Disruptive forces may have a big impact on the future performance of distributors. This article, the second in a three-part series, introduces a framework for harnessing these disruptive forces and identifies the capabilities distributors need to develop to successfully navigate the inflection point.
After years of evolutionary change, the wholesale distribution industry now faces numerous disruptive forces and a real inflection point. Distributors of the future will be those that appreciate the magnitude and import of the disruptive forces they currently face and have the courage and conviction to act decisively. These distributors will embrace a framework to effectively assess opportunities, develop plans and act with purpose.
Unlike in retail, where disruption led to the rapid disappearance of some leading players (e.g., Circuit City, Borders, KB Toys, Blockbuster), the wholesale distribution inflection point will see a bifurcation in financial performance. Driving this inflection point are six disruptive forces, which were identified and expanded upon in the first article of this series:
- Accelerating digitization
- Expanding competition
- Emerging customer demand
- Product innovation
- Continuing disintermediation, and
- Consumerization of expectations
In this second article we introduce a framework for harnessing these disruptives forces and the capabilities distributors will need to develop to successfully navigate the inflection point. This accessible “E” framework (see Figure 1) has three complementary elements 1) engage the customer, 2) execute the value chain and 3) energize the business.
Breaking down the “E” framework
Future success for distributors will center, much as it does today, on engaging the customer. Despite numerous forces disrupting the industry and many of its orthodoxies, “customer first” retains its critical position. But for it to maintain its power, distributors will need to transform their thinking from simply meeting customer needs to anticipating and shaping them and proactively delivering solutions to problems that customers may not even know they have. This encompasses a reimagining and realigning of e-commerce, customer service, sales, marketing and other go-to-market capabilities leveraging analytics.
Distributors of the future will also understand that engaging customers can’t be limited to updated e-commerce and a reimagined customer facing organization. It requires executing the value chain. This means applying analytics, process improvement and technology to inventory, logistics, pricing, rebates and network optimization to drive efficiencies and free capital that can be invested in other innovative technologies such as internet of things, robotics, drones and augmented reality.
Distributors will also need to more effectively harness the power of IT to energize the business. This includes establishing a modern, efficient platform for the core transactional needs of the business and leveraging other advances to deliver functionality.
Consideration of the three elements of the framework feeds directly into a distributor’s strategic planning. Strategy can best be expressed as a series of interdependent and self-reinforcing choices starting with Where to Play and How to Win. Once distributors have defined their Winning Aspiration and Where to Play (i.e., their vision, objectives and target customers), consideration of the three limbs of the “E” helps develop responses to the next strategic question of How to Win (i.e., the assets and capabilities they will deploy to create competitive advantage).
Engage the customer
A profound shift is underway in wholesale distribution as it relates to customer interactions, from simply
meeting customer needs to anticipating and shaping them – and proactively delivering solutions to problems that customers may not even know they have.
Two examples from other industries epitomize this shift to anticipating customer needs:
Uber gained traction and a multibillion-dollar valuation by challenging the orthodoxies of a taxi trip, fundamentally changing the way in which available capacity is matched with passenger demand, the way destination information is conveyed and how payment is transacted. It has also extended its model to develop solutions to better match trucking capacity with customer demand, to mitigate the shortage of drivers and to fulfill other delivery demand.
Amazon disrupted many industries and interactions, including the homeowner’s task of reordering various products, such as laundry detergent, toilet paper, batteries and pet food via its Dash buttons. It, too, has extended its model by integrating the functionality into products themselves (i.e., washing machines) and buttons you can program for any product reorder.
The distribution industry’s customer-centricity and the premium placed on face-to-face interactions will need to transform to better align insights, interactions and channels with shifting expectations. Face-to-face interactions will likely become fewer in number but more relevant in terms of content. Instead of reactively meeting customer needs, leading distributors will proactively engage the customer. They will sense and shape demand, deliver a superior experience, capture and leverage insights, and realize incremental value.
These changes are more than semantics. They are being driven by advances in technology, shifts in demographics, increases in competition and heightened expectations. A new demographic of B2B customers is assuming a position of responsibility. These customers are increasingly willing and able to research products, assess vendors, check availability and compare prices before engaging with the distributor.
A recent Forrester Research survey highlighted that B2B buyers would prefer to self-educate about products and services vs. talk to a sales representative by a 3-to-1 margin. The report went on to note that 75 percent of B2B buyers prefer to buy online vs. through a sales representative. In this disruptive environment, incremental changes will not suffice, yet 49 percent of B2B companies still do not have a mobile strategy.
With the emergence of such an informed, empowered and independent B2B customer, the onus is shifting to engaging the customer in new ways, at numerous different touchpoints and at a whole new level. This means, for example, that sales reps must consult with customers to identify pain points they aren’t even aware they have and deliver solutions, not just recap additions to the line card. Distributors should capture mindshare and value before, during and after the purchase transaction occurs. This dynamic continues to reshape the retail industry offering some lessons for distributors, but ultimately the experience assumes a different manifestation for B2B than it does in B2C retail.
Create a leading experience
The primacy of customer experience over customer service represents a deep fundamental change in thinking for many distributors. Ever-pragmatic distributors have not traditionally focused on the somewhat amorphous notion of an experience, believing instead it was sufficient to meet the more tangible and immediate customer needs. This mindset manifested in a relentless focus on broad and deep inventories (we have what you need), competitive pricing (we are the low-cost choice), superior fulfillment (we will get it to you overnight) and responsive customer service (if you have a problem, we are here).
Those foundational capabilities retain a high level of importance, but the future distributor’s value proposition will be driven by a suite of digitally enabled capabilities, such as content marketing, search engine marketing and mobile, that are refined and targeted to deliver a compelling B2B experience. Nearly three-quarters (72 percent) of industrial buyers report a likelihood of increasing spend to a distributor with a user-friendly website. And from our discussions with distributors in other lines of trade, these dynamics are not unique.
As they consider this shift it would also be wise for distributors to research trends and capabilities from the B2C. Traditional drivers of the B2C customer experience include informed store associates, enticing in-store merchandising and compelling brand storytelling. More recently these have been augmented with innovations such as robust omnichannel capabilities (e.g., seamless shopping across mobile apps, retail store, phone and e-commerce) and IoT-enabled fixtures (e.g., hangers with sensors that activate targeted promotions when an item is returned to the rack). Distributors of the future will
study and learn from the retail transformation journey and apply B2B-relevant lessons to their own business and customer interactions.
The select group of distributors already considered leaders in delivering a superior customer experience typically began with comprehensive and multidimensional customer segmentation (e.g., profitability, cost to serve, share of wallet and lifetime value). The insights drove decisions about customer engagement, digital capabilities and the portfolio of relevant value-added services.
Because of the increasing importance of this capability, some distributors have invested in the creation of a true marketing function and a chief marketing officer. This investment helps drive a stronger focus on developing market insights, customer segmentations, branding and a compelling value proposition. What these distributors understand is that delivering a superior customer experience is a highly quantitative exercise around capturing and assessing a diverse set of metrics (such as net promoter score, average order value, conversion rate, abandoned cart rate, retention and first-call issue resolution) and applying analytics to deliver the desired and required experience.
Another dimension of the B2C experience that has great relevance to distribution is omnichannel, the relevance of which is growing as customer expectations increase and go-to-market channels proliferate Leading examples of the omnichannel experience include: ordering both stocked items and special orders via the distributor’s onsite vending machine portal; placing items in a mobile commerce shopping cart while at a job site; linking to a specific project or work order, using workflow for approval, then picking up the items 24×7 at the distributor’s nearby branch; and placing a single order via the distributor’s mobile app for partial pick-up next morning at the branch with delivery of the balance to a job site two days hence.
This focus on the omnichannel experience isn’t just for the benefit of the customers. In a 2015 study from Forrester Research, 60 percent of B2B sellers report that the more channels customers use for purchasing, the more they actually spend overall.
Deliver an insight-driven value proposition
In an effort to better serve the evolving needs of customers, most distributors have added to their line card and product catalog, expanded and upgraded their service offerings, entered new market segments, and increased business complexity through acquisitions and geographic expansion. Yet only a select few distributors effectively apply insights to capture the potential value from this intentional complexity.
To navigate the inflection point, distributors should deliver an insight-driven value proposition, one that encompasses a tailored customer experience as well as analytically driven cross-sell and upsell opportunities. They should master the art and science of gathering disparate primary and secondary data, converting it into actionable insights and leveraging those with customers, suppliers and influencers. One electrical supplies distributor delivers this value proposition in a simple but valuable way by kitting products together for a residential building contractor. The bundle combines pre-cut, labeled sections of wire, wire nuts, electrical boxes, receptacles, faces plates and light fixtures, providing the electrician with exactly what they need for each room in the house. Other distributors leverage insights to tailor delivery times, product put-away, packaging, palletizing, labeling, replenishment, product selection and invoicing decisions. These and other insight-driven value propositions will create sustainable differentiation for distributors.
Convey incremental value to partners
For most distributors, the primary perceived value of customer and market insights is through leveraging them to refine product and service offerings and to develop value propositions that will resonate with specific customer and supplier segments. But distributors looking to position themselves as “the preferred route to market for suppliers” (mitigating the impact of disruptive disintermediation) are waking up to the realization that being a preferred route means more than saturating the market with branches, inventory and sales reps. Increasingly distributors are investing to capture a wider array of data and information, applying an array of analytic tools to extract insights from that data and collaborating with suppliers on its application in the market.
This data-driven approach is evident in the growing adoption of end-to-end category management approaches, investment in sales and operations planning, greater amounts of time spent reviewing results with suppliers and an ongoing search for ways to enrich the insights with macroeconomic, regulatory and weather data. For example, one HVAC distributor is modeling market potential for replacement units based on compliance with regulations requiring conversion to new refrigerants and technologies, changing weather patterns and usage profiles. These and other insights offer great value to the distributor, but can also represent a source of great value with suppliers.
Engaging customers, suppliers and influencers on this higher level will be a critical part of a distributor’s future success.
The remaining two E’s – execute the value chain and energize the business – will be examined in part three of this series.