the ability of disruptors to succeed because they place undue confidence on the overall value they create as a business.
Customers don’t care about overall value. They only care what a distributor can do for their business and its unique challenges. Business customers make rational economic decisions, and when a new channel comes along with higher levels of specialized value that is relevant for their needs, at a competitive and value-appropriate price, they will switch sources.
Faced with disruption, distributor leaders have several choices. Among them, they can seek to compete with disruptors on the new terms created by the new channel. They can cede the battlefield and focus on businesses not threatened by disruption. Or, they can stand and fight on their traditional strengths.
Many argue that the latter approach is a formula for failure, and in my experience, it often is —but only because leaders of incumbent players fail to view their business as offering specialized services to meet unique customer needs. These leaders are blinded by their success and unwilling to think differently to meet new challenges. They approach the battle with disruptors as an incumbent generalist and are not able to make the transition to fight a guerilla war as a specialist.
The good news is that there are plenty of precedents and best practices for a willing distributor leader to consider and act like a specialist. The first step is to segment customers not on established loyalty or profitability, but on their unique needs, defined in the customer’s required services. This approach requires a difficult change in mind-sets. It is not about placing individual customers in segments by accounts, because business customers have different needs from one purchase to the next and they adjust their buying behaviors and sourcing preferences accordingly. Just as your family may buy milk from a grocery, convenience or warehouse store as your needs change, so your customers may buy from sources to match needs for bundled buys, transaction ease, lowest cost, complex installations, custom logistics, and more.
For distributors, taking the first step toward competing as a specialist is to make a list of the specialized services offered by your business and then defining each as a unique business model. For example, your business may meet some customer needs with specialized product or application knowledge. Defining this business model means analyzing your data and knowledge to determine your sales revenue, operational support requirements, sales and marketing methods, gross and net margins, and so on. Done once, the same analysis can be applied to other specializations defined on a continuum from convenience to customized support. After considering each specialization unbundled and on its own, it is critical to look for cross subsidies and jointly leveraged assets. These realities hold your business together, but they also enable disruptors to break it apart.
After completing a specialization analysis, distributors can move forward by strengthening each specialized service according to its own unique value offering and business dynamics. Methods and tools at your disposal include:
- Skunk works teams. When IBM launched the PC, a specialized team was created and put at a remote location to avoid corporate interference. Distributors may need a similar approach to ensure that each specialized service is designed on its own terms, uncluttered with legacy assumptions.
- People and team specialization. In practice, people and teams are pulled in multiple directions requiring differing competencies. Specialization requires defining roles and tasks around those that represent the majority, not totality, of requirements. For example, sales roles are defined around product knowledge, process execution or account relationships. One person can be an expert at two of three competencies—for example, account managers are experts at relationships and farming activities, but they are not product experts.
- Vertical specialization. Disruptors like Amazon are making the greatest inroads in industries where distributors serve retailers, perhaps because it is easier to disrupt consumers than business buyers. In these industries, distributors are acquiring brands and manufacturers are setting up stores, and the traditional manufacturer/distributor value chain partnership is evolving (or devolving) rapidly. This lesson may apply to all distributor-served industries, however, and all distributors should rethink vertical roles up and down the value chain.
- Product assortment and supplier programs. Viewed as unique, specialized services, each “business within your overall business” may require a unique set of products and brands. Moreover, the value you offer manufacturers will vary by specialization, leading to new priorities for selecting suppliers, support you expect from them and programs you define for working and partnering with them.
- Leverage digital tools. As your business adopts and uses digital tools, you can do so with an eye toward specialization. This approach may result in different e-commerce platforms and websites, new uses for CRM and marketing automation, new tasking for analytics teams, and so on. As in a skill often attributed to hockey great Wayne Gretzky, distributors must “think ahead to where the puck will be” as they make their plans for digital tools.
- Acquire for specialization. Strategic specialization requires leaders to acknowledge build or buy When strengthening a specialization, sometimes the best or fastest option is not to work with the people and assets you have, but to acquire a business with the required specialization. Traditionally, this has been about distributors acquiring other distributors. Going forward, it is about buying specialized capabilities that might include video production, data and analytics, manufacturing, e-commerce expertise and so forth.
Thinking, acting and fighting as a specialist is a huge challenge for many distributor leaders, because current practices like customer stratification favor account-based segmentation models. Moreover, ERP, CRM and other business platforms process orders and capture operational and financial metrics primarily by accounts and products, not by services delivered to customers. This approach hides the truth that most distributors offer a range of services to customers, and it creates the opportunity for disruptors that are specialized to meet a specific customer need. It clouds strategic thinking by distributor leaders and traps them into repeating self-defeating business practices.
The inability to think and act like a specialist will doom many distributor leaders to the “frog in hot water” scenario, because disruptors change the competitive rules for all players. Some distributor leaders will respond too slowly and suffer the consequences—just as a frog in a pot of heating water fails to jump out before it reaches the boiling point!
Build your digital vision by reading Getting Results From Your Digital Investments and these articles, Innovation Turns the Table on Amazon and Create New Value That Is Measurable, Meaningful and Unmatched.
About the author:
Mark Dancer, President of Channelvation, Inc., is a channel strategist and leading authority on digital transformation. He is also an NAW Institute for Distribution Excellence Fellow. You may reach Mark at firstname.lastname@example.org.
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