The Executive Problem With E-Commerce

Is your firm falling behind, keeping pace, or making the right changes? 

﷯The major issues with e-commerce, when it comes to distribution, are easy enough to identify.  ﷯Our 2016 research on distributor online efforts clearly points to three areas where firms, who are falling behind in e-sales, fail;﷯ ﷯specifically ﷯firms that﷯:

•    ﷯Fail to invest sufficient capital in e-commerce with most companies investing less than $100,000 per year, while winners typically invest three to ten times this amount on an annual basis.﷯

•    ﷯Don’t build out the software platform to compete online.  ﷯A competitive online experience takes three to four different pieces of software in addition to the transaction platform including PIM (p﷯roduct i﷯nformation m﷯anagement), p﷯unch-o﷯ut, f﷯aceted s﷯earch﷯ and o﷯nline q﷯uotations.﷯

•    ﷯Don’t ﷯change their culture ﷯to include product managers, changing the sales force, and developing the operating platform to compete with delivery windows. 

﷯These problems are ﷯solved with sufficient effort, planning﷯ and time, but some two-thirds of distributors, those who sell less than 10 percent﷯ to 12 percent﷯ of their annual volume online, can’t seem to push through these issues.  ﷯With e-commerce growing at 8 percent/﷯year and vendors selling 30﷯ percent of their volume through alternative e-channels, there is plenty of reason to become competitive online.  ﷯But our research finds the vast majority of distributors aren’t moving forward fast-enough.  ﷯In fact, many are losing the online battle.  ﷯The fundamental problem is somewhere else and we tackle it in this installment. 

﷯The e﷯xecutive that d﷯oesn’t e﷯xecute

﷯Most public distribution and larger private firms over $500 million﷯ in sales are performing well online.  ﷯It is the vast middle market firms, those between $50 million﷯ and $500 million﷯ in annual sales, that﷯ run the risk of losing the battle for the e-sale.  ﷯Our work with these firms through research, seminars﷯ and field audits finds that the single most important variable for e-commerce success is executive motivation, drive﷯ and belief in online capability.  ﷯If these traits are missing as in﷯ regards to online investment, the firm is highly likely to lag in e-commerce performance and, based on the pace of online growth, ﷯likely to lose a substantial chunk of existing sales as customers move to buying ﷯ online. 

﷯The seminal question is how could previously successful executives miss so badly when it comes to online activity? ﷯The answer is a combination of cultural, firm life-cycle﷯ and traditional investment approach that stymies the growth in what, to many, is the future of the $3 t﷯rillion﷯ in sales North American industry.  

﷯Selling is not marketing and ﷯marketing is not what it used to be

﷯Most distributors are sales-driven.  ﷯They have a volume orientation and drive top line sales over profits.  ﷯They support this with leagues of outside and inside sales professionals who, typically, have significant experience in thousands of products and their application(s).  ﷯Over the generations, however, many of these products and their applications have entered the commodity space.  ﷯They are, largely, differentiated by price, and customers often understand the application better than their distributor sellers.  ﷯Sellers are trained to sell tangible advantages of products and services to secure the order.  ﷯Additionally, there are experts in products and processes who design solutions for customers.  ﷯B﷯ut this is﷯ typically﷯ done at the Pareto customer base.  ﷯In most of the four-dozen vertical product-markets representing Durable Goods distribution, half or more of all products are commodities where the customer can self-serve with little need for the cost of sales assistance. 

﷯In the past two decades, most mid-market distributors have added the marketing discipline and carved out a managerial or executive slot for a qualified marketer.  ﷯Firms have engaged parts of the marketing mix of product, pricing, sales-promotion, channel, and fee-based service.  ﷯Our recent research on fee-based income finds that, overall, distributors secure twelve-percent of overall revenue through fee-based service offerings.  ﷯It is difficult to do this without qualified marketing.  ﷯

﷯But marketing online is not selling and shares some parts of traditional marketing management, but not others.  ﷯Online marketing has much to do with product content, its quality, data and content integrity across systems and publications﷯ and current data.  ﷯The way content is arranged, titled﷯ and placed into a taxonomy has much to do with online search success.  ﷯T﷯his is done by product managers who know the products and how users think about different applications.  ﷯Finally, the field of B2B data analytics rests on extracting variables from search, online ordering﷯ and customer demographics to increase the chance the customer will buy.  ﷯Few of these skills are found in existing sellers and traditional marketing is typically not strong in product management, data analytics, or managing content quality; especially for syndication.   

﷯The upshot is that distributors, who want to be successful in e-commerce, have a significant challenge in changing from a sales model to a self-serve model dependent on content, data analytics and systems.  ﷯Too many distributor execs, experienced in sales management and general marketing, simply don’t understand what it takes to achieve e-commerce success and, hence, underestimate the work needed to drive online sales. 

﷯The generational ﷯divide and financial horizon

﷯Most mid-market distribution firms are third generation; they started in the years from 1920 to 1950 ﷯ as North-America began to industrialize.  ﷯Most firms have a substantial amount of family shareholders, where some work in the business but many do not.  ﷯These shareholders are wealthy; their stock in the family firm has built up significant value.  ﷯As the generations pass, however, private shareholders lose passion for a singular industry and treat the firm as a portfolio investment.  ﷯In essence, they look for diversification of their wealth both to protect and grow it.  ﷯They correctly see investment in a single firm as risky with an uneven chance for growth.  ﷯Hence, they often want to sell the firm or take profits out to place into other investments.

 ﷯The problem with the third generations’ financial need(s), however, runs counter to the needs of the online transition.  ﷯The software and expertise to manage an online effort can run well into seven figures for the first few years for a mid-size firm.  ﷯Annual investments, after the initial build-out, run into six-figures for people and systems upkeep.  ﷯In short, magnitude of investment for online commerce runs counter to the diversification and lifestyle needs of the third generation.  ﷯Yet, without a competitive online effort, the distribution firm becomes uncompetitive and decreases shareholder value.  ﷯The cost of capital exceeds the return on capital investment.  ﷯We caution mid-market distribution firms to carefully assess if they should invest in e-commerce or sell the firm outright.    

﷯Energy and t﷯ime

﷯Harvard Marketing Professor Ted Leavitt was fond of saying, “management is for the young.” ﷯Today’s third generation owners are in the twilight of their careers.  ﷯They look to move out of the family business,﷯ into an enjoyable retirement.  ﷯ The online revolution comes at a point where, physically and mentally, many do not have the stamina or want the hassle of leading major change in a sizable organization.  ﷯Where there is a capable fourth-generation, we find online progress and success is much more probable.

﷯The third-generation wholesale executive has well-earned the admiration for growing a privately-held firm in an increasingly competitive industry.  ﷯Unfortunately, the changes needed for online success ﷯comes at a time in their careers when they want to enjoy the fruits of their labors.  ﷯They don’t want to spend another five to ten years learning an entirely new means of going to market while changing their corporate culture.  

﷯It’s not about a new ﷯way to launder a transaction

﷯We ask the question﷯ in our research and field audits, is﷯ “e-commerce ﷯ another means to launder a transaction or a fundamental change in the way distribution is accomplished?” ﷯The vast majority of executive responses go to, “another means to launder a transaction.” ﷯Increasingly and unfortunately, the changes to the distribution firm and advances of online leaders demonstrate e-commerce is a fundamental change in the business.  ﷯One has only to look at Grainger’s reduction in branches from 420 to 250 or Forrester’s prediction that one﷯ million sales jobs will leave the B2B space by 2020.  ﷯E-commerce and online business significantly changes customer-facing and order-fulfillment disciplines.  

 ﷯There is a growing list of firms who have navigated the build-out of e-commerce software but fail at transforming their firms.  ﷯We call this a d﷯igital w﷯ashout.  ﷯This failure belongs to the executive suite, and two-thirds of failures in e-commerce are the failure to anticipate and plan cultural change.

﷯Executive n﷯eed

﷯We expect many distribution execs to do their best to adopt e-commerce.  ﷯Their success is, to some degree, relative to the progress of their competitors.  ﷯However, highly successful e-commerce firms and new entrants with more efficient business models, will accelerate the scope and pace of change.  ﷯Far too many executives underestimate the changes their businesses will need to compete online.  ﷯Additionally, the generational timing for investment and attention to the firm runs counter to substantial change.  ﷯We caution executives to know what they are getting into before opening the checkbook too far.   

﷯Scott Benfield is a consultant for distributors and manufacturers in traditional and digital marketing. ﷯He is located in Chicago and can be reached at ﷯630-﷯428-9311 or scott@benfieldconsulting.com.﷯

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