June 25, 2017


















SUMMARY OF THE CLASS - ďENLIGHTENMENTĒ QUESTIONS

SUMMARY OF THE CLASS - "ENLIGHTENMENT" QUESTIONS

In a re-shuffled order, I have summarized all of the questions that you sent to me as part of your initial assignment. I have also inserted some quick, unedited comments following some of the questions. If any of you would like to start a thread on any of these questions, please feel free to do so. I too will try to intersperse responses to these questions as time and on-line opportunities permit.

A.   MACRO, ENVIRONMENTAL TYPE QUESTIONS
  1. What are some of the major archetypes of players in the Industrial Distribution world? Are there ways to segment players in a given subset of the industry to easily identify their particular perspectives, reactions to change initiatives and what motivates them? (Comments: In channel diagrams, there is typically a box for the "manufacturer", one for the "distributor" and one for the "end-user" in a business-to-business channel. In most consumer channels, there are "two-steps" for distribution; one step is a warehouse that roughly breaks truckloads into assorted cases that go to the second-step that is a retail "store" at which the final box, the "consumer" buys assorted items in broken case quantities with the additional procurement cost advantages of a nearby location at whatever time they want. But, there are also other channel species. Small manufactures will use independent "rep agencies" as their shared field sales force. There may be "importers" that serve as shared "master wholesalers" to a countryís distribution channel. In some channels, there are "master wholesalers" that sell assorted cases of commodities to small distributors that canít easily buy and sell straight truckloads of commodity goods. What are their motivations? 95% of them are driven by trying to push, stimulate more volume via product-centric marketing to get "economies of scale" that donít really exist and otherwise practice (unspoken?) financial management assumptions and practices to maximize and grow their profits. Many may not realize that their assets to support the growing profits are growing faster than their re-invested profits until a bank tells them that they are in violation of asset-backed lending covenants. See article 2.8 at my web site to understand the "long-term, stable growth rate concept.
  2. Other taxonomy terms: the term "distributor" originally meant a creature that sold components or ingredients to an end-user that then created a "whole" product (e.g. an electronic component distributor sells to a PC manufacturer). "Wholesale distributors" would then sell a complete finished product to an end-user (e.g. Ingram Micro will sell PCís and PC networking gear that you see around your office to a "value-added re-seller" that designs, procures and installs the network into an office. In building channels, an array of different types of sub-contractors (plumbing, electrical, heating/air, drywall, etc.) are the "value-added re-seller" equivalents to their formally named cousins in the PC channel.)

  3. The US has been moving away from being the manufacturing country that we once were due to cheaper labor. Will the US companies eventually reclaim the manufacturing status we had 30 years ago? (Comment: The US has the patents on most of the new significant technology that will yield new products and services. As these technologies bear practical, marketable solutions, there will arise new manufacturing jobs and opportunities. Donít forget that software, and all digital entertainment and financial products are "manufacturing" too. The jobs that we are losing to low-value added, labor-intensive activities on physical products that arenít too freight and/or time sensitive will never come back, especially if they are pollution and liability intensive processes. If a manufacturing plant requires big fixed asset intensity, then it also requires big, "deep pocket" owners. Such owners and facilities can then become targets for extortion payments (or we will close you down) by: union organizers, trial lawyers, local taxing authorities, EPA/Greenpeace activists, etc. In Chinaís "free enterprise zone", unions are illegal. Taxes for now are minimal. And, regulations of all kinds are non-existent. These collective overhead costs are more significant in total, long-term cost and return calculations than the cost of hourly labor. And, donít discount the day that China will effectively nationalize outside investments for pennies on the dollar if they have too.)
  4. For years we have seen consolidation and margin squeeze that have had a devastating effect on the independent distributor. Currently in my field (industrial/medical gases) we are seeing a rebound of independents. How are these new upstarts able to compete in the same market that drove them away a few short years ago? (Comment: Every channel is different. In your channel, there may be more and new niche opportunities opening up. But, in many channels the financially driven, publicly-traded "roll-up" companies replaced local owner/operators with "professional" managers who turn over every couple of years before they establish good working relationships with the service employees and the best, right customers. This allows the local owner operator to work harder, make better incremental investments of their own resources (time, talent, treasure) into securing better selling relationships with the better customers for the long haul while executing on basic service excellence. The independent then wins through better service retention economics while the chain location withers under increasing cost cutting pressure from HQ. See the case study in Chapter 3 of the book (as posted at www.merrifield.com) on the big national chain with the big, slick, national product promotion campaigns as an example of why top-down, central planning does not typically work well in most distribution channels.)
  5. You made references in the reading to the lack of exclusive distribution channels (or channels protected by the manufacturers) in todayís marketplace. Do you feel as if this type of channel is superior? If so, they why is it less common? (Comment: Perhaps the biggest single strategic issue that determines whether a manufacturerís line is "exclusive", then "selective" and eventually optimally "intensive" is the life cycle of the product and whether the end-user perceives the product as a commodity. Another large factor is how important critical pre and or post sales services are to the end-usersí on-going needs concerning the product. A number of equipment (and auto) dealers have different degrees of exclusivity depending upon how capital-intensive, skill-intensive and time-sensitive breakdown maintenance of the equipment is to the customer. At the extreme, Caterpillar has very exclusive and lucrative dealer territories and then Cat can dictate whatever they want the dealer to do. If a major pipeline is going to be built across some isolated, frozen wilderness, the contractor will use 100% Cat equipment, because some dealer is going to provide X hour response time repair services.)

B.    COMPETITIVE STRATEGY QUESTIONS

  1. What are some of the frameworks and mental models used by Industrial Distribution leaders to make business decisions? (Comment: Most canít articulate all of their un-spoken, out-dated assumptions or "mental models" that they are using to run their business. That is what the first three chapters of my "forthcoming book" posted on my web site are all about. We have to identify both the right models for reinventing profitable growth as well as the wrong ones that must be given up.)
  2. Can an organization determine, objectively, what their actual versus perceived strengths to their customers are, or, would this be done more effectively through a third party marketing group? (Comment: Bigger companies hire 3rd party companies to do customer surveying all of the time. Small companies can not afford the services, but they can still do quick-and-dirty, first-peel-of-the-onion surveys of their 3 to 5 most profitable customers in their number one historic niche as well as for 3 to 5 of their most promising target accounts in the same niche. IF, they can: a) identify the niche and the customers; b) ask the right questions; c) listen well with a third ear (there is "art" in this; it isnít all "science"); and then d) change their organizations to deliver a distinctive, consistent, perfectly tuned and usually allocated (Aís get more for free, Dís get less or the same for fees) service solution. A lot of "ifís"!)
  3. Can a distributor succeed at playing both ends of the spectrum in regards to lowest price provider (for market share) in some cases as well as excelling as top-notch value added organization at the other? (Comment: Most distribution customers donít buy "price"; they buy lowest "total procurement cost" (TPC) which involves a different recipe of 1-stop-shop items and services for each customer niche if not for each individual, big account: there is a lot of unrecognized, special-stock-for-just-one-customer inventory at every local distribution facility. All things being equal, it is best for a distributor to buy inventory at the lowest TPC, which may often involve a higher landed cost. We learned from the ABC case at the end of Chapter One of the book that fill-rates due to a critical mass of customer demand is more important than turn-earn, which is driven by the customer demand. Whether ABC is the lowest price buyer of some of the commodity items that it sells is irrelevant. If ABC can get a huge share of the value buying customers in a given customer niche, they are apt to be the best landed-cost buyer on average across an entire basket of items that the niche buys. Sure, some other distributor might be a lower-cost, lower priced seller on some of the commodity items that an ABC customer buys. But, without the total lowest TPC offering, the price house will win only a small and often profitless share of market. Look at the Wholesale Clubs for consumers! They offer the lowest prices on the 600 biggest commodity consumables in our lives, but they only have 5% share of market, because they donít offer me, or most of you, the lowest TPC most of the time. Samís and Costco are the last two standing that matter, and neither are happy with their ROI or growth rate prospects. Iíll bet most of you may do some load-up trips to a Wal-Mart, but otherwise buy most of your consumables at the full-service grocery store nearest your home. Why?)
  4. How do you balance the push for market share (sometimes at the expense of profitability) with the ultimate goal of increasing shareholder value? (Comment: In mature markets you canít "push" customers to buy more than what they need. If you marry the right customers that are growing faster than their competitors at their competitorsí expense, then the growing customers will grow you. If you have an exclusive distribution franchise for a new to the world product that can replace an old way (and products) of doing things, because it offers breakthrough total value for a customer, then by all means "push" or develop a market by calling on the "early majority" buyers. If you cut the price on a mature product to get a customer to switch their buying to you or to load up for future needs, has any new demand been created? How easy is it for any other competitor to recognize your "unique marketing proposition" and match it in a second? Where is the sustainable competitive advantage in cutting the price? And from question 7 above, we saw that low-price on the few price-sensitive items is not the lowest TPC for the great majority of the customers.)
  5. How should an organization combat their competitorsí low bid strategy (specifics)?
  6. (Comment: If the customer is a government entity that must, by law, take the lowest priced bid, then it is important to look at different tactics. Some vendors create "minority owned" marketing partner fronts. Some seek to influence the spec writing so that every other competitor can not effectively, completely bid on the contract or wouldnít want to when the local service capabilities are carefully delineated with non-performance penalty fine clauses included. Others pass on the bulk volume contract because they can work their in-house buddies for lucrative fill in business. Others take the bid at a loss, because they have done the math for over charging on the fill-in, exception business to make it all profitable. Most customers have the freedom and inclination, however, to buy some vague notion of "best total value". For these customers it is important to teach and co-create their much more precise definition of what "best value" is and then to see that you have it, if you do! A lot of buyers use "price", because in their minds no supplier, including you, offers a compelling service value difference. So, define, achieve and sell a service value difference to get out of the price game. If the gate-keeper buyer still insists that low-price is all that matters, even when they agree that your higher priced solution is the better total deal for their company, then you are talking to the wrong person as far as reframing the best value solution. Team sell on a honcho-to-honcho basis, higher up. Finally, know the customer niches and value-buyers for whom you can make a difference and sell only them. Know your true total costs and donít bid on losing business. It is better to be smaller and much more profitable by selling customers that you like, trust and have a growth future that will grow you. You will also have the extra resources Ė time, talent, treasure and trust credibility with all stakeholders Ė with which to invest in new promising opportunities. Most companies have most of their assets and activity costs tied up in break even or money-losing customer relationships. Their lack of profits and growing debt make them panic and become short-sighted, "lean-n-mean" financial managers who cut back the oats for even the few winning customers and employees that they have.)

  7. How does a distributor break the cycle of price fixation when all the competition focuses on is price (referencing the "dumb competitor" death spiral)? (Comment: See the answers to 8 and 9.)
  8. From a distributor perspective, what is the most effective way to approach mature/existing accounts on being compensated for services provided (i.e. the unbundling activity)? (Comment: this will be the subject of a future weekly assignment which will be centered around an annotated slide show at my web site at this link, if you want to read ahead: ./articles/Fees_for_Services_slides.pdf)

C.    ORGANIZATIONAL DEVELOPMENT

  1. In a dynamic working environment (management changes, vision changes, etc), what is the most effective way to create and maintain a healthy culture? (Comment: First, letís define "culture". Hereís one from Websterís: "The set of shared attitudes, values, goals and practices that characterizes a company." Second, appreciate that there is an entire industry built up around this "soft science", but here are a few thoughts. Enlightened company cultures are nice, but the company still has to meet some customer niche(s) needs better than anyone else to make a profit to reinvest to feed all stakeholdersí expectations. I believe if you focus on your best historic niche of customers and do what you have been doing for them a lot better you will be on your way. Chapter Oneís Maps help each company in a mature industry with a mature product line reinvent and revive their core. Then, work to install free-market, democratic principles and measurement realities within the company. For a quick overview on this challenge, read about my "Six systems" in article 5.10 at: ./articles/5_10.asp. These readings might help you to at least understand why your culture may be dysfunctional to some degree and maybe give you some ideas on how to start moving down a path that will help to improve both the profit power and the culture. But, the first step is to make sure that you have a CEO who doesnít mind admitting to or hearing about their mistakes. They should be quick to give praise and take blame. Good coaches lose games while their players win them. Can you figure out the mature wisdom behind that statement?)
  2. When you have a revolutionary idea, how do you craft it into an intelligent, compelling argument for strategic change in an industry? (Comment: You donít. If you proclaim something big enough, you will get locked up for life like Galileo did when he offered proof positive for the solar system instead of the earth-centric heavens model. As Machiavelli stated: "Change has no constituents". You can certainly start by implementing change in your own performance and perhaps in your own department. This will require doing strategic tactics that will not fully comply with other peopleís expectations, company policies, etc. Just tell whomever that you are and will comply while continuing to do what makes strategic sense. If and when you are more measurably successful, give credit to the dysfunctional policies. If you have access to higher people who can influence the strategic levers of the business, then you might float by subversive articles, etc from my web site as "strawman, thought pieces". Humans at the individual and collective levels have to pre-contemplate transitional change for some time before they actually try any real experiments. We will address "change management" later in the course, but for now if you would like to read ahead check out this link to another annotated slide show: ./articles/Knowing_Doing_Gap_slides.pdf.)
  3. How do you get "older staff" to listen to new ways dealing with supply chain management and inventory control? (Is this more of an ethical question?) (Comment: No it isnít an ethical question, it is a life cycle reality. All leaders of all human organizations got promoted to the fast track 20+ years ago, because they got good at what ever made sense and worked at the time. All mature organizations are behind the curve in comparison to current marketplace realities and possibilities by different degrees. Companies that are the least mired in the past, do best. For more ideas see the comments and reference in question 13 above.)

D.    TECHNOLOGY

  1. What will the role of technology be in driving profitability, or in my case lowering total cost? (Comment: "Technology" fits under step 6 of the 7 steps in my kinetic chain. You read about this in Chapter One of the book or here is a link to a dedicated exhibit on it: ./exhibits/Kinetic_ChainEx_16.pdf. IT only enables a great strategy that is also in alignment with the other 4 steps that precede step 6. The 11 firms covered in the book "Good to Great" confessed that "technology" was not a cause for their success, just an amplifier that was shaped by other factors (the first 5 steps of the kinetic chain). There are only two industries that refer to their customers as "users", the recreational drug industry and the IT industry. The net average ROI on technology investments is about zero, because lots of companies have bought technology to get a "strategic advantage" and got big losses, because the first 5 steps werenít in place.)
  2. Will RFID be as helpful as advertised in providing value to customers? (Comment: RFID is currently in the hype phase of its life cycle. I expect that it wonít really go anywhere in the next two years beyond EZ pass stuff on Northeastern toll roads and Wal-Mart experiments. But, in the longer run, it will offer great benefits wherever it can be a step-6-on-the-kinetic-chaini enabler. For a good write up on the future of RFID, see this article link:
    http://www.discover.com/issues/mar-04/departments/emerging-technology.)