For the vast majority of MNCs, working with third-party distributors, dealers, and other types of channel partners is a fact of life in emerging markets. These local partners bring to bear their knowledge of the local market, relationships with customers, and a range of other capabilities that MNCs hope will offer a “plug and play” solution for rapidly scaling operations. These benefits do not come without costs, however. Many of the executives that Frontier Strategy Group works with report their fair share of headaches when it comes to managing the third parties that stand between them and their end customers; whether it is an over-zealous entrepreneur that is not willing to adhere to corporate strategies and policies, or an under-performing partner that can’t or won’t make the right investments to hit aggressive targets.
To shed some light on this challenging topic, Frontier Strategy Group recently conducted a comprehensive survey of our client executives. We asked a range of questions designed to uncover how MNCs are evaluating, managing and incentivizing their channel partners. The analysis we performed is designed to help senior executives benchmark their approach to channel management against that of their industry and regional peers.
We also uncovered some thought-provoking differences between the management approach taken by high-growth companies versus average and low-growth companies that we hope will challenge the status quo:
1) Do not default to geography as the criteria used to define distributors’ territories
- Although the status quo is to segment distributors by geography (57% of all companies), high-growth companies are roughly twice as likely as low-growth companies to assign territories based on type or size of customers
2) Use non-monetary incentives to gain increased visibility into, and control over, distributors
- 87% of companies use non-monetary incentives to reward distributor performance, but there is a stark contrast between the types of incentives used by high-growth companies (“Integrating” Incentives) and those used by average and low-growth companies (“Value Transfer” Incentives)
- Integrating Incentives, such as providing business consulting or CRM platforms to distributors, add value for both parties and provide vendors with the ability to streamline distributor operations
- Value Transfers, such as allowing the use of the vendor’s corporate logo, represent a one-time and one-way transfer of value from vendor to distributor, with little or no long-term ROI for the vendor
3) Invest in the best, walk away from the rest
- High-growth companies are highly reliant on their distributors in emerging markets, sending on average more than 50% of both volumes and revenues through their distributors
- These high-growth companies are investing significantly more resources in managing distributors – an average of 53 full-time equivalents (FTEs) per region, versus only 11 FTEs at low-growth companies
- However, high-growth companies replace a significantly higher percentage of their distributors (on average, 17% in the past two years versus 7% at average growth companies) and report shorter average partnership lifecycles
Over the next few weeks we will explore each of these recommendations in more depth here on the blog.
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[...] of approximately $50 million. Were all of these wrongdoings Diageo’s fault? Given that over 90% of Western multinationals operating in emerging markets work with local distribution partners to some degree, it’s difficult for executives sitting in headquarters to be aware of [...]