The four stages described here provide a framework for achieving marketing discipline: (1) the traditional model, (2) sales and service resource alignment, (3) performance sensing, and (4) strategic solutions.  This article excerpt is reprinted with permission from the National Association of Wholesaler-Distributors' Outlook 2003. See www.nawpubs.org for more information.  Excerpt from National Association of Wholesalers' Outlook 2003, Reprinted with Permission. See www.nawpubs.org for more information.

The word marketing, to most wholesaler-distributors, evokes images of product promos, spiffs and sales incentive programs. However, Peter Drucker, in his book Management: Tasks, Responsibilities, and Practices (Harper & Row, 1974), said

The purpose of a business is to create a customer, not make a profit. Making a profit is rather a goal and a test of management effectiveness in creating a customer. A business has only two functions in society, marketing and innovation. Everything else is just cost. Marketing, which is the opposite of selling, is finding ways to create value for customers. Innovation is the constant process of finding new ways to employ existing resource investments. Every department in a business must have impact on these two areas. When they are correct, selling becomes unnecessary. Customers only need to be made aware that the value proposition exists.

Drucker's definition that marketing is finding ways to add value to customers seems obvious. To most wholesaler-distributors, value means selling service and providing quality staff, inventory availability and receivable support. In the past this industry view worked well, so long as the wholesaler-distributor could actually perform.

There are two problems with this view today. Many traditional competitors and some new ones offer these services as well. The fancy word for this is that the value provided by most distributors is undifferentiated. Drucker also said that when selling service, sometimes the best you can hope for is to be no worse than the competition. It is very hard to create a compelling reason for a customer to choose one undifferentiated supplier over another. In this situation price competition becomes the word of the day.

The second issue with the traditional view of wholesaler-distributor value is that very few distributors actually measure or manage any of these key value offerings. Ask almost any distributor about their service and the answer will be that it is "Great." In the real world, when pushed for proof, the answer is often, "No one complained today." Additionally, few distributors have the sophisticated human resources development processes to actually measure and improve employee performance.

The recent Facing the Forces of Change study documented a compelling case of emerging threats to those businesses that continue to live with the traditional view. As power moves down the channel, customers are demanding more services and lower costs. Manufacturers are also seeking new alternatives in gaining access to their markets. Wholesaler-distributors are like the icing in an Oreo cookie, squeezed from both ends.

The good news in the study is that there are key paths that can be used by wholesaler-distributors to retain or regain the offensive in their marketplace. The study was developed for those organizations that are not held hostage to history and who are seeking their own path to success.

The study formulated four different alternative futures using scenario methodology. The point of scenarios is that the future can't be predicted, but by recognizing change early, a business can "skate to where the money is." The two keys to success in this model are that a business both recognizes and reacts to the market change. The study provides insight into both the changes looming on the horizon and the actions to take in any given scenario.

The study also provided a series of how-to approaches that can be used to recognize that change is occurring. Unfortunately, most wholesaler- distributors lack the discipline of marketing that is necessary to make use of the described tools.

The discipline of marketing

One of the key Facing the Forces of Change messages is that wholesaler-distributors need to get strong input from their customers. As customer choices continue to expand, their ability to change suppliers increases. This trend is identified in Facing the Forces of Change as an "expected outcome." Three-quarters of customer respondents to a survey for the study expect the Internet to be the most common tool for identifying new suppliers. (See Exhibit 2-5, page 62, in Facing the Forces of Change.) As the report states, "Obviously, conducting an online search process is simpler, faster and cheaper than a phone or fax search." The customer's cost to change suppliers also declines in this situation. The wholesaler-distributor who has "missile lock" on a customer's emerging needs is in a strong position to gain the business. Marketing is the missing tool to gain missile lock.

Wholesaler-distributors have significant investments in both capital and staff that are employed to produce a financial return by providing value to customers. Marketing is a term that describes the work of understanding what customers want and need and how wholesaler-distributor resources can be effectively employed to meet them. Implied in this definition is defined work and that the results of this work are used in decision making to align resources to produce a profitable return.

The work in marketing includes gathering information from customers, putting that information into patterns, using that information to make resource allocation decisions, creating new programs and measuring performances against expectations. It also requires an ongoing process such that gains are made over time.

One-shot, "let's get our act together," efforts in this area lack the recurring nature of the required process. They may help, but they don't constitute the discipline required for a real marketing effort. Marketing generates an ongoing flow of information that is continually changing. Managers are continually making resourcing decisions based on changes in this information flow.

The two additional pieces required for success in marketing are an information management system for storing and manipulating the information and some person who is responsible for the actual work. In other words, it must be someone's job and they must have the ability to access and use the information from the ongoing flow. Drucker is right when he says that every employee needs to be involved in marketing. A giant leap forward for most distributors is to have one real person involved. This person is ideally on the same organizational level as the senior sales executive.

Marketing and Sales are often thought to be in conflict. This conflict arises from a lack of answers to questions such as the following:

The only source of customer insight for most wholesale distribution managers is input provided to them from their sales representatives. But sometimes, sales people make things up. There are also times where the needs of the salesperson are at odds with the needs of the organization. Over the years, one common characteristic of best practices for distributor organizations is that they had a formal and structured source of customer performance information that did not come from the salesforce.

What information is needed and where does it come from? How can this information be used to improve resource allocations and profit?

The information is not about what products customers purchase from a wholesaler-distributor. The needed information will not be found in any transaction-based computer system. Rather, the information needed is about what a customer organization is trying to accomplish, including their threats, opportunities, strengths and weaknesses. Customers are always interested in ways to improve their competitive position or reduce their pain. The most valuable information that can be obtained is about future plans and intentions of customers. The example below indicates how this plays out in the real world.

This example raises some questions:

With a disciplined marketing effort, wholesaler-distributors have much stronger early recognition skills. Recognizing market changes before they occur allows the wholesaler-distributor to keep the initiative rather than just react to external forces. A key point in the example is recognizing patterns and redeploying resources, not just reacting to a single customer request.

Creating the marketing function

There are several stages that a firm moves through to create this discipline. The stages described here provide a framework for achieving marketing discipline.

Stage one: the traditional model. This firm relies on field sales people to provide the majority of customer-needs information; there is no formal system for identifying patterns. The typical salesforce is heavily incentivized on generation of gross margin dollars. The organization is very focused on products and suppliers. There may be some solid sales-management practices in place, but these would involve sales budgeting, margin enhancement, call reports and joint supplier visits. Companies that are still running with these traditional models need to start gathering customer information that does not relate to future purchases.

This information is what is needed to prime the marketing pump. The wholesaler-distributor uses this information to identify solutions that add value for the customer. The power in this comes from being involved in customer dialogs on an ongoing basis.

The quickest way to destroy this process is to remain excessively concerned with how much can be sold to the customer. The issue is not about what customers buy; rather, it is about the distributor's "share of spend." The focus must be on gathering information to solve a customer's problem. (Few people keep inviting an insurance salesperson back to dinner if he can't stop trying to sell insurance.)

The discovery process described above still requires that someone be charged with doing the work and that a formal system exist to collect and analyze the information.

Whatever computer system is used, it must facilitate the customer relationship management (CRM) process, which collects event- or time-based data like discussion notes in searchable fields. Transaction data from the firm's legacy system is loaded into the CRM-style information system. This transaction data is used to determine the share of spend, where total sales represents the numerator and total customer purchases represent the denominator. The customer's total spend may include some product gaps (things the distributor doesn't sell), but it may also include several fee-based services opportunities as well. The proper system design looks at all customers in a market, usually defined as a geographical area. Existing customers, both active and inactive, are only a subset of the total market customers.

The bulk of the information in each customer record will consist of documented discussions that are stored by date and searchable by content. Each customer record will consist of many definition fields which may include key competitors, SIC code, employees, trade associations, decision makers, decision influencers and types of decision-making processes.

A key point to remember is that a customer is a relationship characterized by a flow of purchased goods. It may or may not correspond to who gets an invoice. (In medical research the customer is often the research scientist, not the research institution. As the research scientist moves, so does the supplier volume.) A misunderstanding of this point is frequently one of the major flaws in CRM systems.

Stage one creates the key flow of information. It can be viewed as the market-intelligence piece of the process. The wholesaler-distributor then needs to begin the process of aligning resources with the opportunity.

Stage two: sales and service resource alignment. Firms at this level have created some real customer segmentation and allocate services based on these segmentation criteria. This goes way beyond allocating "suck up" behavior based on size (small, medium and large). Field sales people work with assigned accounts and the customers to whom they are assigned change on a regular basis. These firms have solid data on total customer spend, which is maintained and updated on a recurring basis.

The customer framework in Facing the Forces of Change (Exhibit 2-1, page 59) demonstrates the value of segmentation. For example, a wholesaler- distributor serving multiple customer types must be aware of differences in ordering preferences before investing in technology. Exhibit 2-1 shows that 28% of contractor customer orders are made today in person, whereas only 4% of OEM customer orders are made in person. Building contractors often go to a wholesaler- distributor's branch location to make unplanned purchases; in-person orders represent a minority of orders for distributors selling to OEM, institutional and MRO buyers. In addition, while institutional customers expect that by 2006 more than half of their orders will be made via electronic data interchange or e- commerce, contractors believe that only 31% of their orders will be via these methods. Ordering preference is just one example of how customer needs differ.

Firms operating at stage two have segments of customers who are not serviced routinely by field sales people. This goes way beyond the old concept of house accounts. These customers may range greatly in size from large to small. The art of segmentation is to group customers according to maximum similarity within each group while creating groups that are maximally different. Some possible criteria may involve bulk breaking, special convenience, need for technical support and after-sales support, financing, etc.

The most expensive form of customer service is attention from a field sales representative. Firms at this level have unbundled the role of the traditional field sales rep and separated demand creation from demand fulfillment, i.e., servicing. Many wholesaler-distributors sell over 95% of their volume to customers who purchase the same products repeatedly. These firms have evolved inside sales and customer service departments to handle such accounts. They also use the web and telephone to manage technical information requirements.

The role of the salesforce has transitioned from classic selling and servicing to creating and building customer relationship equity. The salesforce is focused on opportunity for sales increases rather than existing volume. They may be involved with all large customers, but their role is defined and limited once the "share of customer spend" goals are achieved. The marketing effort provides the information and insight to measure opportunity.

Sales management is involved with managing investment of the selling resources against identified opportunities. Major account selling is a company responsibility, not the responsibility of the individual sales rep. The sales rep may be the "quarterback on the field," but the company creates and runs the "play book."

There may be other kinds of specialized functions that take over parts of the traditional generalist sales rep role. Wholesaler-distributors involved in original-equipment and integrated-supply markets usually have a team of operations specialists who set up major account relationships and programs once the initial sale is made.

One of the key defining characteristics of wholesaler-distributors in stage two is some kind of service-rationing process. Each customer segment has a different set of standards with respect to delivery turnaround, pricing, fill rates, special ordering, access to technical support, quotation responsiveness and a host of other service outputs. The obvious goal is to provide outstanding service to every customer. However, triage is often required when demands exceed service capacity.

Stage one provides market information and insight. Stage two is the alignment of resources to the opportunities developed in stage one. Both of these stages are often viewed as static, i.e., "Once we figure it out we will be done." Marketing discipline occurs in stage three, where the process becomes dynamic.

Stage three: performance sensing. Stage three is about how the information is used in running the wholesaler-distributor business. Here a formal market evaluation process occurs several times each year. During this process key decisions are taken to increase or decrease resource investments in specific customer segments. Additional decisions, like changing out key suppliers or new programs, are also considered. These actions are based on a formal examination of strategic and tactical questions.

In the Facing the Forces of Change study, a series of questions is posed for each identified scenario. One valuable suggestion is an ongoing review of industry articles on new practices or solutions. An excellent source of such articles is NAW's electronic newsletter NAW SmartBrief, available at www.SmartBrief.com/NAW. This "clipping service" and the questions from the study provide a framework for identifying emerging threats and opportunities.

At stage three the wholesaler-distributor has developed the discipline of marketing. The tools and knowledge exist and are used in routine decision making. Each firm will view this discipline differently, based on its entrepreneurial skills, knowledge and experience.

Stage four: strategic solutions. Market forces and competition will make the wholesale distribution segment more cost effective for customers. Yet some wholesaler-distributors will fade away because they either can't recognize or respond to these market forces. Marketing discipline can be a powerful tool for staying on the winning side of the continuing market consolidation.

The implications of the Facing the Forces of Change scenarios are both far-reaching and profound for wholesaler-distributors. One of the key messages in the study is that channels evolve to solve customer problems, not to push product. An organization is at stage four when it is not hostage to existing economic models and thinks strategically about where the money is flowing.

Characteristics of stage four might include starting a completely new division that is built on a professional-services model instead of a gross- profit model, or even a wide-ranging change in the products that are offered for sale. Firms at stage four define themselves by the customers they serve, not the products they sell.

Actions required to walk the walk

These concepts, coupled with the Facing the Forces of Change foundation, are very powerful. There is, however, an executive decision that needs to be made before choosing to pursue any investment in the marketing arena. The senior wholesale distribution executive needs to objectively compare his or her own firm's performance against that of his competitors in the same industry. The areas of greatest concern are return on total asset (ROTA) performance and year-on- year revenue growth. If the firm is below average on either of these two critical performance factors, then several things need to occur prior to investment in marketing discipline.

When firms are below average, problems are easy to identify. They usually involve issues with the executive leadership, and often exist because the executive is "hostage to history." The solutions are also pretty straightforward, once the emotion fades. This sideline assessment check is required to ensure that there is a solid foundation for building marketing discipline within the firm.

Creating marketing discipline requires an investment in producing a potential competitive advantage. This business decision is framed in a series of risk/opportunity assessments. The decision is a large one, in that a senior executive must be appointed or hired, technology must be purchased and a fair amount of research information needs to be purchased as well. Each firm should build a realistic first-year expense budget, making sure to separate recurring versus non-recurring (one-time setup) costs.

Once cost is established, benefits can be developed in a series of qualitative discussions regarding risk and opportunity. Your senior executives should read the Facing the Forces of Change study and compare their individual views with the various scenarios in order to quantify risks and opportunities. Questions to explore:

The workbook accompanying the Facing the Forces of Change report can be helpful in guiding this discussion. Once the discussion is fully developed, a series of expectations can be developed for the marketing discipline investment. The benefits include profits from increased growth in new accounts (same or new geography), increased penetration of existing customers (same or new products), revenue from new fee-based services and the potential large wins from a gain of a new major supplier or customer.

Creating marketing discipline is a major decision. Drucker says that most management decisions aren't really decisions at all, because they never evolve to actual work. The work involves taking the time for an executive team to read and discuss the Facing the Forces of Change study, generating facts for informed decision making and, finally, making the choice consciously and with intention.

The bottom line

Chaos creates opportunity for those organizations that can capitalize on turbulent times. Consider this classic definition of a marketing channel from Anne Coughlan's book Marketing Channels (Prentice Hall, 2001):

A marketing channel is a set of interdependent organizations involved in the process of making a product or service available for use or consumption.

There will always be channels and there will always be interdependent organizations involved in the process. The wholesaler-distributor operating at stage four is dynamically changing its resource base to seek out and satisfy emerging needs of both customers and suppliers in its chosen channels. Someone will always be necessary to perform some of the work required to make a product or service available for use or consumption. There will be profitable returns on investment made by those firms that figure it out and understand that it is a constantly moving target.

J. Michael Marks is founder and partner of Indian River Consulting Group. IRCG is an experience-driven, general consulting practice specializing in distribution issues for business-to-business distributors and manufacturers. IRCG's specialists help companies make the changes necessary to maintain competitive advantage. You can contact them by calling 321-956-8617, or visit www.ircg.com for more information.

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