As the world perseveres in adapting to the next normal and as we enter the fourth quarter of 2020, planning for 2021 is a central focus for distributors. And for most, such strategic planning will look different this year.
Many business functions have undergone substantial change. To name a few:
- Sales teams were pushed to the limit due to social distancing constraints.
- Operations adopted new standard operating procedures to accommodate safe curbside pick-up and/or touchless drop-off at customer sites.
- IT teams raced to build digital capabilities to improve customer experience.
Given these transformative changes in business functions, the strategic planning function must also flex to factor for those changes. And distributors must embrace the new horizon while planning, rather than take the traditional approach of ‘doing more and better of the same.’
Though many firms are in defensive mode after facing the most unprecedented public health crisis in recent history, how we plan the next year matters more than ever – not only for the short term, but also for the long-term survival of our businesses.
A Strategic Planning Framework for the New Normal
We’ve helped many distributors with their strategic planning over the years. So, using our experiences and research, we put together a few checklists for planning in the new normal based on one of our proven frameworks: Growth Cube.
We developed the “Growth Cube” framework through comprehensive research on how distributors grow profitably and sustainably. For our study, we reviewed 15 years of financial performance across seven verticals for more than 40 publicly traded distributors and hundreds of independent wholesaler-distributors.
After examining the growth processes of those firms, we distilled our findings into three dimensions: Generating, Managing and Sustaining Growth.
Each dimension has its own essential best practices. And we’ve developed custom checklists within this framework that distributors can use as a better lens for planning strategic investments in 2021 – checklists that account for drastic change and apply forward thinking.
To start, let’s look at Generating Growth.
Generating Growth Dimension
The first dimension, Generating Growth, focuses on top-line performance. Based on our financial analysis of distributors’ growth rates over the years, we identified nine foundational strategies for generating growth. But these strategies have numerous combinations and variations under varying contexts.
Here, we will group the nine strategies into two categories: traditional and non-traditional.
Traditional Growth Strategies
Five growth generation strategies fall in the ‘traditional’ bucket:
- Penetrating existing accounts
- Acquiring new customers
- Introducing new products and services
- Opening new branches
- Expanding into adjacent market segments
Sales teams usually apply one or more of the above strategies in the appropriate context using field data and unlimited customer access. But social distancing has ushered in virtual sales models and limited access to the customer. This makes sales teams data-deficient and leads to growth gaps.
How do we address data deficiency? We need a supplement, and that supplement is customer stratification, the foundation of these five growth generation strategies. Customer stratification is the process of segmenting customers into micro clusters based on buying behavior.
Customer analytics have become far more critical for sales teams, enabling them to implement these traditional growth strategies amid new limitations.
Now, step back and ask yourself: What kind of customer-specific information do you typically provide the sales team so they can execute a growth strategy? In many cases, it’s limited to the customer’s recent purchase history.
To truly supplement data deficiency with customer analytics, you must increase the granularity of customer-specific information (without overwhelming the salesperson). Two types of information provide the most useful customer insights:
- Past insights: A customer-specific dashboard that summarizes critical metrics in terms of revenue, product mix, margin trend and cost-to-serve.
- Future insights: A customer-specific profile that highlights item-level sales recommendations and margin enhancement opportunities. (This is the result of converting customer stratification results into playbooks for the sales team.)
Checklist No. 1: Traditional Growth Strategies
What’s your plan for retooling and retraining sales teams with customer stratification so they can execute traditional growth strategies?
Are you providing enough customer intelligence to enable sales teams?
Do your sales teams have the skill and will to use customer analytics?
Non-Traditional Growth Strategies
Four growth generation strategies constitute the ‘non-traditional’ group:
- Adding a new go-to-market channel
- Creating a new business unit by combining two or more traditional growth strategies
- Innovating your customer value proposition
- Diversifying into adjacent verticals or value chain functions
Traditionally, most distributors’ leadership teams don’t prioritize these strategies, operating with the mindsets ‘fix it when it is broken’ or ‘don’t rock the boat.’
But with the increased importance of digital interactions and remote or virtual selling, exploring these growth opportunities is imperative. And for some, a lack of diversification can threaten business continuity altogether.
Here are a few examples of how other distributors are putting these strategies to use:
- Distributors who lacked e-commerce capability and were caught off-guard as COVID-19 accelerated digital adoption are expediting their efforts to add this new go-to-market channel.
- Pioneers are finding initial success in creating and branding a separate business unit for low-cost service delivery while pursuing traditional brick-and-mortar business with their full-service model. For example, Zoro tools is the subsidiary company owned by Grainger and is its low-cost option for industrial products.
- Industrial and chemical distributors who exclusively focus on oil & gas are seeing the impact of both COVID-19 and lack of diversification in their businesses, and they’re considering how they might expand into adjacent verticals.
Checklist No. 2: Non-Traditional Growth Strategies
What’s your firm’s position on these non-traditional growth drivers: new (digital) channels, diversification, and business model innovation?
Which is your focus in 2021?
How does it alter your customer value proposition (on both value creation and capture) and influence top-line growth in 2021?
As you can see, the pandemic has greatly influenced how distributors should apply these strategies going forward. Traditional growth generation demands customer analytics now more than ever. And non-traditional strategies are edging toward being essential to survival, let alone growth, as seen in greater adoption of e-commerce and diversification.
The Managing Growth Dimension
The second dimension, Managing Growth, focuses on bottom line performance and opportunities for profitability. Based on our financial analysis of distributors’ profitability and cash conversion cycle over the years, we identified critical capabilities in each of the seven process groups, collectively called 7S:
- Source (supplier management)
- Stock (inventory management)
- Store (warehouse)
- Sell (sales, marketing and pricing)
- Ship (transportation)
- Supply chain planning
- Support Services (IT, HR and finance)
In the context of planning the next year, we’ll group critical capabilities for managing growth into two categories: foundational and emerging.
Two core functions fall in the ‘foundational’ category:
- Inventory management (part of the Stock process group)
- Pricing optimization (part of the Sell process group)
Even as distributors’ business models evolve beyond products, inventory remains a central component of value creation for end customers. It’s also the largest asset on many distributors’ balance sheets. As distributors expand into e-commerce and other digital platforms:
- Inventory management is even more critical to the overall customer experience.
- Product availability is far more essential to the omnichannel value proposition.
- Differing profitability levels across channels force distributors to reexamine traditional stocking strategies.
And while inventory is core to creating value for customers, pricing optimization is the lever to capture value from the customer. Many distributors haven’t optimized pricing opportunities in their brick-and-mortar spaces yet, so e-commerce and digital marketplaces are presenting both challenges and opportunities.
In the current virtual and emerging digital landscape, it’s more imperative than ever for distributors to invest in and build pricing capabilities.
The foundational capabilities provide opportunities for distributors to review and validate their data quality before embarking on advanced techniques such as AI.
Checklist No. 3: Foundational Capability Planning
How are you planning to address gaps in foundational capabilities – omnichannel inventory management (value creation) and pricing optimization (value capture)?
Does your current process maturity on these two functions align with your emerging business model and digital capabilities?
Though there are recessionary trends and uncertainty in the marketplace, there are plenty of signals that indicate an acceleration of previous trends rather than entirely new behaviors. For example, we can point to two trends in the sales process group that have become critical ‘emerging’ capabilities:
- Sales transformation
Distributors have been aware of the need for e-commerce channels for years, but the recent public health crisis has now made it essential to distributors’ relevance in the marketplace.
Even though distributors’ e-commerce maturity varies across the spectrum, the optimization of this channel in B2B markets is still in its infancy and we consider it an emerging capability.
A second emerging capability, sales transformation, addresses the “people” aspect of digital acceleration. As online channels and marketplaces become more widespread in the industry, the role of outside sales teams is being redefined. Sales transformation has become an inevitable topic across verticals, primarily because:
- Outside sales teams are the most expensive personnel on a distributor’s P&L, and they become the primary target as the margin squeeze continues and commoditization of industrial products increases.
- Inter-generational challenges arise as the next generation of sales teams come on board.
Additionally, it must be understood that capability development is a continuous process. And such development should address four factors that are critical to the success of any capability:
- People (skill)
- Process (structure)
- Technology (speed)
- Culture (accountability)
Sales transformation and e-commerce help organizations tackle growth challenges as they move toward their growth goals. That’s why these areas must be strategically developed as part of the planning process for 2021.
Checklist No. 4: Emerging Capability Planning
What are your gaps in emerging capabilities – e-commerce (and related digital interactions) and sales team transformation?
How are you planning to address those gaps?
Are your investments aligned with pain points?
Effective management is a pivotal bridge between generating and sustaining growth. With the right capabilities in place – particularly those that make you more agile as demand and expectations change – you’ll have the support and structure necessary to maintain the growth you pursue.
The Sustaining Growth Dimension
The final dimension focuses on sustaining profitable growth over time. This is the most overlooked dimension because it requires long-term vision and alignment. In our research, we focused on uncovering the root causes behind declines in growth and profitability.
In doing so, we found that while planning for growth, distributors often:
- Make incorrect assumptions about the potential of an opportunity, customer retention, etc. Some of these assumptions are explicitly discussed and validated, while others go unnoticed.
- Miss profitability or growth targets due to “capability” failures such as execution breakdown, talent fit (and lack thereof), broken processes or misaligned culture.
We identified and grouped these root causes into two categories: opportunity assumptions (made during the Generating Growth phase) and capability assumptions (made during the Managing Growth phase). These unchecked assumptions manifest as growth blind spots, disrupting the firm’s growth journey.
Opportunity Blind Spots While Generating Growth
The two blind spots, or risks, that stand out on the opportunity side are:
- Customer retention assumptions
- Supplier alignment assumptions
During growth planning, the assumptions we make about these two parameters are critical. And they manifest as blind spots if left unchecked. Given the current revenue recovery journey, a forward-thinking distributor should have three critical analytics to help them detect potential customer churn and supplier shake-up well ahead of time.
These critical analytics are:
- Item stratification
- Customer stratification
- Supplier stratification
Stratification is the process of using quantitative methods to identify which items, customers and/or suppliers are growing and profitable and which are not so profitable.
The insights from these analytics put both executive and field teams on the same page by identifying core customers, strategic suppliers, and profitable products, and filtering the signal from noise. They are especially critical in a crisis, in which you lack sufficient time to respond.
For example, a building materials distributor has systematically built up these three critical analytics over the years and generated unique insights by connecting the analytics at the segment level. Throughout this crisis, the distributor used these analytics as an anchor to manage blind spots by predicting core customer churn, selecting strategic suppliers and redeploying working capital.
The executives and middle management used the same terminology and made decisions with clarity and confidence.
Checklist No. 5: Opportunity Blind Spot Detection
What are the major obstacles or blind spots faced by your firm while implementing growth strategies, especially on customer and supplier fronts?
Is there a process to detect, capture or avoid these expensive mistakes (lessons)?
Who is accountable at the C-level?
Do you have in-house analytical and assessment tools to scan and detect incorrect assumptions on customer churn and supplier mix?
Capability Blind Spots While Managing Growth
Blind spots on the capability side, such as underestimating the potential loss of key talent or overestimating the ability to integrate acquired firms, originate from internal sources. And these blind spots stem from the assumptions made by the firm about what the firm can do. These assumptions result from a misaligned understanding of internal capabilities.
During the recent crisis, many such assumptions about internal capabilities were put to the test in areas including but not limited to:
- Digital commerce
- Virtual sales competencies
- Working capital stability
- Supply chain resilience
The best practices to manage blind spots include timely validation of these assumptions through internal capability assessments and cultivation of a growth mindset as a key ingredient of company culture. The capability assessments expose the gaps in critical business processes, technology readiness, and people competencies.
This is a great starting point, but the leadership team should also have a growth mindset to close the gaps proactively.
A growth mindset is a result of three elements:
- Adaptability: A compelling vision and courage to remain relevant.
- Agility: Making continuous change happen rather than waiting for a “big bang”; encouraging a test-and-learn approach rather than waiting forever.
- Alignment: Bridging the gap between intentions and investments.
The following quote from an industrial distributor summarizes the growth mindset:
“Some companies that are trying to just invest in technologies, if they don’t take a hard look at their culture and their willingness to change and adapt and learn and grow, I think they’re going to spend a lot of money and have a hard time getting ROI. They need to get their people oriented around redeploying their talents, embracing the reality and the need for the technologies, and understanding the strategic positioning the companies are trying to do. When you get that part right, then making the investments is much easier and much less risky.”
Checklist No. 6: Capability Blind Spot Detection
How did your firm respond to the recent crisis and the underlying risks?
Do you have in-house capability assessment tools and resources to scan and detect gaps in process maturity, people competencies and technology readiness?
Does your leadership team exhibit a growth mindset in terms of adaptability, agility and alignment when it comes to closing capability gaps?
What are the gaps and solutions to build and drive a growth mindset?
Planning for sustained growth is often last on the list, but we argue it is as important as any other dimension of the “Growth Cube.” When you use stratification analytics to identify opportunities and risks, when you take the time to assess your true capabilities against best practices, and when you apply a growth mindset to close capability gaps, you eliminate blind spots and pave the way for success.
Your 2020 Strategy: Stay Agile and Relevant
Make your strategic planning session relevant and realistic, rather than just an annual ritual. Of driving profitable growth, James Cash Penney said, “Growth is never by mere chance; it is the result of forces working together.”
Apply the six ‘growth-cube’ checklists presented in this article, and make your strategic investments in 2021 to drive relevance and agility. Good luck.
Senthil Gunasekaran is co-founder of ActVantage, which helps distributors drive profitable growth through analytics and talent development. He has more than 18 years of experience helping hundreds of distributors and manufacturers, while co-authoring seven books for NAW. He also delivers executive education and speaks at industry forums. Prior to ActVantage, Gunasekaran led research and industry projects at Texas A&M’s ID program. Contact him at email@example.com or visit actvantage.com.