June 4, 2003 - Distribution Channel Commentary (DCC) # 27


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I received an e-mail from a friend with the following instructions that I would like you to try:

Go to www.google.com then type in your phone number (separated by hyphens, including area code) and click on Google Search. If your phone number is listed, it will show your name and address and give you two map options: Yahoo and MapQuest. See how accurate the map is to your home.

I did it; my name popped right up; and the map was surprisingly accurate. So what? My friend thought it was "VERY SCARY." He went on to encourage his friends to contact Google to remove our telephone number from their database and forward on the e-mail to others.

Besides the amazing speed of Google and the accuracy of the map to my house, my emotions were rather neutral. My thoughts drifted back more than four years ago when people were up in arms about our privacy being invaded due to the Internet. Scott McNealy, the CEO of Sun Microsystems, commented at that time with something like: "No one in the US has had any informational privacy for some time, so get over it!" He went on to suggest that we might look at the upside benefits of: being able to get the information we wanted quicker and more accurately, and only being bothered by solicitations that were exactly what we needed when we needed it, which would make it "lucky", useful, non-junk mail. I thought then and now that both points made sense, so now I feel glad that if someone around the world wanted to get in touch with me quickly, they can with Googleís help.

Too bad we canít get the same type of useful, fast data within our businesses to better define and execute our best strategy for improving profits and grow faster in spite of the generally tough economic conditions that most distributors currently face. Most distributors are, however, drowning in financial data that has nothing to do with creating service value for the right customers in the right niche. Their financials donít even measure the effectiveness of their intangible assets - people, processes, trust relationships on the buy and sell side, locally tuned inventory, etc; they only measure the tangible items which has been fashionable since 1492. What 99% of distributors need is more "strategic performance information" (SPI), so that they can stop subsidizing losing elements of their business and start synergizing with their best opportunity, intangible assets. This commentary will use SPI as a theme and look at different aspects of our SPI information gap and what to do about it.


Two weeks ago in DCC 25.5, I shared my recommendations to one of our video users who had written in that he was .." Choking on too many good ideas from the video." I got a follow-up response to those thoughts from another client which included the farmerís response to the U.S. Dept of Agriculture chapís offer for some free, better-farming educational services: "Son, I already know how to farm two times better than Iím doing. Why would I want to know even more."

Assuming many of you in reader land are similarly frustrated with past change programs that fizzled, I have put together 14 annotated slides in a slide show posted at our site under the "slide show" button entitled "Closing the Knowing-Doing Gap."

REGARDING THIS SLIDE SHOW, I HAVE A FAVOR TO ASK. Are these annotated slide shows intelligible and helpful? Should I do more? On any particular subjects? Thanks!


My sub-heading above is in quotes because it is the title of an article that is currently posted at the virtual magazine "Optimize" at this URL: http://www.optimizemag.com. The lead author, Geoffrey Moore, is an excellent writer and successful IT consultant who authored the book "Crossing the Chasm" among others.

Before summarizing a few of his points with comments, here is a gentle plug for Optimize. I like to check it out once a month for several reasons:

  1. They tend to get better than average writers that offer better than average breadth and depth of content (for free!).
  2. Their focus is on how companies can use technology to better execute strategy, which happens to be a huge, untapped opportunity for most distributors.
  3. They tend to do a good job at offering bigger picture summaries of IT trends in words that the non-IT executive can understand, although the pitch is still to the "CIO" (the Chief Information Officer)

Their article suggestions can get a bit theoretical, because they have to address all industries with a bias towards big business CIOís who can afford to be less pragmatic than distributors. These qualities can make it more difficult to find relevant connections to distribution companies, but cherry-picking ideas and relating them to distribution companies and channels is where I try to help.

Now letís cover Mr. Moore and friendís article. Hereís the URL: http://www.optimizemag.com/issue/019/management.htm;jsessionid=IJPHU4QXHB5SCQSNDBCCKHSCJUMEYJVN. It starts out this way:

"Cutting expenses is painful, but straightforward; finding a strategy to grow your business is much more difficultÖ.just finished the latest round of cost-cutting activities. Every vendor has been squeezed, every lease renegotiated, every dollar of capital (and discretionary) expense cutÖtime to turn 100% of our attention to growth"

The authors then go on to detail eight roadblocks to growing. Here are re-phrasings of my favorites:

  1. Growth requires new: ideas, products, partnership deals, styles of leadership and organizational structure. Itís all too daunting. Itís easier to cut and hope that the economy will come back and lift all boats.
  2. Financial ambition goals donít work because no one believes that they will really happen. Sales reps will forecast whatever increases you want; everyone will try harder for two weeks, and then the numbers will be what the economy and the channel will let them be.
  3. Too much analysis and too little creativity. We measure every expense by person, by department, but who is actually re-thinking the business from a target-customer, value-creation viewpoint, then changing service processes that thread through departments. Or, other strategic level re-alignment approaches?
  4. Spending any extra resources Ė all the equivalent of borrowed cash Ė at this time is the worst time. There seem to be few big upside opportunities to pursue.
  5. The sales force canít re-conceptualize what they are doing. If they could they should have the CEOís job. "They are only the channel, not the growth engine" that we wish they could be.

How to overcome these roadblocks? The article shifts to vague guidelines, but here are a few of their themes that I would like to build on:

  1. "The key goal of a growth plan is to nail down the factors that drive growth for your company." Weíve done that for all distributors selling mature product lines into mature customer segments in two key documents: the 14 annotated slides at this URL: Good_to_Great_Distribution_Results.pdf. And, in our 23 page "strategy paper" which can be requested by e-mail from karen@merrifield.com.
  2. "Plans never workÖthere is never a right answer...navigating a slow economy is like white-water rafting. You have to make it up as you go along." For more on transition management and dealing with three types of problems including total surprises see the slide show promoted in #2 - The Closing the Knowing Doing Gap slides.
  3. "Growth through acquisition doesnít count. While acquisitions can be an important way to grow, to a growth purist, they are not scoring opportunities. Growing by buying up someone elseís customers (and problems these days) is an expensive and ultimately unsustainable strategy and often takes your eye off the real target." Look at the premiums that were paid for distribution companies, especially by foreigners in í99 and Ď00 that are now in turmoil. (For example: want to buy US Foodservice? It now appears to be on the block.) And what are the "scoring opportunities?" I think it is creating lowest total procurement cost value for the right customers in the best-fit customer niche at each distribution location. Why buy more profitless volume if we canít run what we have in a top 5%-ile fashion?

In summary, this article does a nice job on why so many companies just cut costs, hope and look for outside causes to blame for tough conditions. The suggestions for what to do about the roadblocks blur, because they canít write relevant strategic guidelines for all businesses in one article. And, the suggestions to use IT for strategic advantage fall flat, because IT is a tool to serve a strategy. If you donít know what your best profit-growth strategy is then no IT tool can help you in a focused, relevant manner. For more help on the strategic re-visioning thing check the next topic below.


Regular readers of this commentary series know that I have spent a lot of time offering very prescriptive strategic how-toís for mature commodity selling distributors. I have even created two summary documents on how to strategy. Again, they are:

  1. The good to great slide-show at our site. And,
  2. Our 23 page "strategy paper" which is free via e-mail upon request to karen@merrifield.com. (Hundreds have gone out in the past two weeks!)

But, lets take a longer-term (100-year) and higher-up (30,000 feet) perspective on what are the right business success assumptions to hold. Here are 4 key themes that you donít want to be on the wrong side of:

  1. Pushing Products through geographic based sales agents (the 4 Pís of marketing: product, promotion, price, place) has been fading fast in effectiveness versus delivering the lowest total procurement cost value to the right customers in the right, best niche, one niche at a time. Weight them 90%+ for TPC and 10%- for the 4 Pís. The Proctor and Gamble product manager model still seems to hold, however, a 90/10 advantage over TPC selling to the right customers for both manufacturers and distributors.
  2. (For more on the history of TPC see page 3 and 4 of our "strategy paper." A site worth a monthly visit is www.valueadded.org; itís all about case studies on how MRO product manufacturers and distributors are measuring and co-creating TPC savings with channel partners. This month check out the survey a manufacturer is using with distributors to subtly sell their TPC value, here is the link: http://www.valueaddedpartners.org/downloads/Ashburn/Distributor%20Survey.pdf ).

  3. Financial management is only a small portion of high return economics for all stakeholders in a business. Can you identify the bad side effects of managing your business with the Ď60s mantra of: "Buy low, sell high, collect early, pay late, hire cheap and work them hard, sell more for economies of scale"?
  4. On the last point above, selling more volume for economies of scale used to work for most manufacturers (think black Model T approach losing to the JIT assembly and mass customization of PCs at Dell); but, it never worked for distributors. Service is a variable cost created by individuals who are hard to standardize. If they arenít busy, we still pay for them and lose their potential productivity. We canít warehouse their activity value for peak demand surges later in the day or year. And, every important customer gets customized services. Most durable goods distributors have far more, de facto, special stock for only one customer at their locations than they realize.

    If financial management encourages us to push products and buy market share through acquisitions, it will keep us from creating distinctive service value for targeted customers. Instead, we should be embracing service retention economics that focuses our attention on managing all of our intangible factors Ė people, processes, channel relationships, etc. -Ė to serve the right customers with an entire new set of shared SPI that is missing in most distribution companies. If we re-weight financial management to 20% or less and service retention economics 80%+ then we will get better financial numbers as well as inventory turn-earn, highest fill-rate advantages of scale within a customer niche within a shipping geography. (Where will you find that last concept in your financials?)

  5. "Theory X, theory Y" was first articulated by Douglas MacGregor in 1960 which started the human potential on the job movement. It has continued to evolve into self-organizing, open (eco)systems stuff. But, donít get caught up in theory! If a distributor wants to achieve basic service brilliance (which is the low-cost, high-value, high-morale way to go) for each customer niche and strata they target, then we will have to dramatically down-weight the theory X, command-n-control, departmental cost and efficiency measurement activity with the related sticks and carrot incentives. Then, as long as hard SPI from hell is shared with all employees along with responsibility and incentives for making them happen, we can evolve a blended approach of theories X, Y and open systems. UPS, FedEx and LL Bean do this, why shouldnít we? (For a short slide show on theory x, y and open systems check out: http://www.owlnet.rice.edu/~psyc231/Lecture_Notes/psyc_231_ch14_OT_OD.ppt )
  6. Donít expect a traditional business economic recovery to give your business relief this fall. The normal recovery (like all of the ones we have had since WW2) that was suppose to come in the second half of the year for the past three years hasnít come for some big structural reasons. We are in the first post-bubble, global capital expenditure, debt-exhaustion, boom-bust that we have had since í29. And, this one is 2.5 times bigger in proportion than the last with some additional serious structural complications. Be prepared for more of what we have had for the past 3 years for the next 10 or so. If we have to live underwater, we will just have to grow gills better than 50%+ of our competitors, which shouldnít be too tough if we are the right side of all of these trends. (Want more on post-bubble management see article 1.10 and support notes at our site.)

If anyone out there wants more detail or history on these big, mega management trends/themes, let me know. I donít want to waste my time and yours on too much detail. Let us suffice to say that: we need to understand the big trends and go with them instead of unconsciously hanging on to obsolete success assumptions. We will, however, take a closer look at the first theme, the shift from the 4 Pís to customer relationship/profitability management, in the next topic.


I have been making big bucks within my own distribution firms and indirectly through clients on customer-centric profitability plays since 1975 when I ran my first experiment on team selling for core and target accounts in the paper distribution channel. In the summer of í76, I rammed through a small order management program over the protests of three disbelieving branch managers with great results that were commemorated in the Harvard Business Case study, "Paper Distributors, Inc. (E); The Small Order Problem." My thinking and practices in this area have continued to progress ever since, but 90%+ of all distributors still arenít hearing them, let alone buying them. What an opportunity for the few!

Perhaps after 20+ years of preaching, my time has arrived. Could it be that Customer Relationship Management (CRM) software vendorsí collective promotional efforts along with a writer from Fortune magazine, Larry Selden, will put customer-centric profitability management thinking into the credibility mainstream?

Larry Selden? Check out his article in the 9-15-02 issue of Fortune entitled: "Will This Customer Sink Your Stock." Hereís a key set up paragraph followed by the link:

"Get ready for a big idea that's about to sweep through most companies: managing the enterprise not as a collection of products and services, not as a group of territories, but as a portfolio of customers. Of course, managers have always known that some customers are more profitable than others. But it's amazing how many executives, like those of that big retailer, haven't the least idea just how profitable (or unprofitable) individual customers or customer segments are. http://www.fortune.com/fortune/articles/0,15114,368649,00.html

Selden has since co-authored a book that is due out any day entitled: Angel Customers and Demon Customers: Discover Which is Which and Turbo-Charge Your Stock. I will let you know if it is worth getting in the near future.

As for CRM software, first what is it? Lots of software vendors are selling lots of variations of application software that, among other things, usually tries to consolidate all the information about a customer in one place so that service people who have "touch points" with the customers can make those interactions better. The big goal for CRM is to retain and sell more to customers.

Because these software apps are tools and not a strategy, they canít tell a firm: what its #1 historical best niche of (profitable) customers are; how to define, measure, achieve and sell basic service excellence tuned to each niche and strata within; etc. Nor, do most packages include any activity based costing to figure out who has been historically profitable or not. So, it isnít surprising that there have been lots of mixed reviews from companyís that have tried these packages. (For a good overview article entitled: "Why Some Companies Succeed at CRM (and Many Fail)" go to this link: http://www.ameinfo.com/news/Detailed/16856.html .

Because so many CRM firms are promoting these new packages, they are recycling and distributing all of the studies on: service retention economics, re-thinking businesses around profitable customers, etc. that go back to the early Ď90s at least. These infomercials are also discrediting or under-weighting the 4 Pís thinking that has supported product management through channels for too long. (For an article that touches on "lifetime value of customers, customer acquisition and retention costs" etc. skim through "What Are Your Customers Worth" at: http://www.optimizemagazine.com/issue/007/roi.htm.

This last article reference will not give you the pragmatic, distribution specific answers that you will find in our articles, commentaries and video, but it has good general concept examples.)

In closing, the CRM packages out there are generally too tricked out for distributorsí initial needs. The typical distributor should consider doing the following steps (how-to details are in our "strategy paper" and video):

  1. Do simple customer profitability ranking reports.
  2. Determine from amongst the most profitable customers what each locationís historical best niche(s) has/have been.
  3. Do a better, total basic service job for core and target customers in those best niches.
  4. Segment and serve different strata of customers within a niche differently and simply.
  5. Then, if you want to do more informationally enriched, extra services for better accounts, design your CRM capabilities with a guiding strategy and target accounts in mind.


Because the underlying theme of this commentary has been SPI (strategic performance information) and we have referred to a number of Optimizemag.com articles aimed at the CIO, shouldnít we be asking who will fill the CIO role at a distribution company? Who will figure out: all of the SPI needs, how to capture the data, how to generate, share and educate 100% of the employees to use the new reports?

For distributors that run their businesses on a distribution-specific software package, the logical solution should come from the software vendor. Most of the bigger, better distribution software vendors already have: 1) "business intelligence packages", 2) simple to fancy customer profitability analysis packages and 3) consultants on staff looking for more work. What has been missing to make these three factors work together is a crystallized definition of a distributorís historic strategy based on customer profitability ranking reports. If the vendor and the distributor work together on tuning the existing software to support our prescriptive good-to-great, distribution-results material, the SPI solutions will emerge.

Vendors could easily develop a strategic audit process that they could offer to their user groups based on our customer profitability methods and their software with which they are intimately familiar. Then, the "upgrades and mods" to their BI/SPI and customer profitability packages would follow. It could be an entire new product, service development path that actually does grow profit power for distributors. Distributors should ideally want to get both an economy of CIO and SPI solutions from a vendor, but not share their new strategic support tools with other competitive distributors that may be in the vendorís total user group.

This intra-group conflict could be an issue, but solvable. The software vendor could create, for example, sub-groups or forums within their total user base of non-competitive distributors that could then share: the same CIO-consultant, SPI development work and implementation success stories and discoveries. It is ultimately better for an ambitious distributor to get the right tools and execute well than to worry about competitors who are not going to do anything even if the new, right tools are handed to them.

Any thoughts from readers out there on this radical proposition?


Thatís all for this week!


Bruce Merrifield