Catching the wave

by Dr. Stanton G. Cort

Distributors must digitize their businesses to learn how to surf the e-storm.

In the movie The Perfect Storm, Captain Billy Tyne and his crew of the Andrea Gail, battered, bleeding, exhausted but alive, find themselves in the relative calm of the eye of the storm. A few deep breaths of relief later, they see the storm’s south wall of wind and waves.

“She’s not going to let us out!” growls Billy in resignation, as 70-, 80-, and 100-foot waves rush in. Imagine what they could have done if they had caught and surfed that 100 footer, rather than having it deliver the perfect wipe out.

The e-storm lesson is this. Don’t be fooled by the recent bad news about the dot-coms. Their falling market values, slowing growth, operating failures and the numbers of them going out of business or being gobbled up are just the eye of a perfect e-storm in B2B distribution. The north wall has passed. We are in relative calm.

But the south wall’s wind and wave lurk just over the horizon. This isn’t a frivolous metaphor. To B2B distributors, learning to do e-business seems about as feasible as learning to surf. But both can be done when you know a few principles and get a little step-by-step practice. So take a deep breath or two. Use this brief respite to get ready to catch and surf those e-business waves. The rush will be great and so will the profits.

We’ll talk here about a three-step process of learning to surf.  The first is learning what the new wave of the e-storm will look like.   Since the key to catching that wave is “digitizing” your business, we’ll address that idea next. Third, we’ll go through the five steps to catching the wave in a way that will strengthen your long-term business fundamentals.

The next wave of the e-storm
The next wave of the e-storm in B2B markets will be characterized by maturing technology, growth and profit opportunities in distribution channels, and traditional competitors developing electronically based business models. Distributors can capitalize on all three dimensions.

1) Maturing e-business technology will be accessible.
During the next two to five years, the electronic and information technology that fuels the e-business storm will mature in a very important way. The core functionality necessary to do the fundamentals of e-business in B2B channels will be available to ordinary distributors, their manufacturers and their customers. In ways similar to how the PC has become a part of daily household life, technical platforms will continue to stabilize. For most purposes, application solution providers (service and software companies) will make their products easier for non-technical people to understand. For the remaining technical application challenges, larger numbers of technically qualified people will be available for hire.

2) Growth and profit opportunities in the channels will grow.
During the next five to 10 years, manufacturer, distributor and customer love affairs with information value will grow hotter. So will their willingness to pay for it. That is only logical, given the power of timely, accurate and skillfully used information to reduce costs of doing business and to broaden business scopes. It means that in B2B channels, information value as a percentage of the total landed cost of products and services will increase.  Since information always has been their key stock in trade, distributors’ potential growth and profit opportunities will be huge.

3) E-business competition will come from all directions.
In three to four years, the e-storm will seem like a maelstrom, with e-business waves coming from every quarter. Everyone in B2B channels will claim to have some kind of e-business model.  The dot-coms will still be there, often at the cutting edge. Your customers will demand reverse auctions, integrated supply, etc.  Your suppliers will require linked information systems, paperless transactions, etc. And they will use multiple sales channels.  Your distributor competitors will talk like Silicon Valley technoids. The reason is clear. Technology to meet competitive pressures and to pursue growing opportunities will be readily accessible. So, more and more players in B2B markets will learn to use it to surf rather than be wiped out. That means “digitizing” their businesses. 

What digitizing business means
Digitizing means getting your company ready to achieve competitive advantage in B2B e-business. The process is a lot less technical than it appears on the surface. It depends on the same set of skills that made you successful. That is, knowing your suppliers and customers, then letting them get what they value in the way they want to get it. We’ll go step by step through the process in the next section.

The term digitizing comes from the fact that electronically enabled information transfer energizes B2B e-business and the e-storm. So, context, the value created by e-business models, is information value or digital value. Some people like to say that all e-business comes down to zeroes and ones (the off/on signals or digits that computers use). Digitizing your business, then, means transforming it so that a large part of the value it offers suppliers and customers (its core value proposition) can be delivered electronically. It’s easy to grasp some completely digitized businesses. Tax preparation software, computer games or music delivered over the Internet require no concrete, tangible product to deliver their core value.

It is more difficult to think about digitizing a traditional distribution businesses. In fact, it can’t be 100 percent digital. But it can deliver information value electronically to a significant enough degree to create competitive advantage. To show you how, we’ll look at the three fundamental digitizing principles and five action steps.

Principle 1: Learn to see information value the way your suppliers and customers do. Break the habit of thinking that tangible (product) and intangible (information) values have to be bundled. The customers already have broken the habit and the dot-coms are educating them to do it more. For example, FedEx, UPS and others promote substituting information for inventory.  What they really mean is the real value of inventory is the knowledge that a lack of critical physical parts will not interrupt production. Thus, shipment-tracking information delivers the same value.

Principle 2: Learn to see your business as a set of processes that enable your suppliers and customers to get the values they want the way they want to get them. This applies to both your suppliers and your customers because, if you don’t provide value to both, one or both will find ways around you. For example, functions such as inventory control, counter sales, inside sales, order entry, delivery, invoicing and collection (which usually are separate for management efficiency) in reality are one process from the customer’s perspective. All contribute to (or detract from) the value of sourcing parts through you.

Principle 3: Think like a dot-com. As you examine each process, ask yourself, “How can I deliver this value without using any physical assets or activities?” The dot-coms think this way because information-based value is where their competitive advantage lies. This doesn’t mean you have to try to abandon all your physical capabilities. It simply tells you which ones are most vulnerable as value creators and, therefore, should be focuses of your digitizing program.

Learning to catch the wave
Here are five steps to digitizing your company. They flow directly from the three principles and depend on the skills that have made you successful over the years.

1) Re-examine your core value proposition. Focus on your suppliers and your customers. Get inside their heads. For example, what does your inventory really do for them? What is the real value of a personal call from a sales person? Do accurate invoices really matter? Why? Delivering these perceived values is your core value proposition.

2) Trace the processes that deliver the values. Start by listing all the kinds of value you want to deliver. Then, list all the activities you perform. Link the activities to the values they affect. Put them in sequential order. Now you have a map of your company’s key processes.

3) Examine each activity that involves tangible products and/or assets. Look for ways that information can deliver the same value to your supplier or customer. Some examples are: replacing inventory with information, paperless ordering and invoicing, telephone or Internet conferencing instead of sales calls, creation of electronic markets, etc. Don’t worry at this point that you don’t do or know how to do a lot of these things.

4) Decide whether to make or outsource your digital capabilities. This is the step that frees you from your current electronic constraints. You don’t need to be technically adept.  All you need is to know what you want the output to be. If you have the resources and technical capability to update and expand your information capabilities, make the changes internally. If not, outsource by buying them, developing partnerships, forging strategic alliances or depending on your suppliers. Increasingly, plenty of competent sources will be available.

5) Protect your essential link with your customers. You have the essential link when your customer (or supplier) thinks of you as the key access route to the value he/she wants. For example, “Without my distributor I can’t be sure the right cutting tools will be there when I need them.”  While digitizing by outsourcing extends your access to resources, collaboration in any form exposes you to losing your essential link. Therefore, in deciding whether to outsource each capability, consider whether your source will be able to come between you and your suppliers or customers. If so, it is worth the resources to develop that particular capability internally.

Perfecting your technique
Catching and surfing the big ones are two different skills. Now you know the technique to spot and catch the perfect wave. The south wall of the perfect e-storm is on the horizon. Start working now on your surfing technique. Steps 1 to 3 require no resources beyond your management’s existing skill set. Meet with them this week to begin your digitizing process. The rewards are as huge as the waves. It’s up to you now to decide whether you want to experience the rush.

Dr. Stanton G. Cort is associate professor and head of marketing at the Weatherhead School of Management, Cleveland. For 30 years, he has studied, written and consulted for companies in the channels of distribution. He currently focuses on the impact of electronic business on competitive structure and dynamics in B2B channels of distribution. He teaches supply chain management and entrepreneurial marketing. He can be reached at (216) 368-2064.

This article originally appeared in the Progressive Distributor ASMMA/I.D.A. 2001 spring edition.

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