Case Study: Manufacturer Shifts Approach to 2 Distinct Segments to Reduce Conflict, Solidify Market Position
*Disclaimer: The following case study is based on a real client. The company name has been changed to protect the company’s identity
Allison-Fuchs is a leader in the power transmission industry with a large installed base in mechanical equipment and other specialty hardware necessary for factory operation. Allison-Fuchs built its installed base by offering innovative and reliable products.
In the beginning, a channel dedicated to technical knowledge evolved to sell Allison-Fuchs products. By using a limited-distribution model, the company had a degree of control of the channel and its offerings.
Over time, Allison-Fuchs products matured and became commodities (commodities exist when the application knowledge rests with the end-user). Because of this maturity, their products became the incumbent or default choice. This meant selling was no longer as necessary as products “sold themselves” through customers reading the brand on the work out part and simply reordering.
This caused channel conflict and two distinct channel-partner segments emerged. One segment of the channel is technical and “sells” the products while the other segment is logistic and cost-savings focused. These two segments are at odds both in terms of business model and ability to effectively serve or make a market.
The technical segment sells mostly to end-user engineering departments. Their approach is high touch and high engagement, often performing initial design work. This segment requires higher margins to operate and most are inefficient at managing flow business. They were actively pushing back against Allison-Fuchs because of share shift, or other distributors using pricing discounts to take business from them.
The logistic-focused segment sells mostly to procurement departments. Their approach is low touch and low engagement. They are efficient at managing flow business and able to support low margins (but always wanting more). They actively try to swap out Allison-Fuchs products for their own private-label offerings. They often use Total Cost of Ownership (TCO) as a reason to replace the company’s components and drive cost savings.
Allison-Fuchs was treating both segments the same and the result was lower-than-expected growth. While they were growing sales, they were not meeting their parent company’s expectations. The industrial market was growing 3% and while Allison-Fuchs was growing above market, year-over-year growth of 8% was “required” by their parent company.
The parent company, which acquired them as a strategic acquisition, had open distributions and believed the issue could be resolved by simply opening Allison-Fuchs’s limited distribution model.
To Allison-Fuchs, this meant the channel that helped create their market was not the one to take them into the future – a distinct break with closely held beliefs. Additionally, distributors were questioning their commitment to the limited distribution model that built their strong market position from the beginning.
To solve this dilemma, they needed to know two things:
1. How important is technical selling to Allison-Fuchs products?
2. What ability do logistical distributors have to swap out Allison-Fuchs products?
This is fundamentally an economic issue driven by degree of risk. Allison-Fuchs had attempted fixes but continued to hit internal constraints and were unable to improve growth. Progress had stalled and frustration was prevalent throughout the company. Indian River Consulting Group was brought in to provide clarity to the issue and external insight into the possible solutions.
To answer these two questions, IRCG needed to understand two core traits:
- Is Allison-Fuchs brand-led or channel-led?
- What service outputs are end-users demanding and who in the channel is providing them?
Brand-led versus channel-led tells us where the channel power lies. Brand-led means the power lies with the brand and how that power is used matters most. A customer in this situation chooses the brand first and then finds the best channel partner that sells it. Channel-led means power is with the channel and the only thing the manufacturer can do is focus on being easy to do business with. In this situation, the customer chooses the distributor first and purchases the brand the channel partner recommends. Private label is a viable alternative for channel-led products.
Service Outputs Demanded (SODs) are the services that end-users require from the channel. Service Outputs Supplied (SOSs) are the services supplied by the channel. To understand the effect on the channel, it is necessary to know what services are demanded (or valued), who in the channel provides them and if they are being adequately fulfilled. Service outputs ultimately tell how fairly the channel is being compensated for the services it provides.
Following a kick-off meeting to align expectations of the process and deliverable, IRCG undertook a series of interviews to answer the questions above including:
- One-on-one interviews with internal stakeholders
- Adaptive interviews with channel partners
- Adaptive interviews with end-users
The channel partner and end-user interview set included large and small, geographically dispersed, OEMs, and a wide range of end users. Interviews were completed using a proprietary adaptive interview technique, creating a trusting conversation between peers.
IRCG found that Allison-Fuchs is brand-led and, more importantly, their channel power was being underutilized. Additionally, both Allison-Fuchs and their distributors had a heightened view of the value each provided in the overall value chain. End-users choose the brand first and the source of supply second.
This meant distributors have a low ability to swap Allison-Fuchs for other products (although that did not stop them from trying, adding to the channel noise). While the company’s products represented a very small share of end-users’ factory operating costs, their impact on the full system was outsized. Said another way, failure of an Allison-Fuchs product came with potentially high total costs to the system. Because of this, most orders were flow business and read and reorder was the standard.
A misalignment of service outputs supplied was also found. Technical selling was important and needed to be invested in and nurtured. End-user OEMs relied on Allison-Fuchs and the channel to provide the needed technical expertise. Allison-Fuchs relied on small specialty distributors that supported the specification and selection process in addition to the actual transaction.
Because of this misalignment, Allison-Fuchs was overcompensating the logistic-focused, market-serving distributors with both margin and allocation of resources. Their discounting and support were driven more by channel-partner-perceived takeaway power than the economic value of services actually provided to their customers.
IRCG recommended that leadership take two core actions to regain market power and sales growth:
- Focus on OEM specification. The importance of read and reorder in the buying process highlighted the need to focus more resources on OEM specification and the “OEM Waterfall.” By getting the company specified with more OEMs, all vendors who sell to and support the OEM eventually will default to specifying Allison-Fuchs. The risk of swapping for lower cost or lower quality (with limited cost savings), ensured that specification work was the key to regaining market power.
- Own total cost of ownership. Allison-Fuchs needed to own the total cost of ownership conversation with end-users. By directing the conversation with end-users, they could demonstrate the true cost of ownership and highlight the potentially exponential costs of product failure. Increasing direct contact with end-users while still serving them through distribution allows Allison-Fuchs to control the conversation about total cost of ownership without substantially increasing their cost to serve. It additionally lowered the ability of logistic distributors to attempt to swap out their products.
The recommendations meant Allison-Fuchs needed to treat the two channel segments differently, pulling back resources from market-serving channel partners and redirecting them to market-making efforts and partners. This did not mean cutting off market-serving channel partners but instead making a strategic investment in the partners and activities best positioned to grow business.
Finally, Allison-Fuchs was advised to ignore the channel noise. This was especially true for the logistic distributors. While the logistic-focused distributors might have the ability to make a lot of noise, their ability to retaliate was low.
The open-distribution strategy of their parent was rejected as a result of the recommendations, and Allison-Fuchs was able to regain market power, better align resources to results and reduce the channel conflict to a healthy level. A valuable side benefit was bringing market data into the growth-expectation conversations with their new owner. The net result was a more realistic set of owner expectations; the channel changes also improved their ability to grow.
Allison-Fuchs met their owner’s growth expectation in the first year following the project.