The BESTX Method for Sustainably Managing Networks and Channels

Management for Professionals Distribution Strategy Livio Moretti The BESTX® Method for Sustainably Managing Networks and Channels Management for Professionals More information about this series at htt.

Management for Professionals

Distribution Strategy

Management for Professionals

Livio Moretti

Distribution Strategy

Managing Networks and Channels

European Institute of Business Administration

Paris, France

Management for Professionals

https://doi.org/10.1007/978-3-319-91959-1

Library of Congress Control Number: 2018943454

# Springer International Publishing AG, part of Springer Nature 2019

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“This book provides valuable insights and a managerial approach to DistributionStrategy and Pricing, including a comprehensive assessment on how to apply itstools in the continuously evolving business environment.”

—M Bonaccorso, Group CFO – PartnerRE

“Historically, distribution Channels—the 4th P in the marketing mix, has been theleast glamorous of the marketing mix variables The reality today is radicallydifferent Product proliferation, media fragmentation, intermediary power,e-commerce, m-commerce, etc., among other things have conspired to place apremium on effective Channel design and management Unfortunately, there is adearth of practical advice on howfirms can build an effective distribution Channelmanagement Livio has leveraged his wealth of experience to create a compellingbook which will help leaders and their organizations to design and execute state-of-the-art Go-to-Market Channel strategy.”

—Paddy Padmanabhan, Chaired Professor of Marketing at Insead,Academic Director Recognized in the Ten Most Influential

Management Science Authors

“A much-needed book that raises awareness about the roles of Distribution andCommercial Strategy A timely contribution, nice to read and well substantiated.Very useful for crafting and developing a winning Distribution strategy.”

—Adrián Zicari, Full Teaching Professor Management Accounting and Control

Department, ESSEC Business School Paris

“A must-read book, very pragmatic and customer-oriented Especially useful formanagers who always wondered how to get efficient and effective results withoutexperiencing negative outcomes No to mention the focus on the pharmaceuticalindustry in the appendix, very insightful!”

—Anne-Flore Maman Larraufie, Academic Director of ESSEC’s advanced

master of Strategy and International Business

v

“Although entitled “Distribution Strategy”, Livio Moretti’s book goes beyonddistribution strategy per se Indeed, it encompasses multiple Managementapproaches such as Commercial Policy and Pricing Strategy and relates them all to

a well-integrated set of management tools useful for all levels of business managers.Based on a long professional experience, especially in the consulting and pharma-ceutical sectors, it takes a pragmatic approach and describes the intricacies andpitfalls related to distribution in all business sectors, to emphasize the best practices

in the field A “must read” opus, all the more as good books on distributionmanagement are so rare!”

—Hubert Faucher, Permanent Professor, ESSEC, B2B Management

and Marketing, Key Account Management

The business environment is becoming increasingly volatile and complex The33-year average tenure of companies on the S&P 500 in 1965 narrowed to

20 years in 1990 and is forecasted to shrink to just 14 years by 2026 This should

be aflashpoint for executives; with this churn rate about half of the S&P 500 will bereplaced over the next 10–15 years A plethora of factors, such as tougher competi-tive landscape, channel consolidation, price pressure, rising R&D costs, stricterregulation, supply-chain sophistication and emerging market instabilities not tomention the disrupting force of digital innovations and robotics, lie behind thenecessity to rethink the way a company operates

Corporations’ performance has recovered since the last global turmoil, but notbecause of a revenue growth Remarkably, what has helped report better earningshas been a renewed focus on how the core business is effectively managed Thedifference between the trends of revenues and profits is a clear indication of

efficiency gains: within 3 years after the crisis, the earnings growth has been twicethe corresponding increase in revenues.1 Having reduced expenses as deeply aspossible and with no signs of demand uptake in their markets, many organizationshad no other option than (re)focusing on their internal capabilities

Competitive advantage, nowadays, has a very short life span Bringing aninnovative product to market can be costly and, often times, provides only a fewmonths head start Therefore, leaders need tofigure out, while their competitors arecatching up, how to maintain the edge

Yet if the case for bringing an organization to upscale its capabilities is clear, how

to do it is less certain A recent survey2concluded that nine organizations out of tenare far from implementing any of the most basic Commercial Excellence principles.Excluding the historical sectors that adopted and developed the discipline, theadoption rate ranges from 5 to 10%, surprisingly still very low

1 In the period 2009 –2011, the cumulated S&P 500 companies’ revenues have grown by 8%, while the EBITDA has improved by 17%.

2 The survey was carried out in 2013 on 313 revenue managers and pricing professionals working in international medium and large organizations.

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This bookfills a gap by focusing on Distribution Management, one of the coreCommercial Excellence domains Its areas of application are vast and the rewards areimmense when thoroughly applied, enhancing thefinancial performance and creat-ing the conditions for a sustainable competitive advantage.

The following pages guide the reader through the steps required to strategicallyand practically reshape the Distribution Channels The approach is based on themethodology adopted by Fortune 100 multinationals developed together with man-agement consultancies and condenses the experience of hands-on transformationinitiatives with an abundance of concrete examples, visual frameworks, templates,and checklists

This is a manual conceived to be used not just read; it is a dialogue with a businessschool classmate who turned into a Distribution and Pricing expert As a good friend,

he would support you through an overly theoretical and generalist literature justproviding what you need to know to lead a transformation program and materializetangible, durable results

I am sure that everyone will enjoy the read and will get that inspiration neededwhen embarking on such an exciting journey

McKinsey & Co

New York, NY, USA

Kiran Raghavapudi

Over time, this book has benefited from the influence of a large number of people,and it would be a daunting task to recall the names of General Managers, pricingexperts, heads of marketing, sales directors, and regional teams who have signifi-cantly, often unconsciously, contributed to shaping the concepts exposed and towhom I owe a debt of recognition

In particular, I would like to acknowledge the support of Kiran Raghavapudi,Engagement Manager within the Pricing Practice of McKinsey & Co., who hasenhanced with an experienced eye the overall methodology, sharpening the conceptsand polishing theflow He also authored the Diagnostics section, explaining howprivate equity managers assess organizations maturity

I also wish to renew my gratitude to Francesco Puppini, a seasoned data scientist,who has been introducing Business Intelligence tools to large corporations foralmost two decades Francesco has written an enlightening overview of Data andSystems explaining how organizations can make the most out of their most valuableintangible assets

Antoine Tran Quan Nam deserves a special mention Antoine did significantresearch in the Revenue Management area with ESSEC Business School, a leadingFrench institution and contributed to this book with bibliography research, theoreti-cal sections, and practical examples issued from his current role leading Gross to Netprojects globally for a large Pharmaceutical company

I wish to express my recognition to all the subject matter experts who had thepatience to proofread the manuscript and suggest very valuable improvements Inparticular, Carolina Heitmann who has implemented various Commercial Excel-lence initiatives globally for a chemical manufacturer and Javier Hyman, an experi-encedfinance senior professional, who has orchestrated several various Gross-to-Netinitiatives in the Generics and FMCG sectors Javier has provided enlighteninginsights on value chain analysis and pricing waterfalls

Finally, I thank my family for the unshakable patience and undimmed supportthroughout the (long) process of writing a book

ix

1 Introduction to Distribution Strategy 1

1.1 Distribution Strategy: What Is It and Why Is It So Crucial? 1

1.2 Who Can Benefit from This Book? 6

1.3 How Is This Book Structured? 7

1.4 Crucial Factors for a Successful Implementation 8

2 Phase 1: Build the End-State Vision 19

2.1 Distribution End-State 21

2.2 Network Design 25

2.3 Distribution Architecture Scenarios 32

3 Phase 2: Evaluate the Context 35

3.1 Sales Transactional Analysis 35

3.2 Commercial Policy and Strategy Alignment 46

3.3 Competitors Benchmark 47

3.4 Channel Partners Analysis 49

3.5 Distribution Efficiency Diagnostic 50

4 Phase 3: Segment Channels and Partners 59

4.1 The Traditional Segmentation Approach 62

4.2 A Better Approach 63

4.3 Channel Development: A Win-Win Outcome 68

4.4 Re-balancing the Outcome 71

4.5 Effective Product Segmentation 75

4.6 Organizational Maturity in Structuring Channels 76

5 Phase 4: Design Commercial Terms 83

5.1 Introduction to Distribution Agreements 83

5.2 Push and Pull Budgets Allocation 85

5.3 Gross-to-Net 90

5.4 Discounts Strategy: Pain Management 107

5.5 Rebates Strategy: Pay for Performance 110

5.6 Commercial Terms Structural Design 114

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6 Phase 5: Execute 125

6.1 List Price Setting 126

6.2 Price-Volume Elasticity 128

6.3 Credit Policy Fine-Tuning 133

6.4 Forecasting and Stock Management 135

6.5 Infrastructure 137

6.6 Monitor, Track, Adjust 142

6.7 Execution Shortfalls Mitigation 144

6.8 Annex: Pricing Strategy 148

7 Common Pitfalls 165

7.1 Unconditional Undue Payments 165

7.2 Sunk and Opportunity Costs Fallacy 166

7.3 Poor Pricing Execution 168

7.4 Lack of End-User Visibility 170

7.5 Price Elasticity Overestimation 171

7.6 Contribution Margins Myopia 172

7.7 Volume Targets Obsession 174

7.8 Revenue Drivers Dismissal 175

7.9 Inefficient Credit Allocation 176

8 Business Intelligence 179

8.1 Data Storage 179

8.2 Business Intelligence 184

8.3 Business Requirements 187

8.4 System Selection and Team Set-Up 188

8.5 The Key to Success for Your BI Project 189

8.6 Data Investments ROI 191

8.7 Data Analytics Frameworks 193

Annex A: Case Study—The Pharmaceutical Industry 203

A.1 Challenges and Scenarios 203

A.2 Strategic Options and Distribution Strategy 207

A Final Remark 211

Glossary 213

Bibliography 215

Livio Moretti currently Corporate Strategy Director for a large global company,has passionately tested and implemented Commercial Excellence for almost twodecades.

For several years, he has put in motion its principles with top-tier managementconsultancies, multinationals, as well as local medium-sized players As GeneralManager for a Life Science affiliate and CFO for a Telecom operator, he had theopportunity to directly implement several Distribution-related initiatives such asredefining Commercial Terms and Policies, shaping customer centric Go-To-Marketplans, setting up innovative Marketing Excellence programs, running commercialnegotiations, overhauling distribution channels, introducing Value-Based Pricing,and enhancing Field-Force Effectiveness

Graduated in engineering and economics from Politecnico di Milano, summacum laude, and from Ecole Centrale Paris, he received an MBA degree from theINSEAD Business School He has been a guest speaker in MBA programs on

“Competitive Strategy,” and authored several publications on Distribution and to-Market for leading consultancies

Go-xiii

List of Acronyms and Abbreviations

ABC Activity-Based Costing

APA Advance Pricing Agreement

AUC Annual Unit Cost

ASP Average Selling Price

BI Business Intelligence

B2B Business to Business

COGS Cost of Goods Sold

CPG Consumer Packaged Good

CT Commercial Terms

CP Credit Policy

D2C Direct to Consumer (Sale Channel)

DPO Dynamic Price Optimization

DW Data Warehouse

EBIT Earnings Before Interest and Taxes

EBITDA Earnings Before Interest, Taxes, Depreciation, Amortization

ERP Enterprise Resource Planning

FTE Full-Time Equivalent

GMV Gross Merchandise Value

IROI Incremental ROI

KPI Key Performance Indicator

KVC Key Value Category

KVI Key Value Item

M&A Mergers and Acquisitions

MAP Minimum Advertised Price

MRO Maintenance, Repair, and Operations

MSRP Manufacturer Suggested Retail Price

NBA Next Best Alternative

OEM Original Equipment Manufacturer

PCG Packaged Consumer Goods

PMO Project Management Office

PPR Pocket Price Ratio

PTMC Price to Meet Competition

R&D Research and Development

xv

Rep Sales Representative

RM Revenue Management

ROI Return on Investment

ROS Return on Sales

RSM Regional Sales Managers

SKU Stock Keeping Unit

SPIFS Sales and Promotion Incentive Funds

T&C Terms and Conditions

UAT User Acceptance Testing

USP Unique Selling Proposition

Introduction to Distribution Strategy 1

At the end of this section the reader will:

– understand the importance of a well managed Distribution and its business impact– have a high-level view of the BEST-X Methodology, its principles and KeySuccess Factors

– test how advanced is his or her organization in by answering a list of question

1.1 Distribution Strategy: What Is It and Why Is It So Crucial?

Many companies have achieved remarkable results through strategic moves:geographical and portfolio expansion, mergers and acquisitions, off-shoring,divestments, outsourcing, adoption of innovative technologies, just to name afew Experienced marketing teams craft tailored messages, effective promotionplans, compelling pricing strategies and earn rewarding margins while doing

so Managers are also familiar with Sales Force Effectiveness, Go-to-MarketStrategies and Revenue Management, the core elements of Commercial Excel-lence Sophisticated pricing software, CRM applications, accounting andreporting systems are all but ubiquitously implemented Dynamic Pricing andreal-time yield management1 are likewise becoming the norm All in all,organizations in a short timespan, have witnessed a radical evolution in howthey manage their business

However, as the incremental benefits from these significant activities tarnish,other areas of the business performance are coming to the forefront of management

1 The terms revenue management and yield management are often confused, yet there is a key distinction between the two disciplines Whereas revenue management involves predicting con- sumer behavior by segmenting markets, forecasting demand and optimizing prices for several different types of products, yield management refers speci fically to maximizing revenue through inventory control Thus, “yield management” is more of a tactical application.

# Springer International Publishing AG, part of Springer Nature 2019

L Moretti, Distribution Strategy, Management for Professionals,

https://doi.org/10.1007/978-3-319-91959-1_1

1

priorities Notwithstanding the consistent advances made recently in these crucialdisciplines, little progress has been made in other core areas, such as the DistributionChannels Management Still today, only a few organizations are able to capture thefull potential of their indirect sale channels They frequently fail in translating thecustomer’ needs into a distribution strategy, fall prey to market consolidations, set upsub-optimal commercial policies and lose consistent revenues through leakages.Their channel partners become therefore mere tactical logistic operators whichdon’t hesitate to switch to another manufacturer for marginal short-term gains.Even when a wholesaler is apprehended as a strategic asset, the approach remainsfrequently too basic.

Only a minority of the most senior managers is able to think strategically aboutChannel Management Organization leaders do acknowledge the magnitude of theincentives budget, but often regard it (or rather dismiss it) as a pure“ticket to play”, asort of fee for being present in the market Contractual agreements, often the result ofhistorical legacy and tiresome negotiations, seem a routine boring yearly process.Commercial Terms and Conditions (T&C) are subject to incremental inefficientevolutions of “legacy agreements” Customized terms are defined via one-to-onenegotiations and the result is a patchwork of contract clausesfilled with a motley andunmanageable set of exceptions Pertinent methodologies are rarely introduced andexecution remains at bay together withfloppy processes and uninspired teams Thissteering by sight inevitably ends up in an ineffective allocation of resources Despiteall this, there is abundant scientific literature and empirical evidence demonstratingthe disproportionate return of investment of an efficient and well thought distributionstrategy Several scholars researches, demonstrate the high correlation betweenmarket share and distribution presence A study conducted over 116 years period

in the Japanese retail market proved a strong retail distributionfirst mover tage.2A concomitant study evidenced further prove between retail distribution andsales concluding that the in the Swedish alcoholic drinks market, sales elasticity withrespect to retail distribution (0.74) is six times higher than the correspondingelasticity to advertising (0.13).3

advan-Various reasons can kick-off a Distribution overhaul: a rapidly evolving system within a challenged industry, an unsustainable competitive pressure, anacceleration in price erosion with drying pipeline A new market entry or

eco-2 “First-Mover Advantage Through Distribution: A Decomposition Approach”, Mitsukuni Nishida The author assessed the correlation between physical distribution and sales performance of six major Japanese convenience-store chains from 47 geographical markets between 1991 and 2007 and re-con firmed the assumption that a first mover advantage through distribution can increase sales per outlet signi ficantly The paper found that first entrants have a positive market-share advantage over later entrants Speci fically, the physical distribution, measured by the number of outlets in a market, drives most of the advantage.

3 “The Effect of Retail Distribution on Sales of Alcoholic Beverages”, Friberg and Sanctuary (2017) The study underlines that the correlation between distribution and market share is dispro- portionately correlated What is interesting is then to assess the price to pay for extending presence and shelf space and how this drives pro fitability in the long run.

product launch can also command the development of a robust Distribution Strategy.

A robust methodology, pertinent organizational capabilities and the right mindsetvirtually every company can be in full control of its distribution These three areasare precisely the focus of the book

Distribution Strategy

With the term “Distribution Strategy” we refer to the plan that specifies howproducts or services flow through distribution channels in order to reach theend-users A“Distribution Channel” is defined as the path through which productsgets from the manufacturer to the consumer and is composed by the set of interdepen-dent organizations that are involved in such a process It can be as immediate as a directtransaction from the vendor to the end customer (we will talk in this case of directdistribution) or it may include several interconnected intermediaries along the food-chain such as wholesalers, distributors, sub-distributors, agents, vendors, resellers andretailers (Fig.1.1) For the purpose of this book we will use the terms Distributor andWholesaler interchangeably as they involve similar business models In emergingmarkets is not uncommon tofind up to seven tiers that allow manufacturers to reachthe most remote areas Marlboro, Unilever, Colgate might reach a city mall with theircontrolled importing company and resell to a wholesaler who has contracts withmultiple distributors that would supply the mall Then a smaller company mightbring it to a village where the product is bought by an individual that can sell cigarettes

or a soaps door to door by the unit

To simplify, there are three basic Distribution Channel structures: direct, tier-one,tier-two and multiple-tiered distribution (Fig.1.2)

Every industry has its own specific distribution channels, for instance, medicinesflow from the manufacturer factories to the importer and then to a wholesaler

or distributor before ending on the pharmacy shelves In the food industry,some products do not reach the consumer beforefirst going through a long sequence

of intermediaries such as farmers, traders, exporters, importers, processors,wholesalers, distributors, and retailers Other sectors, such as Banking, use a shortdistribution path as they prefer to reach their customers mostly directly; even if theynow provide multiple access option through digital and phone channels, their route

to market is still mostly direct to consumer

Fig 1.1 A common distribution value chain

Despite Go-to-Market differences across sectors, the principles that we willdiscuss in this book remain the same and apply inevitably to most situations.How does a good Distribution Strategy look like?

We can qualify a Distribution Strategy successful whenever it allows to:

1 Create a stable and competitive Distribution environment converging towards anideal end-state structure Several industries have witnessed an excessive con-solidation of the distribution channels to the detriment of the entire ecosystem Athoughtful channel Strategy prevents these risks and maintains a thriving Distri-bution environment When defining an end-state scenario manufacturers need toanticipate potential future equilibriums in the Channel They need to preventfor instance Stackelberg oligopolies by which a leading Distributor might takeadvantage of its negotiation power to force an increase in discounts which would

be immediately replicated by the market followers Hence the capability toanticipate threaths and capture opportunities plays a crucial role

2 Incorporate end-user needs to Define Effective Commercial Terms enabling aneffective implementation of the Go-to-Market plan, maximizing short-termfinan-cial returns Commercial conditions should tighten cooperation with the strategicpartners and improve channels’ performance while minimizing manufacturers’trade incentives investments The totalfinancial pay-out that vendors grant to aDistributor can be decomposed infive main activities (Fig.1.3) The fair compen-sation for each of these elements depends on the specific effort and risk, and islinked to the viability of the business model For instance a risky market environ-ment might have more sub-distributors or retailers defaulting on their credit and thevendor indirectly makes up for these Distributor losses by granting higherincentives A market with many remote areas might have higher logistic costs.More demanding end users might generate higher costs to provide assistance andservices The sum of all these components will determine the cost of doing businessand shall be remunerated correspondingly by vendors

AGENT

Manufacturer

Final Customer

3 Set optimal pricing strategies allowing to extract the company portfolio valuethroughout its lifecycle Pricing is by far the most effective profit lever available,especially when coupled with a proper Distribution Strategy Successfulcorporations are always successful in price-setting and execution They definethe right list price, the appropriate channel incentives and ensure that the end-user

is paying just the right price for the product when accounting for its perceivedbenefits versus the alternative options

4 Bolster the infrastructure sustaining the Distribution and Pricing competitiveadvantage by minimizing revenue leakages and exceptions loopholes, improvingteams’ capabilities and ensuring data-driven decision making This goes hand inhand with making sound decisions in systems investments, processes implemen-tation and performance management The infrastructure is what materialize agood strategy into concrete outcomes

How can a well-managed Distribution Channel support your business?

It will become more evident throughout the book how an effective management ofthe indirect sales channel can impact revenues and costs translating into higherprofitability and long-term market share:

1 Revenues The potential to increase salesfigures does not require much introduction.The magnitude of the impact depends on the maturity level and the executioncapabilities, consultancies usually indicate a potential ranging in the high single

Fig 1.3 Different distributors ’ role command different compensation models

digit area.4,5This is not surprising considering that sale channels play a crucial role inthe manufacturer Go-to-Market implementation.

2 Costs Second, a well-thought strategy allows attaining thefinancial targets with

a much lower budget Uninspired organizations are frequently overpaying thelow performers thus compromising their ability to incentivize their most profit-able channels partners An efficient Distribution Management optimizes theCommercial Policy budget and eliminates leakages

3 Sustainability Finally, in addition to the immediate business performance gratition, an effective Distribution Management can carve out a privileged competitiveposition A strong relationship with a partner will not fade away easily and shall makethe business baseline more resilient A manufacturer with loose ties with the trademight forgo overnight important revenue streams simply by having one exclusivepartner switching to competition Recovering from such an event, if at all possible,can be costly Conversely, a well-managed network with few reliable and capablepartners will virtually shore-up any marketing and sales initiative and bring to life,better and faster, every launch, pricing, and lifecycle management strategy

Due to the uniqueness of its approach, we expect that this book will spark new ideas incommercial teams and business leaders across multiple industries The combination of

a structured methodology and real-life examples will help Leaders as well as ing, Sales and Pricing Managers in their professional activity and career progression.Leaderswill broaden their perspective on designing a compelling Go-to-Marketblueprint and frame their thinking on how their function affects the indirect salesmanagement They will rapidly understand what is at stake in their business journeyand how to exploit the untapped potential They will also enforce a solid methodol-ogy, shape a productive organizational set-up, invest in the right capabilities and, ifneeded, in infrastructure improvements In addition to that, the book will providethem with a common language when discussing distribution and strategic topics.Distribution, Trade, Pricing Managers will sharpen their analysis, prioritysetting, and processes more efficiently They will have at reach a systematic meth-odology complemented by all the frameworks needed They will be able to autono-mously identify the upsides and craft a plan to capture and sustain them Their timewill be more efficiently invested in value-creating activities and they will be able toprovide valuable options for the Distribution Policy overhaul

Market-By all means, any team member will be able to unlock opportunities, improveDecision Making, Data Analysis, Execution and Processes while at the same timeexpand knowledge and understanding of the Distribution Channels Further, Sales

4 Queenan, Ferguson, Highie, Kappor 2007 on Revenue Management.

5 A recent study indicate a potential sales uplift across sectors comprised between 2% to 7%.

Channel Management will continue to be a significant stop along one’s careerprogression.

In general the book will allow the reader to:

– improve market share and profitability while reducing the investments in theDistribution Channel

– take decisions on resource allocation maximizing growth and profitability– select and incentivize the Channel Partners to increase share of wallet

– craft an effective Commercial Policy aligned with the Corporate Strategy, able tounlock the market opportunities

– improve the Go-to-Market capabilities of the entire value chain and enhancecustomer experience

– anticipate and mitigate risks, reduce revenue leakages, incentivize internal teams,set appropriate targets and avoid frequent pitfalls

The book is divided into eight core chapters and an annex:

• Chapter 1: Approach This section addresses the key success factors of atransformational initiative: mindset, capabilities, execution

• Chapter 2–6: BEST-X Methodology Each of the five chapters addresses aseparate phase of the BEST-X methodology: Building the End-State strategy,Evaluating the context, Segmenting the Channel, defining commercial Terms andExecuting the plan A dedicated appendix summarizes the core principles ofPricing, a fundamental pillar of Distribution Management

• Chapter 7: Pitfalls This section focuses on the most frequent mistakes andprovides some food for thoughts For instance, why elasticity is oftenoverestimated, discounts too generous, sunk costs misinterpreted, credit policysub-optimal, targets setting myopic?

• Chapter8: Data and Business Intelligence Thisfinal chapter explores the datauniverse and addresses a selection of topics: where are data stored and processed,what is the right operating system for our needs, what are the differences betweenData Cubes and Lakes, how to make choices among business intelligence tools,when should we use a self-service BI and in-memory BI?

• Annex This section brings to light the distribution challenges and strategicoptions of an industry confronted with a radical value chain power shift

1.4 Crucial Factors for a Successful Implementation

Any food lover would agree that a delicious dish can only be created by using quality ingredients and following a tested recipe In the same way, any initiativeaiming at improving the Distribution performance should rely on a successful recipe(Methodology and Principles) and high-quality ingredients (the Human factor) Let

high-us take a closer look at these elements

This book revolves around the“recipe” for creating performing distribution channels

It provides a step by step guide leading to optimal decisions and, in a didactic spirit,includes real-life examples, case studies, frameworks, tables, and analytical visuals.Let’s review the objective of each phase and the major questions that should betackled:

1 B stands for Building the End-State Strategy The goal is to define a clearcommercial roadmap based on the channel trends, risks and opportunities, com-petition dynamics and strengths-weaknesses of the organization All has to tieback to the corporate mission and the business objectives

• Do we see commonalities or differences between our Channel Managementand the competition’s? Does our business model justify these differences?

• Should we play an active role in the channels structural development? If yes,

do we have a clear idea of what structure our channels should have in themedium term?

• How are we addressing channel conflict risks?

• What is the feedback from end-users? Is the Go-to-Market plan effectivelyimplemented?

2 E stands for Evaluating the context and running the Diagnostics This secondphase is related to the assessment of the status quo: internal capabilities and assets(skills, data, systems, processes), execution, process compliance, customer needs,Go-to-Market, competition, portfolio and pipeline

• How are sales distributed across the channels, segments and Partners?

• Which channels, Partners, brands provide the highest growth, sales, grossmargins?

• What evolution do we see in the trends? Which Partners seem more resilient toadverse events?

• How effectively is the commercial policy implemented? Do we notice anyrevenues leakages?

• Are discounts and rebates well balanced across channels, partners of the samechannel?

• Is the proportion of fixed discounts versus performance-based rebates nent to our environment and business priorities?

perti-3 S stands for channel Segmentation The objective is to develop a future-proofchannel structure A core element in this respect involves creating an actionablesegmentation which strenghten the execution of the marketing plan Manycompanies fail in addressing this point by adopting a simplistic approach

• How many actors are there in each element of the value chain and what share

of the market they represent?

• Which are the key value creation channels and which segments types should

be created within each channel?

• What are the Channels interlinks, who are the influencers? How is powerspread across the value chain?

• Is any channel partner building a dominant position which might weaken ourpricing power?

• What is the proportion of e-commerce generated sales and how do we expect it

to evolve? How are the digital channels affecting the traditional ones and howare they being used by end-customers?

• How many end-users buy directly from the manufacturer and how manyinstead rely on distributors?

• Which distributor can cover remote areas, succesfully launch new products,and provide a superious service and experience to the end-user?

4 T stands for Terms Definition This phase involves the design of effective and

efficient Commercial Terms Effective in the sense that they allow achievingsustainable sales and market share increases, efficient as they minimize theincentives budget required to do so In essence, this is an exercise of capitalallocation conjugating internalfinancial metrics with external channel dynamics.The Distribution Policy should reflect the strategic/financial relevance of theChannel and the companies populating each segment At the same time, thecommercial incentives should provide more support to develop crucial executioncapabilities

• What is the optimal allocation of discounts and rebates by product, by Partnerand by channel?

• What is the ideal balance of fixed versus performance-based incentives?

• How to make a decision on end-user pricing when the elasticity curve is notavailable?

• How can we improve sales by tweaking the Credit Policy?

5 X stands for Execution Lastly, we need to ensure that the implementationscrews are tight: exception management, data consistency, timely availability,analytics capabilities, pricing infrastructure, communication, risk mitigation,concept testing training and processes We will also see how to dynamicallytackle this area with proper monitoring and course correction

Key Questions

• Following the previous gap analysis, what are the improvements needed interms of organizational design and capabilities, data and processes?

• How and at what frequency shall we monitor, track and course correct?

• What improvements in the pricing infrastructure are required to removerevenue leakage and ensure compliant execution?

• How to anticipate and minimize channel conflicts?

Figure 1.4 displays the Methodology flow with the five phases abovementioned

Figure1.5includes work-streams detail and the pricing components which will

be discussed in detail in the“Pricing Strategy” Annex

Customization As much as we would love to provide a fully thought out solution,the reader will need to invest time and effort to adapt the Methodology to the specificneeds Large organizations are sometimes lured by one-size-fits-all approachorchestrated by the head office teams, but let’s be honest: it does not work

We see differences in all areas: different end-customers’ expectations, channelstructures, distribution layers, consolidation dynamics, competitive pressure, busi-ness priorities, product portfolios, logistics capabilities, implementation skills,

4

5

Fig 1.4 Distribution Strategy BEST-X methodology

channels’ maturity, regulation and even taxation What works in a market might bedestroying value in another, so it is vital to address each situation separately.

In a recent benchmark for a large multinational company, a consultancy observedthat the Gross-to-Net on Gross Sales could range from a minimum of 4% to amaximum of 35% The lowfigure corresponded to a market whose wholesalers act

as logistic service providers; the high-end number would instead correspond to a moredeveloped channel that would play the most predominant sale and promotion role Itappears here in full evidence that completely different approaches have to be adopted

In addition to this, a tailored implementation will ensure that we have an ate endorsement from the leadership team Otherwise, chances are that the manage-ment will rebuff any new idea on the grounds of local market idiosyncrasies TheGeneral Manager, seeing the risks of a methodology imposed by a cascaded initiativemight be tempted to maintain the status-quo and curb the transformation ambition.Beside local acceptance and management ownership, the project has to bediscussed with the teams to ensure that it is carefully tailored to the specific marketneeds Communication needs to be well structured not only within the steeringcommittee and the working groups but also, at a different level, with the entiresales team, the broader organization and the external stakeholders The buy-in fromall these parties represents a key success factor, therefore we need to establish atwo-way communication channel whereby all feedback is taken into account.Figure1.6displays a typical project plan for a Distribution Strategy project whichallows to revisit the entire Go-to-Market plan

appropri-Distribution

Commercial Terms Discounts and

Rebates Network Design

Transactional Analysis

Customer &

Criteria and weights Segmentation

Fig 1.5 Distribution Strategy BEST-X®methodology detailed overview representing all the work streams

Channel Partner: Win-win outcome If we believe that sales channels represent acore competitive advantage we need to agree that a core priority is to identify andtighten bonds with the most strategic partners Customers, in theory, have the realpower of choice, however, they can exercise it only within the boundaries set by the(direct or indirect) Distribution As result, manufacturers need to create theconditions to motivate their Distributors to implement their marketing plan.Establishing a win-win rapport is crucial, a channel strategy aimed at relationbuilding will provide more reliable and cost-efficient results than simply short-term monetary rewards In addition, it will create a barrier to entry and strengthenresilience in downturns It is a long-term journey, requiring new operating modelsand new value sets such as transparency and trust The Channel shall also benefitfrom this exchange; by having a stronger connection with its supplier it can increasemarket share and profitability It can also build a more resilient business less prone tomarketfluctuations and will improve overall its position vis-a-vis its own clients, forinstance the retailers or thefinal customers A strategic partnership, designed as werecommend, would also bolster its own organization by investing in systems,processes, people It wouldfinally benefit from the supplier know-how and financialsupport Therefore, what we aim for is a win-win outcome for each party.

We will see that each phase of the methodology embeds relationship buildingaspects: definition of priorities, risks and opportunities, network structuring, mutualexpectations, infrastructure and processes Table1.1shows an example of respectivedistribution of roles

Resources: investment efficiency Incentives should be seen as investments in theirown right and not as a “necessary evil” They are resources allocated to produce

precise results, each dollar should be paired to a precise tangible objective When wehire a sales representative we have a business case justifying the workforce increase;the value created must be higher than the salary and annex costs Unsurprisingly, thisprinciple holds true also for channel incentives.

The idea is to look at incentives as any other investment, measuring the effects onbusiness performance, market dynamics and channel development Managers shouldalways be able to explain why a Distribution agreement includes certain provisions

or why an exception has been bestowed During the past years, confronted with somany suboptimal terms designs we came to the conclusion that there are three mainmisconceptions:

1 The “democracy ideal”, whereby the key account managers consider fair toprovide to all partners the same commercial T&C,

2 The“heritage syndrome” according to which it seems impossible to change theT&C that have been granted in the past It is sometimes viewed as a sort of cast-in-stone set of agreements inherited from the previous generations,

3 The“ticket to play” concept luring managers to pay a certain price in order tooperate in a certain market as everyone does so

We will see how these three reasoningflaws might destroy value and how theycan be overcome

Employee churn has become an area of mounting concern in the last decades talentsare not wedded to companies as they used to be We need to manage dynamically therequired skills and capabilities with the right balance of internal and externalresources Vendors and distributors are more frequently placing their staff in eachother locations Many disruptive factors have been changing the human managementlandscape and their strategic relevance rival only with their growing complexity.Let’s examine few key leadership and capabilities requirements

Table 1.1 Transparency

between Manufacturer and

Distributors on mutual roles

– Production of consistent quantity – Quality standards

– Support and training – Return policy – Pricing – Credit policy – Timely deliveries – Sales leads

– Accurate forecast – Investments in training – IT and infrastructure – Delivery timing – Customer relation – Audited accounts – Prompt payments – Post-sales support – Marketing and events

Leadership: risk-taking and disruption Distribution Management is a complexarea which spans well beyond discounts, rebates, chargebacks, and optimal push/pull balance It questions the very organization’s mindset Transformationalprograms must be driven by the right leadership, as without an assessment of theway an organization works, thinks, and behaves changes will be limited, superficialand temporary Savvy organizations remain humble and challenge constantly theirbeliefs Decision makers are honest about their intention to drive change, they see theneed for it and accept a certain level of risk-taking.

This, in most cases, is the highest hurdle Taking decisions is challenging, asevolution has programmed the human brain to achieve results by minimizing energyconsumption and any behavior that falls out of the daily routine requires a higherenergy level If we would be using its processing power for all trivial daily tasks wewould not have much left for more significant decisions

Let’s make an experiment, take a break and cross your arms Then try to crossthem in the opposite direction You have noticed that the second time took a bitlonger to your brain to process the information and give the instruction to the arms.Our brain processes very fast all those actions that we consider automatic; theyconstitute our habits and make up to almost half of our daily brain activity Theproblem with this is that it makes no difference between a good and a bad habit: as aresult, from time to time, we should shake our habits

This applies to business too Companies, organizations are like human bodies.They are lazy, they work with habits and routines and they have an inertia to change

as this would require more energy and more thinking The limbic system is in chargewhen you crossed your arms for thefirst time but when you cross the arms in theopposite way you ask the intervention of the pre-frontal cortex, the brain part incharge of higher level thinking In our analogy, the leaders should act as the“pre-frontal cortex” of the organization constantly shaking up the inertia

Capabilities are clearly a major key success factor For various reasons, teams’skills are not always up to speed and organizations need to identify the requiredcapabilities to succeed in the market and focus on (i) develop the right skill-set of theexisting workforce and (ii) review the hiring process and link it to the Go-to-Marketplan What do we mean by this?

The hiring process is rarely tuned on the competencies required for the position.Recruitment is among one of the most challenging yet impactful activities of acompany, butfinding the right people pays off Too often companies choose talents

on the basis of a pertinent track record instead of assessing the precise attitude andskill-set needed for the job Recent research6showed wide gaps between the traits ofthe most successful salespeople in large organizations and the traits of the new hiredstaff This seems common sense, but rarely the hiring process is linked to the to thetop performers’ behavioral profiles It is also wise to empower HR business partner

6 McKinsey & Co “Treat you reps like customers”, https://www.mckinsey.com/business-functions/ marketing-and-sales/our-insights/for-top-sales-force-performance-treat-your-reps-like-customers

with analytical tools, to use psychology in order to engage teams and to haveeffective performance management systems.

Development programs are not always focused on the real needs, they might bewell executed but not tailored to the business priorities Companies should spendenough time to single out the 2–3 core skills needed for any specific job in ascientific way and concentrate their efforts to reinforce what makes teamsperforming better The priorities might change across business lines and evensegments If the customer interfacing teams are frequently asked technical questionsand this is a key success factor to close a sale, we need to train the teams on technicalknowledge Conversely, if the priority for outbound call-centers is more related tosales techniques, the team should be trained on communication, persuasion, listeningskills and so on

How to achieve this? Involve employees from the outset, their buy-in is essential.Make sure that individual objectives are echoing business goals as people arereportedly more effective is they see that their performance fits the big picture.You are already adjusting pricing and distribution incentives dynamically, in asimilar fashion you should adapt employees goals in real-time These simple actionswill improve clarity and commitment the strongest leading indicators of companies’performance

Active participation is important, the core team members should take part inSteering Committees, brainstorming sessions, functional discussions Sufficient timehas to be devoted also to regular one-to-one reviews with the Project Manager

Influencers, such as regional heads and key account managers, should be closelyinvolved in the decision-making process

All stakeholders should also play a role in granting continuity over time In thefollowing cycles, they have to ensure that what was decided has been executed andthat the plan is periodically reviewed and improved

At the end of this section the reader will be able to:

– Define the ideal End-State Distribution

– Run an assessment of the internal performance

– Design the optimal Network Structure

– Define multiple scenarios on Channels’ evolution

Years ago while working for a large apparel manufacturer, I had the chance todrive around the country and meet the major wholesalers to assess the soundness ofour Commercial Strategy All seemed to run smoothly, meetings were constructive

on both sides This until we met Petrocom, “The” Distributor, a large companyaccounting for 30% of the manufacturer sales which, on top of its dominant position,was also growing twice as fast as the other channel Partners In few years the share ofwallet grew from 18 to a staggering 30% and the trend seemed unstoppable It hadbetter access to credit, a more educated management, superior technology, abovestandard Go-to-Market, well trained and skilled workforce and intimate ties with theretailers Doing business with them seemed a blessing: volumes, gross margins,growth What else should a manufacturer wish?

Well, in reality, the horizon was cloudy, the sunny days were about to end With

no doubt, in few years Petrocom would have become the sole major partner andconsequently expecting an ever-increasing portion of the value-chain gross margins.With this grim picture in mind, we were silently heading towards their head

office I could notice from the outset some glaring differences to the rest of thecompanies we had visited before While previous negotiations took place in a halfrun down warehouses, with managers in casual clothes and broad smiles, theupcoming meeting quickly proved to be staged in a very different scene Rightafter passing through an imposing gate we stumbled upon an eye-poppingfleet ofGerman brand new luxury cars We were graciously proposed a brief tour to witnesstheir latest investments: machinery, vehicles, warehouses All top-notch

# Springer International Publishing AG, part of Springer Nature 2019

L Moretti, Distribution Strategy, Management for Professionals,

https://doi.org/10.1007/978-3-319-91959-1_2

19

Execution of terms, policy and processes

Phase 1: De fining the long term view

The meeting started Petrocom’s COO set at the end of a long table, his first wordswere:“We are buying from you over 110 million dollars, we are your best partnersand we deserve more” Followed by “our total turnover is over 600 million dollarsand we are growing by 12% per annum”

What did he want to tell us? The message could not have been more direct: weaccount for almost half of your business but you represent only a small portion ofours So if you don’t agree with our T&C you have to be ready for a severe damage

to your activity next year The tension in the room was palpable The vendor staffkept silently watching an assistant pouring tea infine china cups Ironically, thereason we had asked for a meeting was to renegotiate downwards the disproportion-ate high incentives

Back at the office, we started brainstorming in order to decide our response Westarted looking deeper into the past activity and 2 days later we had thefirst results ofthe transactional analysis We found out an even gloomier image To the dismay ofthe account manager, we had bestowed even higher incentives than initiallyexpected, due to unreasonable incentives exceptions

It became evident that it would have been hard for other Distributors to matchPetrocom investment capacity and compete So what had to be done tofind a remedy

to an established severe channel issue? The most important part of the job was done,

we surfaced a ticking bomb and showed the imminent risks

This situation would have been different if the company would have taken moreseriously its Strategy and assessed risks earlier It would have probably been able tocreate the conditions for a more balanced development of its most important saleschannel

This chapter aims precisely at explaining how to anticipate these scenarios andconsequently craft a Distribution Strategy that can mitigate risks

in Fig 2.1, will contribute to defining an ideal End-State which will be thentranslated into more concrete outputs i.e the Commercial Policy and the ChannelStructure, treated separately in the next chapters Let’s get into more detail andexamine each of the steps of this process.

Input 1: Corporate Strategy/Mission A proper Distribution Strategy affects boththe long-term competitive position and the short-term financial performance Weneed to ensure that the way the channel develops is consistent with the direction ofthe company, i.e to the“big picture” It has to be tuned to the Corporate Mission,therefore we need to have a high-definition picture of the company’s objectives andpriorities which takes into account competition, suppliers, products, internalcapabilities and customers (i.e the“Strategy”), but includes also operational itemssuch as portfolio planning, growth platforms, brand strategy, R&D pipeline Any-thing we do at some point should tie back to the overall organizational goals

An incentive policy is often seen as a mere target-achievement-tool that motivatethe channel to sell This is a very short-sighted and dangerous view Anyfinancialreward should be part of a larger picture It is like watching a detail of a paintinghanging on a museum wall, only when we take two steps back and see the whole

CHANNEL BUSINESS MODEL and DYNAMICS

Fig 2.1 De finition of the Distribution End-State Strategy

image we can understand its purpose The full painting frame in our case is theCompany Strategy/Mission.

Example: Amazon, customer-centricity at its best

Let’s take the example of one of the most valuable global retailers, and how itsmission impacts pricing and distribution strategy

Amazon 10-K SECfiling starts with a enlightening introduction “We seek to

be Earth’s most customer-centric company”

This principle lies behind any major operational and strategic decision Whenthe retailer has to choose between making short-term gains and transferring value

to the end user, it often opts for the latter This affects any decision on trade-offs

as the priority will not be on short-term targets but on customer loyalty and term cashflows Amazon’s value proposition spins around customer experienceand consists in having a broad offer and a consistent customer value perception Italso aims at providing sellers with a unique value proposition in terms of growthpotential and logistics convenience

long-Pricing, a fundamental attribute of Distribution Strategy, shapes deeply tomer perception; maybe for this reason in Amazon it is not a P&L lever butrather an algorithm-driven decision A set of guidelines are set to avoid channelconflicts and predatory pricing which could damage the customer perception.Logistic is likewise a key value proposition Therefore the retailer developed aMulti-channel Fulfilment policy, which simplifies operations and allowed vendors togrow across multiple direct sales channels without adding supply chain complexity

cus-In conclusion, we sense how the Retailer mission affects the DistributionStrategy: channel management, dynamic pricing, Key Value Items promotion,logistic, return policy, time to delivery, purchase process (one-click), Portfolioand Seller reach

Input 2: Commercial Strategy The Commercial Strategy includes distributiondecisions and embraces all the actions the company is taking in order to maximizemarket reach, share and profitability It is a very broad area which goes beyond thescope of the book as it includes go to market plans, product lifecycle, pricing andpromotions, tender management, sales force management, communication, brand-ing, market entry, portfolio management, operational planning etc While definingthe Distribution Objectives we need to ensure that we remain consistent with theCommercial Strategy

A second consideration involves the End User The distribution strategy should becrafted by having front and central the customer success In concrete terms, companiesneed to be as close as possible to the front line and know what is happening at eachtouchpoint of the customer journey They need to have a clear picture of how demand

is fulfilled, how orders are processed, how the product is consumed and how buyingdecisions are formed Many organizations try to force consumers to purchase viachannels they don’t like just because they look more efficient from their perspective

In conclusion, an essential input for the Distribution Strategy is the observation ofcustomer behavior: visit showrooms, fairs, demonstration, promotional events, salesactivities Monitor the digital engagement and transformation rate of each channelaction Keep track of Customer channel satisfaction and gather any possible hint toimprove the overall experience.

Input 3: Channel business model and dynamics It is also crucial to understandour partner business model and the routes to market adopted in order to be betterprepared than our competitors to answer its needs This allows us to assess andimprove the competitiveness of our value proposition, for instance, using theguideline proposed in Fig.2.2

At the same time we also need to anticipate risks and channel dynamics in order tovisualize our ideal End-State structure Anticipating the channels interplay, conflicts,power shifts, consolidations, back-door agreements is the essence of this exercise If

we have 10 distributors today, and we had 30 distributors 10 years ago, there might

be a risk that if we don’t act now we might end up soon with a very concentratedmarket resulting in a reduction of the negotiation power To make sure we have ahealthy channel-mix we need to foster a healthy competitive environment among ourdistribution partners before it is too late

Channel dynamics can cause heavy losses and dramatic market share slumps as inthe case of the tractor manufacturer New Holland which alienated farmers with aninfamously poor distributor management

ASSESS PARTNER

BUSINESS MODEL

PERFORM SWOT ANALYSIS

DEVELOP PROPOSITION

EMBED IN COMMERCIAL POLICY

WHAT ARE THE OPPORTUNITIES AND THREATS?

WHAT IS THE COMPETITION VALUE PROPOSITION TO YOUR PARTNER?

HOW CAN YOU SUPPORT THE CHANNEL?

WHAT ARE THE ADVANTAGES VS COMPETITION?

HOW WILL THIS IMPACT SALES/PROFITS?

WHAT TERMS SHALL YOU ADD/MODIFY? AT WHAT COST?

WHAT ARE THE INTERNAL AND AGREED KPIS?

HOW CAN YOU FINANCE THE PROPOSITION?

Fig 2.2 Distribution commercial policy comparative assessment

When it comes to Distribution Strategy, a key question is:“What incentive policyshould we introduce if we want to secure, on one side, short-term sales, and on theother long-term sustainability?”.

Easier said than done, especially if the sales channel is on a consolidation trend Thelion’s share is held by a few large distributors, they can make the difference at the end ofeach quarter byfilling that gap that makes us reach our targets So while we would like

to reward disproportionately their performance, we should also invest in the ment of the medium-sized partners in order to avoid or delay consolidation In order tofind the most appropriate answer, we need at first to ensure that this strategic need iswell perceived across the entire organization and then that a conscious decision is taken

develop-on the short-ldevelop-ong term trade-off Only then we will be able to allocate properly theinvestments and drive the sales channel evolution In a recent work, we have redirectedaround one-fifth of the incentives from the main three partners to the challengers’ tendistributors This translated into a general improvement in performance as the leadinggroup felt a sudden pressure to keep performing and the challengers felt motivated togain share of wallet

Input 4: Self-assessment

The ideal distribution channel depends on our own organization capabilities as well as

on the industry dynamics

Self-assessment We usually dedicate a lot of time analyzing the external ment but we need to thoroughly assess also our own performance in the eyes of ourchannel We can run a survey asking our partners to provide a rating for each category

environ-so that we can identify the weak spots and develop an action plan to improve the score.Table2.1shows an example of framework we can use for this purpose

Industry specifics On top of the action plan stemming from the self-assessment, weneed to consider sector and company peculiarities Regulated industries, forinstance, need to pay a special attention to legislative evolutions as they affect thecompany freedom of maneuvering and impact both strategy and operations Thishelps identifying risks and opportunities across Distribution models and anticipatingpotential new and innovative channels Transport companies, conversely are moresensitive to oil price and their strategy needs to hedge and share risks with the valuechain Retailers’ performance is very sensitive to macroeconomics and their Distri-bution agreements should include elements linking the real estate pricing evolution

to the sales and margin performance

These factors allow us to establish the channel strategy principles which will betaken as a reference going forward for any Distribution related decisions Figure2.3,provides a vivid example of an end-state vision In this situation, the manufacturerhad perceived the looming challenge of losing the grip over the Channel andtherefore redesigned the whole commercial approach to secure a sustainability

2.2 Network Design

This phase should provide a high-level vision of the optimal network design, i.e.channels structuring/sizing, and Commercial Policy (Fig.2.4) To improve productpromotion and distribution we might need new partners tofill territory gaps terminate

Distribution End-State Strategy 2018-2023

1 Reduce number of channel partners to 20, and allocate across four segments (Elite, Premium, Growth, Standard).

2 Keep share of sales through Elite segment within +-5% of Premium segment market share in Brazil

3 Increase Share of sales to Premium segment by 2023 to 60% and maintain share

of sales through segment between 10% and 15%.

3 Build position with Growth channel partners to balance dependency on Elite, and target in the long term a share of wallet of 15%.

4 Incentivize channel partners to fulfill internally generated sales orders

5 For each distributor the sales of our two product lines (food and drinks) should

be balanced (50/50% with a tolerance of +/- 20%)

6 Ensure that each region has at least 1 Growth Distributor

7 Use Standard segment to cover sales area gaps.

Fig 2.3 Example of channel strategy

Table 2.1 Self-assessment framework

Topic

Importance relative to our end game strategy

Rating for our company

Rating for our direct competitor Open communication with

partners

Reliable and trustworthy

Innovative and with portfolio

well- fitting the market needs

Consistency in policy and

procedure

Fairness in how we treat

partners

Competence

Supply chain responsiveness

Support (technical, training )

Motivating commercial policy

Credit policy

non-growable partners’ contracts, invest in medium-sized companies with high tial and so on It is rare to see just one channel serving all the needs, even in one singletarget market Moreover, we might need a multi-brand strategy that requires multiplechannels In addition, our products typically require a different level of servicesaccording to the segment sophistication and price point Therefore we need to use avariable channel configuration providing a high flexibility in fulfilling needs.

poten-Once the distribution channel end-state design is clear, we need to think of how itsimplementation The overall Distribution architecture is a fundamental enabler butsadly only in rare occasions manufacturers are successfully influencing the channelevolution in order to keep a healthy competition among all parties

From where should we start from? A goodfirst step, as always, consists in asking thefundamental questions The answers shall define the direction to give to our work andbring to our attention trends and challenges We listed below a common list of questions

• How shall the current Commercial Policy evolve to face the challenges?

• Are there any smaller distributors in the channel with an unstable financialsituation?

• What would be the consequences of smaller distributors going out of business?

• What are the strategic segments and Partners within each channel?

• How many channels, segments and partners should we have?

• Are there any channel partners that have built (or are building) a dominantposition in the market which might weaken our pricing power?

• What is the role, contribution, challenge of each channel and each Partner?

• Are there any emerging channels or changes in customers purchasepreferences?

• Are we serving end-users directly? Does this generate channel conflicts?

COMMERCIAL POLICY (short term)

CHANNEL STRUCTURE (long term)

CHANNEL BUSINESS MODEL and DYNAMICS

Fig 2.4 Channel design stage