Forging a strategic distribution alliance.
"Strategic alliance" has entered the terminology of business with a vengeance, serving as a catchall 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) 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 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 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 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 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; * 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, 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. We have metioned that the truth about the manufacturer plays into the distributor's picture. Intentionally 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 distributors and inspire their confidence are investments in them that cannot be used later to benefit their replacements! Such "idiosyncratic 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 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 the transition to a replacement distributor. Effectively, these investments constitute a penalty or fine to be forfeited 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 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. 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. 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 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 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 impact on the strength of their relationships. Indeed, many of our respondents 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 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 commitment makes the distributor more amenable 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 how to run their businesses well). Respect enhances two-way communication, which in turn strongly increases the distributor's allegiance.
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 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? 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 the supplier. But for an intangible such as insurance, the "product" is more ephemeral. 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. Barton Weitz is a professor of marketing and the J.C. Penney Eminent Scholar at the University of Florida.
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|Title Annotation:||Wisdom from Wharton|
|Publication:||Chief Executive (U.S.)|
|Date:||Nov 1, 1991|
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