January 28, 2004: Distribution Channel Commentary (DCC) # 55

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THIS WEEK’S TOPICS

  1. CHICAGO LOSES 2 MORE HISTORIC CANDY BRANDS.
  2. STATS ON HOW EXECS GET ADVICE.
  3. BEST BRANCH MANAGERS WORK OUT WITH THE WEAK.
  4. CONTRACTORS BENEFIT FROM FREE MBA ADVICE.
  5. FIGHTING FOR YOUR PRICE; SELLING YOUR SERVICE VALUE.
  6. CASE STUDY: SELLING PRICE WORKS FOR THE FIRST IN A NICHE.
  7. IS DINOSAUR MATING BACK? BIGs THAT FIZZELED THIS PAST WEEK.
  1. CHICAGO LOSES 2 MORE HISTORIC CANDY BRANDS.

Chicago’s reputation as the capital of the nation’s candy industry took another hit recently when both the factory and retail stores for the Fannie May and Fanny Farmer brands closed. The brand names were sold to another manufacturer that will make them available through grocery chains and mass merchants.

What are the lessons for most other manufacturers and their distribution channels?

  • Manufacturing will continue to leave the U.S. with its high labor, regulatory, legal and insurance costs for foreign locations.
  • Distribution channels have to keep reducing old-world, high-cost, traditional services to a value mix that customers will still pay for. This includes eliminating a lot of slow moving items for which there never was a big enough final demand.
  • Channel end-users who are both time and economically pressed continue to buy more standardized items, from fewer suppliers with better one-stop-shopping fill-rates and a lower total procurement cost. (I wouldn’t be surprised to see value displays for boxes of Fannie Farmer chocolates in Wal-Mart for Valentine’s Day 2005!)
  • The number of employees in traditional channels will continue to drop. Chicago had an estimated 13,600 workers in the candy industry in ’95 and now has about 7,000.

Every distributor of physical goods in the US has to rethink their business model. How can we:

  • Downsize our business activity to that which is profitable, and that we can further dominate?
  • Upgrade all of our operational elements by weeding the least effective elements?
  • Refocus on our most historically profitable customer niches to refine our unique, service value proposition to an outstanding level.
  • Revive our growth in those customer niches by: consolidating out miscellaneous suppliers, achieving highest competitive retention rates, and stealing the few target accounts in the niche(s) that have a growth future for both themselves and their supplier of choice.
  • Reinvent or reweave our corporate (operational) fabric? All of our employees, processes, metrics and incentives will have to be re-tuned to make this competitive transformation successful. How can we get most of them to be part of the new solution instead of part of the change resistant problem? Do they see the bigger, longer-term picture and what is in it for them?
  • Then, invent by doing spin-out, start-up ventures with living-edge, adjacent-to-our-core opportunities. We have no business trying new growth adventures until we are first the distinctive best at what we are already doing and throwing off excess resources – time, talent and treasure – with which to invest.

Here’s the link to the article on Chicago’s fading candy industry: http://www.nytimes.com/2004/01/20/business/20candy.html.

And, here’s a link to a transformational, educational solution in a box for a negligible cost/hour of employee training that will help you: downsize, upgrade, refocus, revive, reinvent and invent: http://www.merrifield.com. (check out all links on the "High Performance…" video in the center of the page!) It’s guaranteed!

    2.    STATS ON HOW EXECS GET ADVICE.

In turbulent times, executives will naturally need more, different and better advice on how to better define what they and their company have really been doing and how it must change. The Financial Times recently ran an article entitled "Priceless Advice of the Kitchen Cabinet" which gave a good, but incomplete review of a "Mori survey" that will be released later this week. The link to the FT article is below as well as one to Mori’s homepage (public opinion poll service in the UK; interesting site). Because the FT article will only be accessible to subscribers, here are some reconstituted stats:

If an executive does seeks advice, on what topic is it:

  • People issues was the #1 topic.
  • Strategy was at #2, although only 32% of executives would seek counsel on this subject matter. Inference: a lot of executives seem to think that they know what they are strategically doing? Yet they and their management "team" would flunk the customer IQ quiz at this link: ./exhibits/Customer%20IQ%20Quiz.pdf.
  • Reassurance on decisions already made was also about 32%. Shoot, then ask questions?
  • 1 out of 101 executives did not ask anyone about anything. Are these folks that brilliant or that insecure about admitting that they are not omniscient?

If an executive did seek advice, what were the criteria that they used for selecting an advisor:

  • "Trust" them was mentioned most frequently by 87% of the executives.
  • "Objectivity" (with no percentage reported) was next.
  • "Experience and Discretion" then followed.

What types of people were the executives most likely to turn to for advice?

  • Most "senior colleague" was the top choice (check with the boss).
  • 63% turned to their spouse or partner.
  • The "finance director" scored the same as the spouse (is it in the budget?).
  • Other board members was next without a percentage.
  • 40% would check with peers in unrelated industries. (In the YPO organization, the "forum" activity, a networking group comprised of local, non-competing executives, is the #1 most valued activity. In the TEC Group, members dispense with most of the YPO’s socializing, travel, etc. and focus mainly on facilitator-led monthly meetings with local, non-competing executives. Both organizations are providing de facto advisory boards for participants.)
  • 36% check in with "friends".
  • 28% consult both "human resource directors" and "external legal advisors" (legal consultations would undoubtedly be higher in the more litigious USA).
  • 21% go to "accountants".
  • 20% to "management consultants". ( L )
  • 16% with "executive coaches".
  • 15% with "executive secretaries".
  • 12% with "marketing directors". (Seems interestingly low, doesn’t it?)

Because these are most "interesting times" for people in the manufacturing and distribution of physical goods in the US, it might be time to stop and critique the quantity, quality and mix of the advice we have been habitually seeking to insure that it is appropriate for the times. For more information on rethinking your advisory mix, you can "google" the phrase "finding good advisors". Here is a link to a typical small business guidelines article that you might find that way: http://www.usbusiness-review.com/content_archives/0312/01.html.

Here are the links to the FT article http://search.ft.com/search/article.html?id=040116001020&query=%22kitchen+cabinet%22&vsc_appId=totalSearch&offset=0&resultsToShow=10&vsc_subjectConcept=&vsc_companyConcept=&state=More&vsc_publicationGroups=FTFT&searchCat=0.

And, Mori’s homepage: http://www.mori.com/pubinfo/index.phtml.

    3.    BEST BRANCH MANAGERS WORK OUT WITH THE WEAK.

There is a new reality-based TV show in the UK called "Boss Swap" in which two bosses from different companies are switched into the other’s position for two weeks with big incentives to make things happen. The feedback from both the underlings on the job and critics of the show were abysmal, but it did make me think of highly successful variation on a theme that distribution chains can use:

Here’s how one chain’s top executives got great results from the "branch manager work-out plan":

  • They assumed that several branch manager heads could be better than one in a turnaround branch situation and that other branch managers might be able to offer different, better- chemistry advice to besieged peers than the "help" that top management had been offering.
  • They had an incentive program in which all branch managers’ performance incentives were tied to how well the entire company did on its financial targets. So, the best branch managers had a lot of incentive dollar upside if the worst performing branches did better.
  • They tried a cheap experiment. They asked if any struggling branch managers would like to invite any two of the top 10%-ile branch managers in for a 1 to 4 day consulting gig.
  • All three of the managers had to be up for it and propose a schedule/agenda of what they would do for the chosen amount of time. One guideline was that both visitors would spend front-end time traveling half-days with different sales reps to see only: core, target and problem accounts. Then, they could spend time inside each interviewing a cross section of employees. And, they would have wrap-up meetings through dinner meeting sessions each day that they were there.

I’ll spare you the rest of the details, but it was and still is a big success (as needed and requested). Think about it! How else can we get more rapid improvement and renewed can-do energy for the cost? These internal consultants are instantly up to speed with everything at their "client’s" location and will see lots of little improvement opportunities that will yield immediate results. If we want to create a "learning organization", why not make as many people as possible "teachers". First time teachers always learn more than first time students. In the case above, the visiting branch managers may have gotten more ideas and can-do energy out of the assignment than the struggling branch manager. And, making your very best even better always yields great results.

   4.    CONTRACTORS BENEFIT FROM FREE MBA ADVICE.

For distributors who sell to and through small business people, you might be interested to read about how NYU’s Stern Business School has sent MBA students to work with small businesses, like Ken Taylor Plumbing, to help them get big results. Smart distributors to small business segments have always:

  • Identified bigger, better customers who are de facto partners who call the distributor first for most everything they buy.
  • Turned these core customers into living edge advisors and laboratories for new ideas.
  • Helped their best customers network with other, non-competing best customers.
  • Provided free consulting services to co-create new profitable growth solutions that can be shared with other partner customers in the same segment.

These steps add up to "enlightened, longer-term, self-interest". If distributors want to grow their profits, then they will have to land, retain, dominate and help grow the best 10% of a mature-industry, customer segment. When these customers grow by taking industry share from the most poorly run customers, they will buy more volume, in larger average order sizes on best turn-earn items from the helping supplier.

Maybe some distributors who are located in the same city with an MBA program can match students with contractors as the NYU Business school did. If you want to read about how "Ken Taylor Plumbing" grew at 28% and then 38% in consecutive years with MBA help, here’s the link: http://www.stern.nyu.edu/News/news/2004/january/0119ft.htm.

    5.    FIGHTING FOR YOUR PRICE; SELLING YOUR SERVICE VALUE.

In last week’s DCC, I provided links to distribution-specific, how-to information on getting paid for service value (See DCC #54.1). My selective perception for the topic has continued to flag material relevant to this vital challenge. This week I encourage you to check out:

"Fighting for your Price" which is a McKinsey Quarterly article that details how big buyers of commodity goods are systematically squeezing profitability out of suppliers in pursuit of ever lower "total cost of ownership". This trend is huge and will filter down from the big buyers to the smaller ones in all channels. But, the article also details how suppliers can and must fight back. Here’s the link to a big content piece: http://www.mckinseyquarterly.com/article_page.asp?ar=1228&L2=3&srid=69.

For more guidelines on getting paid for your service value, you might want to check the following three links at the distribution-oriented site "Value Added Partners.org":

"Is your value proposition strong enough?" (90%+ of distributors’ isn’t !) http://www.valueaddedpartners.org/articles/articles_ValueProposition.asp.

"Nine no-fail tips for becoming an undisputed value leader" http://www.valueaddedpartners.org/articles/articles_ValueLeader.asp.

"Finding Money in Holes" (traditional sell product applications to the end-user approach) http://www.valueaddedpartners.org/articles/articles_FindingMoneyInHoles.asp.

    6.    CASE STUDY: SELLING PRICE WORKS FOR THE FIRST IN A NICHE.

Even if you believe in the "create and sell distinctive service value one customer niche at a time" advice/theme that this DCC series offers, you might be tempted to protect some old or get some new business by leading with "price". Don’t! It’s a trap. Selling on price isn’t a strategy. Any other competitor can understand what your "edge" is in one second and copy it or beat it in two seconds. And, lots of dumb, desperate competitors will! Start value-wars, not price ones.

Besides, the market for pure price buyers is surprisingly small with high internal turnover. This is because most new price buyers generally wise up and move on to being "value buyers" of some degree and type. The wholesale club segment of the consumables world only has 5% total share and both survivors, Costco and Wal-Mart’s Sam’s Club division, aren’t doing as well as they would like.

Here’s a latest case study on both the allure and the misery of selling on price: United Airlines’ new discount division, "TED". The division has yet to fly it first flight, and it is already in a fare war. Why would any company that has yet to figure out how to make money on its bankrupt, core division get into a price-game that already has too many Southwest, me-too clone competitors?

Let this negative role model story be an incentive for you to strive to tell all customers with pride and conviction that: "You can always find suppliers that will have lower prices than ours, but you will never find a supplier that can beat our lowest total procurement cost solution for you!"

Here’s the link to one more article that illustrates that volume vanity continues to trump profit sanity: http://www.gamblingmagazine.com/managearticle.asp?C=70&A=9340.

(PS: I read this article in the NY Times, but the link above was the first, easiest link to get to. Although I did not check out this new gambling site, perhaps there is some serendipitous value waiting there for you.)

If you want a total curriculum on how to define "perfect service" for a given customer niche and then go on to: measure, achieve, sell, get paid for and leverage its value, then check out modules 4.1 to 4.13 in our "High Performance…" video. And/or, the articles in sections 3 and 4 in our "articles" section at www.merrifield.com.

    7.    IS DINOSAUR MATING BACK? BIGs THAT FIZZELED THIS PAST WEEK.

Readers who may bank with either JP Morgan or Bank One may have noticed this past week that the two, huge banks plan to merge to create the second largest bank on the planet behind CitiBank. All other readers may have yawned or perhaps smirked about how the poor customers of these two banks are apt to take another cut in service quality.

I had a speculative thought about JP Morgan’s energy for doing the deal. Were they more motivated to be more generous on the price and terms, because former Enron CFO, Andrew Fastow was closing in on his plea-bargain/conviction deal? Fastow is now going to provide information to help prosecutors nail the top two executives of Enron, Ken Lay and Jeff Skilling. But, what new information will surface on JP Morgan’s substantial role in creating and participating in the 300+ "special purpose entities"(SPE) that helped to inflate profits and enrich insiders at both Enron and JP Morgan? Will the former shareholders of Bank One find themselves sharing in the cost of an escalating legal liability charge? Were the JP Morgan executives thinking that by getting even bigger they could further reduce their chances of failing from past sins? We will see.

If any of you are interested in how big a sewage industry SPE creation became during the ‘90’s and still is, here’s a link to a recent update: http://www.businessweek.com/magazine/content/02_04/b3767704.htm

These types of deals should also make us ask: "is bigger better?" Gary Hamel, the strategy author, wrote an op-ed article for the Wall Street Journal on the JPM/Bank One merger entitled: "When Dinosaurs Mate" which pointed out that statistically they don’t create value. You don’t get a gazelle by breeding dinosaurs. For those of you who are subscribers to the WSJ online and inclined to read a good, short article, here is the link to his article: http://online.wsj.com/article/0,,SB107473290438308387,00.html

Otherwise, here are some of his main points:

  • research proves that there is little to no correlation between size and profitability
  • research proves that mega-mergers are just as likely to destroy shareholder value
  • a major acquisition is the fastest way to compensate for a company’s failure to grow organically
  • Peer-beating growth when achieved organically and free of accounting trickery is an undeniable testament to the quality of a company’s underlying strategy and the competence of its management.
  • Less than 7% of the S&P 500 are able to achieve top quartile earnings growth over any 10 year period; less than 4% are able to do it for revenue growth.

Here are some of this past week’s business news reports from Bigs that support Hamel’s points:

  • (1-22) AT&T reported Q4 net income declined $176MM, revenues dropped 12.8% and forecasted that their revenue slide would continue into 2004.
  • (1-22) Kodak will take another $1.78B charge to pay for 15,000 job cuts coupled with a 94% decline in quarterly net income. A separate WSJ article detailed how Kodak partnered with an already moribund K-Mart in 2001 that lead to a big write-off while being outmaneuvered by Fuji at both Wal-Mart and Walgreen’s, two certifiable gazelles.
  • Ford announced a quarterly loss of $793MM while being overtaken by Toyota for the number two spot for total cars sold. No big surprise! The book entitled "The Machine that Changed the World" published in 1990 predicted that it would be just a matter of time before Toyota would be the world’s most profitable and largest car manufacture, because of their JIT capability and culture in contrast to the UAW controlled domestic car plants.

And finally, one of the best business books of the past 20 years, "Built to Last", took pairs of similar companies in which one was driven by long-term, customer value/service principles and the other driven by financial managers who were endeavoring to "maximize shareholder" (and share option holders’) value. The financially managed companies who often acquired scale and scope consistently under-performed the companies that pursued sustainable profit power as a symptomatic by-product of doing the best value job for the customers that they pursued.

Let’s get back to distinctive value creation for one target niche of customer at a time to get peer-beating profit growth as a happy by-product!

 

That’s all for this week!

Bruce Merrifield

919/933-7474

www.merrifield.com