Manufacturers typically partner with distributors to increase sales by expanding market coverage. Distributors benefit from the relationship by utilizing an additional product line to increase sales through market share growth.
As a result, the working relationship between manufacturer and distributor can often become defined by sales quotas. This model works well as long as demand and market share continue to increase; the level of trust and commitment in the relationship remains acceptable as both parties benefit from a profitable competitive position.
But what happens to the relationship when demand softens and the focus shifts to retaining market share rather than growing it?
Eventually, the number of competitors serving a specific market expands to meet demand, challenging the market share advantage that the distributor once enjoyed. Increased competition leads to extended periods of severe price and service warfare to retain share. Soon, margins are driven so low that both distributor and manufacturer must react.
Once the distributor can no longer invest in selling the product, then effort is shifted to sell products that offer competitive advantages and a better ROI. The manufacturer reacts by pursuing alternative distributors or other market channels to replace the diminished distributor commitment. Sometimes, without sufficient differentiation, a lower priced version of a product is introduced, compromising hard-won brand position and the distributor relationship. Before long, the level of trust, commitment, and communication between the manufacturer and distributor is virtually non-existent.
This very typical scenario demands a different manufacturer-distributor model. Their mutual customers still need solutions, but the fundamental purpose of their relationship must shift. Today, information and capabilities — not products or services alone — form the basis of sustainable competitive advantage.
Rather than using quotas to drive greater market share, the re-purposed manufacturer-distributor relationship must focus on increased collaboration. The partners can develop shared, mutually beneficial goals that are customer-centric and produce strategic value for their customers – goals that are explicit, measurable and realistic for the market conditions. They can collect, manage, and share information about the market that can be used to identify and capitalize on opportunities before competitors. They can better synchronize two-way communication about the market. The manufacturer may form a distributor advisory board to share experience, knowledge and information among non-competing distributors and themselves. New product ideas are regularly derived from these meetings.
Re-purposing the working relationship between manufacturer and distributor provides direction for both parties and a means to adapt strategy that will ultimately lead to higher levels of trust and commitment, a renewed competitive market position, and a higher ROI.
What is the status of your manufacturer-distributor relationships?
Would your relationships benefit from a strategic discussion as market partners?
