The following is an excerpt of Brent Grover’s latest distribution management book, The Little Black Book of Strategic Planning for Distributors, published by Modern Distribution Management. In this article, Grover argues that distributors need to focus both on operational excellence and customer intimacy, rather than choosing one over the other.
In The Discipline of Market Leaders: Choose Your Customers, Narrow Your Focus, Dominate Your Market, authors Michael Treacy and Fred Wiersema adapted the three Michael Porter strategies into a choice of customer intimacy, operational excellence or product leadership. If you agree that product leadership isn’t a viable option for most distributors, the authors leave distributors with two alternatives: operational excellence or customer intimacy. In the following paragraphs I will argue for a third option.
Strategic choice No. 1 in The Discipline of Market Leaders is operational excellence, keeping costs down while making the customer’s life easier. Operationally excellent distributors use metrics to manage their businesses, monitor and control their processes, and strive to improve quality and minimize costs. In the interest of efficiency, these distributors encourage their customers to accept a limited assortment of products and service options.
Strategic choice No. 2, customer intimacy, as defined by Treacy and Wiersema, is exemplified by distributors that are extremely close to their customers and are eager to customize their business processes and services to strengthen the relationship.
The Discipline of Market Leaders states that the demands on financial resources and management time make it unrealistic to try to focus on more than one of the basic value disciplines. The authors contend that failure to focus on one value only results in lack of market differentiation and poor results. They argue the need to go “past operational competence to reach operational excellence” and “past customer responsiveness to create customer intimacy.”
I disagree about these values being mutually exclusive for distributors. Our experience with strategic planning for distributors demonstrates that operational excellence is no longer optional – it’s a requirement. Operational excellence is taken for granted by the customers distributors want most.
Customer expectations have risen markedly since the Treacy and Wiersema book was published in 1993. Distributor gross margins in most lines of trade have lost ground in recent years. There is less room for bloated operating costs. Both from the vantage of customer expectations and operating margins, mere operational competence is not enough to compete for business and make adequate profits.
What we see as the imperative of operational excellence would leave customer intimacy as the only choice of discipline for wholesale distributors. Not only do we see the operational excellence as compatible with customer intimacy, for distributors we see them as inseparable. They are interdependent, and they are both essential.
Let me take that one step further: Customer intimacy equals operational excellence for wholesale distributors. We have left the age of mass markets. In the words of Jonathan Byrnes, senior lecturer at MIT, we have entered the age of precision markets. Distributors make most of their operating profits from a small number of large customers (and most lose a good amount of those profits doing business with a handful of large customers).
The discipline of customer intimacy requires you to be close with your major accounts at multiple levels. The discipline of operational excellence mandates that you align all aspects of your operation to the current (and foreseeable) needs of your most profitable accounts. Helping your best customers increase their profit makes both you and your customers more effective and efficient.
If every distributor chose customer intimacy as the basis of its business strategy, how would the individual businesses be distinguishable from one another? What could the companies do to be distinctive in the eyes of their customers? Could we jump to the conclusion that all distributors are simply trying to do the same thing – be intimate with their customers – but some execute better than the others?
If every distributor knows how to get operational excellence right (a faulty assumption of course) you might surmise that they all look alike to customers, and the only difference from one company to another is price. That is a scary notion, and we need to negate it. Execution is so difficult that even if every competitor pursued identical strategies there would be major differences from one company to another.
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