Why Distributors Can’t Innovate – and How You Can Start

Disruptors are at the gate: Build a culture of innovation now

I consulted for a large distribution company that was trying to develop a new service – temporary branches on customer sites. Fortunately, this wasn’t part of my assignment.

But I watched as, over the course of a few years, the firm could never figure out how to execute this initiative even though the distributor was very well operated and stocked with top talent across the enterprise. In contrast, a major competitor launched a temporary branch program that was highly successful.

This inability to innovate is a common problem among distribution companies in my long experience. Many distributors have tried to:

• Compete online
• Create a telesales capability
• Launch a new line of business (e.g., safety, breakroom supplies)
• Develop new services to differentiate from pure product sellers
• Implement a successful CRM
• And so on

In my experience, these initiatives fail more often than they succeed. Most of the time, that failure was simultaneously inevitable due to how the distributor managed the innovation and avoidable if the company had employed a better approach.

Here’s how I believe distributors can innovate successfully.

3 Guiding Principles for Distributor Innovation

1. Don’t choose innovation initiatives through your budget process.

In his classic work, “The Innovator’s Dilemma”, Clay Christensen argues:

To be clear, Christensen has no issue with using customer feedback to drive most of your strategic decision-making. His point is:

• You can’t identify the potential of brand-new technologies and services by asking customers who don’t understand them.
• You can’t learn from competitors who aren’t innovative.
• It’s impossible to build accurate pro-formas for new ideas because you don’t have any data. Indeed, Christensen’s innovation principle No. 3 is, “Markets that don’t exist can’t be analyzed.”

In most companies, if you can’t prove a new initiative will generate sufficient profits in the long run, the default action is to kill it. But by definition, breakthrough innovations have unknown financial outcomes.

That means nearly every distributor is wired to kill most new ideas because they can’t make the cut during budgeting.

This includes my client – the return on the temporary branches was unknown and so it was never properly resourced or tested.

For the most part, successful innovation in distribution is driven by senior executives with enough passion and power to support risky initiatives. Unfortunately, people like that are hard to find. Instead, I suggest you have separate meetings focused on real and prospective industry innovations and allocate a portion of your resources to R&D, expecting to learn and experiment with new ideas – without expecting to profit from them during your normal investment horizon.

2. Don’t manage innovation through your normal structure.

I worked at Grainger during the early days of the Internet, and the company decided to build its ecommerce capabilities in a separate business unit. Senior executives told us, “If we try to build Grainger.com in our existing structure, the parent will kill the child.”

Many people in the legacy business unit didn’t see the opportunity. Managers protested that ecommerce was a tiny portion of our business and resented the resources the company invested. I heard many managers in the “core business” argue that ecommerce wasn’t really growing sales – it was driving channel shift. That meant ecommerce was nothing but a cost to the company.

It sounds ludicrous in retrospect, given how vital ecommerce became to distribution in general and Grainger in particular. And yet, two decades later, that scenario continues to play out in many other distribution companies.

Those Grainger senior executives did the right thing 25 years ago by protecting ecommerce from operating managers, who are wired to allocate resources in the most profitable manner. That process generally excludes any investments in emerging technologies.  

In contrast, my consulting client kept assigning the task of developing on-site branches to their best field leaders. I knew these executives and they were fantastic operators – which meant they were the wrong leaders to develop a new, unproven concept. As great general managers, they were terrific at driving sales and squeezing profits out of a P&L. But innovations that, in the short-term, did neither of these while consuming a lot of resources had zero chance of winning their support.

In the 12^th edition of the NAW’s Facing the Forces of Change series, “Innovate to Dominate”, distribution innovation guru Mark Dancer writes: “Very few distributors have plans at all for leveraging the next wave of change and the progress is held back because leaders lack learnable innovation skills around foresight, scenario analysis, and entrepreneurship… distribution does not have a tradition of driving change.”

Manufacturers, for whom innovation is a survival requirement, do it better. Can you imagine if Ford asked its executives in charge of hitting production targets to develop the next F-150? Or if design engineers tried to build prototypes on the factory production line? The company would never again update its best-selling vehicle.

Yet, that’s exactly how most distributors try to manage innovation. No wonder it fails.

3. Scale down your cost model and your expectations.

Clayton M. Christensen in “The Innovator’s Dilemma” points out that while disruptive technologies often create new markets, those markets are very small. His “Principle #2” is: “Small Markets Don’t Solve the Growth Needs of Large Companies.”

Because great distribution leaders are usually great operators, they not only want a predictable return, they only focus on initiatives that are big enough to matter in the short term. This often kills innovation because emerging technologies not only create small markets (at first), but they often fail.

This contributes to what Mark Dancer in his NAW book “Innovate to Dominate” defines as “The Vision Cliff”:

Distributors respond “en masse” to commonly accepted best practices, but a lack of vision precludes them from planning for more complicated technologies without immediately obvious use cases and implementations.

Nearly every transformative technology starts out creating a small market before it becomes dominant. Electric cars were a niche for years; as of this writing, Tesla – an outside disruptor at first – is the most valuable automaker in the world. Smartphones in their current form didn’t exist 15 years ago; now they’re ubiquitous and the industry leader. Apple was an outside disruptor that destroyed long-established brands or pushed them into niches.

There’s no real reason that Toyota, Volkswagen or GM couldn’t have dominated the electric car space. Motorola or Nokia could have developed the smartphone. But these were niche markets at first, and companies made rational, customer-research driven decisions about where to invest. They had no data to develop exciting pro-formas; customers weren’t asking for these solutions and there were no “skunk works” divisions that succeeded in identifying these opportunities. So, the riches went to disruptors instead.

Learn to Disrupt as You are Disrupted

Consider the list of failed innovations I listed above:

• Online success
• Telesales capability
• A new line of business
• New services
• A successful CRM

If your organization has failed at these or similar initiatives, perhaps the problem wasn’t the idea but the execution.

This isn’t an abstract issue: The development of B2B marketplaces is bringing industry-shaking disruption to the distribution industry. I think it’s equivalent in scale to what electric cars and smartphones did to their industries. Many distribution leaders agree, but few organizations are trying to innovate solutions. Instead, the industry seems to be standing by, watching as Amazon, Alibaba, eBay, Google and Walmart build marketplaces that carry products once exclusive to distributors.

What to Do Next

Distributors need to experiment with various breakthrough ideas – including marketplace strategies – right now. But don’t give the assignment to the leaders responsible for your day-to-day P&L and operations. They’ll kill it. You need to create a group with enough resources to explore various innovations without the burden of producing a specific return or supporting the overhead of its parent. This is anathema to most distributors but it’s the only way to sustain a culture of innovation.

When this innovation team identifies a new technology, let it learn and grow until you can determine if the opportunity deserves more investment or should become part of the core business. Many times, the new innovation or technology will not succeed. But occasionally, you’ll innovate something truly game-changing: Grainger’s ecommerce channels – which so many managers viewed as a sideline when it was launched in the mid-1990s – account for 64% of the company’s sales today.

Be inspired by industry innovators. Zoro – which was itself set up by Grainger as an innovation-focused business unit protected from its parent – is launching its own marketplace. And SEFA, a buying group for food equipment distributors, is starting up, Culitrade, a marketplace for its members.

Distributors are learning how to build cultures that drive innovation; don’t wait. The disruptors are at the gate and the battle for distribution supremacy will likely go to the swift and not the strong.