The Manufacturer-Distributor Relationship: Can This Marriage Be Saved?

The Manufacturer-Distributor Relationship: Can This Marriage Be Saved?

      Every time I find myself talking to people about their distribution channel issues, it feels like I’m knee deep in marriage counseling.  Once upon a time, both parties had looked forward to an exciting journey together in which they’d grow and be successful.  But instead many growth-seeking business leaders say they feel trapped in punishing distribution partnerships. There’s no bigger downer in channel relationships than suffering through non-distinctive service levels, shrinking margin pools, escalating conflicts, and plummeting prices.  After years of inattention, we end up with simmering discontent from misaligned goals, un-kept promises and in the worst cases, mistrust and extra-curricular affairs. 

The result of all this strife is mutually unsatisfying manufacturer-distributor partnerships, which invariably leads one or more of the parties to ask the question, “Can this relationship be saved?”

Sure, relationship problems are easy fodder for lunchtime jokes and water cooler banter, but the manufacturer-distributor stakes can be high. Consider the channel dilemma faced by South Korea’s Samsung as they launch a new generation of Galaxy tablets and other smart devices in North America, where women buyers now account for the majority of purchases.  A recent article at Retail Customer Experience.com, Fifty shades of frustration: Why do women hate Best Buy?  exposed what has long been known about the state of consumer electronics shopping environments: Visually intimidating aisles, ridiculously unhelpful information displays, more employees trying to prevent theft than answer questions, little help getting bulky purchase to the car, and draconian return policies than make the whole process feel risky.  Any guesses how this marriage is likely to impact the success of Samsung’s new products?

In over twenty-five years of counseling senior marketers on designing and managing their routes-to-market, I’ve learned a few things about how why these critical business relationships so often get to the edge of a cliff, and how to help redirect them back to being profitable and productive.  More than anything else, a simple outward re-directing of attention to winning with customers - and away from finger-pointing, economic threats, marketplace punishments, or just avoidance - is the most powerful path to a healthy and productive partnership.

Herman Miller, the premier office furniture maker pushed out of its distribution comfort zone by uncovering frustrations that its end business customers had with the way their office solutions were delivered and installed by furniture dealers. Frustrations that other competing furniture makers had not yet addressed. By working closely with its channel partners, Herman Miller launched the revolutionary program named Last Mile, a proprietary new distribution service solutions that addressed those customer frustrations and spurred profitable growth for the company and its dealers. Twenty years ago Miller was at the top of its industry. It’s still there, in large part because it knew that status quo thinking wouldn’t be enough to maintain its position.

So the bottom line for most companies looking to improve under-performing distribution channels is this: Your distribution marriage can indeed be saved. But just like our personal relationships, positive change comes roaring out only when we’re willing to move beyond the familiar and comfortable.

A renewed ability to win together gets sparked when both sides of a distribution relationship accept that their most deeply held truths about the marketplace - and each other – are counter-productive, incomplete, or more than likely outdated.  And in distribution relationship therapy it’s important to manage emotions by keeping the conversation focused and straight-forward: What buying experience outcomes are end customers seeking? What activities are needed to deliver improvements to these experiences? What channel model is best equipped to perform them?

Truth on the Wall

The best way to reinvent a distribution partnership is to follow a straightforward path, and thankfully, the basic steps are not mysterious.  What it requires is fresh customer insights, objective analysis of current distribution experiences, enough hard facts to piece together a reliable view of opportunity risk and potential, and a dash of creativity. Most importantly, successful distribution partnering requires alignment and agreement at every juncture.

The first step in putting a channel system back on a healthy growth trajectory is realigning all the parties on an updated and revised truth, “on the wall” for everyone to see, about how distinctive value can be created for end customers. The most difficult challenge in building a customer-focused distribution system is keeping our own biases and implementation anxieties at bay. Early in the process, the intent is to be an exceptional listener, without screening what we hear through the lens of conventional wisdom about what can be done.

Then both parties get real with one another and make a brutally honest comparison of this truth about customer desires to what customers actually experience from the different channel options available in the market today.

Then these two assessments lead to the heart of the matter: How much separates the customer’s ideal distribution experience from the existing one? What distribution activities and competencies must be built, borrowed, or bought to come closer to what customers desire than our competitors do? And how much time, investment, and skill will it take each partner to arrive there together? These are the kinds of critical relationship questions that a distribution gap analysis seeks to answer.

As with any therapeutic relationship-building process, involvement by everyone involved is key and we want to be sure our distribution partners, or at least a representative sample of them, are actively engaged with us in developing a range of options for joining forces to improve the customer’s current experience reality.  

In the end, the manufacturer-distributor strategy improvement work concludes not at some imaginary customer experience ideal, but at the design of an optimal distribution structure. Optimal defined as a channel system that is attainable, profitable, and closer to the customer’s desired experience than competitors. It also specifies who in the relationship is to perform each channel activity and how to equitably share compensation and rewards.

Improving Relationship Dynamics

But going after new distribution whitespace and improved customer experiences is only half of what’s required, and it’s the easier half. The hard part, just as in a faltering marriage, is getting our partner to work with us despite all the baggage of the past. And we should add, our own entrenched attitudes are part of that baggage. If we’re willing to own up, and open up to the possibility of something different – and better – we have a chance.

So, how do we go about improving our channel relationship dynamics and building more trust and commitment to actually acting on a new optimal distribution approach? The process, if it’s even a process, is necessarily less systematic than generating clever Powerpoint presentations or drafting detailed execution timelines. And that makes it a messier, squishier business. It’s more of an operating style, a mix of art and attitude, distilled from companies that have succeeded (and sadly, sometimes failed) at their efforts to coax system-enhancing actions from their partners.

Here then are six fundamental levers for stepping up to the relationship-building side of distribution channels. Think of these as the six vows of a successful manufacturer-distributor relationship:

1.   We Collaborate with You (our channel partner) on Voice of the Customer research. There’s nothing that partners, domestic or commercial, hate more than surprise ultimatums. Any chance for cooperation vanishes. The companies that I’ve seen do it best invite their partners in right from the start.

2.   We Listen to You. Then after listening, we go to great lengths to respond to the needs we hear and then incorporate your thoughts in closing marketplace gaps. Helping our partners solve their own challenges, some of which may not be obvious to us at first blush, is key to alignment, productive collaboration, and mutually profitable growth. And let’s admit it, our partners do have valuable facts to contribute, ideas that are sometimes better than ours, and legitimate points to make. It makes as much sense to honor our partners in business as it does in marriage.

3.   We Share Costs and Rewards Equitably with you. It  no doubt helps channel partners when a supplier pitches in with advice, marketing collateral, and web-based support. But it means even more when a supplier goes to the trouble of factoring in the partner’s likely ROI on any new distribution model or initiative. And it speaks volumes when the supplier puts its money where its mouth is through co-investments in the relationship. Leading chainsaw maker Stihl USA did that by financing 30% of the cost for each of its thousands of independent dealers to install new showrooms.  Later as returns began rolling in, Stihl was fair in apportioning margins that fully recognized partners’ costs and contributions to end-customer value. Stihl’s exclusivity at dealerships grew, and market share for their premium-priced products climbed in the midst of an economic recession.

4.   We Deliver on Our Commitments at the level of performance we agreed to with you. Establishing trust is essential to earning the right to expect partners to execute their part of the bargain with equal drive. Action and good-faith effort speak louder than words. They overcome deep-seated suspicions and anger. They create optimism; “our problems are surmountable if we make the leap together”. It’s the marriage theme all over again.

5.   We Protect Your Investments  from others intent on free-riding off your value-added services and customer experiences. This doesn’t mean all channel relationships have to be exclusive arrangements. We can still work with other partners. But it does imply that we won’t be opportunistic and cut our partners off at the knees. “We pledge not to allow discounters to lure away customers who have just helped themselves to your high-value services.”

6.   We Build a Reputation that generates admiration, respect, commitment and trust – for us in your eyes and for you, our partner, in the eyes of your customers. There are essentially three kinds of glue that hold a marriage together: Morals – we don’t believe in divorce. Calculation – we can’t afford to split the family unit. And Affection – I love you and want to be near you. It’s amazing what possibilities begin to materialize when we look at our channel partners through the same sort of lens.

Ultimately our goal isn’t to save every distribution marriage at all costs. It’s to do what’s best for the kids, our shared end customers. More often than not, if we focus on the customer, our old channel relationship recriminations will start to fade away, and we’ll see movement towards a shared goal that’s larger than either of us. And if we’re empathetic, smart, diligent and inclusive about it, customers will open the door to increased value that we create together, and profitable growth will inevitably follow.  n

 

Richard E. Wilson is managing director of the advisory firm Chicago Strategy Associates, and a former clinical professor of marketing at the Kellogg School of Management and Director of the school’s Center for Global Marketing Practice. rick@chicagostrategy.com

Courage to Build a Customer-Focused Organization

Something’s eating at the heart of old-school western business, and it isn’t just a hangover from the tough economy or recent financial sector excesses. Not that long ago, iconic brands were faltering, commoditization was rampant, margins were plummeting, planning horizons got stuck quarter-to-quarter, suppliers and distribution partners were bickering, and opportunities for growth were increasingly being sought in greener pastures overseas. But like children swept up in a messy divorce, it’s the ultimate consumer’s buying experience that got caught in the middle.

You see, now that the dust has settling on the great 21^st Century economic malaise, the basic game is still be the same. Winners will still be those who delight end customers by breaking with the pack and offering them distinctly better experiences than others are. But in today’s hyper-connected world, providing better experience alternatives means making a difference in more than just your product’s features and its price.  It involves re-thinking every aspect of how your end customers learn about, find, evaluate, choose, buy, own, use, update, and share, maybe even talk about, your product, service, or solution. This is distribution.

More than ever, what customers say they crave most are better buying and ownership experiences in the distribution channels available to them, not lower prices or bigger selections. And this fundamental dynamic holds true whether your end customer is in a mature, western market or a growing emerging one. Good times or bad, customers choosing among options will always discriminate on a complex range of variables, and only a certain segment makes their decision on the single dimension of price (unless all the options are identical!). Even in tough economic times, consumers make careful trade-offs around dimensions like durability, safety, usability, personalization, returnability, installation and much more when comparing prices. This is as true in Iowa as it is in Beijing, Mumbai and Rio.

And dramatic advances in internet and mobility technology mean that new improvements to your end customers’ experiences are being pushed further and further downstream into your distribution activities and partners. The net result is that all these touch point experiences will come together to either reinforce or destroy your customer’s experience with, and therefore perceptions of, your brand. And your future.

What customers say they crave, then, are more authentic interactions at every touch point in the experience-creating channels for your offering. They  want to be treated as individuals, not abstract members of segmentation schemes. Future innovations in distribution channel experiences simply can’t be described in the arcane language of ‘customer satisfaction’ research and ‘buyer insight’ studies.

Creating competitive advantage through your distribution channels comes from looking harder and more creatively at white spaces in your industry. White spaces in distribution, once spotted, may seem hard to reach or dangerous to explore. Some members of your management team will want to turn away from such daunting prospects, calling their retreat a “return to fundamentals.” The familiar may indeed be more comfortable (i.e., “doable”), but treading on old ground will typically do little to help your company change the actual experiences your customers have downstream in your channels.

This is where Frans Johansson’s thinking becomes helpful. Johansson, author of the fascinating book The Medici Effect: What Elephants and Epidemics Can Teach Us About Innovation, synthesizes medical, mathematical, and business research into a fresh perspective on converting natural fears of white space unknowns into managerial terms. He views white space as opportunities that arise in the margins, or the unknown, where two or more industry players or marketplace activities intersect.

Using this perspective, you can start to see your supply chains and your distribution channels as simply a stapling together of one industry intersection or activity after another, all the way from components supplier to assembler to wholesaler to retailer, and with all sorts of other ancillary industries such as logistics added in at different points along the way. Often, managers in under-performing chains or channels experiencing intense cost reduction pressures, inadvertently start regarding these intersects as necessary evils - the inefficiencies and loss of control that a company must endure in order to avoid doing all the customer experience work itself. But more powerful and enduring gains in the marketplace can be made if instead you view every one of these intersects as a white space opportunity, and see that orchestrating all of them in fundamentally new ways is the biggest opportunity of all.

Classic prospect theory teaches us that, without even realizing it, managers often take bigger risks in relatively safe environments than they are willing to take in hazardous ones. It is not so much that managers cannot live with uncertainty; the real problem is that they and their organizations fear losing. In the relative comfort of one’s industry, it is easy to do badly but it is hard to lose entirely. There may be some off years, some bad quarters, and the odd product failures, but the chances of going out of business are fairly low in the medium term. The long term, as they say, is another story. And the day of reckoning may be here for many companies.

That’s why Johansson says it takes “intersectional courage” to work the white spaces between industries. Managers fear the unknown risks involved in tackling new space. Ironically, however, taking the plunge may be less risky for your company than continuing to operate in the old corporate confines of tried-and-true processes. Staying afloat in a tough competitive environment is not exactly risk-free. But for a variety of reasons, it can be hard for managers to make an accurate comparison between white space and normal business risks.

But here’s what you will likely find most frustrating on your journey: those whitespaces are more than likely hiding right out in the open. What makes such golden nuggets so hard to see is the dense fog of conventional wisdom and constraints-based thinking that the old generals in your business have long espoused, and which you are struggling to break free.  As new leaders, you must stop fighting their last war!

Of course, this is not a journey for the timid, the faint of heart, or the risk-averse. But as one senior leader recently said to me – “What’s our alternative? Follow the lemmings over the cliff?”. Maybe Woody Allen was right that ‘just showing up is half the game”. But what about the other half? And what about winning?

 

Richard E. Wilson is managing director of the advisory firm Chicago Strategy Associates, and a former clinical professor of marketing at the Kellogg School of Management and Director of the school’s Center for Global Marketing Practice. rick@chicagostrategy.com

Illusions of Control

Forward integrate or not? Indra Nooyi at Pepsi and Jeff Bezos at Amazon have said yes. They will very likely be proven misguided.

Nonetheless, for many CEOs and their corporate strategy chieftains, consolidation, forward distribution integration, and scale conversations are dominating the big corporate strategy debates of today. Yet if there is any truth in capitalist business environments, it must be this – no matter the strategy, you can’t hide from the market.

So let’s start our review of forward integration by taking a break from obfuscating economics-speak. When we use the term market, as in ‘let the market decide’, what we really are referring to is the sum of all the needs, desires, and resulting behaviors of final customers that sit at the end of any business system. Like it or not, these customers are both judge and jury.

This means that smart companies, as well as their strongest competitors and most astute regulators, will focus on a single dominant strategic question as they craft future direction and govern the allocation of scarce resources. What choices do end customers have as they evaluate alternatives, and who do they choose?

Yet designing and executing business systems to consistently and profitably win over these picky end customers is at once straight-forward and maddeningly complex. Even though strategists are as prone to confirmation bias as anyone (“the ‘don’t confuse me with facts’ problem), customers easily and willingly, and often quite forcefully, express the desired outcomes they seek as they make decisions about what to buy and how to buy it. That holds for both consumer and business buyers.

As a result, understanding what any company’s “ideal” growth strategy should be is the straight-forward part. It should be squarely focused on delivering the full range of what and how outcomes end customers seek, and delivering them profitably and better than any other alternatives available.

But the complex part comes barging in as companies intensely debate, across often warring internal functional factions, how to design, build, fund, and manage business system that will, at the end of the day, deliver better than any competitor those winning outcomes to customers. This brings us to the vertical integration question. And understanding it fully is as much a study of CEO psychology as it is of hard-edged financial and strategic analysis.

After years of unsuccessful efforts to stem erosion in market share and customer retention, frustrated CEOs of once-strong legacy brands often show signs of siege mentality, especially when tough questions are met with blank stares. Are we offering the right value proposition (outcome for customers)? Are we delivering it? What’s standing in our way? When answers prove elusive, either internally or from outside partners, these CEOs often make the fateful decision to “take control of their destiny” and vertically integrate.

The question is – what destiny? And is it one that leads to greater numbers of customers choosing their offerings at acceptable prices? Public rationales for most vertical integration moves are usually more about cost savings, efficiency, lower prices, and greater control. They typically make only vague allusions to the messy business of customers and new ways of winning them over. Let’s look at a recent example.

Larry Ellison, who at one time was the Red Bull of corporate IT systems, has abandoned his fierce loyalty to being a best-in-class and tightly-focused industry leader in favor of buying Sun Microsystems. Apparently as part of a drive to become a fully vertically integrated player. He seemed very tuned to the question on everyone’s mind – how will this help Oracle win over customers? - when he commented about Oracle’s decision this week that “we’re really brilliant, or we’re idiots”.

Indeed, Oracle would be wise to look at its own proud history for inspiration and strategic direction. IBM, once the world’s biggest and most powerful business system, was brought to its knees in the early-80s by a new generation of nimble, focused, best-in-class players. Players that were unencumbered by IBM’s high-cost, slow changing, vertically integrated old behemoth of a business model. A business model, as military strategists often despair, best prepared to fight yesterday’s war. In fact, Larry Ellison founded Oracle in 1977 as one of those new breed of competitor. One that offered end customers some fresh air in the form of open platform solutions. Ones that weren’t hand-cuffs like IBM’s all-or-nothing bundled alternative. So the question to Oracle is, Why this?

At the end of the day and no matter how difficult, the best business model innovations are those created in the spirit of fresh reinvention and influence over results delivered to end customers, not protection and control of the status quo. Practically, that raises tough questions about how to get best-in-class solution alliances and distribution partners to work collaboratively to create winning new end results for their common customers. While there may indeed be times when such collaboration is simply not possible, and when complete ownership and control is essential to success, they are generally few and far between. And Apple aside, they are rarely successful.

I suspect the rush to vertical integration we seem to be witnessing in today’s climate may have more to do with an overall lack of trust in market forces. And perhaps it’s also a desperate response to tough economic conditions and fast-changing industries. In fact, it might just be an ill-advised knee jerk effort to slow things down. But don’t be fooled. Customers will still have the final vote.

When it comes to vertical integration, Buyer Beware!

CSA Distribution Audits Fueling Growth

Comparing the distribution channel pressures of today with those of even ten years ago reveals a striking decline of distinctive marketplace differentiation. These changes represent a significant opportunity for companies that regularly re-assess whether they are doing everything they can to guide, manage and motivate their channel partners to achieve new levels of growth and profitability.

·   How are end-customer channel needs in your marketplace evolving and how do they create barriers to you and your distribution partners achieving your growth objectives?

·   What gaps exist between your channel partners’ current business models and the economics of emerging customer channel needs in your fast-changing industry?

·   How motivated and prepared are your channel partners to respond effectively and efficiently to industry and competitive performance pressures in their local markets?

·   Are your channel management and incentive programs as aligned as they need to be with the demands your channel partners are facing in today’s fast-changing markets?

Approach. The CSA Channel Opportunity Audit is an independent and systematic diagnosis of your company’s distribution channel opportunities and threats, and is composed of four key elements of diagnosis:

Our Channel Opportunity Audit approach has been used successfully with hundreds of companies over the past twenty five years and focuses on one dominant goal:

Surface tangible ways to work with channel partners to differentiate your products and services with end-customers and accelerate market share growth.

Process. The CSA Channel Opportunity Audit is typically executed in four to five weeks of elapsed time in your marketplace, and proceeds systematically through a series of detailed assessment and analysis steps:

Step 1:  Internal Management Interviews. A highly-seasoned distribution channel expert from CSA will interview senior thought leaders and line managers within your organization to surface critical insights and beliefs about current distribution channel opportunities and threats.

Step 2:  External Market Discussions. CSA will conduct one-on-one working discussions with end-customers and distribution channels in your marketplace to surface their insights and observations about how changing industry and customer dynamics are affecting their current business models and economics.

Step 3:   Synthesis and Diagnosis. A Channel Opportunity Audit report will be provided to you that outlines how your company is positioned to address pressing channel threats and opportunities.

Step 4:     Private Facilitated Workshop. You and your senior leadership colleagues will receive an advance briefing packet and participate in an executive-level Channel Opportunity offsite facilitated by management advisor and educator Richard E. Wilson, a global expert on distribution channel strategy, execution and management.

Benefits. The CSA Channel Opportunity Audit is specifically designed to be a fast-paced and efficient way for you to build stronger readiness for action with your distribution system.

 

Richard E. Wilson is managing director of the advisory firm Chicago Strategy Associates, and a former clinical professor of marketing at the Kellogg School of Management and Director of the school’s Center for Global Marketing Practice. rick@chicagostrategy.com

Technology Distribution Meets New SMB Realities

Distribution channels are moving front and center in the competitive arms race. Virtually everywhere in our scan of a hundred-plus markets, companies are finding that channel design, execution, and management are becoming critical to profitability, defensibility, and long-term growth.

This isn’t too surprising in mature commodity product categories, but it’s also the case in technology markets as well.

And even though technology offerings for small and mid-sized businesses (SMBs) seem tailor-made for direct-channel delivery, upstream providers and downstream customers often continue to favor the value created through new one- and two-step distribution models. The reason, we’re finding, is that SMB owners and managers still find themselves stymied by the dizzying pace of technology change, a proliferating universe of sources, and an insurmountable array of adoption hurdles.

And because they usually lack sophisticated and dedicated technology staff, SMBs are looking for best solution packages tailored to their business processes and integrated seamlessly into existing operations. In fact, share gains in the SMB market will increasingly accrue to distribution channels that efficiently and effectively deliver new value in areas related to solution customization, one-stop sourcing, on-site demonstrations, small-scale pilot testing, non-disruptive and affordable installation, enhanced adoption training, easy upgrade, and lower total adoption costs. And more.

Superb technical expertise is no longer adequate. SMB technology sales are evolving from one-off, pick-and-pack hardware and software licensing sales into persisting cloud-based subscription services. As hardware and software products become less stand-alone and more like component parts in a larger on-premise or off-premise cloud solution, physical product adoption and distribution services are taking a back seat to more consultative approaches to solving vertical- and user-specific business challenges.

Many sophisticated solution providers understand this shift and are attempting to ramp up the skill sets of their 3rd-party distribution partners. From a practical standpoint, this requires clear and actionable answers to two closely related questions:

• What specific channel behaviors will move market share? and,
• How do we incent desired channel behaviors?

For example, What steps should be followed to educate SMBs about their technology design and delivery options, in terms they find clear and compelling? What are the best ways to demonstrate tailored web-based solutions? What concrete channel activities are needed to maximize ease of adoption and use for SMBs? How can channel players best collaborate to ensure one-stop process integration and make upgrades effort-free for the SMB? Is this SMB’s business security best guarded through on-premise or off-premise cloud solutions? How can the channel help reduce an SMB’s all-in cost of adoption?

While major technology solution providers have largely figured out the product and price side of new offline and online technology offerings, many of the biggest players have yet to pin down a distribution-based competitive advantage. And while Gartner estimates that over the next five years companies will spend $112 billion cumulatively on cloud-based solutions, the road to SMB adoption has been bumpy.

SAP, for example, recently acknowledged that poor downstream value-added meant that over the past three years adoption rates of its internet-enabled offering ran barely 1% of target. IBM is finding that barely 20% of its partners are driving meaningful results in their local markets.

In the end, better results for all technology providers and their distribution partners will take detailed, customer-based understanding of the market combined with disciplined execution in the heart of the channel system – in other words, the what and the how.

Solution = Product + Distribution

"Most electronic health record solutions on the market today do a very bad job of supporting new work processes and true interoperability".

– Physician user, letter to NYTimes, April 11,2009

Better products are certainly part of a better solution. But the real opportunity for makers of medical devices of all stripes lies in better distribution—helping that practitioner or administrator through the complex process of identifying what he or she needs, evaluating the options, making the purchase on affordable terms, implementing the solution, training staff, and figuring out how to adjust work processes . 

Because buying medical technology is not straightforward, there is a fascinating set of channel issues that are begging to be explored. Whoever gets the distribution angle right first in their category—health informatics, monitoring devices, orthopedic implants, surgical gloves, whatever—is going to surge ahead relative to competition.

Hyundai Understands Marketing 101

Even strong automakers’ sales flattened or dropped over the last two years. But not Hyundai’s.

Its August-to-August revenues were up nearly 50%. Granted this rise was off a relatively small base (although not that small; Hyundai sales are now about the same as Chrysler’s). But still, for a company that’s been selling in the States for over a decade, it was a whopping jump.

Why are consumers suddenly buying Hyundai’s? Tighter budgets certainly make low-price sedans more attractive than SUVs. But as I’m happy to see the Times reporting, that’s not the whole story. The big reason is better value, as value should be evaluated: 'benefits - price'. All too frequently today, brand players and pundits confuse "lowest price" with "best value". The assumption in this line of thinking is that consumers essentially incorporate no other criteria in their selection decision. Hyundai understands the distinction well.

Consumers and car mags think the product is improving. And Hyundai management was aggressive with improving the consumers total experience. For example, they were first to let consumers who lost their job return a car within 12 months of purchase, heretofore an unheard-of warrantee.

Hyundai is a classic market-entry success story. A renegade entrant comes in with an offering below the old market minimum, then gradually learns new ways to provide benefits and better value in more compelling ways than other low price  competitors.

What I like, though, is that Hyundai provides the textbook example for the case I’ve been making to manufacturers ever since the financial crisis took hold. Yes, you have to get your costs under control. But do it sensibly and with care not to negate long-term brand, distribution, and marketplace advantage. Indeed, this may be the best of all possible times to create new advantage.

For established competitors in 2009, that meant investing in differentiated customer experiences. Hyundai did. I haven’t seen any figures on lost-job car returns, but my hunch is they’re not high. People find they like the car. One man, the Times reports, says, “I used to drive Cadillacs all the time. I don’t need to drive a heavy car like that anymore. No disrespect to G.M. or anybody, but my next car will be a Hyundai, too.”

Is Vertical Integration The Future?

One distribution system design question is popping up in more and more markets in the U.S. and globally:

For over twenty years, companies like Pepsi have marketed their brands and managed growth in their global product portfolio by consolidating their independent channels (bottlers) and influencing them at arms length through minority stakes (usually in the 30% to 40% range).

So Pepsi reversed course. It’s completing its forays into forward integration, by buying virtually all of its two top bottlers, which together command 80% of  capacity in Pepsi’s carbonated soft-drink (CSD) business.  Pepsi has offered at least three reasons for its decision in the WSJournal and NY Times:

•  Gain “greater flexibility” to direct capacity at fast-changing consumer tastes
• Build advantage in the fastest-growing portion of the nonalcoholic beverage market – waters, juices, energy drinks, Gatorade – all of which are now distributed more and more through non-CSD bottler routes-to-market
•  Reduce the number of margin-takers in the product pipeline to anticipate a long down-market in which overall system profits are smaller

Pepsi puts a spotlight on the two biggest demands on marketing channels today: adaptability and speed. Both seem to suffer in traditional distribution structures. As a result, we're seeing a decided uptick in companies concluding that collaboration and partnering with third-party distribution players is simply too difficult, too slow, and too costly. 

That may be. But Pepsi paid a heft premium of over $1 billion for its distribution partners. That will be very hard to earn back. And the company now has added considerably to its balance sheet, putting increased pressure on asset productivity. It's distribution 101 time: you can cut out the middleman, but not the activities (and costs).

do product makers need to own their distribution channels to make them high performing?

And Don't Forget The Channels Part

Manitowoc, the maker of huge cranes used in construction projects, had announced a (not surprising) big sales and earnings drop (Wall Street Journal, March 31), and their stock has sunk like a stone. We all know that new commercial construction was on the skids, but the Manitowoc news was still sad to hear. Especially since they’ve evidently had already done what you’re supposed to: squeeze out production efficiencies, stretch working capital, go back to the table with lenders. Keep the ship afloat.

Is there anything left that they could do to get sales growth under way again? I think there is. While I know nothing about what Manitowoc is actually trying on its marketing strategy front, there are a couple things they’d do well to explore, if they haven’t already. And we’re not talking bank-breaker stuff. Early stage exploration costs almost nothing.

First, since sales are way down in European markets, this is a good time for Manitowoc to revisit its foreign distribution partners and their business models. I don’t mean raise their prices, or insist they load up on inventory. I mean revisit and reinvent everybody’s activities down at a granular level, in search of new value-creating levers. What’s effective, what isn’t? What will help end customers most, what doesn’t add much value? Who’s good at what? How should we reapportion our division of labor?

When everybody’s desperate to reignite sales, they’re going to be more cooperative.

Second, look for ways that Manitowoc can reposition itself from a product manufacturer to a solutions provider. Cranes are a focal point in any large-scale construction process. Schedules get planned around them, very carefully. Manitowoc may be able to get more mileage out of that centrality than it has exploited thus far. Why not be sure there isn’t a way to sell the crane as the anchor to a larger solution that pulls together other equipment, other contractors, and makes portions of the entire construction process run more smoothly.

Even a cash-strapped company can afford to investigate new, innovative third-party distribution possibilities. And now isn’t a bad time. In fact, it’s an excellent time.

Nobel Award Recognizes Distribution Theory

The reputation and status of the Nobel awards has been weighted down under controversy for the past week because of the Committee's decision to award the Peace prize to U.S. President Barack Obama after being in his position for what many refer to as 'only nine months'. That controversy is a shame, because awardees in other categories are less controversially accepted for the brilliance of their work and accomplishments. One of them is someone near and dear to my own narrow field of business management study - Distribution Strategy.

Oliver Williamson, a retired Berkeley professor, has just been awarded the Nobel Prize for Economics, for his study of commercial border lines. When does it make sense for a company to do activities itself and when is it preferable to contract with supply or distribution partners to do the job? In the real world, Williamson observed, figuring out the answer can be difficult. Getting a handle on your own costs is hard enough, but to understand another company’s you either have to make educated guesses or trust the other guy to be honest and accurate.

In the broad area of corporate strategy, Oliver Williamson was a contributor of great significance, and the issues he looked at (when distribution was much less fashionable than it is today) had a profound impact on the evolution of modern theory in the subject area. His work on understanding transaction costs, as well as his coining of the idea of "information impactedness", pushed the envelope on how to think about Distribution Strategy, but was work that received little recognition outside a small circle of devotees.

From what little I’ve read, however, the Nobel Committee is unambiguously spotlighting the challenges of Distribution Strategy. Many strategists are tempted to limit distribution to ideas about 'getting material products from point A to point B' (or 'physical distribution'). And for much of modern business history, that has not always been easy to do (think of getting petroleum from the North Slope to the Lower 48 or reliably getting a package from one of thousands of small producers to a specific consumer over night).

But moving stuff is often the easiest strategy element of distribution in its totality. The hardest part is typically in the design of the total end-to-end value chain of activities from upstream suppliers to assemblers to retail channels to final customer/consumer, then hammering out the relationships needed to make that value chain work both cost-efficiently and consumer satisfaction-effective.

Mentally, most employees, even most executives, live inside their own company. But as the Nobel people and Oliver Williamson know, it’s how well a company manages at its borders – its work in conjunction with other companies – that will increasingly make it or break it. For that, the Nobel Committee rightly recognized a genuine pioneer for his fantastic work!

Microsoft Escalates Vertical Integration Wars

The WSJ reported today that Microsoft has decided to enter the rapidly escalating battle over how the consumer electronics market space is being fundamentally restructured (Microsoft Seeks to Take a Bite Out of Apple With New Stores).

Unlike Gateway's anemic efforts at forward integration into retail (1997-2004), I anticipate Microsoft's moves, along with those of other leading players, will dramatically reshape the landscape. Those moves include Best Buy's backward integration in private label (see: In Hard Times, Is Best Buy’s Best Good Enough? ), Wal-Mart's and wireless service reseller Tracfone's entry into mass market electronics (see: Wal-Mart Wireless Expands), Samsung's designs on the content and apps end of digital retail (see: Samsung Seeks Some iPhone Magic ) and Amazon's rabid appetite to dominate the conventional 'click and buy' internet merchant space (see: Can Amazon Be the Wal-Mart of the Web?).

But back to Microsoft's forward integration into consumer electronics retailing: here's the bottom line perspective from the company:

"Our customers have told us they want more choice, more value and better service, and that's what we'll deliver through our Microsoft Stores" David Porter, corporate vice president . Microsoft retail stores, WSJ, 10/15/09

This is only the latest entry of another major player in what is shaping up to be a battle of the titans. Noisy dithering by wall street analysts, journalists, and other pundits over who's making the most aggressive price reductions, who's sourcing smartest, who's ramping up their M&A engines for greater scale and efficiency, and who's "getting the value message from consumer" is simply obscuring a more fundamental and ultimately dramatic business model restructuting hidden in plain sight.

So, buckle up - it's going to become a (much) bumpier ride competing in the consumer electronics space! (due credit to Bette)