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

Time to Reduce Frictions

Past articles in the Wall Street Journal traced demand for an electronics product all the way from the consumer-facing retailer, Minnesota-based Best Buy,  around the world a couple times, and finally to a California machine tools shop near the opposite, upstream end of the supply chain.

As the Journal shows, the chain doesn’t really function as a unified system. It’s more a series of one-to-one contractual interactions. Separate pieces only connect with each other in a logistical sense.

Almost miraculously, and not through any real planning, the product (a DVD player) takes shape as it progresses from supplier to supplier back to Best Buy. Nobody in the process has a clear idea what’s happening with everybody else.

In good times, this crude set-up works well enough. But when demand or supply shifts suddenly in one part of the chain, the others get jolted. The thing is, because the data and strategy linkages are so weak, responses to the change in one place are apt to be too big in some places, too small in others. As a result, upstream suppliers have been caught with millions of dollars in unsellable excess inventory and the need to lay off much of their workforce.

Downstream, retailers haven’t had enough inventory to catch the wave when buying restarts.

I’m delighted to see this important issue getting press coverage. Businesses have to get much, much better at working together as integrated routes-to-market systems. Technologically and operationally, giant suppliers like Procter & Gamble and giant retailers like Wal-Mart have been discussing and dabbling in this for years. But strategically, “partners” in a value chain system rarely work together as partners.

As the Journal article shows, there is an urgent need to shift from frictional relationships to smooth ones.  And that is fundamentally the new generation's top management challenge.

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.

Channel Collaboration Brings Wireless Innovation to Market

Sometimes real news isn’t new. Sometimes it’s enough to discover that something you barely noticed has subsequently blossomed.

In today’s New York Times, David Pogue reminds us of a market-making collaboration between two companies more than two years ago. But back in 2007 it was hard to tell how big the collaboration’s payoff would be. Now we know.

The two companies are Apple, maker of iPhones, and Cingular Wireless, a network provider later rebranded AT&T Mobility. Apple had developed “Visual Voicemail,” which would let people check their incoming voice messages by glancing at a list on their phone screen and chosing the order instead of being tied to sequential listening to each message one at a time. No doubt, phone users would love this feature. Problem was, big wireless networks at the time weren’t designed to link with software that converted voice data into visible readouts.

For both engineering and business reasons collaboration was key, and in this case an exclusive relationship between supplier and carrier probably proved indispensible. As Mr. Pogue points out, the engineering costs were too high for Cingular, or any carrier, to absorb without relaible assurances about adequate product sales. In this situation, that was done by gaining sole rights to iPhone’s sales. An exclusive also benefited Apple, which could then concentrate on perfecting a single phone for use on a single network, an approach very much in keeping with Apple’s preference to wait for its pitch then swing for the fences.

Was Visual Voicemail either company’s only reason to go exclusive? I doubt it. But VV probably helped focus executives on both sides to get past the head-to-head negotiation mentality and accent the value for each party of focusing on new solutions and usage experiences for end consumers.

Working together like Apple and Cingular apparently did remains the exception. But intensifying competition in all industries is going to make it the rule. Where relationship exclusivity helped both companies win big, tomorrow’s collaborations will be essential simply to win small.

Healthcare Distribution - A Must-Read

In my twenty-five years of work on distribution strategy, I have never read a more fascinating analysis of distribution system challenges and opportunities as the one recently published by Dr.Atul Gawande, a surgeon, writer, and a staff member of Brigham and Women's Hospital, the Dana Farber Cancer Institute, and the New Yorker magazine.

If you have not yet read his piece in The New Yorker, I strongly encourage you to take the time. It's an absolute must-read analysis for anyone interested in designing and managing higher-performing, lower-cost complex distribution systems.

Enjoy!

Who to trust?

The more distant and complex our market systems become, the more consumers seek out providers they feel they can trust.

The list of groups we no longer trust as before grows weekly. Toy makers, peanut butter processors, banks of all stripes, companies with strong balance sheets and outstanding reputations that have been hammered by a global collapse in demand. Even the AARP has not been immune from criticism about conflicts of interest in controversial healthcare products they recommended and profited from! 

Now credit card companies – the ones were supposed to  trust – are under fire. No less than the U.S. President himself says so: 

“Those who are issuing credit [should be] able to make a reasonable profit, but . . . in a way that is responsible, [where] consumers are not finding themselves in a bad situation that they didn't anticipate." 

Over-priced fees, obscure penalties, unexpected rate hikes after luring consumers with low sign-up rates, and possibly sharing customer data with others are among the manipulative practices charged against card issuers.

Nobody buys a credit card transaction, not really. They buy a shirt or a sit-down meal or something, and pay for it with their card. The card is a convenience, an afterthought, a facilitator of the main business.  At the moment of credit-card truth, people’s mind is usually elsewhere – how great the food tasted, where to shop next, etc.

No one is better positioned to take responsibility for everything involved in a commercial transaction – product or service quality, payment conditions, shipping, warranties – than the immediate vendor. Can we as consumers trust that the vendor has done all we expect to fulfill that expectation?

Consider all the new (free!) online consumer service platforms hitting the web. For example, mint.com, the on-line place that offers to help you manage your money better. Mint says, approximately, “We’re your trusted financial advisor.” If that’s the case, should part of the deal be trust that they are looking out for your interests?  When you must deal with credit card companies they recommend, should you assume they are looking out for your best financial management interests? Surely they’re better positioned to do that than you are. 

But what if mint.com is concerned about losing valuable commission money from the credit card companies they recommend? Are they holding these companies to task for the same practices our president is coming down hard on? Should they? Do they have an obligation to warn consumers that a low initial rate at credit card company X is often followed by rate hikes?

In fact, what is mint.com? A wonderful free service for consumers or a credit card broker with a free front-0end service?

My point isn’t to criticize mint.com. Many consumers need and benefit from financial management advice. My point is that in today’s world of fast-changing markets, trust is the new basis of differentiation. So companies new and old need to be diligent about their transparency and cautious about their partnerships and alliances. And not transparent in the fine print or buried in layers of web pages.

Over time, the market will sort out the wheat from the chaff, and winning face-to-the-customer providers will be those who maintain a true fiduciary responsibility to their end customers. They will be trusted.

History and the Bollywood Distribution Wars

For a little perspective on the Hollywood version of the nascent developments in India (see my earlier post here), look at what was happening in the movie industry-pay TV distribution wars in 1982 as the Reagan era antitrust transformation was building steam (a parallel battle was well underway in the movie industry-theatre chain front as well):

The studios also complain bitterly about HBO's move to bankroll independent producers. The firm already has reportedly invested as much as $4 million in such promising properties as "Sophie's Choice," starring Meryl Streep and Kevin Kline. "If we don't stop them, they will control all aspects of moviemaking," says Paramount's Diller. "There would be no reason for studios to exist." Most of all, Hollywood resents what it perceives as HBO's arrogance. One insider says that an HBO film buyer told a studio executive bluntly: "I know your movie is worth $2 million, but I'm going to offer you $1 million. We know you'll take it because you're all whores." "Their arrogant attitude and way of doing business has needlessly angered almost everyone they have dealt with," Diller says. Moguls: In response, HBO executive vice president Michael Fuchs points out that no one is forcing the studios to give away their pictures. "They need our revenue, and we need their movies," he notes. "If we're unfair, then let's not do business. If the deal was unsatisfactory, then I don't know why agreement was reached." As for the charge that HBO is arrogant, Fuchs says that given the way many Hollywood moguls have conducted business over the years, "we sort of consider that a compliment. I can remember the early days of HBO when we were almost petrified to go into the studios for fear we would be eaten alive." (Newsweek, 11/15/82)

You can see clearly how distribution issues, when much is on the line, are up close and personal.

Those involved in India’s struggleds might want to remember the old adage:

"Generals are always most prepared to fight the last war”

Bollywouldn’t

The world’s biggest film market, India, is now embroiled in a classic distribution channels battle.

Just as the battle played out in U.S. markets decades ago (with Supreme Court anti-trust implications!) Bollywood movie makers want to slice the box-office pie one way, the big theater chains want to cut it another. Film producers are demanding a straight percentage split, exactly the same for every movie. Chain owners say that when the film is a dud they should only fork over a smaller share of its receipts.
Both sides are right.

As The New York Times story describes, the problem isn’t that one side is trying to be fundamentally unfair to the other. It’s that even though both are in the movie business, a producer’s commercial realities have only one thing in common with those of a theater owner: ticket sales.

Otherwise, they’re looking in opposite directions. Movie producers have to raise money, then create and manage giant short-term businesses. Theater-owners’ eyes are riveted on the fixed costs tied to their real assets: debt, rent, maintenance, wage labor. The movie becomes just a medium of exchange.

When two ends of a distribution channel don’t understand each other’s business – and these two clearly don’t – we see channel conflict. Bollywood movie makers are withholding films, theater owners are bad-mouthing the producers in public. Much of their combined energy, time and money is being dissipated as waste heat.

Channel relationships very often become dysfunctional like this. Therefore, a big part of my teaching and advisory work aims to turn distribution system antagonists into more collaborative partners.

The first step is always the same: Help each side appreciate the economics and operating constraints that govern the other side. Help a supermarket chain understand what it’s like for a consumer packaged goods to worry about new product development and supply chain quality control. Help the manufacturer see why the retailer isn’t paying much attention to the manufacturer’s products but is obsessing about store sales per square foot.

It’s not easy to develop a language that bridges between these mindsets. When you manage it, however, you have the makings of a bigger system. More efficient, more intelligent, more competitive.

Pocket Vehicle, Pocket Dealerships?

One ray of sunshine for General Motors this year has been the warm attention that is greeting P.U.M.A., its enclosed two-wheel, two-person version of the Segway, in partnership with that company.

Myself, I'm intrigued at the thought of climbing into a P.U.M.A. for the three-mile commute between my home near Wrigley Field and my classrooms downtown or in nearby Evanston. But others might be worried that a city bus or SUV could squash them without even feeling the bump. They might ask, What are the odds you’d make it to class?

Thankfully, Chicago and New York aren’t GM’s target markets. It’s imagining places like Singapore where vehicles are smaller and congestion is ten times thicker. P.U.M.A.s could be as practical there as rickshaws, bicycles, or skateboards.

Assuming the P.U.M.A. ever gets beyond prototype to commercial product, how would it be sold? Where would it be sold? It’s hard to think of a scenario where a typical U.S. car dealer, say in New Jersey, would want to expend much creative, new generation-style retailing energy on customers looking at a P.U.M.A.

Maybe GM's targeted dealers in Hong Kong or Cairo would have retailing models with customer experiences, inventories and profit models that are different enough from the standard American ones to make this work.

My question is really: How is GM thinking about the P.U.M.A. at the point of sale? In a long-ended previous era, strong, consumer-focused Dealerships made GM what it is as much as any best-selling Olds or Corvette. But they kept that model in a bizarre frozen state of suspended animation,. It's as if they believed that car buyers in 2009 are essentially the same as car buyers in 1950. While that's a clear sign of management senility for traditional auto products, it's sheer lunacy for new-age products aimed at new generations of buyers.

What should emerging-product and -market dealership look like? How can G.M. use P.U.M.A. to make that dealership more viable? Without more attention to the marketing channels question, new product idea after new product ideas will continue to languish and wither on the vine.

Remember my colleague Phil Kottler's Marketing 101: the FOUR P's....

Signs of New Distribution Era Emerging

Signs are everywhere that a sea change is occurring in how branded product makers and their channel partners chart growth strategies together. Many will start moving away form old-school adversarial relationships to find new ways to re-focus on providing consumers with the benefits of trusted brands.

For too long, manufacturers and their dominant distribution partners have danced around the trade-offs that price- and cost-only systems create. The trade-offs are especially acute when a marketplace is supplied by long, overseas supply chains where oversight and quality control are more difficult to assure. While long supply chains are an important part of the global economy, they still demand operating oversight which drives up costs and investment. Contract manufacturers (and distribution channels building their own store brands) are finding out there's more to sourcing than "spec and buy".

• NYT on risks of cost-only sourcing: a sales manager at a company in southern China said leaded paint was about 30 percent cheaper than paint without lead...it depends on the client’s requirement, if the prices they offer make it impossible to use lead-free paint, we’ll tell them that we might have to use leaded paint. If they agree, we’ll use leaded paint. It totally depends on what the clients want.”
  
• WSJ on toys supply chain: After a summer of toy recalls, toy licensors and trade associations are counting on stepped-up safety pledges to reassure parents before the holiday shopping season...some industry analysts question the effectiveness of tighter safety measures by companies that own brands and images but may have little manufacturing know-how...licensors have less experience... toy manufacturers such as Mattel and Hasbro Inc. are better seasoned at quality control.
  
• NYT on government oversight: A working group appointed by President Bush recommended preventing problems by building safety into manufacturing and distribution, intervening when risks were identified and responding quickly after an unsafe product made its way into the country...Representative Rosa DeLauro [said] the plan should detail how bad actors will be held accountable, how strict safety standards will be developed and enforced, and how such a system would be funded

What's important about this development is the impact it has on total system costs and end prices. It turns out that buyers who came back from overseas sourcing trips exclaiming - "it seems too good to be true" - were spot on. It was, and consumers are getting more and more concerned about who to trust.

In a related development, earlier this summer the U.S. Supreme Court seemed to anticipate such developments when they overturned a nearly 100 year old ruling to give manufacturers the right to set minimum resale prices. Why would the court suggest that higher prices are better for consumers?

The underpinnings of the court’s new reasoning were developed long ago by economists at the University of Chicago who argued that allowing manufacturers to stipulate prices on branded products can lead to greater benefits for end consumers when increased retail margins are used to fund required service levels. In reaching its new decision, the 2007 court acknowledged and embraced this view of consumer market dynamics, and concluded that any given instance of resale price maintenance is now within the law – if the manufacturer can show it has not concentrated market power to drive a supplier or retailer cartel, and if it can show that in setting a minimum price at retail, it is promoting consumers’ best interests and driving up overall demand.

Current consumer sentiment seems to be supportive of the Supreme Court's direction. None of this, however, suggests that manufacturers and their resale channel partners have free reign to drive up prices beyond what customers are willing to pay. But watch for new developments. In the new era of distribution, forward-looking manufacturers and their channel partners will once again offer trusted products at price points required to actually deliver on the brands' promises.

Microsoft Jumps in to Customer Experience Revolution

Competition in consumer markets is restructuring in daring new ways right now. The more familiar battleground of product against product or retailer against retailer is being trumped by larger contests between coordinated systems.

This new go-to-market landscape has product manufacturers and retail partners collaborating to create new business models that win over consumers from other combinations of players. To beat competitors and gain share, companies are starting to see they must create tighter and more strategic system wide alliances to drive differentiated new experiences for consumers.

And now, we find Microsoft the latest branded product maker to jump head first into this new customer experience revolution. While pundits debate the merits of an idiosyncratic ad campaign, we are very impressed with the company's early forays into go-to-market system thinking.

As part of its new $300 million marketing campaign and image makeover, Microsoft Corp. plans to deploy its own customer-service representatives at retailers such as Best Buy and Circuit City to help people with their PC purchases.
The world's largest software company plans to have 155 "Microsoft Gurus" in U.S. stores by the end of the year, and expand based on the project's success, said Tom Pilla, Microsoft's general manager of corporate communication.

The experts will answer questions about PCs and Microsoft products and demonstrate how the company's products work together -- help designed to get customers "thinking Microsoft."

"Think of that as borrowing a page from Nordstrom, with that retail customer experience," Pilla said, referring to the upscale department-store chain known for customer service...." (Rachel Metz, Associated Press)

I have for some time lamented the absence of branded product manufacturer leadership in growing consumer markets. And their abscence is not only bizarre, it’s the norm. Branded product manufacturers long ago ceded customer experience responsibility and retail system influence to downstream players, helping to fuel these retailers growing power.

So I applaud the company's strategic direction and predict that if they follow up these initial marketplace moves with more, it will fuel what is at best today a brush fire of change in the consumer electronics and software marketplace.

Competitiveness and Intellectual Accounts

A recent Op/Ed piece argues that our competitiveness as a nation in coming decades will be determined not only by our financial accounts but also by our intellectual accounts. That same prediction is being made about a less lofty realm as well - at the level of global go-to-market and supply systems.

Power bases are shifting - to expertise, which will always trump its weaker cousins coercion and even reward. Expertise about opportunities to create incremental new value for all the players in these complex supply and distribution systems. From strategic conversations that provide insights directly - in the voice of the end customer.

When marketing channels are championed, or stewarded as Professor Kash Rangan describes, from an external perspective, an end customer perspective, surprising things happen. Customers see new value, and improved buying and decision alternatives. Intermediaries are winners, focused on creating tangible growth-oriented advisory and physical distribution value for both their customers and their vendors. And branded product and solution manufacturers operate on a strategic path of differentiation.

Differentiation in not only product dimensions, but total customer experience. The kind of customer experiences that build excitement and new options for end customers. The kind that grow a marketplace and increase the margin pool. The kind that optimally-structured marketing channel systems provide. Finally. Welcome to the 21st Century.

* * * *

Disclosure - But then I think this could finally be the Cubs' year. The team not only has talent and seasoning, the team has chemistry. And they think. Can they build momentum - from a .500 start?

Pricing Wars in Canada Fraying Relationships

Wal-Mart announced today that their stores in Canada will no longer be stocking best-selling LEGO building block products. For some time, Canadian's have been lamenting that retail prices of goods sold in canada have been too high relative to what the canadian dollar can purchase in neighboring US markets. It seems that retail prices have not been adequately correcting for shifts in US dollar-Canadian dollar exchange rates.

With a long legacy of building relationships based on muscular strong-arming of suppliers, it's hardly a surprise to anyone that Wal-Mart is looking outside the company to extract retail price relief from vendors. When that doesn't work, they start looking to boost sales of more vulnerable (and compliant!) second-tier products on their shelves. in LEGO's case, that means Wal-Mart is reallocating it's shelf space to Mega blocks (made by Montreal-based Mega Brands).

Two strategic problems with Wal-Mart's old school strong-arming tactics. First, consumers want LEGO brand products. Does Wal-Mart really have research to the contrary? I wouldn't bet your stock investments on it!

But secondly, LEGO products are euro- (or kroner-) denominated purchases. They're made in Denmark. If you look at what's happened to euro (and kroner) exchange rates, you see that it's US retailers feeling the squeeze in 2008 as their cost of goods sold rise in US dollars. LEGO products selling for $35 (CN) today at a 40% gross margin have COGS of $21 (CN). That $21 (CN) is equivalent to 14 euros. And that same 14 euro wholesale price from Denamrk (with similar mark-up) would be priced at $35 in the US. The same pattern holds for kroners.

So where is the pricing gap? (US and canadian dollars are essentially at parity today) .

We know what's really behind the news, and so does LEGO. Wal-Mart is disingeniously using this exercise as a PR smoke screen to strong-arm LEGO into margin concessions. Not surprising.
The good news for consumers is that LEGO is standing firm. Passing system efficiency gains on to consumers in the form of lower prices is smart retailer-vendor strategy. But unhealthy and unrealistic price pressure to simply grab retail share in a tough market can only lead to cheapened products, cheapened brands, and eventually safety problems as subcontractors make risky cost-cutting decisions.

But then, Mega Brands knows that story well. Remember the toy recalls last year? It seems that price isn't the only concern consumers have.

Western Competencies Surge as Supply Chains Falter

“China has been the world’s factory and the anchor of the global disconnect between rising material prices and lower consumer prices,” said Dong Tao, an economist for Credit Suisse, to the New York Times. “But its heyday is over. We’re going to see higher prices.”

This has to be welcome news for American manufacturers. Maybe offshore price competition will ease a little in the short run. The $64,000 question is what’s the best way for Western branded manufacturers to respond? Most manufacturing executives would redouble their R&D efforts. That’s just going to intensify competition.

My vote is for more attention to distribution.

American businesses know U.S. business systems intimately. They have an advantage in cultural as well as linguistic fluency. They have long and deep relationships with wholesalers and retailers. We’re not talking competition on Internet time here. Well into the future, Pacific-based corporations – even those with U.S. subsidiaries – will be disadvantaged in the nuts and bolts of overseeing how their products are marketed by trade partners.

What’s more, end customers are showing resistance to the low-price pitch when it’s attached to bland, shoddy or possibly unsafe products. Now is the time for mature Western manufacturing enterprises to step it up, and differentiate in a space where their ultra-low price rivals simply cannot: on-time deliveries, in-store training, more flexible returns procedures, and above all by putting superior knowledge of the end customer to work in the retail sales environment.

Customers will respond positively.

What is more, U.S. legal precedent now allows the possibility for manufacturers to set prices for their goods at the retail point of sale (see prior 360 Degree View post: Signs of a New Distribution Era Emerging). In other words, a branded manufacturer can work on distribution differentiation selectively with a few quality retailers, every party assured that a store down the street will not undercut them.

Hitting the Wall at Wal-Mart?

Wal-Mart is going to the next level in its drive to provide more value. Long the king of everyday low prices for consumers, the biggest retailer on the planet now wants to take better care of the planet itself.

Wal-Mart wants to sell electric/hybrid cars, use windmills in its parking lots to recharge them, reduce paper use and improve medicine at the same time by digitizing physician prescription records in its network, and make its suppliers more energy efficient, both in their products and in the processes used to manufacture them. And it will demand offshore manufacturers to comply with U.S. environmental and safety standards.

Wow! That’s a fantastic goal. And who better to create the momentum than Wal-Mart? So it may seem boorish to ask, Is Wal-Mart going about this praiseworthy task in the right way? I’m suspicious.

Wal-Mart is notorious for its heavy-handed application of market power. While early on it delivered low prices through fantastic supply chain reinventions and improvements, it has for some time simply gained the upper hand by squeezing suppliers. More and more, this is less about making suppliers more efficient (which is good), and more about leaving them drained, disheartened, and increasingly less differentiated. That’s not good.

To judge from Wal-Mart chief Lee Scott’s public statements, as quoted last week in The New York Times, Wal-Mart is still resorting to the heavy hand. …”[If suppliers do not fall into line by joining the international environmental standards organization C.I.E.S], Wal-Mart will in fact lead; we will move forward by ourselves.”

I read into that single word “lead” a new application of Wal-Mart’s old strong-arm methods. Wal-Mart will in fact mandate. It’s all for the good of the planet, dear vendor. But all the same it’s our way or the highway. The squeeze is still on.

I wish Mr. Scott had said something more like this: Helping the planet is starting to make competitive sense for all of us. Suppliers that differentiate their products on environmental effectiveness will have an enormous and supportive outlet in Wal-Mart. Come work with us in this better way. We’ll feature you.

In other words, how about a little less strong arming and a litte more partnering, Wal-Mart?

Read The Times’s coverage, “Wal-Mart Chief Offers a Social Manifesto,” at: http://www.nytimes.com/2008/01/24/business/24walmart.html?scp=1&sq=wal-mart++%2BC.I.E.S.&st=nyt

Cool Power Drives Distribution Channel Innovation

Power - and its more important result, influence - has always been at the heart of channel management and channel conflict. Historically, that channel power has been based on the twp types of power most familiar - and comfortable - to old school leaders. Reward power and its close relative coercion.

In a world where most distribution systems are dominated by a small concentration of large, high-share channel players (think Wal-Mart and Home Depot in retail, Ferguson and Grainger in wholesale), power becomes increasingly central to success. Unfortunately, old school leaders (and they still control most executive teams today) learned about power from the likes of Robert Malott, the former Chairman and CEO of big Chicago manufacturer FMC. Malott spoke for many of them when he declared, "Leadership is demonstrated when the ability to inflict pain is confirmed". (Fortune, 11/28/07).

But today its downstream distribution players that are inflicting all the pain. And traditionally strong branded product manufacturers are struggling with huge management challenges that have emerged in the strategic direction of dominant retailers: reverse auctions to buy product from lowest bidders, backward-integrating into the manufacturer’s domain, contracts that secure intellectual property rights for ideas arising in day-to-day relationships, increased favoritism toward licensed house brands.

But old schoolers' attempts to meet force with force have been largely ineffective, and the brand companies they are stewarding are suffering as a result.

A parallel concentration of four mega consulting firms - advising leading companies on both sides of the manufacturing-distribution struggle - continue to propose worn out strategies: move production overseas to compette better with private label price points, create sub brands and exclusive SKUs, go direct on the internet, hold the line in negotiations, acquiese and build volume. A leading business association's latest management book, ominously titled "Working at Cross Purposes", warns that ..."win-win is dead and shared prosperity – if it ever existed – was a fantasy".

The biggest downside of outdated, muscular (think military) coercive channel management power is the level of distrust, anger, resistance and revenge such actions evoke in their target. While rewards might seem more attractive, remember that offering a reward implicitly pointts to the fact that you can withold it - ala coercion. Luckily, a few signs of fresh air and new thinking are emerging.

New leaders are emerging, and they recognize that there are many more bases of pwer than reward and coercion. A new generation of cororpate leaders are starting to embrace what Harvard's Joseph Nye calls 'cool power', and goes on to say that ..."we need soft power to bring people to share our values and help us pursue common goals. Today's businesspeople are in a similar situation...[but] let's change the terms... generals and CEOs don't like 'soft'...let's call the traditional kind of power that we used to value 'hot power' and the new kind 'cool power' ..."

We like Professor Nye's perspective, and it's one that executives would be wise to adopt when they turn to managing their distribution systems and their largest distribution partners. There are at least four other bases of power that are significantly moreeffective in adversarial environments: Expertise, Referent, Legitimate, and Information. At their heart lies a great deal of lasting influence that accrues to any company - indeed, any person - whose magnetism is based on profiund desire by another party to be associated with them because they are valued experts, provide attractive status, are revered as close advisors, and can provide critical insights.

The best case example? Steve Jobs of Apple Computer. Apple's single-digit market share in computers is by traditional standards meaningless. Jobs has never had any market power, no big distribution network, no giant factories. But a few years ago he had a good idea, the iPod, and even that wasn't a new kind of product; it was a better-conceived, better-designed version of an existing one. He's now doing something similar in phones. He had no hot power, indeed no presence at all in the phone business. Yet the major wireless service providers were competing for the right to offer the iPhone because they wanted Jobs' power to attract customers with his superior ideas. Cool power trumped hot power.

Fears Around Overseas Suppy Chains Creates Opportunity for Branded Product Makers

Mounting concerns swirling around long, overseas supply chains and low-cost contract manufacturers is creating a significant strategic opportunity for branded product makers in the U.S. market. "Made in the U.S.A.” is now being exploited by emboldened marketers catering to heightened consumer concerns about workplace and environmental issues, consumer safety and quality problems, and logistics and transportation impacts.

Press reports indicate that the recent recalls of Mattel toys, made in China with lead-based paint, prompted many parents to seek American-made toys. Some domestic companies, such as Stack & Stick, which produces building blocks, or Little Capers, which makes superhero costumes, are working American flags and “Made in the USA” messages into their advertising, as well as marketing themselves as a safe alternative.

All this attention to the realities of running a well-honed manufacturing operation and living up to the promises of trusted brands is a boon to incumbent branded product makers, who have seen their roles increasingly emasculated by commoditized, price-based, undifferentiated retail powerhouses. Finally, word is getting out that there's more to the trust game than lowest price, and there's more to delivering on consumers' needs than lowest cost.

With all the competitive pressures that dominant U.S. retailers are facing vis-a-vis specialty stores and other higher-value consumer shopping options, wouldn't they be better served focusing on consumer experience differentiation than bulding bigger and bigger overseas private label sourcing machines?

Fears Around Overseas Suppy Chains Creates Opportunity for Branded Product Makers

Mounting concerns swirling around long, overseas supply chains and low-cost contract manufacturers is creating a significant strategic opportunity for branded product makers in the U.S. market. "Made in the U.S.A.” is now being exploited by emboldened marketers catering to heightened consumer concerns about workplace and environmental issues, consumer safety and quality problems, and logistics and transportation impacts.

Press reports indicate that the recent recalls of Mattel toys, made in China with lead-based paint, prompted many parents to seek American-made toys. Some domestic companies, such as Stack & Stick, which produces building blocks, or Little Capers, which makes superhero costumes, are working American flags and “Made in the USA” messages into their advertising, as well as marketing themselves as a safe alternative.

All this attention to the realities of running a well-honed manufacturing operation and living up to the promises of trusted brands is a boon to incumbent branded product makers, who have seen their roles increasingly emasculated by commoditized, price-based, undifferentiated retail powerhouses. Finally, word is getting out that there's more to the trust game than lowest price, and there's more to delivering on consumers' needs than lowest cost.

With all the competitive pressures that dominant U.S. retailers are facing vis-a-vis specialty stores and other higher-value consumer shopping options, wouldn't they be better served focusing on consumer experience differentiation than bulding bigger and bigger overseas private label sourcing machines?

Toyota Targets Distribution System to Solve Image Crisis

There's an intense sense of urgency around distribution in more and more sectors of the US economy. After years of intense cost-cutting and efficiency moves, there's a growing concensus that growth will be driven by improving the customer's total experience - from learning, shopping, and buying all the way through using and maintaining a product. That all happens downstream in distribution.

Read what Toyota’s North American sales and marketing chief Jim Lentz had to say about all this. He recently made some very pointed strtaegic comments about the importance of fixing the experience that consumers have in their dealerships:

"... dealers urgently need to improve their image...we’re all being judged on what happens at the dealership level – and it’s not always good... a quarter of prospective customers who walk into a dealership leave without buying because of poor treatment...at Toyota, retail treatment is one of our most pressing issues...improving dealers’ image requires a hard look at some of the industry’s sacred cows such as vehicle allocations and dealer awards..."

We expect we'll be hearing much more of this from incumbent US branded product manufacturers as they rise to the challenges of generating growth.