Going forward, we expect wholesalers' business models to migrate toward two primary strategic paths, which will be oriented to either logistics or services. Any wholesaler considering transition of its business model will need to select the optimal business model and, based on this model, craft the ideal manufacturer relationships. This month's discussion will focus on these transition issues. Assessing business models centers on answering:
- What is your current core competency?
- What "critical path" resources can you access?
- Who is your target customer?
- How broad or deep is your product offering?
Answers to these questions will suggest a possible business model. First, examine your core competencies to understand how they relate to the key capabilities of a logistics or services specialist described below.
Logistics and servicesLogistics is all about efficient and cost-effective product delivery. From the customer perspective, logistics providers offer cost reductions through fast, convenient order fulfillment. These specialists achieve hundreds of millions of dollars in revenues through the delivery of state-of-the-art warehousing and distribution, high-technology capabilities, and seamless links with partners and customers.
The logistics specialist also can be defined by economies of scale. Because this business model requires a heavy capital investment, many wholesalers will not go this route.
Most logistics specialists are national or super-regional entities with four to six locations. They typically see 10 to 20 inventory turns per year, maintain a 13% to 16% cost structure and achieve gross margins of 15% to 18%.
Service providers, on the other hand, give customers a more attractive support package, offering them effectiveness and education. This business model requires a higher-priced sales force with specialized skills.
Service business models represent the most likely migration path for the traditional distributor. This path costs less to build than logistics and more closely fits most traditional distributors' skills and capabilities.
Service specialists can be defined by the key capabilities of value add and differentiation. Reinvestment in salespeople, recruiting, training, planning and target marketing will be required to maintain state-of-the-art service offerings.
Service specialists serve a defined target market through local or regional businesses. Sophisticated sales and marketing techniques and a high investment in local market planning often produce gross margins exceeding 20%.
Success in these businesses can be achieved by selling "metered services." For example, instead of selling replacement pumps and valves for a plant, some distributors have begun selling upkeep. They monitor, maintain and replace pumps and valves, and they price this service based on fluid flow through the plant. You can benefit from this approach to customers by better knowledge of your customers' businesses, which leads to stronger relationships. These customers are likely to be more loyal, understand the value you provide and are less likely to switch to another channel offering a low price.
Core competencies and resourcesAnalyze the variables in the matrix (right) and plot your competencies to determine which business model best reflects your market position.
Most distributors will find they possess five or six of the competencies required to succeed on one particular business model. For remaining characteristics you may not have, it may be feasible to develop or acquire them.
Certain "critical path" resources are crucial. For instance, logistics requires capital resources, growth through acquisition or expansion and often the scale achieved through many locations. Services require a sales force that can provide a differentiated offering to a strong customer base.
Your target customer should align with your vision of your business model. Will your current customers value the transaction-oriented capabilities of the logistics specialist, or are they looking for the pre- and post-sale support of a services business?
Customers buying services value product knowledge and applications expertise. Those buying logistics look for consistency and efficiency.
It is important to understand your current customer base and where your strongest customer relationships reside. Keep in mind that your buyers may shift depending on the business model you choose. For example, if you are selling to an industrial account with multiple plant locations and sophisticated purchasing, logistics will be key. Often, that buyer will be a purchasing manager; the service buyer is typically in the maintenance or engineering department.
Does your product strategy align with your business model? If you pursue a logistics strategy, your product offering will need to broaden. Economies of scale will be key. Leverage the business model to sell and, therefore, deliver more products. Plumbing wholesalers, for instance, might even move to new product areas such as tools and electrical products to achieve this breadth.
If you adopt a service strategy, you'll need to complement your product offering with depth through related specialty products and services. The keys here are to leverage relationships and build entrenchment within accounts.
Once you validate your selection of a business model, you must analyze your current manufacturer relationships and understand how your partners intend to organize and focus in the future. After all, the success or failure of your future business models may hinge on your ability to establish and maintain the right manufacturer partnerships.
Joint planning and aligning distributor/manufacturer goals are critical. Ideally, your services or logistics strategies will be dual distributor/ manufacturer investments.
However, if you find that your suppliers' strategic direction doesn't match your assessment of where your own business is headed, you'll need to ask yourself if you can change your model; find other manufacturer partners; or educate suppliers on the value of your business model.
If your business cannot carve out a marketable position for the future, or if your critical suppliers' goals don't align with your own, it becomes a question of survival. Often, in the face of these realities, your best path forward is to preserve your assets and position for acquisition.