January 15, 2003 Distribution Channel Commentary # 7

 

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            If you know what these commentaries are all about, go to “TOPICS” below; otherwise, read on.

 

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Until then, This explains what our Reference abbreviations in this and other commentaries mean:

1.       “WS-ART#” = at our web site, under “articles”, the specific article #;

2.  “DCC# x/y” = Distribution Channel Commentary-edition#/topic#.

3.       “EB#”  = e-booklet article #).

4.       “VM#” = our video, “High Performance Distribution for All”, module #. Lots of info on the video is in the e-booklet and at our WS.)     

 

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THIS WEEK’S TOPICS:

 

1.       YOUR ECONOMIC FORECAST ASSUMPTIONS FOR 2003

2.       WANTED: A NEW PROFIT POWER MODEL WITH ALL ON BOARD

3.       WHERE ARE WE GOING TO GET NEW PROFIT GROWTH?

 

1. YOUR ECONOMIC FORECAST ASSUMPTIONS FOR 2003

 

Have you read a lot of 2003 forecasts by all of the experts that are being covered in all of the normal business news sources? Have you blended what you have read with what you are actually experiencing, seeing and wishing? What’s your final take? Do you worry that you are making the right assumptions for how to bet your company’s resources most wisely for 2003?

 

For some big picture summations of the forecasting season just finished here are some good web reads:

a.       “Policy Traction” by Stephen Roach, Morgan Stanley economist, dated 1-13-03. I’m amazed that a sell-side brokerage firm lets this guy publish (for free!) his wisdom which is counter to the cheerleading hype that has come out of Wall Street for the past 3 years. The gist of this piece is that the just announced Bush stimulation package, if passed, won’t help the economy much at all because the excesses of the bubble economy have not been worked through and the normal pent-up demands that could be stimulated – autos, houses and capital expenditures – aren’t there. A very worthwhile, big picture, objective read at: http://www.morganstanley.com/GEFdata/digests/20030113-mon.html

b.       “The Unholy Alliance Continues Between Advertisers and Our Free Press” by Robert B. Gordan dated 1-15-03. Skim this one to realize that whether you are reading the Wall Street Journal, a “good” regional paper or any of the advertising-revenue starved business magazines, the news has to agree with what the advertisers want to believe and want the readers to buy into. And, coverage of daily economic data reports and company announcements that are not tied into the bigger, shifting economic picture are missing the real story and opportunities. Here’s the URL:

http://www.financialsense.com/editorials/gordon/2003/0115.htm

c.        “Oracles, Soothsayers and Fortune Tellers” by Jim Puplava dated 1-11-03. This chap is one of the editors and key contributors to the www.financialsense.com site. In this article he has summarized most of the 2003 forecasts by most of the popular business information sources and points out their shortcomings. You might not agree with the extremity of his conservative slant, but his compilation of facts and charts is impressive. Here’s the URL:  http://www.financialsense.com/stormwatch/update.htm

 

Regardless of what happens in 2003 is your company prepared for and able to pursue the smartest, strategic things to do as well as identifying, reacting and adapting to all negative and positive surprises faster than the competition? After all, we just have to be noticeably better and a bit faster than the other guy who will then be ground down, if not eaten, by the economic pressures that are chasing us all.

 

Do all of your employees bring both their hobby energy/passion and their home economic savvy to work everyday? Or, are they doing just enough to get by and keep the political peace? What can we do to change our company environment and our collective understanding of both the game business and the upside opportunities for all jobs and the company’s prosperity that in turn feeds and grows us all? If not, read on.

 

2.       WANTED: A NEW PROFIT POWER MODEL WITH ALL ON BOARD

 

Special thanks to Bill Derville, CEO of General Tool who emailed me a copy of a Washington Post article entitled "When Business Plans Go Bust” published on Jan. 4th. Here is the URL:

http://www.washingtonpost.com/wp-dyn/articles/A11406-2003Jan4.html          

 

The article reviews all of the industries that have fallen into the no-profit zone: hub-n-spoke airlines, the telecom companies, too-many location retailers and fast food operators, etc. One of the main reasons is that many of these industries kept fine-tuning and expanding their profitable strategies of the ‘90’s. The extra long boom of the ‘90s allowed many players to push a good thing way too far to the point where it is now a bad thing. It concludes that there is a “business model crisis.”

 

If your company isn’t making the profits that it needs to, has your business model been over-extended industry wide? If there is too much competitive capacity offering your customers the same undifferentiated, total product solution for less? What’s the solution? To try harder and more efficiently in the same way or to significantly rethink your business assumptions? To paraphrase Einstein – today’s problems can’t be solved with today’s solutions; we need to do some “next level thinking.”

 

New, successful business models are easier said and sketched out than done, even if it only involves taking our past game to the next level as opposed to going from carriages to autos. Because most of us already know how to run our businesses 2 times better than we are already doing, why don’t we just close the knowing-doing gap and execute better? (EB#8; VM 5.1-13)

 

But, closing knowing-doing gaps isn’t as easy as “P.I.E”: productivity, innovation and education. Or, in chronological order, the education must proceed the innovative experiments that then will eventually lead to higher productivity. Do we have to become the “learning organization” that was touted in the early ‘90s? 

 

If “yes”, why did the “learning organization” fad never catch on with 97% of the established businesses that haven’t been perpetual, next-level, successful innovators? For starters, the term suggests that we aren’t learning when we all are. On a personal level we learn by reactively solving everyday problems, so naturally we might get defensive about the implication that we are not a learning organization, at least at the individual optimization level. But, how many companies have been able to get everyone to think together about the bigger picture issues and then to apply new and old skills on an integrated, coordinated, leveraged basis?

 

The next big problem with the “learning organization” idea is that the how to’s for doing it are too vague. For a quick refresher on this point go to the following URL starring the book “The Fifth Discipline”(1990), its author, Peter Senge, and a checklist of good, but too vague for management discussion topics:

http://www.infed.org/thinkers/senge.htm

 

If, however, you want a list of distribution-specific references for stimulating: next level thinking, new initiative hatching and company-wide commitment to action with better implementation capability – here’s a personal bibliography effort:

 

1.       For a “guiding vision”, a north star(s) that everyone can look up to and be excited about moving towards (EB# 6; VM# 2.4, 3.3-7).

 

2.       For everyone to substitute their own personal, myopic, political, even selfish agendas for doing what ever it takes to improve the total effectiveness of the company which in turn feeds all stakeholders’ needs ever better (VM# 2.5-9).

For business case study contrasts on “united we stand, divided we fall” just consider the following pairs of companies and how they have progressed over the past 20 years. Can you circle the one in which all of the employees are “commonwealth capitalists” versus the other in which the parts and different unions were all for themselves?

Southwest Airlines vs. the once totally dominant #1 United Airlines

Wal-Mart Vs K-mart;

Nucor vs. the rest of the US steel industry.

 

3.       For systems economics, teach everyone the “service/people/customer retention cycle discussed in WS-art# 3.7, VM#3.12) and the system economics behind “heroic recoveries” (WS-art# 3.5; VM#4.8)

4.       For service process systems and cross-trained skills that deliver zero errors and 100% on time performance check out: VM# 4.4-9, 5.11)

 

Time out! Is this list of cook-book, distribution-specific material (much of which is instantly free at our web site “article” section) a bit overwhelming and a bit disjointed for the average reader out there? Take a breath and then add these challenges to the pile:

 

1.       Can you get everyone on your management team to read articles and show up for a productive, one-hour session for which they are prepared to discuss a list of what related questions? Wouldn’t it be great if they could all watch a 10 minute, compelling video lesson on their own which came with pre-packaged review and discussion questions to be modified as desired?

 

2.       Will you have the ability to handle the waves of pushback resistance that will surface in each one of these discussions? 

a.       First wave: standard, unchallenged, mythical or hyped rational excuses - “this won’t work, because…”

b.       Second wave: “Well even if my excuses aren’t that big a deal, no one else does things any differently within our industry; we have survived so far without changing; why mess with mother-nature, our heritage, our religious tradition.”

c.        Third wave: The fragile ego reasons which no one will come out and admit, so in a thought bubble: “Doing new stuff means having new personal skills which I won’t do well at first. It also means new problems or questions from others for which I don’t have ready, I’m-in-control answers. And, trying new stuff means that I have been preaching, teaching, leading dysfunctional old stuff; my personal value proposition has been a big lie.”

(For a case study on the three waves of objections that arise over the need to go to open-book with all employees, read EB # 9. Otherwise, do CEO’s want to be the ones who stir up these feelings with their key employees? Wouldn’t if be helpful to have an outside authority to pitch the new ideas, point out all of their ramifications and handle many of the obvious objections in the process. Sure, but the cost? You can buy 53 hourly discussions in 10-minute video modules purchased from MCG resellers of our “High Performance Distribution Ideas for All” for $600 or in some cases much less. A list of our growing reseller list is in the EB)

 

3.       How can you first get the management team and then all of the employees to understand the ABC’s of corporate finance and where premium wages, job growth and security come from, so that they will all know both the short-term and long-term answers of “what’s in it for me”? (VM# 2.1-12 cover this)

 

4.       What if you do succeed in thinking through a crystallized strategy with next-level, how-to plays to follow? Isn’t that going to build up a lot of hope as well as fear that we can’t really follow through with a successful implementation? How will we deal with both the known and unknown problems that will start to appear? The problems and fears could melt away if everyone on the team were fluent with the same implementation, learning or transition-management tools like:

 

a.       pushing the wheel of learning (VM#5.7);

b.       making good mistakes to fail forward (VM#5.8);

c.        maintaining one sustainable proactive energy effort from all (VM#5.1); and,

d.       using praising statements as the oxygen of progress (VM#5.2, WS-art # 6.3), etc.

 

Enough for now on solutions for the profit model crisis and becoming a learning organization to take a distribution company to the next level or from “good to great.” One final thought: I suspect that the average sized distributor location within a given distribution channel can achieve the following breakthrough economics with next level thinking:

 

 

 

1.       They can increase the gross margin generated per full-time equivalent employee by 40% within 6 months and 100% over two plus years.

 

2.       They can double their operating income ratio as a percent of sales in 6 months and quadruple it in 12 to 24 months.

 

3.       By focusing all employees on: protecting and growing the top 5 to 10 most profitable customers (per location); and penetrating the 5 to 10 most important target accounts, they can start to grow sales and profits 3 to 6 months out at a rate that is 2 to 5 times the industry average. (more in topic 3 below)

 

How many distributors will give next level thinking a try? How many will keep trying to try harder at the individual level in the same old ways for less cost?

 

3.        WHERE ARE WE GOING TO GET NEW GROWTH?

 

In the close for topic 2 above, I suggested that distributors can grow profitably even in tough times by doing a total team (laser-beam) focus on the right accounts. Here are some “next level” thoughts on this issue:

 

First some facts and key assumptions about profit/growth potential of key customers:

 

a.       20% of the typical distributors customer portfolio will generate between 120 to 140% of the operating profit for a given location and often 4 to 10 accounts are really the entire franchise profit story. These accounts are in a way cross-subsidizing lots of customers (often about 50%) that are marginal losers along about 1 to 5% of the accounts that are big losers that give the company lots of small orders every day. (WS-art # 2.3; VM # 3.5-11). Besides turning the bottom, lead accounts into golden profitable ones, most of the franchise accounts still have a lot of additional volume that they could give the main distributor supplier even though they will often assure us that “you are getting all of the business.” For the franchise whale accounts, the best defense is a better total sell and service offense.

 

b.       Another 1 to 3% of the potential customers in a given distribution location territory will account for about 80% of the new, future growth in that area that some distributor will wind up enjoying. If you can partner these gazelles, they will grow you; if you can’t they will grow the competition. Can you look into your own portfolio or territory and see who caught the last group of gazelles for big growth in the last 10+ years? What current (potential) customers look like they are gazelles for the next 10 years? (VM # 3.4)

 

c.        If you asked any employee from the CEO on down who the top 5 accounts are for both the franchise and target gazelle groups, how many would know them by heart? How many could tick off the proactive measures that the company is doing to make lucky things happen on the upside with these accounts? What if your competitor’s people can do this already for some of your franchise accounts for which you really have only one sales person representing the company?

 

What proactive measures should a distribution location do for these accounts?

 

a.       Make sure that everyone knows: the two lists of customers by heart; what growing them means to their long-term livelihood; and that the answer is “yes” to whatever any of these customers might directly or indirectly require of them at any time (VM# 3.7, 4.9, 4.13). Teaching what this means with case study examples, real and hypothetical, for each sub-group of customers would be beneficial. Can you remember when service and emergency heroics (or lack of them) made an important difference in keeping or losing key business? Write those historical case studies down and draw general conclusions and guidelines from them. Ritz Carlton maids, for example, are “empowered” to spend up to $2000 of the hotel’s money immediately on the spot to solve a disgruntled customer’s problem. The hotel does, however, teach case study problems and solutions to the staff so they are prepared to quickly execute heroic recoveries (VM# 4.8, WS-art # 3.5).

 

b.       Put two schedules on the wall listing everyone at the company who could possibly help at one or both sets of accounts by calling on one or more buying influences. Start with honchos calling on core accounts to find in much greater depth who these customers really are on an individual and collective basis. Why they buy from us and what we or other suppliers have done that has bugged them the most for new service improvement insights (VM# 3.1-3). Then, ask them what other different types of suppliers they buy from. This is how the best drug wholesalers identified new services for fee opportunities. The best distributors didn’t then develop these service capabilities from scratch, they bought the little service provider and helped them market their service(s) to 100’s of other existing accounts.

While surveying these accounts develop a customer information database. As an idea starter for a survey to fill out check out Harvey Mackay’s “Swim With the Sharks” 66 question survey at :

http://www.mackay.com/howhelp/Mac66.html. You can do it for 20 accounts in total per location with your own creative twists! Remember you want to build a strong rope of many person-to-person relationship strands with these customers. So, if one strand breaks due to turnover, you are still going to maintain your position and positive momentum with the customer.

 

c.        For the target accounts, you should do as much corporate espionage, information-gathering, and back door demonstrating of the product as possible before you ever call on a purchasing person. This is best done by people who are bold, clever, diplomatic and licensed to kill J. To be simplistic, there are two extremes of selling: creative penetrators and meticulous maintainers (AKA, hunters and farmers). Both are important and necessary, but not found in one person. Coming up with a total back-door selling strategy and dome selling schedule for target accounts headed by a terrific penetrator is more art than science. But, nothing will happen if you leave the same people on the target accounts who have not historically made anything happen. Even working with them on a team basis going forward is problematic because they often are so defensive about why they didn’t do the job historically. It may be best to buy the accounts from them if need be and reassign them to the cracker team.

 

d.       Identify the #1 best supplier in each product category from whom these target customers could buy more of or switch to for a total value reason. Include their people in the calling schedule at the right time with the right up-front agreements. Using their people to sell in-depth product solutions will complement the total effort as well as get the suppliers on the hook to say “yes” to whatever it takes to get a long-term relationship going with prem-o accounts. (More on this in the next commentary).

 

e.       Consider setting up a pool that includes the two sets of accounts – franchise whales and target gazelles – and measuring the “delta GM$”, the year-over-year increase in gross margin dollars. Spiff incentives to all kinds of people is possible off of this pool. But, more specifically, if any outside sales rep has a compensation problem with spending inordinate amounts of today’s time on an account that may pay off down the road instead of grabbing a few extra orders from activity-trap, regular customers. Deal with it. Reassign the big potential ones to someone who understands 10 in the bush is worth more than one in the hand. Put the quibbler on a salary plus gainsharing bonus and reassign all of their little activity accounts, so they can super focus and obsess on the big one(s). Find out what the real underlying ego fears are and let the person off those hooks and get them to where they can still best contribute to the team.

 

 

 

In summary, 97% of distributors aren’t doing all of these measures above and continually improving their skills at doing so. Most are caught up in more of everything, activity traps. They are hiring more sales people, opening more sub-critical mass branches, going after more total customers, doing more product promotions to any and everyone. The ones who shape-up or out losing accounts to free the resources to focus like a team laser-beam on the right accounts (in one customer niche at a time) will wind up selling everything to the accounts with a growing future that will in turn grow the distributor faster than the industry.

 

 

Hope you enjoyed and benefited from this latest commentary. We welcome your comments, questions and contributions. Good luck on getting to the “next level.”

 

Regards,

 

 

 

Bruce Merrifield