Deep Dive: Defeating disintermediation

Can distributors and suppliers fight the forces of disruption together, armed with game-changing and radically inventive ideas?

This edition is my second written to help me prepare for my session at MDM’s 6th Annual Sales Transformation Summit, June 13-15 in Colorado. My topic is vitally important–how can distributors defeat disintermediation by offering big ideas for B2B innovation and the future of distribution? My first attempt explored opportunities for leveraging artificial intelligence (AI) to forge stronger bonds through new digital-age collaborations. In this newsletter, I share insights from a just-published McKinsey & Company article, “How distributors can self-disrupt to win in the new digital world,” by Alex Abdelnour, Brooke Daniels, Steve Reis, and Kevin Sachs. The article’s frame is how distributors can learn from digital natives and defend against their disruptive power. My tack is different. I share Abdelnour et al.’s findings and recommendations as a foil for how distributors can better collaborate, integrate, and optimize with suppliers. Disruption is the province of outside players seeking to capitalize on frictions in how established businesses serve customers. By doing so, disruptors defeat, displace or co-opt incumbent distributors. Disruption is a big idea that builds exponential advantage by leveraging the power of digital technologies. I am looking for distribution’s big ideas, which will be more about reinventing, building up, and partnering. To dissuade disintermediation, distributors must offer big ideas built not on threats but opportunities. The opposite of disintermediation is not “stronger together” but “radically inventive, game-changing, and dominant together.”

Collaboration beats disruption

Abdelnour et al. begin by establishing the bona fides of digitally native disruptors, including Amazon Business, Alibaba, eBay, and Mercato, as defined by their sales volume, rapid growth, digital experiences, and bolt-on physical-world capabilities for sales and technical expertise. They cite a  McKinsey & Company study to argue that B2B customers are “excited about the faster,  cheaper, and more seamless buying experiences that digital players can offer.” Moreover, all but 5% of B2B buyers are willing to give up human interactions with salespeople. Disruptors are on the move and increasingly dominant, but the article offers hope:

Distributors who have not yet been disrupted can learn from early adopters on the front line. Indeed, we believe they should endeavor to learn new strategies quickly to keep pace with digital players that significantly invest in digital and customer experience, supply chain, and talent.

Later, distributors facing the most significant disruptive risk are defined as those “operating in large segments with high margins, limited technical expertise, low value-added services, low customer purchasing power, and easy-to-ship products.” Yes. We all know this. Distributors’ path forward is to “craft plans to compete with digital disruptors,” which involves building competitive capabilities. For my purposes, though, the article’s assertions are hyper-relevant when Abdelnour et al. make a case for supplier defection without calling it for what it is, disintermediation:

A 2019 McKinsey survey of more than 1,000 senior OEM leaders revealed that 48 percent would collaborate with Amazon if it became the largest distributor. As one HVAC and plumbing manufacturer put it, “Amazon is the ideal partner. Cooperation will mean faster and more shipping opportunities and faster capital flow. It’s a win-win model.” [Emphasis added.]

This quote tells the tale. Disruption is not just a battle for customers; it is a battle for suppliers. Disruptors may become a relatively more attractive channel than distributors. And, if manufacturers can also serve customers increasingly direct by leveraging supplier e-commerce platforms and digital-age marketing and sales, the siren's call for disintermediation will grow ever louder.

This means that distributors must perform a tricky two-step. As they innovate on the front end to provide differentiated and sticky customer experiences for their own benefit, distributors must leverage their new digital-age capabilities to embrace manufacturers and work equally hard on the back end for their suppliers’ benefit. Said differently, distributors must not view digital capabilities as freeing them from the long-standing love/hate relationship with suppliers. Instead, distributors must use their capabilities to draw suppliers closer to a partnership designed to optimize supplier outcomes.

Ideas are better than recommendations

Below, I share the McKinsey article’s four recommendations to help distributors defeat disruption. I explore each proposal, then offer a big idea. My approach builds on the expertise of innovators introduced in Deep Dive: Shooting for the moon. Big problems require big solutions, which begin with big ideas. Disintermediation is nothing if not a big problem. As for recommendations, distributors need inspiration, not prescription.

Recommendation #1: Build a unique ecosystem to address customer pain points

Abdelnour et al. explain that this recommendation “will help distributors provide technical expertise and value-added services that only they can offer, strengthening customer loyalty.” I think of this as innovating from the center of commerce, as introduced in Distribution Leans In. Distributors can go beyond tribal knowledge gained from representing suppliers by bringing experts and institutions, from vendors and academia, to work with customers on customer problems.

My first big idea for distributors is to become the essential partner for unlocking the Internet of Things’ (IoT) potential. As shared in this Deep Dive, McKinsey predicts that the pent-up B2B value-creating ability of the IoT will soon explode. But there’s a problem. B2B is complex. The data created by sensor-enabled and connected products are siloed and not easily shared across brands. Some suppliers consider IoT data proprietary and work to keep it so. Customers can collect the data but need help to act on it.

Enter distributors. Distributors already help customers optimize their operations, with knowledge delivered human to human, on the floor, through training, codified in service-level agreements and performance contracts, and sometimes sold for a fee as a service. Armed with IoT data, distributor value creation could expand exponentially to improve supplier user experiences and optimize customer operations and growth, as well as worker, company, stakeholder, and shareholder wealth. What’s needed are tech interfaces for accepting IoT data, and combining it with distributor ERP information and manufacturer product specifications and application parameters. Add advanced data and analytics, AI, deep subject matter expertise from experts and academicians, and distributors could be “the essential IoT partner” for driving performance, change, and innovation.

Recommendation #2: Build a distinctive supply chain to keep pace with digital leaders

The authors offer: “Traditional distributors aiming to offer a true omnichannel experience might need to forge innovative new partnerships and alliances.” Now, I think omnichannel is overhyped, underperforming, and basically a bunch of hokum copied mindlessly from retail. (Read my analysis here and learn that retail is abandoning omnichannel.) Still, Abdelnour et al. have a point. Distributors will win by offering a blend of physical and virtual capabilities, and putting the best of both together to solve customer problems. And as mentioned above, distributors will do their best by going beyond what they can do alone.

In the fifth chapter of Innovate to Dominate, I explored best practices for building a world-class innovation ecosystem. My goal was to help distributors build on existing value-chain partnerships with suppliers and distribution-focused technology vendors, to work with education institutions, incubators and labs, design thinking savants, builders of blockchains, startups and their venture capitalists, and governments local, regional, and national. Distributors should aim high. The bigger the problem, the more significant the role for distributors. And the bigger the value created or facilitated by distributors, the more expansive and unheard of are the partnerships.

Distributors must head large customers off at the pass to claim this future. In Quick Take: When customers lead the way, I wrote, “the U.S. Navy is building a blockchain-enabled logistics tool to manage medical inventory at home and abroad. … The Navy’s goal is to achieve ‘true just-in-time delivery of essential products such as blood and plasma.’” Then, I list the Navy’s specifications. I doubt that even the most sophisticated distributors can meet the Navy’s requirements, even if they had the expertise, time, and capital to make an attempt.

Here's another big idea: What if distribution, acting as an industry, reached out to the tech community for an industry-to-industry collaboration? Sound crazy? One leading venture capitalist, Andreesen Horowitz, has already argued that digital startups, guided by venture firm leaders and capital, are the best means to solve our society's and economy's biggest problems. Read Deep Dive: Collaboration Nation for the story and my argument that as community-minded business people serving business customers, distributors are a better partner than government for achieving Andreesen Horowitz’s vision.

Recommendation #3: Focus on tomorrow’s essentials and sales interactions

Abdelnour and his coauthors reveal: “Nearly every distributor will need up-to-date digital tools, including advanced analytics and the cloud, to personalize the customer experience and align with new “hybrid” ways of doing business.” This proposal acknowledges that as distributors do more and more work in the digital world, there is power in offering innovations where customers work as humans in the real world. But distributors are already digitally transforming, and what’s missing are ideas for doing business as humans for humans.

Anthony Howard’s research and book, Humanise: Why Human-Centered Leadership is the Key to the 21st Century, is on point. Howard explains that relationships are a go-to asset for fighting against “systemic challenges.” Disintermediation is nothing if not a systemic challenge. I have found that business relationships exist only in the real world, whether with customers or suppliers. Relationships are human and never virtual. Howard’s work leads to an implementable process.

My third big idea: Replace manufacturer-defined channel management processes with a new business process defined as collaborative channel venturing. I introduced “venturing” here as a process for fighting systemic challenges like disintermediation and disruption. As an idea, introducing a new business process centered around human-first relationships is an antidote to the empty, un-human world of digital commerce.

Venturing begins with agreeing on a shared purpose with partners, building on established relationships, and taking them further. Howard says that purpose is like what one sees in the movies when a spaceship flies toward an intergalactic docking station and is maneuvered by a tractor beam. In his words: “[Purpose] is a gravitational force that draws us in.” For fighting disintermediation, distributors may work with suppliers to focus on a shared purpose that may involve stepping up to help our economy compete on innovation. This shared purpose links to the current war in Ukraine and larger battles in the emerging struggle against autocracy. If not turned aside, autocratic regimes will impact how we all live our lives and do our work, chipping away at western values for entrepreneurship, community betterment, and jobs as a way to achieve economic and social wealth. (Read about free world innovation here.)

As a collaborative process, venturing is also about projects and trade. In commerce, projects are an upgrade to value propositions. Value propositions promise only “we’ll see” what happens. Projects promise “we will do” what matters. Trade acknowledges that building relationships go beyond monetary remuneration for partners, and the primary goal of human-centered business cannot be reduced to selling things. In venturing, trade includes intentional swaps of knowledge, capabilities, assets, financing, logistics, and other items of consequential value. Ultimately, venturing transforms the measure of partnerships from purchases and compensation to trust and loyalty—essential outcomes for dissuading and defeating disintermediation.

Recommendation #4: Bring privileged insights to decision making

The McKinsey article asserts that this recommendation is achieved “by tapping treasure troves of data.” Yes. Of course. Every business initiative in the digital age is about data; digital means data. As suppliers do more digital business with customers, the risk of going it alone without distributors is offset by predictive analytics and artificial intelligence. Data enables disintermediation. To dissuade disintermediation, distributors must leverage data to strengthen and reinvent the traditional manufacturer/distributor relationship, not undo it.

My fourth big idea: Commandeer the tired and decades-old “demand center” concept to develop and build a digital-age platform co-owned and collaboratively operated by manufacturer and distributor partners.

I discovered the idea of digital-age demand centers reading the Harvard Business Review article  “B2B Customers Expect More Than Ever; Demand Centers Can Help.” I learned that modern demand centers are a resource built to align with the growing need for business customers to control how they buy and to meet emerging expectations for a blend of human and digital experiences. Here’s how demand centers work, according to the article:

Demand centers identify business opportunities through inbound marketing (e.g., personalized customer journeys with tailored content and experiences) and outbound marketing (e.g., paid media, events, webinars, and emails to find customers). Demand centers prioritize and qualify leads and orchestrate customer outreach. Sometimes, the response is digital (e.g., the demand center generates an email with personalized content). Other times, the demand center provides guidance and content to help an inside or field salesperson follow up. Together, digital tools and humans adapt to connect with customers at the right moment in their buying cycle.

Data is the cornerstone of digital age demand centers. Acting alone, a distributor or manufacturer might build a demand center, leveraging the power of owned data resident in an individual company’s information systems. But when it comes to data, more is better. By pooling data with well-designed roles for protecting proprietary interests, data centers might revitalize the traditional value chain partnership. More than that, by working together through demand centers, manufacturers and distributors can outdo disruptors. By migrating business to their marketplace platforms, disruptors hope to compete on what is essentially an in-house, on-platform data center. But, disruptors only gain transactional data. Data held by distributors and manufacturers represents customer interaction before and after the purchases as well as the value created by product performance and distributor services. A manufacturer/distributor demand center might not only dissuade disintermediation but might also defeat disruption.

Note: My exploration of demand centers is just beginning. Read here and here for my first two forays.

Join our community by asking questions

Disintermediation is a strategic threat to distributors. Disruption undoes the value chain partnership between manufacturers and distributors. Disintermediation and disruption go together. Disruptors hope to attract manufacturers to online marketplaces, and by doing so, disruptors defeat, displace, or co-opt distributors. Big challenges require big innovations, and innovations start with ideas. Inspired by the McKinsey article, I’ve offered four ideas:

• Distributors as the essential partner for unlocking the power of IoT data;

• Venturing as a collaborative business process to upgrade or replace channel management;

• An industry-to-industry collaboration between distribution and venture-funded digital startups;

• And demand centers to unlock the value of shared data.

My ideas are just a start, and I welcome your challenges and, more importantly, your questions. Why these ideas and not others? How do ideas lead to innovations? How can distributors generate ideas? Should distributors pursue ideas as moon shots, meaning industry-wide initiatives, or as one-off actions by individual distributors (also known as loon shots)? Please share your comments, ideas, experiences, and direction below.

Don’t be a stranger. Click here to schedule a call or send me a note at mark.dancer@n4bi.com.