Guest Feature: Distributor Management Considerations for the International Markets

Aside from the major manufacturers, most suppliers in the HVAC equipment, building automation, building controls and specialized software products industry go to market through distribution partners. This includes selling through wholesalers, national distributors, independent controls contractors and mechanical / heating / A/C contractors. Even the large guys will use distribution channels in conjunction with their direct sales teams; Trane, Carrier & York have distribution partners in addition to their own sales forces. JCI and Honeywell have long used independent controls contractors as partners to complement their Branches, particularly in covering targeted vertical markets or to fill geographic holes. It is even more prevalent for manufacturers of all sizes to use distribution partners of one sort or another (or a combination thereof) when selling in the international markets. This is often an entry strategy as larger manufacturers get a better understanding of the foreign market and, ultimately, get their own sales team in place. However, for most OEMs, controls & automation suppliers and software solutions providers, distribution partners are, and will always be, their sales & support channels for international business. Some supplier / distributor arrangements may involve a foreign joint venture, in which both partners have a shared financial interest and, hopefully, eyes on the same prize.

In a typical North American case, the distribution partner will carry one major brand, say Alerton or Automated Logic building automation products, plus complementary lines of sensors, actuators, valves, CMMS, lighting controls, etc. Mechanical or HVAC contractors will carry a major or mid-tier equipment brand, and fill out their lines in a similar way. Quite often it’s an exclusive brand / distributor arrangement, though some will still carry a competitive brand as well, usually as a legacy product to support an installed base. From a North American management perspective, manufacturers attempt to ‘manage’ their 3rd party channels. In most cases, ‘managing’ doesn’t mean ‘controlling’, but rather ‘influencing’ as effectively as possible. In the international markets, successfully managing / influencing our distribution partners requires significantly more sensitivity, cultural awareness, a sense of what is expected (though perhaps not said), and a refined level of what is commonly referred to as ‘reverent authority’. This refers to influencing, inspiring, guiding an individual or group to a desired outcome, even though you may not have ‘legitimate’ authority over them.

Here’s a synopsis of the distributor environment in the HVAC and building automation / controls space in North America (e.g., US & Canada):

  1. These channels are independent businesses, some very large (e.g., WW Grainger), and some very small;
  2. These channel players most often, and rightly should, carry or have access to a diverse line of products in addition to a major brand. This makes them of greater value to the customer base they serve, and helps to insulate them from the market’s cycles.
  3. Though these 3rd-party distributors may carry a large line of products, they typically do not go out and make the market - they respond to it. This is meant to take nothing away from them, since their job is to respond to demand, not create it. Smart & aggressive distribution partners will enhance the brand(s) they carry, which boosts demand, though creating demand (and a differentiated way of satisfying it) is the responsibility of the manufacturer.
  4. Given Points 1-3, and with particular emphasis on #1, the critical similarity between all distribution partners is to make money. Not being ‘market-makers’, the savvy distributor will balance business sustainability with the path of least resistance, which is especially important when considering long sales cycles in the HVAC and BAS markets.

This leads to the fundamental challenge for any manufacturer, anywhere in the world – how do I increase my ‘share of mind’ within my distribution relationships? How many of my distribution partners wake up every day and think “I really want to sell an integrated building automation system today!” Or, “how about a few more chillers before noon!” Smaller, higher volume (and typically lower margin) products are sold & shipped regularly as the channels respond to market demands. Where do mid-sized & larger equipment and more complex controls systems reside in your distribution partner’s mind at any given time (e.g., what is your mind-share)?

For one BAS manufacturer, I developed and managed a North American program called ‘Supplier of First Choice’, an initiative designed to fight for this critical mind-share. Almost 1/3 of our Canadian distribution partners at the time carried a competitive product line, as did over ½ of our US channels. In the majority of cases, our partners still had the competitive line mainly to support their legacy base, though this didn’t guarantee us anything in terms of preference. ‘Supplier of First Choice’ combined general market promotion, co-op promotion, increased technical training & support, sales training, distributor feedback sessions, a private LinkedIn discussion group, and targeted vertical market programs, all designed to convey to our distribution partners that we want to earn your preference, a greater share of your mind.

Now, what about your mind-share with distribution channels & partners who are 1,000, 3,000 or 6,000 miles away? More complicated? Absolutely. Manageable, or influence-able? Absolutely.

First, let’s look at the landscape:

The North American markets (again, mainly US & Canada) have spoiled most HVAC and BAS / Controls manufacturers. The markets are large, technologically mature, very open and competitive, and with ample opportunities to find loads of market data and / or initiate your own V-O-C (Voice-of-the-Customer) studies to characterize demand. These markets are also quite stable; politically & economically (the 2008-10 period notwithstanding), and innovation tends to evolve technologies and business practices, rather than ‘rock’ them. A common language, shared business values, rule of law, etc., all help, as do the familiarity & trust earned by a host of quality brands across the HVAC, building automation, building controls and building management software markets.

The international markets are different. Certainly there are medium-to-large, mature and technologically-advanced markets overseas, including Germany, France, UK, Italy, Australia & Japan. Several other markets are developed, yet we just wish they could be bigger, like Korea, Hong Kong, Singapore, Belgium, The Netherlands, and South Africa, perhaps even the Czech Republic and Spain. These developed markets generally know our products, or at least what our products do. However, these markets will also have local & regional competitors to our products, some known to us, some perhaps not, though for which there will usually be a local familiarity, and even a preference. Our North American major brands will often be the major brand carried by distribution channels in overseas markets. What about the rest of the lines these channels carry? Most often local / regional lines that are competitive to, and perhaps even displayed right alongside your products, are fighting for the same mind-share. Distribution channel partners in many of these markets may also carry a portfolio of lines that don’t seem to make sense to us – plumbing products, electronics, industrial instrumentation, even industrial refrigeration or more, which means more pressure on mind-share.

And the ‘adolescent’ markets like Brazil, México, Argentina, Poland, Turkey, Malaysia, Indonesia, Thailand, parts of the Balkans, the Arabian Gulf markets, and certainly China & India? The latter have been developing quite quickly, though not without their difficulties. Others, particularly in Latin America and southwest Asia, are still striving for stable growth. Quite often in these countries, where demand grows slowly and unevenly, distribution partners may carry a host of lines, including several direct competitors at the same time, in order to grab their share of a finite (yet hopefully growing) market. Your chance of preferred mind-share? Or, what about distribution partners who demand an exclusive role in representing your product in a large geographic market. You may have mind-share, though on whose terms?

In virtually all of these international markets there is a common set of complicating factors, and challenges to gaining mind-share. Let’s put this into perspective:

  • Language – an issue with the market you are trying to serve, perhaps also with your distribution partner(s). This challenge may start out affecting the quality of your communication, but then lead to a problem with the regularity of communication. The answer is … Find A Way! Partners in international markets are our eyes & ears, not just our delivery channels. The regularity of communication also reflects the strength of the business relationship.
  • Application of your product / technology, perhaps different from North America - translating the GUI doesn’t make your product ready for an international market, nor should you assume the product is used in the same way as in North America.
  • Culture – differences in local preferences vs. foreign, differences in contracting practices, differences in business practices.
  • Brand recognition, or lack thereof, in foreign markets for your products. Distributors overseas are the same as in North America – they respond to the market, they don’t create it.
  • Distance - when you don’t hear from your international distribution partners, many manufacturers assume nothing’s wrong. When I don’t hear, I start to worry. Technical support, customer service, warranties, training, promotional assistance, sales support, among others, are all expectations of the manufacturer by the channel partner. When not forthcoming, mind-share slips. Plus, out-of-sight means out-of-mind (-share). Visit, show the company flag, and call via Skype. Don’t think contractual agreement, think relationship.
  • Local / regional requirements, certifications, warranties, etc., for product performance in international markets. Europe, Japan, China and even some Latin American markets have local requirements, many of which are straightforward (Europe), others opaque (China), and others rather onerous (Japan).

What do we do to improve the performance of our distribution channels / partners in the international markets?

As you know, this involves more than just a copy / paste from your North American practices. Hopefully you’ve chosen a given international market for the right reasons, and selected your distribution partner(s) with the same strategic intent. Given that there is a long list of differences, here are some important management actions that are critical:

  1. You & your international distribution partner must concur on strategic business objectives – what is going to be accomplished, in what general manner, and with what metrics, each year. At the end of the day, every aspect of business in the international markets depends on, and revolves around, a relationship. These relationships are built on trust, and trust cannot exist if there isn’t a shared vision. There is nothing more fundamental in establishing and effectively managing distribution channels in the international markets than this. If you don’t invest the time and effort to build these relationships, attempts to increase your mind-share with these partners will be an expensive waste of time and effort. This is doubly important if you establish a joint venture agreement with an international distribution partner. In such cases, nothing short of a formal business plan will be required.
  2. Acknowledge that your distribution partner knows his / her country market better than you, yet there is a mutual responsibility to meet the shared vision. The goal is a level of confidence between us and our international partners that they can represent us effectively. Since different countries, languages, international business customs & cultures are understandably foreign to us, we can tend to go into micromanagement mode when dealing with distribution partners overseas. Worse yet is a hands-off approach, just hoping everything will turn out alright. An effective management approach is one of empowerment, which I’ve heard best described as combining ‘the freedom to act with the pressure to perform’. Some important qualifiers:

    1. Somewhere in this fundamentally important relationship is an agreement, or at least a formal acknowledgement, of shared business values. This has to guide the ‘freedom to act’ aspect, which should not be interpreted by our partners as carte blanche. The distributor’s professional conduct in contractual, legal, financial and social practices reflect on both the distributor and on us, the supplier;

How do we exert ‘pressure to perform’ on an independent 3rd-party entity, much less one 2,000 miles way? We could use a contractual arrangement that pressures our distribution partners, in any number of ways, to perform – or else. Quite often, however, this results in the partner reaching the goal, and very little else. Are they inspired to do more, to truly excel for you? Or just make the numbers, and perhaps at any cost. So, how do we command the respect of our channel partners, rather than demand it?

I would look to institute some version of the ‘Supplier of First Choice’ program, whether they carry competitive lines or not. ‘This is your market, you understand it, and I need to access it through you as my distribution channel. Let’s make sure we understand how I can help you, and how you can help me. Let’s agree on what it will take for you, as my channel, to be successful (obviously within reason, as you determine the size of the potential market and your market share objectives & time frames).” Your commitment to the channel partner enables a classic negotiating tactic – I will give you what you need, and you give me what I want. Namely, greater mind-share, and a stronger effort to sell my product.

In reality, this is treating your international distribution partner as not just your customer, but an empowered customer. Technically, distributors are our customers, since they buy our products. Usually we are focused on the end-user as the customer, which is correct, as they define the required form / function / features, and ultimately the allowable price for the delivered value. However, our distribution partner, especially in overseas markets we don’t understand well, is our portal, and our direct customer. And, as we should with every customer, we should start by having the international distribution partner describe his / her desired outcome in your relationship:

  • A stronger competitive position in his / her home market, through a more targeted or extensive product line? One with an international / global brand name?
  • The capability to serve local / regional OEMs with a higher quality product (yours) versus lower quality native brands?
  • The opportunity to penetrate new niche or vertical market segments in their country, which your product(s) will allow them to do more competitively?
  • A range of higher volume products, perhaps, because their systems or contractor-driven business involves longer sales cycles?
  • And so on...

We can help them with that, and it starts with a shared commitment. What do we all want to achieve with our customers, besides more business? Leverage, albeit the velvet handcuffs type. I will give you what you need, and you give me what I want.

The S4 Group, Inc. wishes to thank Pat Cronin for providing his valuable insights on the International Marketplace. If you would like more information you can email Pat or reach him by phone at Anam Consulting LLC 262-391-5406.