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What It Takes To Grow: Thoughts for Electrical Distributors

Dec. 26, 2013
Too many distributors misunderstand what it takes to grow their businesses.

“Growth is hard to come by these days.”

That comment came in from a reader of our blog the other day. It really pains us to hear it, because many distributors share the thought. It is also symptomatic of why about 5% of distributors or fewer continue to grow consistently, while the other 95% do not. Part of the problem is right in the statement. If you look for growth, you won’t find it. You have to look for opportunities to add value. Looking for growth is like a vulture looking for something that’s crippled and almost dead. There’s lots of competition among vultures in any walk of life.

Adding value requires looking for opportunities to do something different for a customer that lowers their costs of doing business and improves their productivity. It’s as simple as the difference between someone looking for an opportunity to give, versus someone looking for an opportunity to “take.” That may sound harsh,  but each will find what they are looking for. Only the former will find lasting growth and higher profitability, because they are the originator of value versus a copycat or pretender that’s late to the table.

Realizing that many distributors are losing hope in this weak “recovery,” we dug in to get some fresh answers. We talked to a couple of distributors who have outstanding records of consistent growth, even in recessions. Their answers were stunningly similar, nearly identical. It’s not like we didn’t know their methods and philosophies already, mind you. We did discover some unique ways of implementing their philosophies, though. We also love hearing from these guys.

Bob Zamarripa of OneSource Distributors, Oceanside, Calif., said that less than 5% of distributors would really “get” what it takes to grow even if we told them. So, if you consider yourself to be in the 5% or have what it takes to change your mindset about what it takes, then read on.

We asked Bob why distributors in the other 95% do not grow. “They sell primarily on price and relationships and not value,” said Bob. Ah, but what is value? Bob would tell you it means something slightly different to every customer’s supply chain, and that is a big clue. You can feel the passion and curiosity he has for learning about another person’s business, what they do for whom and how they do it. He loves designing a better mousetrap to solve a problem or realize an opportunity for a customer.

If you followed Bob, you witnessed one of the most outstanding track records of growth ever in this business, because he knows how to talk to executives about their business and takes personal responsibility for doing it. How many CEOs do that? And we’re not talking about just showing up and asking how you can do better. Bob knows business and he talks about it with specific knowledge of how supply chains should work and can work to solve a problem. But first, he finds a problem to attack. We’ll talk more about that.

Growth is Good.

That’s right, growth, not greed, is good. We mention the word greed because we noticed a trait about our interviewees. They are generous, not greedy. They recognize healthy profitability is a sign that you provided value, and they make far more EBITDA margin than the rest of the industry. They will not tell you this next thing explicitly; you have to observe it in them. But heed the message in it, for it is the most important thing you can learn from this article.

When they talk to customers, usually high level executives and owners, these distributor executives totally forget about their own objectives and talk to the customer about the customer’s business. They ask about their total business and not just the part that is affected by the distributor’s service and product. They trust that they will discover where they can add more value by focusing on what the customer does inside their walls and with their customers. You have to get lost in the customer’s business to find growth opportunities. Now, back to why growth is good.

Why is Growth Good?

If you have none, says Bob, it’s just a matter of time before you’re dead. In a slow growth, shrinking and mature business, sound growth strategy says that “adjacencies” are critical. Adjacencies are opportunities to get out of your box and tap into other customer revenue streams different from the customer types you serve and how you serve them today. Fail to do this and your business shrinks as the market languishes and other channels move in like vultures on what is left.

On the other hand, growth creates a healthy, vibrant, fun company. Attitude and morale soar. Because the company is growing and morale is high, employee retention is high. People focus on achieving things for customers instead of competing for positions and glory inside the company. People get more involved and are proud of achieving something outside of themselves. As they get more involved, the company develops more valuable services for customers, and the company’s capabilities evolve. People develop their talent and have more opportunity to advance in the company.

If you invested in automating back room and warehouse operations, your rate of profit grows as you add more gross margin to the existing resource base.

What Does It Take To Grow?

Top management must be committed to growth and become personally involved in finding opportunities and driving the company to realize them.

Finding opportunities comes from asking customers or prospects the right questions about how to save them money and increase their productivity with product and supply chain solutions. The latter has become much more important for distributors to demonstrate value as opposed to the manufacturer.

The growth comes when top management develops the right culture. They look for people who are smart, competitive, team oriented, want to succeed and have a “service nature” about them. They are very intolerant of people who are not team players and do not put their associates and the customer first. They take immediate steps to correct these people and if it doesn’t work, they lose their problems quickly.

The growth-oriented company has at least one person that can investigate customer or prospect needs and mobilize the company to respond with operational changes. This person knows how to get people from different departments together, facilitate solutions, and write business plans to execute. If it’s not a C level executive, they have a strong business development person who does this. We know a Midwestern CEO who was hired by the owner to lead the company. The company had been mired in traditional industrial and construction segments selling electrical and automation product lines. They became worried about growth. This CEO targeted business segments that had not been pursued before. Then he went out and hired people who knew the businesses he was targeting and created business segment leaders to pursue them, as opposed to relying on a geographically organized company only. This makes awesome sense, because a business segment leader, if worth their salt, will dig into the issues of a specific segment and get the company to devise solutions that add value by lowering costs and improving productivity for the customer. If it is a big enough segment, it makes awesome sense to do this.

Growth-oriented top management rewards people like owners. They have a profit sharing program that rewards for growth and profitability. Some of the things Bill Elliott, CEO of Elliott Electric of Nacogdoches, Texas, does to promote a culture of growth in his company are startling contrasts to normal practice. Most people are very covetous of their American Express Card Rewards Points. Not Bill. He tries to pay as many bills as possible with the card, then extends the points to employees for doing things that grow the company’s business. Brilliant and simple, yet we have not seen this before. Everybody does the opposite and keeps the points for themselves. Bill knows if he invests $100,000 worth of points he’s going to get many more dollars than that on the bottom line, which he will profit from as well. First you make the investment, then you get the return. The beauty of this is that American Express funds it. Smart, really smart.

Top management targets growth in more than one segment of their business simultaneously. They go after adjacent market segments, open new branches, acquire into new geographies, get into different phases of the value chain like manufacturing or installation, target competitors customers and take on new product lines outside of the electrical basket. The total adds up to a lot of growth. The point is they learn to write plans and juggle more than one initiative at a time.

Top management demands growth plans for each business segment, sales region and sales unit, like a branch territory. This spells it out for each regional unit and answers the question: Which market segments and customers will be pursued with what products and services?

Top management realizes that IT has become the critical enabler of value-added supply chain services. They get a top notch IT manager and staff with the right attitude. This attitude takes responsibility for finding solutions for customers and helping the organization to add value with productivity enhancements.

They will pay more than local market rate to get the right talent.  This seems like heresy to most. So many businessmen are proud of their ability to get employees on the cheap. And they brag about it. These same distributor executives are the same ones that can’t climb out of their box into other revenue streams besides electrical because they hire people that stay within the confines of doing only what they did yesterday. Then they fail to motivate them by sharing the fruits of growth. Duh. We’re talking about people who do the opposite. They pay high performers high and get far more back than what they pay extra. They don’t worry about blowing pay scales because they structure the pay to reward for growth. Growth funds it.

Top management believes in their people. So they build in much richer reward structures for people to grow the business profitably.

Why Don’t Other Distributors Grow?

They sell on price and relationships only.  A value-oriented distributor executive like Bob Zamarripa responds with glee when most of his competitors behave this way. Because he knows it spells opportunity for him.

Nothing about their services stands out. Without the ability to demonstrate differentiating value, they can only compete on price and relationships.

Wrong focus. Their philosophy of growth is sales-driven only, versus discovering new value to offer customers by talking to them about their business processes, economics and challenges.

Poor planning. They don’t write effective growth plans or implementation plans that get into details of how they are going to make a difference for the customer and how they are going to implement the plan operationally as well as spelling out sales and marketing approaches.

Hiring the wrong talent. They fail to reach out into the market for the talent that has the right capabilities to help the company grow. We cannot emphasize this more. If you want to change your culture or knowledge, get somebody with a different attitude and knowledge base.

They tolerate people with bad attitudes. Barry Boyer, former CEO of Van Meter Industrial, Cedar Rapids, Iowa, and the main catalyst of their culture changes, says, “You can’t afford the luxury of a negative thought,”  and “Bad chases out good.” Barry didn’t tolerate bad attitudes. You had one chance to clean up your act if you were caught with a backsliding attitude towards your coworkers or customers.

Their IT departments are technically oriented versus business solution-oriented, and they may not be very good at the technology, either. If you can’t respond nimbly to changes customers need to create value-added supply chain solutions you can’t grow effectively in today’s technology driven marketplace.

They don’t believe in people, so they won’t invest in them. They may be afraid of their own people. If they ask them to embrace different philosophies or methods, they will mutiny and leave. They allow their salespeople to “own” the customer, as opposed to the company owning them. This leads us to the next observation.

They don’t reward their people for growing the business or the reward systems are ineffective. We’ve seen some pretty complex reward systems that are ineffective because nobody can calculate what they are going to get. We’ve seen attitudes like, “They should be lucky to have a job in this economy.” Neither of these extremes works. The opposite does. Pay people for what you want them to do. Treat them like owners by sharing the profits from growth. Get the right ones on the team, believe in them and feed them. Share.

Wrong questions. When they ask questions of customers, they ask (at best) “How can we do better?” Wrong question. This is not about you. It’s about the customer. You need to get more specific and ask the customer what their productivity and profit drivers are and what issues they currently have. Keep probing until you get something you can help with. Then respond with solutions. That assumes you know how to design new business processes and get IT and operations to come along. That takes teamwork, attitude and skill. Combine it with strategic knowledge about growth and you have a growth juggernaut.

Here’s what it takes to grow.

1.            A change of heart that focuses on what customers do, how they do it and what you can do to help boost their productivity.

2.            A change of culture to value growth as the top priority, so employees will investigate a range of growth opportunities outside your box and learn how to provide leading value.

3.            A real knowledge of growth strategies — all of them: customer retention, penetration, taking share, creating demand, targeting fast growth segments and business adjacencies with new products, services, value chain positions, business models, geographies and channels.

4.            A willingness to treat employees like owners by sharing the profits from growth.

5.            True teamwork that will apply process and IT skills to devising new solutions to customer supply chain challenges. This is the ability to design new plays responding to a different set of “league rules” and competition. If you can’t respond with new plays, or variations of plays, you are predictable and like everyone else. You know what happens next. Price and relationship selling. That won’t get you to 6% plus EBIDTA and 10% growth per year.

So what do you really know about growth?

Ask any person who claims to be religious what they really know about their faith. Most know very little. They all want to go to heaven, but they don’t study very hard to get there, do they? Now why is that? Isn’t it the most important thing? I guess what everyone else is doing here on earth distracts us all. In the case of business, you get distracted by what you have been doing to operate the business, period. And maybe throw in a little NFL football to distract you from the pain of that lost big project. Those are not going to help you grow, however.

This brings us full circle — growth is hard to come by. That’s because most are looking for it in the same places they’ve always looked for it.

You need to look in new places for growth and learn how to provide new value. You need to plan effectively, learn what value strategy really is and develop speed in your organization in discovering opportunities to add value with existing customer segments and new ones.

Don’t wait until your organization is a cooked frog from years and years of drudgery doing the same things day after day for the same types of customers in the same geography with the same basic products and services against the same competitors with the same tactics. Ugh! Break OUT of that RUT! We recommend you start now. Growth may be hard to come by because you never really learned enough about it.

Reading for Growth

Here’s a short list of books you should read on the subject of growth.

1.            How to Grow When Markets Don’t – Adrian Slywotzky

2.            The Upside – The 7 strategies for turning big threats into growth breakthroughs - Adrian Slywotzky

3.            Good To Great – Jim Collins

4.            Profit From the Core – Chris Zook

5.            Beyond The Core – Chris Zook

6.            Double Digit Growth – Michael Treacy

7.            Unstoppable – Chris Zook

8.            Discover Your Core, Then Go For More – Neil Gillespie

You can’t find growth if you’re looking for where it already is. A far better strategy is to help someone else grow and prosper. If you want something, discover how to give it to somebody else. That’s where it begins. You will see that in these books. The rest is just good planning and execution.

We sincerely invite your questions, comments, emails and phone calls. We love growth. It’s the elixir of life, the savior of your business.

About the Author

Allen Ray 1

Allen Ray has years of experience as a distribution business owner and in information systems. He has also been a marketer of product data and is currently a consultant to distributors, advising clients on how to stop  profit leakage and grow their bottom line. You can contact him at [email protected].

About the Author

Neil Gillespie | President

Neil Gillespie is a veteran distribution consultant, speaker and author. He helped Roden Electrical Supply, Knoxville, Tenn., to grow more than 500% over 11 years while more than tripling EBITDA percentage. His book, Discover Your Core, Then Go For More is available on iBooks and You can contact him at [email protected].

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