Distributors need a strategic plan – not to be confused with budget planning – if they want to remain competitive and profitable in the future.
In this Wholesale Change discussion, our hosts Ian Heller and Jonathan Bein, Ph.D. talked about the strategic planning process they have developed to help distributors formulate long-term plans that adapt value propositions over time to empower your company.
Ian Heller: What’s the difference between a strategic plan and a budget?
Jonathan Bein: A budget has numbers, and a strategic plan is a much bigger, overarching item that talks long-term, considering what the company is going to do, how it’s going to do it and the length of time the plan will take. A budget is almost inherently tactical.
Heller: There is no context to it. The thing with budgets is they tend to continue the momentum of what you’ve already been doing. For the most part, it’s how much are we going to allocate to the finance department, marketing department and sales department. If you have big things happening in your industry, like disruptors moving in, new competitors or competitors consolidating, there’s not usually a set of formal steps in the budget process to say, “What does this mean for us? What do we need to do differently over the next three to five years to react to this strategic initiative?”
In our view, a lot of distributors don’t do strategic planning, or if they do, they’re not great at innovation and building new capabilities. Why do you think that is?
Bein: I think the historical distribution business model has been an execution play. If I want to compete in my service area, I must be good at execution. Distributors have become superb at execution, but they are not inherently strategic beasts. It’s not your grandfather’s business anymore.
Why do we need to have a strategy now?
Heller: If you run a sales force, manage branches, deliver good service, manage your working capital and price effectively — you could be a successful distributor CEO. There is a small group that does that well and I am not minimizing that challenge. However, the industry has never been through disruption before. Now, you have Home Depot and Amazon Business that are changing the game, bringing new capabilities.
Your annual budget process that talks about funding sales reps, branches and buyers are not going to be sufficient enough to adapt to these new realities. Being a tactician isn’t good enough anymore.
Heller: How big should your strategy team be to be effective?
Bein: You want to get enough people involved that you don’t finish the strategy and it just gets thrown down to the next level in the organization. I would say a minimum of 10 people, or more if you could. You want representation across all your functions including sales, marketing, finance, operations, warehouse and HR. That may mean C-level and VP level, but it could also include levels down.
A classic problem is if you only use your top people, they’re seeing the top customers who may only make up 5% of your total customers. There’s a bias that forms based on that kind of interaction.
Heller: If you do your strategic planning process right, there’s a lot of work to do. We’ll describe the process shortly, but it involves crunching data, conducting research, getting input from suppliers, customers and employees, and looking at competitors. This generates a huge amount of information and data; you’ll want to share that load.
Bein: Another thing you point out is that the preparation for strategic planning is sometimes more involved than the actual strategic planning itself.
Heller: I like to start these conversations with a SWOT analysis (Strengths, Weaknesses, Opportunities and Threats) for a couple of reasons.
First, you’re able to assess the participants’ willingness to contribute to the conversation; who’s who in the zoo. Some will dominate the conversation, and some will be wallflowers. It helps identify who you need to encourage to come out with their comments and who you need to hold back a little.
The second reason is even more important. A lot of people come to these planning sessions with a burning agenda. SWOT analysis makes sure we take care of these problems, pursue opportunities and unload frustrations. It gets put on paper. Participants have relieved that pressure in their heads and know it’s going to get addressed. Now, they can listen.
Bein: It’s also a bit of an equalizer among the participants. It shouldn’t be rolling down from the top four in the company. Part of the process is to try to make every participant in the room as equal as possible.
Heller: Check your titles at the door.
Bein: It takes some coaching for those who are above and those who are below to see their roles differently. But if you do this well over the course of strategic planning, equality does emerge.
Bein: For the most part, I find senior executives do want to do that in these sessions. They just have to build trust with people that they are sincere in that.
Heller: We have a question from the audience, “How do distributor operators get access, perspective and data regarding external influences that impact our business and should influence our strategy, marketplaces, customer technology, alliances and direct-to-customer models?”
You have to do your research. You don’t get the team together and say, “Here’s a process. Let’s follow a strategic plan.” When we do strategic planning for distributors, we put together a whole information book for the participants. We ask them to read book summaries and articles about things going on in the industry. We do research, talk to suppliers and ask them questions about direct-to-customer models and marketplace views. We do quantitative customer surveys.
How long before the first meeting does the strategic planning typically start?
Bein: 60-90 days.
Heller: Let’s look at our 3-Step Process. We have identified three books we like for strategic planning. The first book asks some fundamental questions about your core competencies. The second book helps you refine a strategic direction and the third book helps define specific activities to pursue within the strategy.
Would you like to walk us through it?
Bein: The first piece is “Discipline of Market Leaders”, and the premise is to figure out what you’re good at. What is your core business? Many companies try to be all things to all people and fail.
Core competency falls into one of three buckets. You’re operationally excellent. You are fantastic at customization. Or you’re great at innovation. If we think about operational excellence, we’re looking at creating more efficiency. Help me expand on this.
Heller: Operational excellence is about efficiency and most distributors differentiate this way. It offers the same value proposition to every customer. Customization is when everyone gets something different, tailored to what they do. Innovation is about offering breakthrough products and services that no one can keep up with.
Bein: As we step through the strategic process, it’s trying to figure out what is the balance of operational excellence versus customization. A lot of companies, through lack of foresight or strategic planning, end up doing more customization than they want to be doing. That’s where the tension ends up. Once you know how much emphasis should be placed on operational excellence versus customization, you can send a clear signal both to your organization and to your customers.
Heller: Let’s get to the second book, “Hedgehog Model”. It asks you to answer three questions: “What are we passionate about doing? What can we consistently do better than anyone else? What key measurement drives our success?” The answers to these three questions become your headshot concept.
We used to start with this but added “Discipline of Market Leaders” first because it allowed us to answer this set of questions with much more precision and focus. You come out of this with a group of 20 people who are influential in the company, saying, “Yes. This is what we are passionate about.”
Someone who is in love with an initiative is going to outexecute someone who’s just in it for the money.
After these first two steps, you’ve gone from a very broad core competency discussion down to “Wow, this is what we do and how we make money at it.” And oh boy, is that clarifying.
Bein: I would say that it is a short distance from Hedgehog itself to a vision or value prop statement.
Heller: At this point, you have all the raw materials you need to write your vision statement. This is the point in the planning where people get excited because you’ve started to get alignment. You’ve gone from very different views about who we are and what we do to a rallying cry about how we are going to beat the competition. It gives people something to get behind.
Bein: Let’s talk about the key measurements that drive our success. One of the things that’s important is getting a measure that is practical and can be understood by people who are customer-facing throughout the organization. It shouldn’t be some exotic derivative that requires certified financial analysts to understand.
Profit-per-employee, profit-per-customer, average-order-value and customer retention are understandable, easily measurable and people can relate to.
Heller: It’s not going to be perfect, there’s no universal measurement. For example, a lot of distributors like Return on Net Assets (RONA). It has a lot of great strengths, but it doesn’t reward growth.
Bein: It’s also not intuitive to customer service reps.
Heller: That’s right. But they will get something like a unique number of customers buying per month. Is that number going up regularly? That’s important if the company is obsessed with retaining customers and acquiring new ones. There are a lot of key measurements, but what works are the ones that everyone can act on.
Heller: The output from the strategic plan has to be a series of carefully selected initiatives that reinforce your strategy, are high leverage, make a difference in the business and you can plan your budget around. What do you think is the hardest phase of this process?
Bein: I think the third phase is the hardest, particularly the first time someone does it. The first-year initiatives tend to look more tactical than strategic because they haven’t developed their strategic chops yet.
Heller: I think there’s some emotion involved, and this process tends to weed out quite a bit of that emotion. By the time you get to picking strategic alternatives, people see their pet projects in a new light. I think this phase is the hardest and also the reason we spend the most time on it by using the “Profit from the Core” model to identify growth alternatives and then prioritize them.
There’s a lot of rigor and work that goes into this phase. You can’t just say, “I’m for this initiative,” you have to write it up and work with a financial analyst. Then, you have to get up in front of the group and sell it. If you are passionate about it, have done your homework and understand your growth alternatives, you have a great chance of getting through this phase of your project.
The beauty of this is that this one initiative may not make this year’s priorities, but maybe will the following year.
Bein: It has to be an annual process and you’ll get better at it every year. By year two, people know what the steps are, and they are more fluent in the process.
Watch the full episode to receive Ian and Jonathan’s Top 10 Tips for Strategic Planning.
Jonathan Bein, Ph.D. is Managing Partner at Distribution Strategy Group. He’s
developed customer-facing analytics approaches for customer segmentation,
customer lifecycle management, positioning and messaging, pricing and channel strategy for distributors that want to align their sales and marketing resources with how their customers want to shop and buy. If you’re ready to drive real ROI, reach out to Jonathan today at