Multinationals Are Reconsidering Their Operating Models in Venezuela

Venezuela has emerged as one of the most significant downside risks to 2013 performance for multinationals operating in Latin America. A devaluation in February and prolonged dollar shortages have not only hammered the value of Venezuelan business units, but in many instances have  rendered their operating models unfeasible.

While a minority of FSG clients are considering exiting Venezuela, some are asking whether a change in their operating model could position them to capture more opportunities over the medium-to-long term, especially given Venezuela’s recent history as one of the most profitable consumer markets in Latin America. Indeed, some companies, particularly in the consumer goods and healthcare space have been considering increasing their direct presence in the market, including opening up local offices with marketing and sales teams in order to capitalize on the struggles of competitors. The benefits of establishing a local office include allowing distributors to pay multinationals in local currency,  to better capture local opportunities, through stronger direct management of distributors or through a more robust direct presence.

For companies who already have a long established presence in Venezuela, the biggest challenge is how to best shield their local revenues from additional devaluation over the next twelve months. Meanwhile, the inability to repatriate currency after the shutdown of SITME and the inoperability of SICAD has only further compounded the situation. As such, companies such as Telefonica and Kimberly-Clark have decided to increase their capital expenditures over the short term and invest in their local production facilities, thus shielding cash assets from further devaluation while putting them to productive use. Other companies have considered investing in commercial real estate or other fixed assets only marginally related to their business models.

Regardless of their current operating model, multinationals should be cautious about the timing of any change in their strategy in Venezuela. The economic and business environment in the country is as likely as not to worsen over the next six months, and the Venezuelan government has thus far failed to pursue a coherent strategy to returning the economy to a period of relative stability, let alone high growth. Prospects for political and economic destabilization remain high, and companies should continue to prioritize contingency planning over growth strategies over the coming months.

FT beyondbrics Feature – EM distribution: try DIY?

FT Original Image

Frontier Strategy Group’s latest research on channel management in emerging markets was featured on the Financial Times’ beyondbrics blog on January 23, 2013. Please find the article below:

With major EM economies slowing in 2012, regional heads of multinational companies are increasingly having to focus on their margins. As new research from the Frontier Strategy Group shows, many are considering boosting them by running some of their own distribution operations.

In a survey of 136 executives from 82 multinationals operating across emerging markets, FSG found their respondents to be none too happy with their distributors. On average, EM distributors take a 25 per cent cut of revenue, and nearly two thirds of respondents said they were planning to work towards a better deal.

Joel Whitaker, head of global research at FSG tells beyondbrics that MNCs moving into emerging markets have conventionally “focused on capturing opportunities as broadly as possible as quickly as possible, leading them to rush into relationships which give considerable power to local distributors.”

You might think that with an in-demand product and a good brand, an MNC should hold the whip hand. However, due largely to their lack of local knowledge, 94 per cent of companies surveyed used indirect distribution channels, so switching between channels is not always easy.

Healthcare, for example, says Dan Kornfield, FSG’s director of strategic research, is “usually defined by a set of big distributors with relations with government. This creates an odd balance of power, where the middle man may be more picky than the supplier.” In more high tech enterprises, such as chemical engineering, the time taken to train distributors can be an additional bind.

Russia stands out in the survey as a particularly hard place to manage distribution. Of the four Brics it stands out as having the lowest average number of distributors per company at just five, compared with 174 in China, 39 in Brazil and 70 in India. It also has the largest average cut taken by distributors at 31 per cent – compared with 25 per cent in China and Brazil and 19 per cent in India – and the highest levels of dissatisfaction with distributor transparency, at 80 per cent.

Russia is defined, says Martina Bozadzhieva, a CEE researcher at FSG, “by a lot of small distributors with great local knowledge but insufficient resources to cover large distances, and a few very large distributors which can”.

The latter companies will often be handling goods from competitors too and consequently, Bozadzhieva says, “are touchy partners to work with. They give you fast geographic access, but they are hard to incentivise, and would not mind if you dropped out.”

Overcoming this could entail DIY distribution: 43 per cent of survey respondents said they were planing to move into direct distribution in at least one of their market segments, and 18 per cent said they were planning to acquire at least one of their distributors.

Alcoholic beverage companies in Latin America, FSG say, have demonstrated how it can be done successfully. “They have mapped out the networks, they know the logistics, they know what it takes to hire the right people – they have realised they can cut out the middle man,” says Kornfield. This comes not only with extensive experience of the local market, he says, but with a strong brand to wield.

When this experience is lacking, though, high risks are involved. Where choice of distributors is limited, causing offence can be costly, and what causes offence can vary from place to place.

“There is huge variation geographically around how easy it is to disengage with distributors”, Whitaker says. “Business in India tends to be more transactional, and that is very familiar to companies from western markets, a lot of their toolkit works well there.

“But a company in Indonesia that tries to rip up a distribution relationship is going to find it much more difficult. The consequences can be quite severe as it’s seen as a more personal relationship.”

And then of course, it might be all too easy to look enviously at the cut being taken by distributors and assume it would be easy to replicate.

“We had a client in consumer goods in Nigeria who was dissatisfied with its distributors. Getting the goods into market was very slow and costly, and because they had the resources they thought they’d go direct”, Bozadzhieva says. “They found it was very challenging, the cost increased, their competitive position deteriorated, and eventually they had to re-enter from scratch with a new distributor.”

PODCAST: Data Reveals Significant Room to Improve Distributor Performance

Podcast

Frontier Strategy Group recently surveyed 136 executives from 82 unique multinational companies (average global revenue, $18.1 billion) on their channel management strategy in emerging markets. The data shows significant room for improvement in distribution performance in 2013. The data also reveals the need to handle channel transitions with rigor and care, yet not shy away from them. A 2-page executive summary of the report can be found here. Dan Kornfield, FSG’s Director of Strategic Research recently discussed key findings from the survey on an exclusive Emerging Market Insights Podcast.

To listen to or download the podcast, click on this link to access the iTunes store.

Building long-term distributor relationships, one year at a time

I recently shared some insights into effectively structuring distributor contracts in China that were gleaned from the recent executive discussion hosted by FSG in Shanghai. The eight executives that FSG brought together, representing heads of China or heads of Asia for a range of technology, industrial, and healthcare companies, also spent quite a bit of time discussing two sides of the same coin: building relationships with distributors, with a long-term partnership in mind, and transitioning or ending relationships with distributors.

But, it is hard for us to discuss these two issues without coming back to contracts! The key takeaway on contracts that was discussed in my previous post was the necessity of conducting an annual review and negotiation of the contract. In addition to the benefits outlined in that post, an additional benefit of an annual discussion is the opportunity to sit down across the table from your distributor and level-set on where the relationship stands, what is going well, and what needs improvement. This guidance and feedback, shared in the context of achieving mutual benefit, is the anchor of a strong relationship. It is also the best tactic at your disposal for ensuring that distributors are not caught off guard if you decide to make a change to the relationship (either by ending it, or scaling it back).

Nobody likes surprises. But, even in the best case scenario, when bad news is being delivered to your distributors, there is a risk in the Chinese market of “losing face.” Several executives mentioned instances of terminated partnerships where the local distributor felt that he had “lost face,” and as a result, felt a personal vendetta against the vendor. This could be manifested in the disgruntled former distributor establishing a relationship with a competitor (and taking key accounts along), sharing trade secrets, or poisoning your company’s reputation in the market.

One way to minimize the damage of a perceived loss of face is to ensure that when territories are transitioned, it is from a small distributor to a larger distributor (and not vice versa). A large distributor will have greater power in the marketplace to minimize the damage that could be caused by a disgruntled former small distributor. But, if you switch from a large distributor to a small distributor, the disgruntled former large distributor has an increased ability to harm your business and impair the operations of your new, smaller distributor.

As the discussion turned to the challenge of transitioning from indirect to direct in China, the key takeaway was to expect the unexpected. Your distributors may well be telling the truth when seemingly making excuses for underperformance, so do not be too hasty to make such a transition, or in his words, “wait until the pain is unbearable.”
Finally, it is important to bear in mind that investing in developing the capabilities of distributors does not and should not be conflated with retaining distributors. Taking a “tough love” approach has proven to be a trend among the highest growth companies. Investing in distributors to develop the capabilities you require should not prevent you from terminating relationships with distributors that are not meeting expectations, and a track record of doing so instills current and future partners with a higher expectation of accountability.

A structured, annual contract negotiation process builds a natural inflection point into the vendor/distributor relationship, which offers an opportunity to proactively evolve the relationship over time, or to bring the relationship to its conclusion with minimal loss of face.

Distribution Channels in Indonesia: Current Trends and Enduring Difficulties

Indonesia

I wrote in this post that for many global businesses operating in emerging markets, the most common sales channel is to operate through distributors.  In Indonesia, one of the truly hot frontier markets in the Asia-Pacific region, this is especially true and a key success factor for MNCs.  Geographically fragmented across many large and small islands, the country has a growing consumer base but is difficult to navigate.  Even foreign companies FSG supports that have been there for over a decade continue to have an indirect or hybrid channel presence, not a pure direct sales force.

I recently spoke with one of FSG’s expert advisors in Indonesia, Ignatius “Iggi” Khomasurya, about the distribution environment there.  He had three basic messages for companies looking to enter or expand operations in Indonesia.  First, there are some interesting trends underway that are expanding opportunity for multinationals and worth a careful look.  Second, though it is a challenging business environment (beyond the geography), it is navigable with proper planning.  Third, there are some big mistakes he has seen other companies make, that you don’t have to.

Trends

The more things change… Cold chain is starting to expand in Indonesia.  This means distributors increasingly deploy refrigerated trucks across the country, which is great news for many businesses, especially those involving food and pharmaceutical products.

A second trend is that the rise of cloud computing is increasing local business interest in deploying enterprise technology and software for sales force automation.  Previously, setup, maintenance and connectivity concerns were prohibitive, but in the cloud, those costs are greatly reduced.   So you can start to expect your distribution partner to report “real time” daily sales figures by area, salesman, store type and SKU.  On the cutting edge, a local FMCG has deployed 1,000 iPads to its sales force.  If you want your distributors to track pipeline inventory in real time, it might not happen tomorrow, but it is no longer a hope that is worlds away.

The more they stay the same… The average consumer in Indonesia does not yet trust e-commerce, and many do not yet have a credit card.  In fact, Iggi said, there are 27 issuers and only around 20 million credit cards in Indonesia, out of a population of 240 million (and many people who do have cards hold two).  This means people (and businesses) use cash and are very tight on cash flow.  As a result, middle and low income Indonesians often prefer to buy a SKU with a small “cash ring” on a daily basis (say a 10 ml shampoo sachet) rather than bulkier packages (a 100 ml shampoo bottle), even if that means forgoing a bulk discount and convenience.

A fourth and final trend is that unlike most other Southeast Asian countries, Indonesia is still dominated by traditional rather than modern retail, and that is changing very slowly.  There are around 2 million outlets in Indonesia selling goods that needs to be replenished regularly. The supermarket presence in Indonesia is growing, but volume sold through convenience stores is growing faster.   Even so, the government is concerned that mom and pop stores will be killed off by modern retail, so it is intervening.  Recently a rule passed to cap the number of stores owned by a single company, such that expansion beyond a certain number can only be done through a franchise model.  This rule aims to facilitate the conversion and revitalization of fading mom and pop stores in a way that still encourages small local business ownership to professionalize and survive.

Difficulties

One of the largest difficulties for MNC’s operating in Indonesia is that local distributors are biased towards believing that foreign companies are trying to take advantage of them.  They are especially concerned that MNC’s will use them to blaze a distribution trail and then take over with their own sales force, offering poor compensation for their initial efforts.  Indonesians are often not confrontational, but Iggi says there are some “bad apples” that can become very antagonistic when an MNC attempts to exit a distribution arrangement with them.  Antagonism is a particularly likely outcome when a distributor feels humiliated and is sensitive to losing face.  Retaliation can be directed at your individual manager, or at your company.  In both cases, distributors can lean on and attempt to mobilize official powers on their behalf.

Threats against individuals can include action in the realm of immigration (instant deportation), taxation or in extreme cases police or military action.  Iggi knows of a local lawyer whose advice to a distributor was to have an expatriate general manager arrested and put in jail to force more favorable negotiation terms.  Some well-known MNCs have had their expatriate staff jailed or passports taken away in the midst of negotiations.  This is scary stuff, but real.

Threats to companies usually involve lawsuits. Iggi tells about a company sued by a distributor that “lost face” when the MNC exited to set up its own sales and distribution unit.  The courts tied up the company’s plans for the next three years, prohibiting appointment of a new distributor or a sales team.  The company went from 70% market share in Indonesia to around 30% by the time the ordeal was resolved.

The majority of distributors are not this uppity.  The ones to watch out for are those with owners with both sensitive personalities, and the resources to retaliate when displeased.  These difficult distributors often have a reputation and can be identified ahead of time by checking in with MNCs and local businesses operating in the community, whether in Jakarta or in the outlying provinces.

Advice

Fortunately, Iggi did not leave us feeling down on Indonesia.  By keeping a few lessons in mind, it is possible to capture Indonesia’s opportunities without incurring the wrath of distributors against the individual manager or company.

First, spend the time to find a good distributor. There are many good ones in Indonesia. Again, ask other MNCs or the people on the ground for character references, and conduct a professional background check if your budget allows.  One word of caution when selecting distributors: screen for motivation, not just ability.  One channel manager at a fast moving consumer goods company in Indonesia recently told Iggi they look for five things in a distributor: 1. Strong financials and good connections; 2. Distribution permits set up and ability to expand distribution; 3. Ability to hire and develop salesmen; 4, Ability to handle collections; 5. Ability to manage in-store merchandising and promoter personnel. At first glance this appears to be a pretty robust list.  But something important is missing.  That manager is just looking for ability, the elements of which are usually external and visible.  But he is not paying enough attention to a core question: who are these people, what motivates them, and are our objectives really aligned?  Because it can be complicated to exit a relationship in Indonesia, you want to be as sure as possible that you are entering a durable relationship.

Second, hire a good local lawyer.  Not when you’re in trouble, but just as a part of your local overhead.  Your general counsel from corporate center is probably an excellent lawyer, but they do not know how to help you structure contracts in Indonesia such that both you and the distributor both agree on what the contract really says.  A good local legal counsel can also help tackle the challenging situations above and draw both parties towards quick, amicable resolution.

Third, when you exit a distributor, understand that it expects to be paid “fairly” in exchange for going away quietly.   It is not unusual for a distributor to expect a significant severance package – on top of the expectation that you will buy out any remaining inventory that they are holding and on occasion help pay the cost of personnel redundancy.  One way to potentially avoid such a payout is to put the distributor on the defensive a few months before you broach the subject of terminating your relationship.  You can put them on the defensive by setting clear measurable expectations that they are not meeting, and by writing official letters pointing to breach of contract.

Fourth, when switching distributors, get involved in the details on both the outgoing and the incoming end.  Make sure you map out the client base the first distributor was reaching, and ensure that the new distributor guarantees to reach the same outlets and more.  Some companies have left a distributor that promised coverage of 60,000 outlets to gain a distributor that promised to reach 75,000 – only to find out after the transition was nearly complete that the second distributor did not have strong links to most of the original 60,000 outlets which were larger accounts and had been loyal customers.

Finally, if you decide to transition to a direct sales force, remember it is tricky to build one from the ground up in Indonesia.  Your best bet is to “hijack” the sales force that was already working for you, but was employed by your distributor.  To ensure this is possible, it is important to structure the initial distribution arrangement so that you have dedicated sales personnel working for you within the distributor, which you help train.  This is not uncommon, and if it is so arranged, these sales personnel will often gladly work for you later.  If negotiated smoothly, the distributor is content to see this happen rather than simply laying off a bunch of employees and creating a labor or morale problem on top of its lost business.

In conclusion, Indonesia is stable and growing, but it is still in some ways the Wild East, especially when it comes to channel management.  As the world’s fourth most populous country it should receive serious attention by any APAC regional executive when conducting market prioritization exercises.  FSG believes that the size of opportunity in Indonesia is actually head and shoulders above the other individual members of the ASEAN pack over the next several years.  We do not discourage operating there, but you’ll want to stay extra alert, and get plenty of local advice.  And of course you will benefit from staying connected to the collective wisdom of other MNCs operating in the country, which is one of FSG’s sweet spots.  Good luck, and let us know if we can help.

China’s channel challenge

The slowdown impacting China could get worse before it gets better for business-to-business companies.  Demand from the US and Europe for Chinese exports will remain depressed until issues such as the eurozone crisis and US fiscal cliff are resolved.  Investment is constrained by the heavy debt burden of local and provincial governments in China, and existing overcapacity.  China’s forthcoming leadership transition only adds an extra layer of uncertainty for Western companies attempting to grow their foothold in the Chinese market.

It was against this backdrop that FSG brought together eight senior-most China executives from leading technology, healthcare, and industrial companies to discuss best practices for managing the channel and driving growth despite the headwinds.  Our discussion over breakfast in Shanghai yielded insights into three aspects of the vendor/distributor relationship: 1) structuring effective contracts, 2) building long-term relationships, and 3) minimizing the pain of transitioning away from an under-performing distributor.

For this post, I’ll touch on contracts.  I’ll address the other two points in a future post.

The key takeaway I took from the discussion on contracts was seemingly counter-intuitive.  Every executive around the table acknowledged that there is little chance of any Chinese partner strictly adhering to the letter of contracts, but despite the apparent futility of these documents, all of the executives agreed that the best practice is to more heavily invest in the negotiation, preparation, and enforcement of contracts.  Local Chinese partners are more likely to view a contract as a roadmap than a strict and binary agreement.  And, every executive in the  room could share his own horror stories of partners violating contracts (or setting up new legal entities to skirt inconvenient agreements).  Although it may seem counter-intuitive to over-invest in contracts when there is little guarantee that partners will strictly adhere to them, a strong argument was made that investing the time and energy to structure a detailed contract can pay dividends, and furthermore, these contracts should be negotiated annually.

Companies should take a modular approach to structuring contracts, that links specific distributor activities to points of margin.  This accomplishes two things.  First, it sets clear expectations for the distributor of what capabilities they are expected to bring to bear with a direct link to their incentives.  Secondly, it allows the vendor to “take back” activities in the future, either because the distributor is underperforming, or because the vendor has built some of its own internal direct capabilities but does not wish to sever distributor relationships entirely.

We spent quite a bit of time discussing the ins and outs of building and eventually transitioning distributor relationships in China; I’ll share some highlights of this discussion in my next post.

 

Gerardo’s Cautionary Tale: Pharmaceutical Companies and Distributors in Brazil

Brazil Flag

Last week I interviewed Gerardo Mendoza, one of Frontier Strategy Group’s Expert Advisors.  Gerardo is originally from Mexico, and also spent some time working in Argentina, before landing in Brazil where he has been an entrepreneur and business advisor for the last fourteen years.  He has become a specialist on corporate tax concerns and the healthcare industry, but this post will be about neither of those themes, per se.  Instead, I want to discuss a trap that Gerardo has seen pharmaceutical companies fall into in Brazil.  This trap is a cautionary tale, because it could easily become a problem for companies in other countries and other industries.

Before I go further, since this is my first post on the FSG blog, let me also introduce myself.  My name is Dan Kornfield, and I spend my time interacting with clients and working with them to uncover useful perspectives on and solutions to common management challenges they face in emerging markets.  I tackle these challenges primarily from a thematic rather than geographic angle.  Specifically, I serve as FSG’s Director of Strategic Research.

One of the areas where I believe FSG is doing truly groundbreaking work is on “channel management,” which is business jargon for managing sales channels, or the variety of ways a company gets its products to end customers.  For many global businesses operating in emerging markets, the most common sales channel is to operate through distributors. In fact, a great deal of business in emerging markets would come to a screeching halt if distributors stopped offering their services.

Distributors are intermediary third party companies that serve as a sales organization (and usually logistics provider as well) for their clients, the producers.  Unlike wholesalers, transactional links in the value chain that simply purchase based on bulk discount and then resell, distributors become active agents for their business partners.  Some distributors work for one company, but most work for several at once.  Some companies have one distributor authorized to operate in a country or region, and others have many.

Distributors represent the producer client’s brand, and take its products to end customers more efficiently and/or more effectively than the client believes they could accomplish by themselves.  Sometimes, distributors are also hired by a company to avoid hassle, or, whether they know it or not, to take on risks that the producer would rather not assume.  For example, a company recently told me they employ a distributor to sell to the Mexican government, because they do not want to have to deal with all the paperwork.

Regardless of industry (e.g. consumer goods, healthcare, heavy industrial, or technology and telecom), about 94% of our clients rely at least partially on distributors, and just over 50% of our clients’ sales volume is brought in through these “indirect” (distribution) channels.

Okay, enough background.  Now back to Gerardo and his cautionary tale.

He explained that many pharmaceutical companies in Brazil have relied too heavily on distributors.  The distributors have grown up to become indispensable partners.  And as the market has grown, distributors have undergone a flurry of M&A activity amongst themselves.  Now some pharmaceutical companies have to reach their end customers through distributors that have larger annual revenues than their clients, and they gain that revenue from a more diversified set of partnerships.  This has led, and is continuing to lead, to a significant imbalance of power in the producer-distributor relationship.

At the end of the day, this means that it is hard for pharmaceutical manufacturers to be able to offer enough sales volume to really matter to some of the major distributors.  Now the only way they can gain preferential time and attention from their own third party agents is to pay them more – at the risk of beginning a margin-conceding arms race with other companies that employ the same distributor.  The alternative is to exit the distributor relationship and, if there are no good alternatives, to shift to operating their own direct sales force.  Now that the market is both complex and well developed, the easiest way to “go direct” would be to acquire some existing distributors.  Unfortunately, many of the good targets have already been gobbled up.

Gerardo believes pharmaceutical companies in Brazil waited far too long to make their move.  If they had diversified earlier into more of a hybrid model, employing distributors while simultaneously developing their own formidable sales force, they would be better off and less drastically dependent.  They also should have had their eyes on acquisition targets earlier, before the distribution market became more consolidated on someone else’s terms.

If you are operating in a fast-growing emerging market country, this story could happen to you.  In your team meeting this month, ask your team members whether they are concerned about overdependence and the potential for consolidation in the distribution space.  You’ve heard the warning that your value chain is only as strong as its weakest link.  But what happens when one of the links in your value chain becomes stronger than you are? That, too, is a problem.

 

Marketing Best Practices in Asia from Brocade

Click here to listen to the full Podcast:


The Asia Pacific region is one of the most diverse territories to conduct business in. For senior executives charged with growing Asian markets, their country portfolio typically extends from as far north as South Korea, to Australia in the far south – covering everything else in between. It’s hard to imagine the challenges CMOs must face as they create their brand for the first time in emerging markets such as China and India, while maintaining their position in developed markets. Frontier Strategy Group’s Associate Vice President, Chris Moore sought out the expertise of Brocade’s Asia Pacific senior management team, winner of the 2011 CMO Asia award for brand excellence in the region. In the following interview, Deb Dutta, Vice President of Asia Pacific and KP Unnikrishnan (Unni), Director of Marketing share their best practices for successfully building the Brocade brand in Asia.

How do you balance between maintaining a consistent global brand versus adapting your message within the local context of Asian markets?

Brocade has been in the Asia Pacific and Japan region for 11 years now. We take pride in the fact that we understood the potential of the region and invested early. From early on we did not just leverage Asia as a place to sell our products, but to also build our products presence. In fact, some of the early brand-building campaigns that we first implemented in Asia were later replicated around the world. One of our key philosophies is that while we have a global strategy, we adapt our approach for the local markets. The CMO award was a great example as we were able to go to our customers in Asia and offer them an opportunity to build their brand on a global scale through a joint advertising campaign published in Forbes.  We created a true win-win solution in which our local customers partnered with a global brand in Brocade to establish their own brand in Asia and worldwide.

What are some of the mechanisms that you have in place for keeping abreast of the local market trends and incorporating that feedback into how you position the Brocade brand?

There are quite a few things that we have done to localize our business, but one is definitely the partnership we have with Frontier Strategy Group in terms of really understanding the market and the trends that we need to be aware of in the Asia Pacific region. It is a combination of working with strong advisory groups such as yours, partnering with local industry associations, local media houses, and lastly working with our alliances partners. All of these relationships bring a lot of local flavor into what we are doing because it helps us understand what our customers’ needs are and gives us local visibility for when we run campaigns and demand generation initiatives in these markets.

How much of a role does the sales team play in building the Brocade brand in their territories?

We strongly believe that every employee at Brocade is a brand ambassador. We are aggressively working inside and outside the organization to position them as thought leaders in the industry. We support the sales teams to attend local industry forums and even speak at these types of events. Senior sales leaders are encouraged to engage with the media and support our brand building efforts as well. We actually have media training programs plus social media programs to ensure our employees understand how to best represent the Brocade brand in the marketplace leveraging the latest communication trends and tools. Our customers’ willingness to discuss with the media about their success stories partnering with Brocade is a direct result of our sales organization building strategic relationships with our customers.

How do you think about mitigating or managing the risk of giving third parties (such as distributors) access to your brand?

Our business model is a 100% partner model in Asia. We strongly believe that this is the best way to scale our business given the diversity of the region. We take part in joint marketing initiatives with our partners. We review plans and forecasts with them on a quarterly basis and ensure that the dollars put into our campaigns link back to the plan, which in turn link back to revenue generation. We put a lot of strong discipline and process into it. Our 360 degree approach involves working with marketing agencies, telemarketing to create demand and partners then convert leads into closed business. Each group knows what everyone else is doing because we are all working towards the same goal. Most partners even know what our strategic direction and focuses are so when we collaborate on a joint investment it can be a win-win for both sides. We also set clear standard operating procedures for how we onboard and certify our partners. This is an ongoing exercise though, because there is a lot of attrition that happens in Asia. We need to make sure that all channel partners undergo the same level of training so that all partners are as skilled at representing the Brocade brand as the Brocade team members themselves.

When you think about communicating with your customers or your prospective customers how do you see the channels evolving over time?

We have a program called the Alliance Partner Network which is a portal we developed for all of our channel partners. Through this online portal, a mobile application and quarterly newsletters we ensure customers are always aware of the latest developments happening at Brocade. We have also built portals that are more specific for the local needs of the partners in Asia. For example, if we release new products in the local market, the partner can login and take part in an online training to understand how to best position the product in the marketplace. The partner doesn’t need to invest in his own go-to-market resources; we provide everything in a fully-customizable format through our portal. The portal is a communicative platform that allows us to both provide partners with the tools they need to sell our products, and capture valuable feedback from our customers about the realities of on-the-ground market conditions.

Managing Channel Partners to Fuel Growth in Uncertain Times

Cisco Systems is reinventing itself.  The company is currently making headlines for slashing costs, announcing plans to lay off 6,500 employees, and selling off non-core product lines such as Flip video recorders and television set-top boxes.  Behind the scenes, however, Cisco is making strategic moves designed to accelerate the company’s growth and profitability.  A revamping of the channel strategy stands out as a key priority, with the company opting to “go deep” with a select number of preferred channel partners and reduce confusion by doubling down on five key product categories (versus 30 previously).

Incentives (especially non-monetary incentives) for channel partners are certainly something that Cisco will be evaluating. Non-monetary incentives in particular are playing an important role for vendors, as they are seen as a strategy for protecting margins and preventing damaging price competition.  However, many vendors also believe that non-monetary incentives yield greater returns in enhancing performance since they represent specific investments in distributors’ capabilities.  Cash payouts, on the other hand, may or may not be properly re-invested by the distributor in their business.

However, FSG’s research has discovered that not all non-monetary incentives are created equal.  We have identified two distinct types of non-monetary incentives: 1) Integrating, and 2) Value Transfer. High growth companies are much more likely to turn to Integrating Incentives.  These are non-monetary incentives that provide the vendor with increased visibility into and control over the operations of their distributors.  These Integrating Incentives can act as a sort of Trojan Horse for vendors seeking to gain increased control over distributors in a way that does not cause their partners to put up defensive barriers.

In my next post, we will take a closer look at the “tough love” approach that high growth companies are taking in managing their relationships with channel partners.

Optimizing Distributor Segmentation in Emerging Markets

Philip Morris International (PMI) recently reported its second-quarter results. PMI attributed declining performance in the EMEA region due to unfavorable terms with its local distributor. In my previous blog post I highlighted the top three takeaways from Frontier Strategy Group’s recent survey aimed at understanding the channel management secrets of high growth companies.  In this post, I’d like to take a deeper dive into how leading companies are segmenting their distributors and assigning territories.

Our analysis shows that many of the most successful companies are looking beyond geography when defining distributors’ territories. In fact, nearly 60% of high growth companies are using ‘Size of Customer’ or ‘Type of Customer’ as the key criteria for defining distributor territories.  Meanwhile, only 32% of low growth companies are using these advanced criteria.

Providing customers with access to a broad product portfolio through a single distributor is also correlated with higher growth.  More than 95% of high growth companies’ distributors carry multiple product lines. In contrast, about 20% of average growth companies limit their distributors to a single product line.

We found these characteristics to be true across emerging market regions and industries, with one notable exception – the healthcare industry. Geography remains the dominant criteria across high, average, and low growth healthcare companies.  This is not surprising given that purchases of healthcare products in emerging markets are most often driven by government bodies overseeing procurement for a particular territory.

In my next post, we will explore the incentives, and specifically non-monetary incentives that are most likely to be used by high growth companies.