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Strategizing Growth, Market Share

October 17, 2011
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CHICAGO — The ability of a wholesaler to grow a business and gain market share requires a multi-dimensional strategic plan that encompasses generating, managing, and sustaining growth. “Distributors can be a lot more profitable,” said Dr. Barry Lawrence, program director for the Industrial Distribution Program of Texas A&M University, to an audience of wholesalers at a day-and-a-half workshop put on by the Heating, Airconditioning & Refrigeration Distributors International (HARDI).

It was the third such consortium offered through the university. The first dealt with optimizing distribution profitability. The second focused on sales and marketing optimization, with the most recent dealing with optimizing growth and market share.

Lawrence told the 35 attendees representing 19 suppliers, “The average distributor could double or triple return on investment. But 90 percent or more ‘best practices’ will fail because we don’t know what the results will be — so we can’t measure along the way.”

Measurements to Lawrence come with a distribution growth framework. He said the strategic planning involves asking such questions as: “What is the market? Where are we? Where do we want to be? How do we get there? Why should customers do business with us?”

Generate, Manage, Sustain

When dealing with generating growth, then managing it, and then sustaining it, Lawrence said, “We have to consider how to manage the growth so it can be maintained.”

For example, he said when looking for ways to generate growth, “Don’t try to do too many different things. Look at the impact on a competitive advantage and consider your risk quotient.” Then looking at it in a somewhat different way, he said key attributes of generating growth are “innovation, focus, and strategic fit.”

The second aspect of managing growth involves such components as gross margins, operating margins, and cash conversion cycle. But it also involves “investing in people and setting expectations.” And Lawrence did warn the wholesalers, “Best practices can work or things can go crazy. Attributes for managing growth are alignment, communication, and accountability.”

Sustaining growth was defined by Lawrence as “what we set out to do, we continue to do. Can we maintain this for the long term?” It can be a tricky proposition as to what might happen “if we take resources from [serving our] core customers to invest in growth.” Or, he said, consider what might happen if you plan on something that may take four or five years to produce strong results, only to face “shareholders who look at quarterly results.”

Growth Strategy

An example of how complex the supply house business can be, comes with time spent on understanding growth strategy and examining the nine aspects that Lawrence said must be evaluated. These are leverage, penetration, broadening, adding, reaching out, expanding, building, innovation, and diversity.

Leverage, said Lawrence, involves such metrics as “core customer retention rate, core customer conversion rate, share of wallet (how much of the customer’s business does the distributor have), and balancing revenue reliance with risk.”

Penetration equates to acquiring new customers. Here the metrics involve “new customer acquisition rate, revenue from new (core) customers, and new customer retention rate.”

Broadening involves acquiring new products and services. Lawrence said distributors need to look at “growth from new products and services, value proposition leverage, and balance over dependency.”

Adding is focused on sales and marketing channels. According to Lawrence, these can include “catalog and line cards, website, email campaigns, direct mail, trade shows, advertising both online and offline, and social media.” The latter, he said, is now being used to sell and “we are just beginning to see what it is going to do.”

Reaching out is literally a geographical expansion resulting in “growth from new territories and national accounts.”

Expanding involves market segments such as industrial, commercial, residential, and utilities. “How many should a distributor go into?” Lawrence asked. “There is growth from new market segments but there are risk factors.”

Building relates to such growth mechanisms as “organic development, acquisition, merger, and strategic alliances.”

The idea of innovation includes the number of innovative efforts, growth from innovative opportunities, and changes in competitive advantage. Through it all, Lawrence said, the distributor has to factor the customer into the equation. “We have to be sure the customer wants to do business with us … the way we want to do business. That last part is very important.”

The idea of diversification relates to different products added to the product mix at the supply house. But here the sales force plays a key part.

“Manufacturers have to convince customers that their brand is the brand to buy. But manufacturers feel that most distributors are not doing that. That’s why you need a sales force. Otherwise manufacturers will take on that responsibility.”

Growth Drivers

“How do we generate growth opportunities?” Lawrence asked. “All growth opportunities originate from five drivers: sales force effectiveness, sales and marketing strategy, supplier relationships, customer relations, and industry dynamics.”

He cited an example of a recurring problem with some distributors. “When it comes to training salespeople, we talk about service, but we train our sales force on products because we get that training for free (from suppliers). But often that training is not as valuable to us if we don’t train our salespeople in service.”

Publication date: 10/17/2011
 

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