Executive Summary 4

Getting Everyone on the Same Page.
This adage rings particularly true when it comes to manufacturer/distributor working relationships.

Our research -- Report Card Update 2001-- found that the majority of manufacturers and distributors are keenly aware of the problems in their working relationships. They also understand how these problems impact their bottom lines as a result of higher sales & marketing costs and lost sales volume. But perhaps the most significant finding is that of the 3,000 manufacturers and distributors we interviewed and surveyed, only three percent of them have taken action to remedy this situation. In today's economic environment, how could this number be so low?

Throughout 2003 we worked to identify the barriers that keep the majority of manufacturers and distributors from taking action to change the nature of their working relationships. While it may be a hard proposition to accept, the greatest barrier to better working relationships stems from differences in how manufacturers and distributors think and make decisions. In other words, when it comes to making decisions that impact sales performance and profitability, manufacturers and distributors are not on the same page.

Our research was based on the work of Peter Senge, Director of the Center for Organizational Learning, MIT's Sloan School of Management. In his book, The Fifth Discipline Senge describes how a person's judgement and decision making are influenced by what are known as mental models. These mental models represent our assumptions and beliefs about how the world around us works. For the most part, we are not aware of our mental models or their influence on our thinking.

Senge's work shows that our mental models are often riddled with misconceptions. As a result, we often make decisions based on what we believe to be true rather than on what we actually know to be fact.

Our goal was to discover how much of the conflict and overall lack of trust between manufacturers and distributors is the result of these mental models.

During the course of the year, 115 manufacturers and 132 distributors, from various industry segments, participated in an in-depth opinion survey designed to identify the extent to which manufacturers and distributors share a similar set of assumptions and beliefs regarding:

1) Current and future conditions in their industry;
2) Who their customers are;
3) The basis of competition, and
4) The purpose and role of the manufacturer/distributor working relationship.

What we discovered is that manufacturers and distributors are more likely to disagree on these topics than they are to agree. Getting manufacturers and distributors on the same page will go a long way toward improving the sales performance and profitability of both parties.

What follows is a brief summary of our findings, conclusions, and recommendations.

Mental Model #1) Current & Future Industry Conditions.

While the manufacturers and distributors who participated in our survey agreed that their industries are very different than they were five years ago, our findings indicate that they do not share a common view about the future of their industries.

In reality, the future of any industry is unknowable. However, this does not absolve manufacturers and distributors from thinking about what the future of their industry might look. This can be accomplished by discussing the following questions.

Which customers will we serve in the future?
Through which channels will we reach these customers?
Who will we be competing against in the future, and what will be the basis of competition?
Where will our profits come from?
What skills and capabilities will we need to survive and prosper?

Without some commonly held assumptions and beliefs regarding the future of their industry, manufacturers and distributors will find themselves constantly reacting to the changes occurring around them.

Manufacturers and distributors who take the time to discuss the questions above will discover that it's really not that hard to recognize and respond in a pro-active manner to industry changes as they develop.

Mental Model #2) Who is the customer?

It appears as though a large number manufacturers are confused about who their customer is. Our research indicates that many manufacturers are still operating under the misconception that the distributor is their customer. This flawed mental model stems from the transactional working relationships that evolved during simpler times. During the 70s and 80s it wasn't overly important for a manufacturer to have contact with actual customers because the value proposition -- product attributes, configuration, availability, and pricing -- was being defined by their marketing department. As a result, manufacturers falsely assumed that since distributors were purchasing their products they must be the customer.

Today however, the customer, not the manufacturer's marketing department defines the value proposition. In this new environment there can be no confusion about who the customer is and how best to serve them. If manufacturers continue to be confused regarding who their customer is, rest assured, it won't take long for their competitors to remedy the situation.

Mental Model #3) How they should compete.

Manufacturers and distributors agreed that quality and price no longer form the basis of competitive advantage and that to succeed in today's marketplace they both need to do a better job of collecting and sharing information.

They were also in agreement that the strategies and tactics used in the past no longer work in today's marketplace. However, there was significant disagreement between the two parties regarding how to respond to current market conditions and competitive pressures.

When an industry evolves to the point where everyone has quality products and low pricing, the basis of competition shifts to the delivery of value which is defined by one person and one person only -- the customer. However, confusion regarding who the customer is and an overall lack of good customer information keeps most manufacturers and distributors from effectively responding to this fundamental shift in the basis of competition.

If manufacturers and distributors cannot agree on how they should compete in this new environment, they are destined to continue to compete on the old dimensions -- quality & price -- which they both agree no longer form the basis of competitive advantage.

Mental Model #4) The purpose and role of the sales/distribution channel.

Manufacturers and distributors agree that their working relationships have not kept pace with the changes that have occurred in their industries. They also agree that problems in their working relationships have a significant negative impact on the sales performance and profitability of both parties.

But perhaps the most significant finding of this study is that both manufacturers and distributors overwhelmingly agree that their working relationships lack common goals and clearly defined plans.

Goals define the fundamental purpose of the manufacturer/distributor working relationship and the specific outcomes both parties are working to achieve. Plans define how the manufacturer and its distributors are going to accomplish their goals.

In the absence of common goals and clearly defined plans working relationships are prone to problems and inefficiencies due to a lack of direction and coordination. The most common problems are fixing mistakes and expediting orders which can have a significant negative impact on profitability.

All of problems described in this executive summary are the direct result of thinking and decision making which have been influenced by flawed mental models -- the misconceptions of manufacturers and distributors. The first step toward addressing these common and costly problems is to get everyone on the same page. This requires that manufacturers and distributors become aware of their mental models and how their thinking and decision making are being influenced by these misconceptions.

Both parties must openly challenge their beliefs and attitudes about their industry, their customers, the basis of competition, and the purpose of their working relationships. This process requires a serious commitment of time and effort. However, doing so will go a long way toward improving the sales performance and profitability of manufacturers and distributors alike.

If manufacturers and distributors constantly challenge their assumptions and beliefs, they will begin to make decisions and take action based on what is actually happening in their industry rather than on what they think or hope is happening.

To learn more about how mental models are affecting the thinking and decision making of your organization, contact Robert Nadeau at 800.867.2778

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