Is there any distribution system more poorly conceived than the one used by most U.S. car manufacturers and dealers? In the prevailing system, car prices are initially jacked up by locked-in labor concessions. Manufacturers pit dealers against other nearby dealers. Dealers are pressured to accept more vehicles than they can sell and—unable to make money from new cars—turn to service and trade-ins to eke out margins. And at the bottom of the chain are customers trapped in high-pressure negotiations for a car that isn't the exact model they want.
That's the grim scenario painted by Harvard Business School marketing professor V. Kasturi "Kash" Rangan in his new book, Transforming Your Go-to-Market Strategy. The auto industry, he says, is a stark example of why go-to-market strategies need high-level attention and execution.
Rangan's answer: A key player in every distribution network needs to act as a "channel steward" who looks out for the interests of all players and customers.
In this interview, Rangan discusses his concept of channel stewards and why companies need them.
Q: You note in the book that in most cases distribution channels seem like "a repository of lost opportunities" that serve neither end users nor channel partners very well. Why is this?
A: That is because most channels are constructed from the supplier out, rather than from the customer in. In other words, the product or service is designed first and it is only then that the supplier thinks about ways to get the product/service out to the customer. If the company achieves its sales goals, it lulls the company into the assumption that the channels must be right. For all you know an alternate channel might have achieved even better results.
The more common pitfall is that the chosen channel is an expedient short-term solution, often not well suited to sustain sales and profitability in the long run. But once a channel is up and running it is very hard to shut it down and construct a new one. So the channel is temporarily repaired, a "band-aid" is applied, and the selling process moves on.
Several years and band-aids later, managers may realize that their channels serve neither their customers nor their channel partners well, but it is too late.
Q: What are channel stewards and what role would they play in creating greater opportunity for all participants?
A: A channel steward is someone who is able to interpret the needs of customers (including latent needs) and construct appropriate channels to address them. It is important to underscore that in so doing, a channel steward creates value for customers, channel partners who perform a role in addressing customer needs, and themselves.
There is no room under channel stewardship for non-value-adding partners; an effective steward must weed them out. By effectively meeting current needs and anticipating new ones, a channel steward expands the pie for all in the system to share.
Q: Could you discuss the three disciplines of channel management and why they are important?
A: The three disciplines are mapping; building and editing; and aligning and influencing.
The first discipline, mapping, is undertaken at an industry level to gain a sense of what the key determinants of channel strategy are and how they are evolving. It gives an idea of current best practices and gaps and projects what the future requirements might be.
The second discipline, building and editing, is an assessment of one's own channels with a view to identifying the deficits with respect to meeting customers' needs and/or competitive best practices. The goal of stewardship is to identify the gaps.
Managers may realize that their channels serve neither their customers nor their channel partners well, but it is too late.
Closing them is the job of the third discipline, aligning and influencing. The aim is at partners who add value, or who could add value, consistent with customer needs; and this means working out a compensation package that is in tune with their effort and performance.
The beauty of the channel stewardship discipline is that it works at the level of customer needs and not at the level of channel institutions. As a result, channel managers can evolve and change their fulfillment of customer needs without having to change channel structure all at once. Of course, the institutions have to be trained, coached, compensated, and motivated to accept new roles or improve how they perform certain roles, but they still have a role, if they are willing to adapt. It is an evolutionary approach to channel change, which is more palatable to channel managers and channel partners. It requires constant monitoring, learning, and adaptation; but all in the best interests of the customers, channel partners, and the channel steward.
Q: Who in an organization needs to be responsible for creating and implementing a channel steward strategy? How does the CEO fit in?
A: It has to be the responsibility of the senior marketing management of a company. It could be a team of CEO, CMO, and the VP of Sales. But it could well be the CMO position by itself, as long as the sales division reports to the CMO.
One should not jump to the conclusion that because the Internet appears cheaper it can solve a company's go-to-market problem.
It would be a mistake to have a staff function lead the channel stewardship strategy. Many companies these days have a head of channels, but in most such companies, this role is separated from the sales team and revolves around partner relations and channel policy.
It is important to understand that channel stewardship is a line function that involves attaining financial goals while simultaneously evolving channels to be in tune with the changing market environment. That's why the role is best performed by that individual or team of individuals who have the responsibility for long-term policy as well as short-term results.
Q: What companies are good examples of channel stewards?
A: Channel stewardship is a brand new concept. Bits and pieces have been practiced in the past, but we have pulled it all together and added some new ones. It would be hard to identify any one firm as an all-around exemplar, but many companies do the different disciplines very well. Cisco Systems and Dell would jump out as excellent on certain dimensions; but not so big and visible companies like Haworth Office Furniture, too, have an excellent record on some stewardship components.
A channel steward need not be a thousand-pound gorilla and market leader. A number of smaller players are good at it, like Haworth and Atlas Copco. Distributors and retailers could be channel stewards too. Wal-Mart, Best Buy (consumer electronics), and HEB (supermarkets) are all discussed in the book.
Q: You point to the auto industry as one example of how a lack of stewardship has created a rotten customer experience as well as major financial troubles for some large players. What does Toyota understand about its channels that GM is still learning?
A: We didn't specifically focus on Toyota's channel strategy in the study, but we know that each Toyota dealer sells an average of over 1,000 cars per year as compared to, say, the Chevrolet division of GM, which has an average much less than 1,000. Moreover, the Japanese company has about 1,500 distributorships in the United States; Chevrolet has about four times that number.
So whether it is serendipitous or not, it is clear that Toyota has a selective number of dealers who face much less intrabrand competition, have a much larger market area, and sell more cars per outlet, thus giving them scale economies. Their dealers have to be more profitable, and therefore more satisfied. In effect that is what channel stewardship is all about. Even if the existing channel were an opportunistic selection, over a period of time it is entirely possible to hone one's channels to keep up with industry changes.
Q: You devote a fair amount of space in the book to considering the impact of the Internet on channel tactics and strategy. Briefly, what are the opportunities and challenges presented by the Internet as a channel?
A: The average cost of a direct sales call is about $150. The Internet is at about $5 or less per interaction! Of course, that should not be misinterpreted to mean that the Internet can now reach customers who could not be economically reached before.
Customers need more than just information. They need the logistics to get the physical product, and they pay a considerable cost too, such as, for example, waiting for the delivery. What it means is that a sales channel can effectively use the Internet as a complement to carry certain aspects of the selling job that were very expensive to deliver in the past. After a direct sales pitch, much follow-on work can now be more efficiently and effectively done through the Internet. More information can be delivered on the Internet compared to what a human being could possibly remember and convey.
In other words, one should not jump to the conclusion that because the Internet appears cheaper it can solve a company's go-to-market problem. The solution has to match what customers want. Most of the time, the Internet is a great complement. But in some cases, where the product is predominantly "digital," the Internet can replace traditional channels at a fraction of the cost.
One has to be nuanced about the possibilities provided by the Internet. The selection of the market segment and the proposed value proposition should be sharp. Most importantly, the technology now provides the possibility of transforming a channel that can seamlessly and transparently connect the customers, channel partners, and suppliers. When that happens, it better facilitates the matching of customer needs and channel system capabilities. It is this "matching" process that distinguishes the stewardship approach.
Q: What are you working on now?
A: I am working on two important things. First, I am developing a robust field application for the alignment concepts advocated in the book. When all is said and done, people are still pondering the "What should I do? I sell to Wal-Mart" question. The book provides strategic guidelines, but now I am working on developing an instrument to calibrate power, trust, and transparency issues so that we can bring the strategic thinking down to the next layer.
Second, I am working on critical channel issues that are at the core of business strategy, especially in certain industries like media, entertainment, and healthcare. Research and learning never stop. This is such an exciting field with relatively less attention being paid. There's much work to do.