Distributors who continue doing “business as usual” will not survive in today’s economy and marketplace. They must offer something unique to attract customers, grow revenue and scale to the future. To do this, they need a new business model.

Innovative business models can help businesses reach new markets and customer segments, expanding their reach and market share. MDM’s report on Business Model Innovation (May 2024) found that 63% of distributors surveyed “see business model innovation as a top priority” with 73% ready to invest in making change happen.

Business Model Innovation Doesn’t Come Easy

Your business model is how you identify customers, satisfy their needs and create value in this transaction. Over-the-counter sales distributors have a simple business model. Its technology “package” comprises a pencil, paper and spreadsheets, and for most distributors, an ERP system to provide price and availability.

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Businesses that want to grow and keep succeeding need future-built technology. Automation will expedite inventory and streamline delivery. They also want to manage inventory, optimize pricing, and integrate systems. Innovative distribution models help businesses reach new markets and customer segments with unmatched predictive analytics.

However, in an economy driven by competition, eCommerce and retailization, distributors must override four critical barriers to business model innovation.

The Foundation: Lack of a Clear Business Case

Any business needs a clear business case. It must prepare a persuasive argument, supported by research and data, that justifies an initiative like digital transformation and business model innovation.

A business case articulates the problem, proposes a solution, and details a cost-benefit analysis. It must present shareholders with the expected financial benefits: increased revenue, cost savings and improved efficiency. It must set key financial metrics, such as return on investment (ROI), net present value (NPV), and payback calendar.

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Also, it will need to spell out the benefits for the end users (your employees). That way you anticipate why they would like to adopt whatever you plan to change and the major risk or pushback you will face.

Any business model innovation requires a foundation that starts with cross-functional teams representing every company stakeholder — sales, finance, operations and management leaders. And this foundation builds on a clear business case.

4 Key Components Needed to Build a Foundation for a Business Model Innovation

1. Project Management: Make A Clear Business Case

25% of the distributors responding to MDM’s 2024 survey acknowledged the lack of a clear business case as a barrier to their business model innovation. A common mistake in preparing a clear business case is starting solutions before we have defined the problems. We need a clear, concise description of the issue that needs to be addressed.

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It should present a balanced and data-driven charter for a clear change management plan on how to take your team from the current to the desired future state

• • Include the issue’s impact on the business, customers and stakeholders
  • Identify potential risks and challenges with mitigation strategies to minimize the impacts
  • Locate pain points, metrics and monitoring systems
  • Assign accountable partners to project components

Best Practice: A business model innovation is a project that needs management. A project charter establishes the initiative’s direction, framework, and guidelines. It is a shared document illustrating the expected timeline with marked actionable events, responsible persons or teams, and risks and constraints.

2. The Knowledge Gap: Lack of Experience

37% of MDM’s survey respondents cited lack of experience as an issue in launching a business model innovation. These distributors worry that internal systems, processes and people can’t manage the task. They may underestimate the skills and talents available, but their concern presents a barrier.

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Distributors recognize that looking internally for solutions may be short-sighted. Managers and employees rely on existing practices and operations. They are reluctant to “fix what ain’t broke.” Their response can be passive or aggressive.

Internal teams and craftspeople often hold biases about what works, citing negative experiences with change. Reliance on internal voices can create an echo chamber, repeating and reinforcing similar ideas.

Innovative business models frequently require insights from outside the organization to challenge functional silo perspectives. Engaging with customers, partners, industry experts and competitors can provide fresh perspectives and ideas that internal teams might not have considered.

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Best Practice: Every distributorship has a wealth of experience. However, history can limit a future-built business model. Leadership must assess the relevant subject matter expertise and the teams ready to launch and sustain the project. External expertise can drive the capability and strategic use of internal readiness can help. Use your network to find solutions for any gap in your plan; for example, trade associations and buying groups are full of content and know people who can help you.

3. The Capability Challenge: Lack of Critical Skills

55% of survey respondents told MDM that their organization lacked business model innovation skills. They may not be able to see the bigger picture beyond incremental changes.

An established organization may resist experimentation and trust its functional silos to meet their goals. This informs a culture that discourages creativity and experimentation.

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The culture struggles to assess market dynamics, competitive markets, and pricing implications. Invested in its history, it cannot learn, adapt and pivot as necessary.

These distributors often lack essential skills:

• Project Management applies knowledge, skills and techniques to achieve specific goals. It organizes and delivers milestones on time and within budget by coordinating, negotiating and resolving challenges

Project management requires focus, tools, and leadership. Project managers drive people and processes to complete defined tasks on time while ensuring outputs meet quality standards. Here’s a question: What was the last successful project your team or company delivered where outcomes were clearly defined, progress was visible and everyone collaborated efficiently?

Small and mid-sized distributors generally lack this capability.

• Change Management is people management. A project like business model innovation requires maximum effort from people directly and indirectly involved in the project, people involved in the change and those affected by it.

Change requires a structured approach to transitioning individuals, teams and organizations from a current state to a desired future state. It involves planning, implementing and supporting changes to achieve desired outcomes and minimize resistance.

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Distributor leadership must recognize and articulate the reasons for change, including the challenges or opportunities driving it. They also need a clear vision and a strategy for achieving the desired future state.

Change management requires almost 100% buy-in from all stakeholders. Any plan must address their concerns and secure their support. The approach must also include those concerns in key performance indicators.

For example, if someone asked how your team or company handles change management, would you say you have a proven methodology that works? Or does every project take a different approach? Or is it something that’s just assumed to get done somehow?

The answer will say a lot about your readiness to execute and sustain change management.

• Communication gaps damage many innovation projects. Success requires someone who can translate the various business requirements into technical summaries and simple messages. This includes managing expectations — promising too much and delivering too little can doom even technically successful projects.

Lengthy experience can constrain effective communication. Functional bias can subvert success. Distributors often call on external resources to manage communication effectively.

Best Practice: Most organizations lack project management and change management capabilities. These skills are not built into a company’s origins; they are learned skills and companies do well without them in the early stages. However, distributors must embrace this capability challenge to complete the business model innovation necessary for survival and growth. They risk dismissing these “soft skills.” The best practice is to secure external resources, such as consultants trained in training, developing and executing change.

4. The Execution Barrier: Lack of Capacity

60% of the distributor executives surveyed told MDM they couldn’t drive a business model innovation because they lacked the capacity. That’s a bold admission from leaders, 73% of whom expect to invest more in business model innovation. When an organization lacks the capacity, it struggles to achieve its objectives, leading to delays, subpar performance and unmet goals.

Distributors can resolve the lack of capacity by addressing these critical issues:

• Human Resources: Current employees may lack the skills, expertise and willingness to embrace change. They deserve training and support to resolve their skills gap. However, if they can’t adapt, leadership must seek more agile talent.

Management must address employee burnout. Workloads may burden staff and lower productivity. Work should be redistributed, or the business should recruit additional talent to share the burden.

• Technical Infrastructure: Distributors must evaluate existing technological resources. An analysis might reveal outdated tech applications and systems.

Launching a business model innovation isn’t a helpdesk add-on. It requires a current IT infrastructure. Installed systems must enhance capabilities and optimize integration.

• Process Readiness: Processes must be executed quickly and accurately. They should be consistent but flexible. They must run smoothly and effectively and prepare for change and unexpected challenges.

Change champions must evaluate processes for their readiness. They must assess the resources, skills, systems and procedures

Moving Forward with Key Takeaways

A Boston Consulting Group (2023) report found a correlation between technology readiness and success. They divided distributors into four distinct types shown in Figure 1.

Figure 1: Four Types of Companies on their journey to being future-built

MDM’s 2024 survey of distributor executives learned “how distributors are challenging convention to delight customers, disrupt competitors and drive revenue.” It presented four challenges and best practice solutions. The research stressed the need to build internal capacity for a business model innovation.

We recognize that the smallest distributors shy away from radical change. And, advanced technologies may not fit simple over-the-counter transactions. However, we worry that mid-sized distributors may miss the boat if they do not prepare now for future market trends and customer demands.