MH: There is a traditional way in which suppliers approach channels, isn’t there?  In most big suppliers, channels are run by people who are rewarded on quarterly sales figures and who usually have job roles that are defined by the channel they manage – distribution manager or retail manager, for instance.  So what is wrong with that model?  And how should people do it differently?

DF: A number of things.  It is built on the distribution mindset.  In other words, the managers are rewarded for shifting product rather than for helping customers solve their problems.  There is no focus on the customer and little or no feedback to head office on what customers’ problems really are and how they are changing.

It is important to remember that these problems are complex and are unlikely to be solved just by buying a single physical product.  Channel people are concerned primarily with meeting their employer’s own internal needs.  And that usually means moving product.  And, once a channel pattern is fixed, they tend to set about making it more efficient, rather than making it right. 

MH: So that destroys the customer experience?

DF: Hmm, I would say that these people are unaware of the customer.  They have no clear idea of how their products are really put into solutions that meet the needs of end-customers.  They are very good at doing things in the right way – stripping out costs – and not very good at doing the right thing. The right thing is to understand what customers want and how the supplier fits into that delivery process.  Very often, the more we try to be efficient and cut costs, the less able we are to do the right thing.

MH: And you think we should start with that customer perspective?

DF: Yes, and when you start seeing things from a customer’s perspective you see a whole host of different ways of obtaining a solution from within a large network.  For example, if you have a data-handling problem, you could solve this with hardware, with software, or by getting someone else to process it for you on a temporary or permanent basis.  The customer just doesn’t see your channel – they aren’t interested in your channel, they are interested only in a solution, and this can come from lots of different places and take many forms and involve input from lots of companies. 
 

“Channel people are concerned primarily with meeting their employer’s own internal needs.”

MH: Why?

DF: Well, most channels people see themselves as suppliers and see a series of pipes or channels going from manufacturers to passive end-users, where the product is delivered. In fact, I would argue that the whole idea of a manufacturer is suspect.  Take Nike.  Is it a manufacturer?  It doesn’t make anything itself!  Equally, many distributors specify products and develop solutions.  And customers, particularly business customers, are far from passive – they actively seek out solutions and often have a strong input into the development and they have to work on what they buy to turn it into a solution.  Also, most suppliers are unaware of the real technology and the processes that go on at intermediary level.  A network view also makes us see how a company’s offering is transformed through the network in order to be a useful solution.

MH: So you make people draw the network and where they fit into it?

DF: Yes. And it is a good idea not to place your company bang in the middle of the board, but somewhere up at the right-hand corner.  Then you sketch in the entire network and you look at all the processes that every node carries out to create solutions.  Include your competitors and your suppliers as well.  Look also at how the other nodes see you – where you fit into their view of the world.

It is a humbling process – you realise just how little you can actually do on your own, and how much you depend upon others.  You also see the range and diversity of competition, from companies that make most of what they sell in-house and provide all the associated service, to those who do hardly anything themselves.  Most of us grew up in a world of similar competitors all working in the same way.  It’s no longer so. 

Then we sing, "Twinkle, twinkle, little star."

MH: What! They do or you do?

DF: Well, I do, and maybe they join in.  "Up above the sky so high, how I wonder what you are." Most companies are far less important to others than they think they are.  Just tiny, tiny stars of which the end-customers are pretty unaware.

MH: So once you have sketched out a network like that, what can you see?

DF: Well, you see how little you can do on your own to solve customers’ problems.  You also start to make sense of the importance of other relationships to your own offering and of how important you are relative to other suppliers or customers.  If you look at the process through their eyes and map out their other relationships and where you fit in, you will discover how little room for manoeuvre you really have.

The exercise also serves to separate the task of strategy from the task of implementation and organisation.  We tend to wrap these together, so that we get a strategy that is pushed by the current state of the organisation.  Look at the way the banks spent decades trying to think of ways of using their existing branch networks!

MH: And all this leads to?

DF: A much clearer idea of how your company works with other companies to develop and deliver solutions to end-customers.  It also gives a much better idea of where you can make changes and where, given the nature of relationships, you perhaps can’t.  Most suppliers attempt to exercise far more power than they actually have.

But the secret is really to understand what customers are looking for and how what you offer fits in with that solution.

It also highlights what is often a huge discrepancy between the cost to the customer of the solution and the supplier’s price tag, rather than focusing on the distribution costs of the manufacturer. We worked with a software company with ambitious growth targets and it became plain that, to meet them, they would have to either strip out a lot of costs and become an IKEA in their approach to customers, or increase their costs and provide a complete solution to the customer.

MH:  So how do you measure and monitor relationships?

DF: Usually we find that relationships are never formally appraised.  When companies do look at their relationships they find that the reality is very different from the view at head office.  It’s important to do regular Relationship Audits.  We did a study of one company and found that the way it handled relationships differed wildly from one country to another.  At another company, we asked them where they felt their distributors fitted into their strategy.  Several of their distributors they saw as "build relationships", but their operations people were actually sending out "decline" messages.

“Most suppliers attempt to exercise far more power than they actually have.”

MH: In a complex network it must sometimes be hard to disentangle relationships.

DF: Yes, and you can’t simply adopt a dyadic approach where you look at the two sides. You have to accept that how you relate to company A will shape your relationship with company B.  We did a study of two big food suppliers, X and Y, in a large European market.  Company X had a very strong relationship with the natural incumbent food-retail chain and company Y had developed a strong relationship with a food retailer who was trying to move in.  Company X then wooed the incomer and offered to do its category management.  There was a huge reaction from the incumbent retailer, who saw this as a real threat.  So you need to triangulate relationships.

MH: But understanding end-users is vital.  So how do you do that?  How do you segment markets?

DF: Segmentation should be about grouping people by their problems, attitudes and behaviour.  Instead, people tend to use simple demographics.  For instance, IT suppliers tend to lump together small and medium businesses, on the grounds that they all have the same requirements.  But you may find that a company’s rate of growth, for example, is the critical indicator of its IT requirements.  Similarly, you often analyse business airline passengers by the size of their company, but if you look at the age of a manager you get a very interesting picture.

The answer is to start interviewing customers and understanding how and why they buy solutions.  Many IT companies talk like this and advertise their "solutions".  But often they’ve not really thought about their customers’ problems and they are only trying to sell products.

MH: You said that a lack of feedback from channels and salespeople was a real weakness in the traditional channel model. How do you mean?

DF: Your product, by the time it reaches the end-user, has been wrapped into a complex solution by intermediaries using their skills, technology and service ability and also by the end-user itself.  It is very dangerous to design products to maximise their performance without understanding these processes.  Often channel salespeople understand what is happening but don’t have a voice in product marketing, let alone product development.

You can spend a fortune on market research and find that it merely tells you what your sales force already knew.  Large companies have this problem with how to use the knowledge they have out in the field.  There is a great quote from Percy Barnevik, the former chief executive of ABB.  He said: "If we knew what we know, we would be unbeatable!"  So some companies have invested heavily in knowledge-management systems to solve this.  The head of Siemens was recently quoted as saying: "Siemens knows what Siemens knows."  That is revolutionary.

MH: Let’s just recap on what you are saying...

DF: OK.  The key is to see the world as a network, and not as a flow from manufacturer to customer.  The key is to see other people’s perspectives, including those of your distributors, suppliers and co-developers.  You depend on these and you must use your relationships with them to develop and fulfil a solution for an end-user.  You must audit each major relationship and the network as a whole.  The bright people are those who are very sure about where they are in the network and what they need to know themselves, and are very good at using other people’s skills.