Question

Topic: Strategy

Distributor Also Manufacturers Competing Products

Posted by Anonymous on 5/16/2005 at 4:24 PM ET 2750 Points
I work for a mid-sized ($1B) manufacturer in a small but growing hi-tech segment, selling both direct and through distributors. The largest distributor ($5B, more diversified) sells about 40% their own manufactured products / 60% resell. Some of that 40% directly compete with my own line. This distributor also offers value-added services, including "let me run your procurement/inventory/logistics operations so you can focus on your core", gaining a powerful inside position. I suspect that they're leveraging their position to swap out my products for theirs, nulling my marketing efforts.
How can I gain more market share from this situation?
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RESPONSES

  • Posted on 5/16/2005 at 5:43 PM Author
    Re: WMMA, thanks for your response.
    I didn't mean to imply that this situation just recently happened. This distributor/competitor has been around for decades, us only for <10 years. So many of these customer relationships pre-existed our entry into the market. We have an agressive sales force out there, do not currently act as distributor for other manufacturers, have a software value-add that is applicable only to our narrower sub-sector.
  • Posted by Peter (henna gaijin) on 5/16/2005 at 6:43 PM Accepted
    Simply put:
    1) expand more in other channels so as to minimize the percentage of your business that goes through this distributor.
    2) find a way to differentiate your products from the distributor's, so they can't as easily swap yours for theirs. People still pay extra for Coca Cola over store brand soft drinks because they have differentiated their product through branding.

    I know - simple to say, but not so simple to implement.
  • Posted by ROIHUNTER on 5/16/2005 at 7:44 PM Member
    David,

    How about going to this manufacturer/distributor and offer to make them an OEM branded product just for them. Then they can continue their practice and you both benefit.

    Just a thought.

  • Posted by mgoodman on 5/16/2005 at 10:51 PM Accepted
    Some very good comments so far. You are facing a tough situation, and there's probably no quick fix.

    Several years ago we had a project with a company (in technology) that found itself in a similar predicament. They were competing with their distributor, and they were losing contact with the end users.

    Our recommendation, which they followed, was to focus on products/segments where they could truly add value and differentiate themselves, and cede volume in the products/segments where they were essentially a commodity. It became a portfolio management issue, and it ultimately improved their margins dramatically -- even at volume levels that were slightly lower than they had originally projected (greater than year-ago, but not as "greater" as they had hoped).

    It is one of the case studies I use frequently with clients. The investment in R&D, marketing/advertising, and sales support for the proprietary products went up, but the sales/profits went up even more. And the volume losses were all in low margin, highly competitive products/segments, with a net result that was very attractive to stockholders.

    I'm not saying this applies to your situation, but it's a lesson worth noting. If the shoe fits ... and all that.

    And if I can help with this, let me know.
  • Posted by Mushfique Manzoor on 5/17/2005 at 12:07 PM Accepted
    hi david

    experts have given some great advice, specially Les.

    my 2 cents nad some queried are...

    1. can acqure his brand and make it yours?? i mean talk to this distributor if he is willing to sell his brand to you. the reason i am saying is that you have not mentioned is pricing a factor of problem, whether he is having a lower price than yours and yet giving better VAS.

    2. talk to this distributor whether he is willing to manufacture your brand on a contract basis.

    3. differentiate your products/brand from the distributors one.

    4. offer better VAS (value added servces) to clients stand out and strengthen your CRM.

    5. is the distributor is upset for you selling directly to customers?? what was the logic in the first place to go for both the channels of selling directly and thru' distributors? can you create or develop alternative channels of distribution to counter this distributor. is it possible for you to dvelop the direct selling further.


    6. i agree with Les that you should stealthly look for new distributor and gradually replace the current one once you get new one.

    7. if you cant beat this distributor for whatever reason then you gotta live with it. then do a portfolio management. i mean, you have mentioned

    "The largest distributor ($5B, more diversified) sells
    about 40% their own manufactured products / 60% resell. Some of that 40% directly compete with my own line."

    so how many products are in this "some of 40%" and what are your margins, are these your bread and butter products. can you tinker with the portfolio that you fight with the distributor as a competitor in segments/products which are not common while cooperate with this common product.

    hope this helps. do let us know with your thoughts on this.

    cheers!!
  • Posted on 5/17/2005 at 3:53 PM Author
    Wow, some great responses coming in! Thanks everyone!
    Let me clarify a couple of points. Several of the suggestions depend on 'if'...
    As I said, high-tech. We focus on high-value-add products, invest heavily in R&D in a very fast-moving field. Having just said that, we offer a mix of unique and commodity items that our sub-segment requires. (Unique today becomes commodity tommorow.)
    This distributor/competitor serves a much broader market; we focus sharply on one sub-segment. (Possible advantages here.) Also, they have said publicly that they aim to increase their % self-manufactured overall. (ref negotiating with them)
    Though this distributor is largest in segment, they're no MS Windows - even the largest isn't that dominant, the segment is fragmented.
    We have a good Web site and take majority of direct sales thru that vs. phone/fax.
  • Posted on 5/17/2005 at 8:25 PM Author
    V-Man: I'm sure you're right, but I'm concerned about this open forum. We are both publicly traded. Don't mean to sound like a riddle, but...
    Our company's greatest strenght is R&D, yeilding a pipeline of must-have high-margin products. (but product life-cycle is short) Also, execution in operations is very good.
    We are international (50-100 countries, Americas, Europe and Asia.) (So is distrib/competitor, but more so.)
    Our focus segment is considered hot, expected to continue to grow even more in future, characterized by rapid technological/scientific advancement, first took off in the 1990s. (Dist/competitor, as I said, is more diversified, including in related segments that are mature.)
    No resignation in sight; confidence (but, was it Andy Grove who said something about staying paranoid?)
  • Posted on 5/18/2005 at 5:02 PM Author
    Product lifecycle is short.
  • Posted by telemoxie on 5/19/2005 at 12:00 AM Member
    quick question... when you say they may be 'swapping out your product for theirs..." - do you mean they may be physically removing and replacing the equipment you have sold with comparable equipment, or do you mean they may be replacing 'obsolete' or outdated equipment from your sales team and your other distributors have sold with the new models of their equipment, or do you mean they might be taking advantage of leads you provide to sell their own equipment?

    If it were me, I would consider implementing some direct communications to end users, possibly in the form of a customer survey or a lead tracking program, and I would work hard to support my loyal distributors. I would also get a copy of the written agreement with this distributor and read it carefully.
  • Posted on 5/19/2005 at 11:07 AM Author
    telemoxie: by 'swapping out' I mean, when they are acting in the role of distibutor taking an order, or earlier in the sales process, or in the context of their value-add spend analysis/inventory management services, influencing the customer to order their self-manufacturered product over ours.
  • Posted on 5/19/2005 at 2:17 PM Author
    Well, responses seem to be trailing off. I understand that I'm supposed to close this out now. My first time on this site, so I hope I do this right.

    Let me say that the responses have been excellent. I've certainly gotten my $30 worth. THANK YOU EVERYONE!

    If I can very breifly summarize the advise that seems to fit best with our situation, (dcandey summarized it well, but I'm putting his 3 in a different sequence. May I also single out Les for praise.):
    1. Maximize pull, demand for our brand - based on inovation and customer intimacy. Continue to look for value-adds.
    2. Maximize other channels, direct and other distributors
    3. Find win-win with this distributor, minimize their incentive to favor their products, etc. (They want their cake and eat it too, offering choice and their own brand.) Ongoing review of our portfolio vis-a-vis margins and competition.

    Some that seem to fit less well include OEM'ing for them (fine for us, but they've invested heavily thru acquisition to enter this market so I don't see why they'd want to - maybe for some lines), niching where it's too small for them to bother (gonna stay and fight for the high-margins (they're #1 in the more broadly defined market, but have no MS-like stranglehold; we're very competative in our narrower segment and committed to stay), become low-cost provider (innovation is simply the qualifier to be in this market at all, so we have to go after the high-margins to fund our R&D.)

    Again, thank you everyone! and if there are any more thoughts, keep 'em coming. I understand that this Q will remain 'open' for dialog even after it's 'closed' for points.
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