If your 2024 plan is to do more of the same but just better, I’d argue that’s not a plan at all. Right now, distributors need to have a serious conversation about:
- What they’ll do that’s different.
- What they’re going to invest.
I see a lot of distributors talking in circles about what they could do and what others are doing to grow sales, expand margin and increase business value. However, when they finally come to the table to define their objectives for the next year, they don’t make a larger commitment.
Distributors can’t afford to do that again this year. They need to invest in the game, instead of just talking about it.
When you come to the table this quarter, look to those areas of your business where there’s the most leverage you’re not leveraging now. In many cases, the two primary areas are:
- Cash flow
- Agility
1. Cash Flow to Demonstrate Increasing Value
Growing sales, expanding margin, increasing business value – it’s about performing at a level to warrant the high EBITDA multiples of market-leading firms. Whether the business is selling or not, it increases capabilities to both invent and acquire others. In short, this is playing the game to win instead of playing it not to lose.
As Kevin Sachs, co-leader of the North American distribution sector practice for McKinsey & Company, recently outlined on The MDM Podcast, distributors with high valuations differentiate themselves from competitors by demonstrating to shareholders that they’re achieving faster revenue growth, expanded profit margins and more efficient leverage of working capital. It is by demonstrating this that they’ve convinced shareholders they’re worthy of that higher multiple.
The lightbulb here? If you’re not demonstrating high growth, high profit and efficient use of working capital, the value of your business is going to decline every year. Typically, this is a byproduct of executive complacency.
I second Sachs’ emphasis on continuous improvement as the ladder from losing value to building it. As Sachs points out, those higher-value companies focused on building more effective sales processes, leveraging data and making efficiency part of their culture.
2. Agility to Zig When They Zag
It’s imperative that distributors can adjust seamlessly as conditions change. We’re amidst a concerning array of active and pending geopolitical concerns, including the upcoming U.S. presidential election, the Russia-Ukraine war, the Israeli-Hamas war, the looming COVID debt bomb and many others.
Simply put, the economy is going to be frothy. Any distributor that’s going to do well next year is going to be light on their feet. They’re going to be able to sense these changes quickly – and react quickly, because speed is a weapon. You’ll need to be positioned to pivot at a day’s notice.
My advice? Check in with your customers and find out what they need. They’re going through the same economic issues as you. Prioritize interviewing them to find out their pain points, and how you can help. This way, when you swerve, you’re swerving with and toward them and not away from their actual concerns and interests.
If You’re Going to Do It, Do It Right
What distributors need to successfully improve cash flow and agility at their companies is to be strategic and apply proper change management. However digital, sales, analytics and culture have converged. All are as important as each other, and all are going through consequential enough change that they warrant a holistic and integrated strategy – a business model transformation.
A few best practices for wisely enacting meaningful change include:
1. Focus on your purpose: to create value for customers. Customers come to you because you provide something they can’t get elsewhere, not because you’re profitable. How are you adding value to them?
2. Let customers drive your digital transformation. The most important outcomes of a digital transformation are reduced friction in your business processes and better customer service. So, where are your customers on their journey? And what do they need from you?
3. Embrace changing technology – and choose wisely. Stop waiting to adopt technologies that will greatly improve your business, but approach with caution. Making the right investments will go a long way. Don’t hesitate to seek input from peers or consultants like IRCG.
4. Use behavioral analytics to segment customers. Leveraging your customer data in this way will help you operate off the most relevant data and make meaningful decisions.
5. Evolve your sales team to better serve customers. Sales teams have experienced some of the most drastic changes over the past several years. Have you reorganized your teams effectively? And if so, don’t forget to realign your sales compensation plans using best practices to reflect these changes.
Be prepared by positioning your company to pivot quickly by implementing these best practices. Agility will be your competitive weapon in the days ahead.
