Distribution Strategy: The BESTX® Method for Sustainably Managing Networks and Channels

By Livio Moretti

This unique book helps business executives to improve their company's business performance by showing how to build an effective and future-proof distribution channel, and adopt effective commercial policies and value-based pricing strategies.

For the first time, an ex-McKinsey consultant and general manager reveals the methodology adopted by successful Fortune 100 multinationals, offering readers a concise, informative and pragmatic guide to the core principles, with an abundance of concrete examples and visual frameworks.

Every good business manager needs to have a microscope on one eye and a telescope on the other eye – this practical, easy to follow book, anchored in solid analytic principles, allows for fast and solid transitions between diagnosis, long-term strategic thinking, and short-term execution.

Bruno Barcelos, General Manager Sandoz, a Novartis Company

• Language: English
• Publisher: Springer
• Release date: Nov 2, 2018
• ISBN: 9783319919591

Book preview

© Springer International Publishing AG, part of Springer Nature 2019

Livio MorettiDistribution StrategyManagement for Professionalshttps://doi.org/10.1007/978-3-319-91959-1_1

1. Introduction to Distribution Strategy

Livio Moretti¹  

(1)

INSEAD, European Institute of Business Administration, Paris, France

Livio Moretti

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

1.2 Who Can Benefit from This Book?

1.3 How Is This Book Structured?

1.4 Crucial Factors for a Successful Implementation

1.4.1 Methodology

1.4.2 Principles

1.4.3 The Human Factor

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 Key Success 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 a few. Experienced marketing teams craft tailored messages, effective promotion plans, compelling pricing strategies and earn rewarding margins while doing so. Managers are also familiar with Sales Force Effectiveness, Go-to-Market Strategies and Revenue Management, the core elements of Commercial Excellence. Sophisticated pricing software, CRM applications, accounting and reporting systems are all but ubiquitously implemented. Dynamic Pricing and real-time yield management¹ are likewise becoming the norm. All in all, organizations in a short timespan, have witnessed a radical evolution in how they 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 priorities. Notwithstanding the consistent advances made recently in these crucial disciplines, little progress has been made in other core areas, such as the Distribution Channels Management. Still today, only a few organizations are able to capture the full potential of their indirect sale channels. They frequently fail in translating the customer’ needs into a distribution strategy, fall prey to market consolidations, set up sub-optimal commercial policies and lose consistent revenues through leakages. Their channel partners become therefore mere tactical logistic operators which don’t hesitate to switch to another manufacturer for marginal short-term gains. Even when a wholesaler is apprehended as a strategic asset, the approach remains frequently too basic.

Only a minority of the most senior managers is able to think strategically about Channel Management. Organization leaders do acknowledge the magnitude of the incentives budget, but often regard it (or rather dismiss it) as a pure ticket to play, a sort of fee for being present in the market. Contractual agreements, often the result of historical legacy and tiresome negotiations, seem a routine boring yearly process. Commercial Terms and Conditions (T&C) are subject to incremental inefficient evolutions of legacy agreements. Customized terms are defined via one-to-one negotiations and the result is a patchwork of contract clauses filled with a motley and unmanageable set of exceptions. Pertinent methodologies are rarely introduced and execution remains at bay together with floppy processes and uninspired teams. This steering by sight inevitably ends up in an ineffective allocation of resources. Despite all this, there is abundant scientific literature and empirical evidence demonstrating the disproportionate return of investment of an efficient and well thought distribution strategy. Several scholars researches, demonstrate the high correlation between market share and distribution presence. A study conducted over 116 years period in the Japanese retail market proved a strong retail distribution first mover advantage.² A concomitant study evidenced further prove between retail distribution and sales concluding that the in the Swedish alcoholic drinks market, sales elasticity with respect to retail distribution (0.74) is six times higher than the corresponding elasticity to advertising (0.13).³

Various reasons can kick-off a Distribution overhaul: a rapidly evolving ecosystem within a challenged industry, an unsustainable competitive pressure, an acceleration in price erosion with drying pipeline. A new market entry or product launch can also command the development of a robust Distribution Strategy. A robust methodology, pertinent organizational capabilities and the right mindset virtually every company can be in full control of its distribution. These three areas are precisely the focus of the book.

Distribution Strategy

With the term Distribution Strategy we refer to the plan that specifies how products or services flow through distribution channels in order to reach the end-users. A Distribution Channel is defined as the path through which products gets from the manufacturer to the consumer and is composed by the set of interdependent organizations that are involved in such a process. It can be as immediate as a direct transaction from the vendor to the end customer (we will talk in this case of direct distribution) or it may include several interconnected intermediaries along the food-chain such as wholesalers, distributors, sub-distributors, agents, vendors, resellers and retailers (Fig. 1.1). For the purpose of this book we will use the terms Distributor and Wholesaler interchangeably as they involve similar business models. In emerging markets is not uncommon to find up to seven tiers that allow manufacturers to reach the most remote areas. Marlboro, Unilever, Colgate might reach a city mall with their controlled importing company and resell to a wholesaler who has contracts with multiple distributors that would supply the mall. Then a smaller company might bring 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.

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Fig. 1.1

A common distribution value chain

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

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Fig. 1.2

Types of Channel structures

Every industry has its own specific distribution channels, for instance, medicines flow 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 before first 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 short distribution path as they prefer to reach their customers mostly directly; even if they now provide multiple access option through digital and phone channels, their route to market is still mostly direct to consumer.

Despite Go-to-Market differences across sectors, the principles that we will discuss 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 an ideal end-state structure. Several industries have witnessed an excessive consolidation of the distribution channels to the detriment of the entire ecosystem. A thoughtful channel Strategy prevents these risks and maintains a thriving Distribution environment. When defining an end-state scenario manufacturers need to anticipate potential future equilibriums in the Channel. They need to prevent for instance Stackelberg oligopolies by which a leading Distributor might take advantage of its negotiation power to force an increase in discounts which would be immediately replicated by the market followers. Hence the capability to anticipate threaths and capture opportunities plays a crucial role.

2.

Incorporate end-user needs to Define Effective Commercial Terms enabling an effective implementation of the Go-to-Market plan, maximizing short-term financial returns. Commercial conditions should tighten cooperation with the strategic partners and improve channels’ performance while minimizing manufacturers’ trade incentives investments. The total financial pay-out that vendors grant to a Distributor can be decomposed in five main activities (Fig. 1.3). The fair compensation for each of these elements depends on the specific effort and risk, and is linked to the viability of the business model. For instance a risky market environment might have more sub-distributors or retailers defaulting on their credit and the vendor indirectly makes up for these Distributor losses by granting higher incentives. A market with many remote areas might have higher logistic costs. More demanding end users might generate higher costs to provide assistance and services. The sum of all these components will determine the cost of doing business and shall be remunerated correspondingly by vendors.

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Fig. 1.3

Different distributors’ role command different compensation models

3.

Set optimal pricing strategies allowing to extract the company portfolio value throughout its lifecycle. Pricing is by far the most effective profit lever available, especially when coupled with a proper Distribution Strategy. Successful corporations are always successful in price-setting and execution. They define the 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 perceived benefits versus the alternative options.

4.

Bolster the infrastructure sustaining the Distribution and Pricing competitive advantage by minimizing revenue leakages and exceptions loopholes, improving teams’ capabilities and ensuring data-driven decision making. This goes hand in hand with making sound decisions in systems investments, processes implementation and performance management. The infrastructure is what materialize a good 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 of the indirect sales channel can impact revenues and costs translating into higher profitability and long-term market share:

1.

Revenues. The potential to increase sales figures does not require much introduction. The magnitude of the impact depends on the maturity level and the execution capabilities, consultancies usually indicate a potential ranging in the high single digit area.⁴,⁵ This is not surprising considering that sale channels play a crucial role in the manufacturer Go-to-Market implementation.

2.

Costs. Second, a well-thought strategy allows attaining the financial targets with a much lower budget. Uninspired organizations are frequently overpaying the low performers thus compromising their ability to incentivize their most profitable channels partners. An efficient Distribution Management optimizes the Commercial Policy budget and eliminates leakages.

3.

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

1.2 Who Can Benefit from This Book?

Due to the uniqueness of its approach, we expect that this book will spark new ideas in commercial teams and business leaders across multiple industries. The combination of a structured methodology and real-life examples will help Leaders as well as Marketing, Sales and Pricing Managers in their professional activity and career progression.

Leaders will broaden their perspective on designing a compelling Go-to-Market blueprint and frame their thinking on how their function affects the indirect sales management. They will rapidly understand what is at stake in their business journey and how to exploit the untapped potential. They will also enforce a solid methodology, shape a productive organizational set-up, invest in the right capabilities and, if needed, in infrastructure improvements. In addition to that, the book will provide them with a common language when discussing distribution and strategic topics.

Distribution, Trade, Pricing Managers will sharpen their analysis, priority setting, and processes more efficiently. They will have at reach a systematic methodology complemented by all the frameworks needed. They will be able to autonomously identify the upsides and craft a plan to capture and sustain them. Their time will be more efficiently invested in value-creating activities and they will be able to provide valuable options for the Distribution Policy overhaul.

By all means, any team member will be able to unlock opportunities, improve Decision Making, Data Analysis, Execution and Processes while at the same time expand knowledge and understanding of the Distribution Channels. Further, Sales Channel Management will continue to be a significant stop along one’s career progression.

In general the book will allow the reader to:

improve market share and profitability while reducing the investments in the Distribution 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 to unlock the market opportunities

improve the Go-to-Market capabilities of the entire value chain and enhance customer experience

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

1.3 How Is This Book Structured?

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

Chapter 1: Approach. This section addresses the key success factors of a transformational initiative: mindset, capabilities, execution.

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

Chapter 7: Pitfalls. This section focuses on the most frequent mistakes and provides some food for thoughts. For instance, why elasticity is often overestimated, discounts too generous, sunk costs misinterpreted, credit policy sub-optimal, targets setting myopic?

Chapter 8: Data and Business Intelligence. This final chapter explores the data universe 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 between Data 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 strategic options 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 high-quality ingredients and following a tested recipe. In the same way, any initiative aiming at improving the Distribution performance should rely on a successful recipe (Methodology and Principles) and high-quality ingredients (the Human factor). Let us take a closer look at these elements.

1.4.1 Methodology

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 be tackled:

1.

B stands for Building the End-State Strategy. The goal is to define a clear commercial roadmap based on the channel trends, risks and opportunities, competition dynamics and strengths-weaknesses of the organization. All has to tie back to the corporate mission and the business objectives.

Key Questions

Is our current Distribution Strategy linked to the business objectives? Can we quantify the alignment?

What elements of the Distribution Strategy would allow to address potential inconsistencies?

What are the opportunities and risks? Do we anticipate any disruptive event in the medium term, e.g. distribution consolidation, new channel emergence, change in end users habits and needs…?

Do we see commonalities or differences between our Channel Management and 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 the medium term?

How are we addressing channel conflict risks?

What is the feedback from end-users? Is the Go-to-Market plan effectively implemented?

2.

E stands for Evaluating the context and running the Diagnostics. This second phase 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.

Key Questions

How reliable and easy to use are the internal data? Do we need a system, process or capabilities upgrade?

What is the diagnostic telling us in terms of gaps and development needs?

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

Which channels, Partners, brands provide the highest growth, sales, gross margins?

What evolution do we see in the trends? Which Partners seem more resilient to adverse events?

How effectively is the commercial policy implemented? Do we notice any revenues leakages?

Are discounts and rebates well balanced across channels, partners of the same channel?

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

3.

S stands for channel Segmentation. The objective is to develop a future-proof channel structure. A core element in this respect involves creating an actionable segmentation which strenghten the execution of the marketing plan. Many companies fail in addressing this point by adopting a simplistic approach.

Key Questions

What is the feedback from the final customers on our Go-to-Market plan? How are the products delivered, what is the service level and what shall be improved in the customer experience? (Note that we started on purpose to talk about the end customer and not the Distributor.)

How are the current distribution channels structured? Are there wholesalers, resellers, dealers, agents, sub-distributors, retailers?

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 power spread across the value chain?

Is any channel partner building a dominant position which might weaken our pricing 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 how are they being used by end-customers?

How many end-users buy directly from the manufacturer and how many instead 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 achieving sustainable sales and market share increases, efficient as they minimize the incentives budget required to do so. In essence, this is an exercise of capital allocation conjugating internal financial metrics with external channel dynamics. The Distribution Policy should reflect the strategic/financial relevance of the Channel and the companies populating each segment. At the same time, the commercial incentives should provide more support to develop crucial execution capabilities.

Key Questions

What are the business objective of each product/brand: profitability, market share, customer loyalty?

What issues/threats have we identified in the Distribution channel and how can our Distribution Policy address them?

What Commercial policy should be defined to support these objectives and what budget should be allocated to each Term?

What portion of incentives should be dedicated to long-term versus short-term goals?

What is the relative weight of the incentives across the portfolio? What is the impact on sales of the channel (push) versus the marketing (pull) activities and what is the ideal balance?

What is the optimal allocation of discounts and rebates by product, by Partner and 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 not available?

How can we improve sales by tweaking the Credit Policy?

5.

X stands for Execution. Lastly, we need to ensure that the implementation screws 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 dynamically tackle this area with proper monitoring and course correction.

Key Questions

Following the previous gap analysis, what are the improvements needed in terms 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 remove revenue leakage and ensure compliant execution?

How to anticipate and minimize channel conflicts?

Figure 1.4 displays the Methodology flow with the five phases above mentioned.

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Fig. 1.4

Distribution Strategy BEST-X methodology

Figure 1.5 includes work-streams detail and the pricing components which will be discussed in detail in the Pricing Strategy Annex.

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Fig. 1.5

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

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 specific needs. Large organizations are sometimes lured by one-size-fits-all approach orchestrated by the head office teams, but let’s be honest: it does not work.

We see differences in all areas: different end-customers’ expectations, channel structures, distribution layers, consolidation dynamics, competitive pressure, business priorities, product portfolios, logistics capabilities, implementation skills, channels’ maturity, regulation and even taxation.