Mike Marks of Indian River Consulting Group says distributors need to break out of the traditional mold of doing business and think differently about how to stand out in an increasingly busy market. In today’s business climate, distributors must do more to maintain their edge.
This is an exclusive summary of the recent MDM Webcast, What Distributor Innovation Looks Like in 2013: Rethinking Your Business Model. The program is available on-demand or on DVD at www.mdm.com/innovation.
Market share incumbents held hostage to the old ways of doing things are losing ground to “rule-breakers,” innovative market share challengers with a fresh perspective, according to Indian River Consulting Group’s Mike Marks in the recent MDM Webcast, What Distributor Innovation Looks Like in 2013: Rethinking Your Business Model.
History shows us that incremental improvements to the same business model can lead to success. The successful automotive company Porsche, for example, has focused on continuous product development along the same platform for years. And Marks says electrical and plumbing supplies distributor Hughes Supply’s success in the 1970s and 1980s was also attributable to making daily, incremental improvements to a basic model. Hughes Supply was acquired by HD Supply in 2006.
The philosophy of evolutionary change embodied by Porsche and Hughes Supply works in stable market conditions, Marks says, but today’s climate demands more. Today, when leaders at a company feel that change is moving at a comfortable pace, he says it’s a sure sign that they’re actually falling behind.
Marks recommends revolutionary, as opposed to evolutionary, change for companies looking to become more innovative. “You need to do something now instead of just talking about it,” he says.
Revolutionary change can transform disadvantage into advantage, like in the story of the Battle of Trafalgar between Britain and Spain in 1805. Instead of following the traditional naval strategy embraced at the time of fighting parallel to the enemy, British Admiral Horatio Nelson ordered his fleet to sail in two lines to perpendicularly intersect the French-Spanish fleet. Nelson’s radical change in tactics resulted in a British victory.
“It’s easy to see in hindsight that he took a situation where everyone did everything the same way, found one or two critical factors where he could change the rules, and they were pivot points that created tremendous competitive advantage,” Marks says.
Like the Spanish ship captains of 1805, distributor leaders today who play by the rules risk losing ground. “A lot of what we see today,” Marks says, “is that market share incumbents, the people that enjoyed market share in an existing traditional setting that are hostage to history are losing position to the market share challengers who care more about the customers than market practices.”
Marks says holding onto market share means aligning customers’ priorities with company priorities. Distributors must be seen by customers as meaningfully better than all other choices, and just having a good relationship or a strong sense of trust isn’t sufficient. If none of a customer’s choices offers noticeably better value to them than any other, Marks says, “all of a sudden the race to the bottom starts because if everybody is good enough, what matters is price, and as we all know, the dumbest guy in the market will always control pricing.”
Part of the problem is distributors’ generalist mindset of trying to sell “a little bit to everybody” to grow along with the market. “But if we’re generalists, what we’re fundamentally doing is spending money trying to be all things to all people,” Marks says, which means meeting only some of the lower-priority needs that all of the customers share. To provide distinguishing value, distributors must focus instead on meeting all of the most critical needs of target segments.
To do this, the customer segments must first be correctly identified by how they want to buy, “not by their size or SIC code.” A building supply company, for example, should segment contractor customers according to their differing business goals rather than by their size. Some may be “lifestyle businesses” who care most about business continuity, while others may be more growth-minded with the intention to scale.
Even though some lifestyle and growth-oriented companies may be the same size or target the same markets, “when you start to talk about what they actually want, their needs are different,” Marks says. To provide value to the growth-oriented segment, for example, the supplier may want to provide
growth tools like seminars or business development tools, even though the lifestyle business segment may have no interest in them.
Distributors should dig deeper to discover the underlying needs of each segment by opening up the lines of communication with customers. Companies must be careful, though, to “listen to what they actually say, not just to their words looking to confirm your current world view.”
Marks says some leaders are blind to company weaknesses, but opening their eyes is necessary. When leaders asked to talk about weaknesses give him a blank look, as he says often happens, he tells them: “Let’s just write down lack of self-awareness, and we’ll work from there.”
While it can be painful to acknowledge areas that need improvement, Marks says it’s much like going to the doctor even though you don’t want to hear that your cholesterol is high or that you need more exercise. “This is that same painfulness,” he says. “You have to go through this.”
One way to circumvent this “functional blindness” in information gathering is to use someone outside the mainstream business to run the process, because Marks says most companies “just can’t see beyond it.”
Despite how hard it can be, distributors that can truly look at their businesses through the eyes of customers will “start to find all kinds of things in there that they really don’t need,” things that aren’t adding value for anyone. Part of innovation is about eliminating or outsourcing those things and repositioning resources for those things that do add value.
Distributors, especially owner-operators, tend to want to control everything, but according to Marks, it’s better to focus on what you do best and buy the rest by outsourcing long-standing weaknesses or persistent annoyances. Just be sure, Marks says, that what’s being outsourced isn’t critical from the customer’s viewpoint. “Get these distractions out of the way so you can truly focus your resources on things that are actually moving the needle in terms of making the customer successful.”
Putting customer needs first is only part of the mindset shift required to be more innovative. One “cherished belief” distributors should question is the idea that if mistakes can be avoided everything works out fine. Innovation often means being willing to take risks and make mistakes.
Risk-averse distributors often also believe that they can’t invest in information technology, warehousing or process improvements because of constantly shrinking margins. Marks says distributors often tell him they plan to make these kinds of investments if they ever get some growth, but this line of thinking can lead some companies into a “death spiral” where a lack of growth begets a lack of investments, which begets a lack of growth, ad infinitum.
But technology investments that enable better data analysis will be key to staying ahead of the curve when combined with a better understanding of customer needs and a commitment to meeting them.
Get more from Marks on the topic of distributor innovation with the DVD of this program at www.mdm.com/innovation.
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