Structural and Cultural Changes To Compete Online, Part Three

In the previous parts of this series, we’ve reviewed competitive changes wrought by e-commerce outside of traditional distribution. These “New Age” distributors use technology to streamline the supply chain and capture commodity sales with reduced prices. Our advice to distributors who are new in their e-commerce journey, is to use technology to remove redundancies and re-examine their value proposition. For distributors who are further along in their e-commerce efforts however, we have found cultural issues that can stymie the e-commerce effort. We examine them in the last article in the series.

It can happen to the best of them

Within the past 12 months, we were asked to visit a top 40 distributors’ efforts in e-commerce. The company had a reputation of being a leading technology investment firm with excellence in e-commerce and a board that supported the online investments of management. Our meeting was attended by the leading executives of the firm. Our questioning found the company had a better than average online software platform and was using e-commerce to migrate existing business from the current account portfolio. Initially e-commerce sales had grown to over 10 percent of total volume, but recently begun to slide back to around 8% of sales; executives were concerned.

During our questioning, we found where there was significant infighting with the existing sales effort over accounts that were moved online as commissions were not paid on these sales. Additionally, we found where inside sales were refusing to service online accounts that had questions prior to checkout, and an online acquisition, after a few years, was performing poorly. 

The upshot of our visit and prior research and fieldwork has found that despite a solid investment in software and online specialists, cultural issues can derail the best of e-commerce efforts. Our findings include the observation that very good managers of the full-service, old style distribution firm, can run into significant problems in their digital transformation. And the problems are a direct result of their prior day-to-day decision-making that doesn’t work in the Digital age. We examine specific cultural issues in the next section.

The sales force problem

Executive management is charged with the digital future of the distribution firm. Unfortunately, the expectations of the digital customer often run counter to the prior experience of the distributor executive. The full-service platform of inside and outside sales and numerous branches is redundant and many online customers are simply unwilling to pay for these services. However, there are some customers who value the full-service platform and will pay for the full-service firm including e-commerce. Executive management, however, is tasked with making the decisions on which customers are self-serve and which are full-service. This decision process should be done with supporting analysis and careful decision-making prior to launching the e-commerce platform. This decision process includes removing sellers and branches that are deemed redundant as the account portfolio is migrated online. 

For the most part, however, distributor executives want the proverbial cake and to make a meal of it. In short, they invest in e-commerce, increasing the operating expenses, while holding intact the full service platform and any redundancies. This strategy only works when e-commerce sales are small as compared to traditional sales or if there a few “New Age” competitors. As e-commerce sales grow, there are almost always cultural conflicts and, if left unresolved, they can bring the online effort to a halt; even reversing sales progress.

In Exhibit I, we’ve categorized seven different types of cultural conflict common in distribution organization. Four of the conflicts have to do with sales and include:

• Not My Customer-Where inside sales does not service the online customer who has a question prior to check-out. The culprit is that inside sellers are afraid of losing their jobs as customers place orders online, and they refuse to help customers who are transitioning online.
• Sales Forever-A problem where sellers refuse to migrate select accounts online and still call on them. Often these accounts have expressed an interest to move online or have a desire to limit sales calls as they are disruptive and not seen as value added. Often these accounts have found other online sources and have expressed a desire to move online for a better price. Sellers, in a battle for the account, simply keep call frequency at previous levels, and the account eventually moves to another supplier where they can self-serve online.
• My Price is Nice-Sellers, in a bid to keep the commissioned sale, undercut the online price with a special “quote.” Unfortunately, this action confuses the customer who has been encouraged to move online, and it makes the organization’s management look unable to control their sales force. Too, this effort often makes a losing account, who has poor activity profits, perform worse as they yield less margin dollars to cover high activity costs.
• Wrench in the Gearbox-This involves both sales and operations employees and is a result of on- the-bubble employees or operations due to e-commerce. As the service platform is reworked and redundant branches and positions are closed, disaffected employees sabotage orders, delay change management efforts, and don’t follow through with quality procedures. These events cause the customer pain and rework for the employer; in essence the on-the-bubble employee is saying, “You can’t do it without us, just look at your quality issues without our support.”

Distribution Executives should realize that there has to be a plan in place regarding accounts which are self-serve and those served by the sales effort. New territories, new sales roles, new compensation schemes, are part of the change as well as a plan for sellers who are no longer needed or who cannot make the transition to a new role. Inside sales will also need to be reviewed as there are branch closings, new expectations for inside support for online customers and limits on what inside sales can do for high activity cost accounts. Too often distributor execs simply build out the e-commerce software without designating accounts as self-serve or full-service and making necessary sales changes. It’s almost a sure bet when this happens that customers will become confused due to cultural conflicts with many seeking online suppliers who don’t have these issues.

The executive problem

Many cultural conflicts to successful e-commerce are attributable to the executive suite. In essence, we often find where executives (Directors, Vice Presidents, and C-Level) don’t fully anticipate problems in e-commerce, including not fully supporting the discipline. These problems, no matter how nuanced, will eventually surface and cause problems. Subordinates can either sense their executive is not supporting the online effort fully, or they can’t get the support they need to make online progress. The conflicts due to executive inaction or poor follow through count for the final three conflicts from Exhibit I. They include:

• Running in place-We give this name to firms who build out the e-commerce platform and simply place it on top the firm like a cherry on a sundae. Many of these firms fail to sell more than 5 percent of total volume online, a level we call a “Digital Washout.” Or there are firms that suffer a “Digital Stall-out;” they get to the industry average in e-commerce sales and then backslide.   Today, some 60 percent of all distributors are in a “Digital Washout,” and another 20 percent are suffering a “Digital Stall-out.” In essence, executives at many firms make little to no attempt to change their culture to drive online sales. Account migration efforts, new e-commerce support positions, and ongoing investment in technology are seldom done or poorly attempted in these firms, and they simply don’t get very far in their online progress.
• Here today, gone manana-This conflict is recognized by tech workers, those who are specialized e-commerce hires, as they leave the firm; at first slowly and then in droves. The problem is that top management does not support the ongoing change effort to the analog (pre-digital) culture including ongoing investment in technology and support personnel. Too often we find where management initially funds the online effort, but makes only superficial changes to the existing culture. As e-commerce workers are overwhelmed by the limited co-operation or outright lack of support from the dominant culture, they receive mixed signals from executive management about their performance. Eventually, they realize that the firm will not change and they leave.
• Kill the golden egg goose-This culture conflict, albeit less common, has been observed in our fieldwork. It is where the dominant culture literally “Kills Off” successful e-commerce by reverting to analog (pre-digital) management practices. In one instance, a traditional distribution firm, whose internal e-commerce efforts had stalled-out and begun to decline, decided to buy a “New Age” entity that was successful in e-commerce and growing. The “New Age” entity served a niche market with specific applications and technical products. They used product-application configurators to aid the online customer; an average sale was four to five figures and highly profitable and the completion of the sale, in a short time frame, was critical as there were significant downtime costs. There were a handful of inside experts for chat or consultation if the customer had a question. These experts were expensive and there were times when they were not busy and other times when they were very busy. 

When the Oil and Gas sector declined, the Parent firm let go many of their traditional inside sales people, and the VP of sales felt justified in using the acquisitions’ specialists to cover any busy periods.  He couldn’t understand why there was excess capacity as they (the specialists) were not busy “all the time” as traditional inside sellers were. Our review found that the excess capacity of the “New Age” entity was justified due to the critical nature of the sale. If the customer could not get an answer on a critical application pronto, they quit the sales process and found another supplier. The acquiring Parent’s executives failed to pinpoint the problem, and as sales declined, they relieved the “New Age” entities’ top management which resulted in a steeper sales decline.

The need for cultural planning for digital transformation

Today, we find few traditional distribution firms that successfully anticipate culture conflict and estimate the complexity, planning and execution required for long-term digital success. Unless this changes, there will be many instances of Digital Washouts or Stall-outs. Our research finds where online sales in distribution are a Pareto, where 20 percent of distributors comprise 80 percent of the online volume.  Furthermore, half of the Pareto show sustained online organic growth and appear to be increasing their lead. Recent research of 130 distribution firms finds that these top 10 percent firms’ executives expect further changes to their organizations in number and role of sellers and number of branches. Many have learned hard lessons of cultural conflict and had to retrench and resolve these issues. We encourage distributor executives to carefully consider the existing research and our field experience. Building out the software platform for e-commerce is only the beginning to e-commerce success. Ongoing cultural and structural changes are necessary for the distribution firm for consistent, online organic growth.