Forging a strategic distribution alliance.
More than a marriage of convenience, a strategic alliance with your distributor can be a match made in heaven, but only if that relationship is based on real commitment and (gasp!) trust.
"Strategic alliance" has entered the terminology of business with a vengeance with great violence; as, to strike with a vengeance s>.
with even greater intensity; as, to return one's insult with a vengeance s>.
See also: Vengeance Vengeance , serving as a catchall catch·all
1. A receptacle or storage area for odds and ends.
2. Something that encompasses a wide variety of items or situations: phrase for a variety of working arrangements--formal and informal--between organizations. In its true sense, a strategic alliance is a close, open-ended (no set termination date termination date,
n See expiration date. ) relationship linking distinct organizations. Such alliances are usually designed to fill a specific purpose, such as developing a new product, exploring a new technology, manufacturing more effectively, or exploiting a market opportunity. Sometimes strategic alliances are embodied em·bod·y
tr.v. em·bod·ied, em·bod·y·ing, em·bod·ies
1. To give a bodily form to; incarnate.
2. To represent in bodily or material form: in a new organization, such as a joint venture. More frequently, they are embodied in contracts or business understandings, embellished, adapted, and cemented as working relationships grow.
Executives often think of forging strategic alliances in connection with their suppliers, firms making complementary products, customers--or even their competitors. This article concerns a more prosaic (but perhaps more important) candidate to be your strategic partner--your distributor.
A strategic alliance with a distributor? Isn't a distributor just somebody who removes your pallets from the factory loading dock and sends you a check from time to time? Many an executive sees distributors merely in these terms. But most managers recognize that your distributor is your marketer and is therefore in a position to make or break your product. What better ally than the organization that connects you to try customers (and can disconnect disconnect - SCSI reconnect you as well)?
It is one thing to decide that a strategic alliance (or a marketing partnership, as some prefer to call it) with a distributor is in order. It is quite another to build such a relationship. Merely announcing to distributors that they have been selected for "partnership" is unlikely to produce results: distributors have heard such corporate propaganda Corporate propaganda are propagandist claims made by a corporation (or corporations), nearly always for the purpose of manipulating market opinion to the benefit of their product or to divide public opinion with regard to controversial issues related to that corporation, and its before and will not be impressed. But if words won't create commitment, what will?
To answer this question, we mounted a three-year study of 378 relationships between manufacturers of industrial products and the distributors who take these products to market. In parallel, we also studied 246 relationships between insurance companies (who provide an intangible, a service, rather than a physical product) and their "distributors," i.e., independent insurance agents. By contrasting industrial hard goods and an intangible consumer service, we wanted to isolate how much the dynamics of alliances with resellers depend on what is being sold to whom. The answer we found is this: surprisingly little.
Below, we sketch the profile of a committed reseller An organization that sells hardware and software to the general public. Resellers purchase products from software publishers and hardware manufacturers. that emerged from the boxes of information we collected on these hundreds of pairs of manufacturers and their resellers. (We will concentrate on distributors and merely note where insurance agents differ.) Our information is unique: We asked both the manufacturer and the reseller to describe their relationships. Then we compared the two images to search for the features that distinguished committed manufacturers from indifferent ones, as well as the committed from the indifferent resellers.
WHAT IS COMMITMENT?
From extensive interviews and reading, we determined that a committed distributor has all of these features:
* Expects to continue selling this brand indefinitely in·def·i·nite
Not definite, especially:
a. Unclear; vague.
b. Lacking precise limits: an indefinite leave of absence.
c. ; * Intends to invest in its relationship with the manufacturer; * Will make sacrifices (within reason) to maintain and grow the relationship; * Feels an emotional attachment to the manufacturer.
Of course, a committed manufacturer is one that feels the same way about the distributor. A committed distributor exhibits several visible symptoms of its allegiance to you, the manufacturer. Do the following conditions describe your distributor?
* Is happy to see your people (rather than closing the blinds when they drive up); * Is willing to take the time needed with your people to get business matters settled thoroughly; * Is patient with your mistakes; * Offers constructive criticism and recommends new ways to improve efficiency; * Will help you out with a favor from time to time (for example, sharing a price cut with a big customer); * Accepts your suggestions if given good arguments; * Takes the attitude that things will even out in the long term; * Is willing to do the odd "extra job" (such as market research); * Turns down other lines that offer slightly better terms; * Is eager to grow with you.
If the answer is yes, chances are this distributor feels strongly committed to you. And if you find yourself behaving the same way, chances are you feel committed to them.
The business advantages of such a relationship are obvious. At the extreme, such a relationship is so tight that economists call it "quasivertical integration" (two organizations function like one).
MAKING A DISTRIBUTOR COMMIT TO YOU
One question executives ask is whether commitment can be one-sided (for example, can a manufacturer be indifferent, yet enjoy commitment from its distributor)? While we found a few such relationships, they were unusual. On the whole, it appears that it is hard to fool the other side--and difficult to get commitment without giving it. The data strongly indicate that a distributor will not commit unless it believes the manufacturer is also committed. In other words Adv. 1. in other words - otherwise stated; "in other words, we are broke"
put differently , the distributor won't "get married" if it believes you only want to date. Further, distributors have a reasonable (though not completely accurate) picture of how committed a manufacturer really is, firm propaganda aside.
Indeed, a distributor must believe you are committed before it will reciprocate re·cip·ro·cate
v. re·cip·ro·cat·ed, re·cip·ro·cat·ing, re·cip·ro·cates
1. To give or take mutually; interchange.
2. To show, feel, or give in response or return.
v. . We have metioned that the truth about the manufacturer plays into the distributor's picture. Intentionally in·ten·tion·al
1. Done deliberately; intended: an intentional slight. See Synonyms at voluntary.
2. Having to do with intention. or not, the manufacturer's personnel and policies signal how serious the manufacturer really is to the distributor. But other signals operate as well.
In particular, distributors place their confidence in manufacturers whom they see investing in them. Further, not just any investment will do. The investments that reassure re·as·sure
tr.v. re·as·sured, re·as·sur·ing, re·as·sures
1. To restore confidence to.
2. To assure again.
3. To reinsure. distributors and inspire their confidence are investments in them that cannot be used later to benefit their replacements! Such "idiosyncratic id·i·o·syn·cra·sy
n. pl. id·i·o·syn·cra·sies
1. A structural or behavioral characteristic peculiar to an individual or group.
2. A physiological or temperamental peculiarity.
3. investments" (idiosyncratic to the relationship between supplier and distributor) include:
* Putting the distributor's name in your advertisements; * Going to considerable lengths to link your name with the distributor's; * Dedicating personnel to this distributor; * Going to extra lengths to learn the distributor's idiosyncrasies and forge working relationships with its personnel; * Sponsoring (this means paying for) business development programs for the distributor; * Training the distributor's people (at your expense).
What these efforts have in common is that they are not easy to redeploy re·de·ploy
tr.v. re·de·ployed, re·de·ploy·ing, re·de·ploys
1. To move (military forces) from one combat zone to another.
2. should your relationship with this distributor end. The knowledge, relationships, mental associations, and capabilities built up in this way become obsolete if termination occurs. Some idiosyncratic investments (such a linking brand name and distributor name) may even hinder hin·der 1
v. hin·dered, hin·der·ing, hin·ders
1. To be or get in the way of.
2. To obstruct or delay the progress of.
v.intr. the transition to a replacement distributor. Effectively, these investments constitute a penalty or fine to be forfeited for·feit
1. Something surrendered or subject to surrender as punishment for a crime, an offense, an error, or a breach of contract.
a. if the relationship ends (economists call them "exit barriers" because they glue manufacturers into their relationships). Distributors who see these investments being made greatly increase their confidence in the manufacturer and their willingness to enter a strategic alliance with their supplier.
A key word here is "see." In some cases, we observed manufacturers who did make these investments, yet tried to disguise them or downplay down·play
tr.v. down·played, down·play·ing, down·plays
To minimize the significance of; play down: downplayed the bad news.
Verb 1. them to the distributor. Why? These manufacturers were afraid that the distributor would think the manufacturer was dependent on them, hence vulnerable. Herein lies the rub. If manufacturers must commit to inspire commitment, and if they have to prove it by publicly erecting barriers to their own exit, then they are vulnerable! This is a reality of strategic alliances of any kind. Strong alliances bring substantial benefits but at substantial costs. One of these costs is the flexibility to change your mind and exit the relationship painlessly pain·less
Free from complication or pain: a painless operation.
painless·ly adv. . Manufacturers who try to downplay their investments in oder to disguise their vulnerability throw away the benefit of a public investment. It inspires the partner's confidence and invites reciprocal commitment from the partner. Otherwise put: Pretend you don't need your spouse, then discover that your spouse loves you less.
The implication is obvious: Don't get married to just anybody. Manufacturers that have carefully selected their distributors (rather than selling to anyone willing to write a check) will find themselves far more able to manage the vulnerability that a strategic alliance demands.
We find the marriage analogy fits well in describing many features of committed relationships A committed relationship is an interpersonal relationship based upon a mutually agreed upon commitment to one another involving exclusivity, honesty, or some other agreed upon behavior. . One of them is history. Just as couples who have always fought find it difficult to trust each other, so distributors who have had a stormy storm·y
adj. storm·i·er, storm·i·est
1. Subject to, characterized by, or affected by storms; tempestuous.
2. past with a manufacturer find it difficult to believe the manufacturer really is committed to them. A contentious history in a business relationship appears to be very difficult to live down, while a harmonious past constitutes an asset.
Another feature is selectivity selectivity /se·lec·tiv·i·ty/ (se-lek-tiv´i-te) in pharmacology, the degree to which a dose of a drug produces the desired effect in relation to adverse effects.
1. of representation. A distributor's confidence in its supplier's commitment increases the more the supplier limits its representation in the distributor's market. Distributing intensively (blanketing a market with outlets), while it does increase product availability, reduces the distributor's confidence in the manufacturer, thereby lessening the distributor's willingness to commit to a strategic alliance.
Interestingly, we found that the terms of the contract (if any) between manufacturers and distributors had no discernible dis·cern·i·ble
Perceptible, as by the faculty of vision or the intellect. See Synonyms at perceptible.
dis·cerni·bly adv. impact on the strength of their relationships. Indeed, many of our respondents In the context of marketing research, a representative sample drawn from a larger population of people from whom information is collected and used to develop or confirm marketing strategy. had trouble telling us what their contracts said! The implication is that contracts interest lawyers more than the participants to a business relationship. The relationship evolves into a working understanding that supplants contract clauses in shaping what each party expects from their arrangement.
THE DISTRIBUTOR'S ACTIONS AND IMPRESSIONS
While it is important for a distributor to believe in its supplier's commitment before it will reciprocate, distributors also take actions that operate to align them more tightly to the supplier; these actions serve as an impetus to the distributor to increases its loyalty to the supplier by making the relationship more important and less readily replaceable.
One of these actions is to limit brand name representation in the supplier's product category. Doing so goes against the nature of a distribution business, which appeals to customers partly by offering one-stop shopping (stocking a panoply pan·o·ply
n. pl. pan·o·plies
1. A splendid or striking array: a panoply of colorful flags. See Synonyms at display.
2. of brands in a category). Yet some distributors narrow their brand offering, reducing the degree of competition to the supplier's brand on their shelves. At the extreme, they offer the supplier brand exclusivity. (The carry on competitors in the category). Our data strongly indicate that the more the distributor concentrates on one brand, to the exclusion of competitors, the more it feels committed to the supplier. In other words, exclusive suppliers are not merely responding to manufacturer pressure or to consumer pull: They are cementing their ties to the manufacturer.
Which comes first, the commitment or the exclusivity of representation? Undoubtedly, they operate in an escalating cycle. Creeping creeping
1. gradual progression of a lesion or tissue growth.
2. prostrate growth pattern of a plant, e.g. c. buttercup (Ranunculus repens), c. caustic (Euphorbia drummondii), c. charlie (Glechoma hederacea), c. commitment makes the distributor more amenable AMENABLE. Responsible; subject to answer in a court of justice liable to punishment. to limiting its stock of competing brands. But that voluntary restraint, in turn, fuels the distributor's interest in, allegiance to, and dependence on the supplierr, thereby contributing to further limitation of stock, and so forth. Over time, the cumulative effect is a strategic alliance with the supplier.
Distributors respond to a manufacturer's efforts to communicate with them. Communicating with distributors should be distinguished from communicating to them. It is exchanges of communication that enhance the distributor's commitment. This means listening, adapting, and acting on the distributor's impressions. It also means respecting and soliciting distributor opinion and using it. Indeed, one feature of committed relationship is that the manufacturer respects the distributor as a business (a corresponding feature by less close-knit relationships is that the supplier believes, and may even declare, that its distributors don't know Don't know (DK, DKed)
"Don't know the trade." A Street expression used whenever one party lacks knowledge of a trade or receives conflicting instructions from the other party. how to run their businesses well). Respect enhances two-way communication Two-way communication is a form of transmission in which both parties involved transmit information. Common forms of two-way communication are:
Distributors monitor how a supplier treats its other distributors. If a manufacturer acquires a reputation (rightly or wrongly) for mistreating its resellers, it pays a price. Distributors, even those who do not themselves feel mistreated, withhold with·hold
v. with·held , with·hold·ing, with·holds
1. To keep in check; restrain.
2. To refrain from giving, granting, or permitting. See Synonyms at keep.
3. commitment from these suppliers. Hence, a reputation for fairness in distributor dealings is an asset in cultivating strategic alliances.
Here we come to the major point of difference between our industrial distributors of hard goods and our insurance agents (sellers of unstockable intangibles to consumers). Distributors assessed the overall quality of the manufacturer's personnel, yet appeared not to factor these assessments into their commitment levels. Insurance agents, in contrast, conditioned their commitment very heavily on their evaluations of the worth of the insurer's personnel. Strikingly, the same is true for supplier commitment to resellers. Industrial suppliers' commitment to distributors was little influenced by their evaluations of distributor personnel. Yet, insurers were much more committed when they perceived their agents were competent, effective businesspeople.
Why this divergence divergence
In mathematics, a differential operator applied to a three-dimensional vector-valued function. The result is a function that describes a rate of change. The divergence of a vector v is given by ? The answer is based on the nature of what is being sold. For industrial distributors, the product is paramount. It can be seen, held, measured, and assessed; it is constant and it is real. It can embody em·bod·y
tr.v. em·bod·ied, em·bod·y·ing, em·bod·ies
1. To give a bodily form to; incarnate.
2. To represent in bodily or material form: the supplier. But for an intangible such as insurance, the "product" is more ephemeral Temporary. Fleeting. Transitory. . Therefore, the insurer's people (who make judgments about how a policy may be adapted to a client and how a claim will be handled) come to embody the product--and the supplier. The old saw that a company is its people seems to be far more appropriate for a service (especially an intangible one) than for a physical, stockable good.
THE CEO'S CONTRIBUTION
Many an executive is attracted by the lure of strategic alliances, and the logic of such relationships is especially compelling when the proposed partner is one's own reseller, the link between a company and its market. But such alliances do not come free, or even cheap. Corporate pronouncements will not do. To convince a distributor to become a genuine marketing partner, a manufacturer must put its resources--and its own commitment--behind its pronouncements. Distributors will demand your commitment--your reciprocity--before they will extend theirs.
Ultimately, strategic alliances are based on mutual need. Mutual need, in turn, creates tension and conflict. (Ask any marriage counselor). But if managed well, such relationships are the basis for a formidable marketing advantage.
Erin Anderson is an associate professor of marketing at the Wharton School of the University of Pennsylvania The Wharton School is the business school of University of Pennsylvania in Philadelphia, Pennsylvania. It was established in 1881 through a donation of Joseph Wharton, making it the world’s oldest business school. . Barton Weitz is a professor of marketing and the J.C. Penney Eminent Scholar at the University of Florida University of Florida is the third-largest university in the United States, with 50,912 students (as of Fall 2006) and has the eighth-largest budget (nearly $1.9 billion per year). UF is home to 16 colleges and more than 150 research centers and institutes. .