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Expanding into new technologies is a battle

Military historians still debate the genius of Napoleon’s tactics. Despite great advances in technology, Napoleon’s mark on warfare remains. And, a couple hundred years after he met his own Waterloo, leaders quote his words, “The transition from defense to offense is one of the most dangerous operations of war” and (paraphrasing) “No war is won on the defense.” I believe Napoleon could have advised distributors. Let’s explore why.

Napoleon and his generals understood head-on invasions could be costly. Even with the best laid plans, the outlay in men, material and other resources exceed a purely defensive posture. Like this epaulette-wearing historical figure, distributors understand direct invasions are expensive.

Historically, distributors have expected the cost of selling to a new customer to be five times higher than selling more to an existing customer. Later in this article, we will explore how this number might also apply to selling new technologies to existing customers.

Mr. Bonaparte realized growth and expansion were impossible without going on the offensive. Today’s distributor management teams certainly concur on this point. The latest survey data indicates nearly 80 percent of all industrially focused distributors are in the midst of some growth driven expansion. There is a good chance you are in the middle of one of these yourself.

Expansion comes in two completely different strategies: expanding product offerings and expanding the geography served. The expanded product offering strategy seems simple. However, two, three or five years into the move, many distributors quietly wonder why they fall short of goals or if the move is even profitable. Let’s explore some pitfalls and strategies for accelerating our efforts.

Product Technology expansion sounds easy
On the surface, this idea sounds pretty easy. Through the years our company has developed a very loyal customer base. These people know us, like us and understand our brand of service. Why not provide them with additional product groupings or technologies?
First, we are not talking about a product expansion where the new technology is closely allied to the products already sold. Examples might include offering an energy efficient version of a product already sold or an electronic version with the same functionality as some existing product. The rules of engagement for this play are roughly the same as any other product launch.

Instead, let’s think about a technology or product line which brings us into new areas of our customer’s consciousness. Historical examples include electrical distributors selling automation products, power transmission distributors selling electronic sensors or industrial distributors selling safety products. In each instance, even though the same customer may purchase the product, the application expertise and fundamental use of the product is much different from your legacy product base.

Many incorrectly suppose they are simply selling more stuff to the same customer and the cost of entry will be low. But the theory soon breaks down. While technically the same company makes the purchase, there is a good chance a different set of customer contacts are involved. For example, a power transmission distributor launching into the sale of electronic sensors might find their target contact group shifted from the mechanical engineering department to the controls engineering group. This new group of people at the customer doesn’t know you.

Along with this shift in customer contacts comes an inherent distrust of your ability to provide proper technical, inventory and manufacturer support. Worse yet, many times the distrust is warranted. Even though you are known to the customer, you’re not known for the right things.

The natural customer tendency is to test you. Without the right preparation, you’re going to spend big bucks and, ultimately, flunk the test. Let’s examine some major issues.

People are a component of the sale
There is no way to prepare your salespeople for a foray into this new technology. All the factory product training, after-work catalog sessions and crash overview courses in the world won’t compensate for lack of application experience. Your salespeople who hold so much knowledge in your old product/technology offerings are neophytes to this new stuff. They will compete head-to-head against heavy hitters with years of understanding under their belts.

Experience dictates that even some of your best sellers, the folks you thought sure to lead the sales charge, will drag their feet in introducing customers to the new product technology. Some fear loss of customer credibility if they promote products they don’t fully understand. Others worry poor service levels on the new products may impact the sales of legacy products. Both concerns are valid. The timid in your sales team will fret that customers don’t want to trust multiple technologies with one supplier. This is largely a fallacy. Regardless of the validity of your team’s perceptions, you must reinforce your front-line team. 

Technology expansion needs a leader
Distributors launching into new technologies have discovered the importance of adding a “category leader” to the team. This person acts as a catalyst for growing sales of the new product group. Distributors with track records of success in these expansions have learned the leader is hired not for technical knowledge, although considerable understanding is required, but for commercial understanding and market prowess.
The leader (sometimes called a specialist) is responsible for building the product and application skills of the entire team. This is not just product knowledge commonly available from supply partners but also commercially focused “how to sell” and “when to approach opportunities” know-how. The lead specialist also evaluates each member of the sales team on product knowledge growth.

The lead specialist should also assume surrogate sales management duties. Setting specific target accounts, prescribing activities and laying down quotas for each account group, the lead specialist will assure that high-potential accounts are not overlooked by the sales team.

Responsibilities for the leader don’t end with the sales group. This person also provides input into a number of other distributor functions. Inventory levels, vendor selection, marketing and inside sales support activities are all influenced by this person.
Inside/phone technical support is more important than most believe

Early in the expansion, customers will test the technical support function offered by your company. As we have already explained, individual salespeople initially will not be a match for their more seasoned competitors. They will need a strong resource to fall back on, an internal place for quick and easy answers to day-to-day, technical support questions. While the specialist leader provides this in the field, there is a need for an augmented effort or your primary guy will soon bog down. As a good rule of thumb, the technical capabilities of this person need to equal or exceed that of the sales people at your major competitors.

For the sake of planning and strategy, think of the inside technical support position as temporary. Over time, field level expertise will grow to no longer depend on this person. Three to five years into the expansion, this position might be blended into the greater outside sales force, inside sales, purchasing or some other department.

Managing/overcoming inventory disadvantage
Because the expansion is a new offering on your part, large inventories are not economically justified. Depending on the technology base of your expansion, volume purchase agreements give a competitive edge to the incumbent competitors. Further, early on in the expansion, you may not completely understand market service stock requirements. All are potentially costly issues.

Co-op groups (like IDC-USA in the bearings/power transmission arena and IWDC in welding) can provide support on both the volume purchase and service/support inventory problems. While most people are aware of the “buying group” concept, these organizations provide assistance in many other areas. Most notably, they assist in handling demands placed on distributors in MRO situations.

Master distributors also provide alternative solutions to the inventory management issues. Since the recession of 2001, master distributors in electrical, safety, personal protection, hoses and fittings, abrasives and nearly everything else have moved into prominence.
Building an informal network for inventory (and information) exchange has once more come into vogue. When the owners of these groups commit to nominal unilateral inventory exchange fees and streamline the paperwork associated with each transaction, all distributors involved can overcome the inventory issue.

Inventory, people and business strategy intersect in the process. Decisions around in-house inventory levels versus master distributor sourcing require thought. Many salespeople strive to maximize gross margin without thought to costs of holding product in stock. Early reports from your sales teams may tie every lost opportunity to price or inventory on hand. Without a process for evaluating the real business issues, it is easy to find yourself with massive inventory adjustments a few years after launch.

The Right partners
Sadly, the premier lines are already taken. Unless the technology you plan to expand into is so cutting-edge and no new clear market leaders exist, the chances of you connecting with the very top manufacturer in the technology are slim. When these organizations do offer up their product line, it often comes with gotchas.

One common supply partner issue comes when a large manufacturer moves into a new technology offering. In an age of mega mergers in the manufacturing world, some strange combinations have been created. Consider these: a major plastic part manufacturer with a small ultra-high-tech communications product line or a fluid power giant with a division making computerized operator interface systems. The list could extend for pages. Old-line distributors dabble in the new technology products, but you plan to use it as a main component of your new venture. It is urgently important to understand whether the massive sales volume of the old-line distributors will give them undue leverage over the supplier.

The real questions in the supplier world might be: Does this supplier have the resources to help us grow our business in a competitive street fight? Are they committed to helping us create a beachhead during the first couple of years? Are their growth numbers for our territory well founded, or will they lose interest in us if we don’t hit a million dollars in the first year?

Remember, most new technology expansions are not single product line additions. Just like your current product mix has primary and auxiliary products, most likely your expansion will be a suite of product lines.

Planning the charge
Stepping back and reviewing these words, we might wonder if any expansion is worth the risk, time or treasure spent. But once more, let’s revert back to the words of Napoleon: “The transition from defense to offense is one of the most dangerous operations of war.” Planning and forethought is imperative; this isn’t a launch today, forget tomorrow adventure.

A final few words. “No war is won on the defense.” We are fighting a war for the hearts and minds of our customers. The value of providing only a portion of the solution to our customers is ever diminishing. Providing wider product offerings has economic impact on the customer. Ultimately, the customer gets to determine who wins the war. If you have a war brewing in your business, give me a call.

Frank Hurtte provides strategic insight for new times. He speaks and consults on the new reality facing distribution in a post-recession world. Contact Frank at River Heights Consulting via email at frank@riverheightsconsulting.com or via phone at (563) 514-1104.

This article originally appeared in the Jan./Feb. 2015 issue of Industrial Supply magazine. Copyright 2015, Direct Business Media.

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