Deep Dive: Toward a new strategy for distribution

Can we crowdsource our way to a framework that will help distributors lead the value chain in the digital age?

In this edition, I attempt something new. I try to crowdsource a strategy framework to fill a gigantic gap. If distributors are to achieve their fullest potential and lead in the digital age, they need a go-to-market strategy methodology that is by and for distributors. Below, I make my case, offer several initial hypotheses, and explore the fundamentals of channel strategy as used by manufacturers. I will seek feedback and ideas directly from business leaders, innovators, and experts to get going. My newsletter platform, Substack, has just launched a new feature for creating conversation threads around a focused topic, and I will attempt to use it to foster a dialogue among my readers. My goal is to push our thinking forward together. Ultimately, I hope to expose and explore a new purpose-driven strategy discipline for distributors, one that aims to build a global and local supply chain that is resilient, responsive, and regenerative.

Developing a strategy of our own

I frequently argue that distributors must embrace channel strategy as a core competency in the digital age, but my recent work has changed my mind. Channel strategy is wrong for distributors. Dead wrong. It’s a dead end. Channel strategy will take innovative distributors down the wrong path, driving them to pursue the wrong customer outcomes, misdirect the application of digital technologies, and fail to modernize the traditional supplier/distributor partnership for the digital age.

Distributors need something more and something new. Channel strategy is for manufacturers, a planning framework for taking products to market, adding value that completes a product’s full potential for customers as they use, consume, or integrate a supplier’s products to execute the customer’s business objectives. Distributors play a crucial role for manufacturers by representing a line card of brands and products, stocking them and taking orders, and sometimes working to generate demand, penetrate new markets, or launch new technologies. Through discounts, rebates, programs, and policies, manufacturers reward distributors for helping them, optimizing distributor profits by aligning them with selling products. Distributors argue that they exist to serve customers, but in reality, they serve two masters: customers that buy products and manufacturers that create them.

Distributors are radically reinventing their business models for the digital age. They need a strategy framework that does what channel strategy does for manufacturers—a design and planning tool for going to market, one that aligns partners with optimizing customer value, but with distributors in the lead, not in the service, of other companies. I do not believe such a strategy method exists, nor is one under development. Distributors are creating new customer experiences, implementing omnichannel capabilities, and considering what it means to operate as a connected business in a value chain that runs on data and algorithms. These are all worthwhile initiatives, but they fall short. They do not conceive the fullest vision of what distributors might become as radically reinvented intermediaries because they are borrowed from disciplines developed to advance the interest of manufacturers, retailers, and technologists. Distributors need something new, and they need it now.

Generating new ideas

As promised above, here are several hypotheses offered to crowdsource a discussion about a revolutionary and empowering go-to-market strategy process for distributors. I don’t know if these are right or wrong, complete or unfinished, helpful or not, and I ask for your assistance:

• Data supremacy. In the digital age, data creates value, not products or services. Companies that can aggregate data from customers, the value chain, environmental conditions, and other sources will create algorithmic services that disrupt traditional distributor roles.

• Unimaginable scale. Digital technologies deliver their best results at scale. New mega competitors will emerge as large manufacturers, distributors, and platforms achieve unprecedented scale and use it to dominate traditional value chain players.

• Localness. At the same time, hyperlocal business models may emerge to compete on community engagement and integration, with operations and value propositions built around revitalizing skilled trade professions, economic vitality, advancing the quality of life and wellness, and other essential elements of the human condition.

• Beyond globalization. The global supply chain is in crisis, reacting in ways that may lead to reshoring of overseas operations and new solutions for managing risk. As “last mile” players, distributors will offer new services that integrate supply chain management and onsite value creation for suppliers and customers.

• Human-centricity. In the long run, changing generational values around work—combined with continuing workforce shortages, automation tools, and education practices—will determine the human-centric value distributors may offer to customers.

A few editions ago, I penned a piece about rethinking channel strategy and applying an updated approach for use by distributors. In the next section of this edition, I review the core of that article, not as practices to be copied because what works for suppliers may not be helpful for distributors. For example, manufacturer channel strategies optimize coverage—a carefully calculated number and mix of distributors to reach and serve targeted customers. In a distributor go-to-market strategy designed to take data-enabled services to market, distributors need a carefully calculated number of and mix of partners that may include manufacturers and new collaborators, including data aggregators, artificial intelligence labs, and more. Just as suppliers add distributors to achieve coverage, distributors may add partners to execute a strategy variable that is not yet named.

Examining every channel strategy variable may seem like a complicated analysis, but it is essential. Manufacturers dominate the value chain because they implement disciplined channel strategies. When it comes to go-to-market planning, distributors are outgunned. Thoughtful distributors may achieve leverage over suppliers by developing and implementing go-to-market processes that are worthy of the new radical roles they are creating as digital-age competitors. With your help, we will examine every channel strategy variable that manufacturers use to achieve dominance and adopt, morph, or discard them for use by distributors.

A whirlwind tour of channel strategy fundamentals

Manufacturers make products. Products must be sold and often require support before the sale, which can include answering questions, customizing features, integrating into a total solution, and more. After the sale, products need support that might include maintenance, troubleshooting, repair, upgrading to newer models, and more. For manufacturers, channel strategy is about deciding how many customer activities will be retained and how many will be transferred to indirect channel partners such as distributors. Retaining all customer activities is often not a viable strategy because business customers want choice and to manage their acquisition costs. Distributors meet these needs by offering a market basket of products and brands, providing customer support that transcends any manufacturer’s knowledge, and spreading their customer servicing costs across their portfolio. As a result, manufacturers with direct and indirect channels usually achieve higher market shares and lower overall go-to-market costs.

For all these reasons, manufacturers must have a channel strategy, and over many years, several fundamentals have emerged, sometimes referred to as the “Five C’s” of channel strategy:

Capabilities. Channel strategy begins by understanding the capabilities required to provide support across the entire customer journey, often organized around pre-sale, transaction, and post-sale phases. These capabilities are mandatory, but the decision to retain or transfer them is critical because they must be delivered effectively and efficiently, with a loyal commitment to supporting the brand.

Coverage. Coverage is about aligning capabilities with customers and prospects. Coverage planning begins with an honest assessment of what distributors can do better or less expensively than manufacturers. Once these facts are known, coverage planning includes several elements:

• Distribution policy. The most fundamental coverage decision goes to how many distributors a manufacturer prefers to have in any given territory. Options include exclusive policies (one distributor per territory), selective (a small number of distributors), open (take on any distributor that wants to carry the manufacturer’s products), and saturation (as many distributors as possible).

• Customer relationships. What do customers value in their relationship with the manufacturer and potential distributor partners? Is one relationship stronger than the other? Do the relationships support each other, are they independent, or are they in competition?

• Partnering. Manufacturers that transfer many vital capabilities to distributors generally want a powerful partnering arrangement and therefore offer selective or exclusive territories. Doing so limits the competition faced by distributor partners. In return, distributors invest more in aligning with and supporting the manufacturer’s brands.

• Selection and authorization. The final step is to recruit, sign-up, and authorize the appropriate number of distributors to achieve policy, relationship, and partnering objectives. Manufacturers will sometimes implement a tiered distributor structure, in which a mix of high- and low-support arrangements optimizes coverage and market share.

Compensation. Channel compensation plans set distributor purchase prices and add incentives in the form of incremental discounts and rebates. Compensation plans are designed to align with capability and coverage needs, allowing a distributor to earn an acceptable overall margin for supporting the manufacturer’s products. Incremental incentives drive the manufacturer’s objectives for sales volume, reward distributors for making investments, or encourage specific sales, marketing, or customer support activities. Bottom line, the compensation plan divides the overall available margin between the manufacturer and its distributor partners.

Controls. Controls are measures for enforcing specific distributor behavior around order quantity and frequency, returned goods, participation in marketing plans, policing competition for customer projects won through bids, encouraging lead generation or customer development, and many more. In addition, controls are about establishing shared business processes, managing costs, and delivering the right level and quality of customer support.

Communication. For a manufacturer, communication is about establishing the patterns, frequency, and depth of conversation with distributor leaders, product managers, marketers, salespeople, and more. Communication needs define a manufacturer’s channel management policies, programs, and staffing. Some manufacturers assign distributor channel management as one responsibility of many to the company’s salespeople. Others set up a dedicated channel organization with channel managers, data analysts, customized software, product and sales trainers, and more. Regardless of form, every manufacturer’s channel management resources are responsible for the tactical execution of the channel strategy.

Will you help create a go-to-market strategy framework for distributors?

My work with distributors and their associations reveals that distributors are on track to inventing a new role as an intermediary in the digital age. Progress is happening in fits and starts, and more by organic evolution than following an intentional path. Manufacturers rule the value chain because they have a strategy for doing so. Channel strategy, as executed by manufacturers, bends distributors to their will. Lacking a strategy, distributors mostly comply. As intermediaries, distributors have not felt the need for a go-to-market strategy. But, as distributors reinvent their business models, they need a strategy for taking their capabilities to market. By filling a gap, distributors can build their bridge to the future.

What do you think? I would love to hear from you. All comments and ideas are appreciated. If you like, please consider these questions:

• Do you agree that manufacturers have a go-to-market strategy and that distributors need a version for themselves to achieve their fullest potential?

• Do my hypotheses point to significant threats or opportunities for distributors? Do you see how a go-to-market strategy can help distributors survive and thrive?

• Can you imagine that a distributor-first strategy might help reinvent partnerships with suppliers and perhaps lead to a collaboration with new entities that might include marketplace platforms, energy producers, educational institutions, and more?

As always, I am available at mark.dancer@n4bi.com. Please add your comments below and look for my coming discussion thread, published here on the Substack platform.