Let's continue our discussion on how to get distributors to do more for less. This is a common problem that many firms ask for my help with. And the first thing that you must always do is set the distributors reference point. And what do I mean by that? It means that your first step is always to convince them that their benchmark is not today, but what will happen if they don't adopt the new flooring? Remember, the distributors like most firms are very present minded. The focus is on what are you going to do for me today? Will it be a price cut, a volume discount, etc? You want to change the focus from today to what will happen over time, especially in the near future. The next thing you want to do, and this is the clincher, is to show them a channel flow analysis that reveals your firm's costly investments in R&D and product development as well as what your firm is willing to do to help bring the product to market. Estimate the distributors costs and what it'll need to bring to the table. And finally, develop the market share estimates to show how distributors would fair in this brave new world. In other words, what happens to their share of the new pie. In this particular case, the distributor was amazed that any supplier would try to help them this way. They had never seen any financial analysis like this much less one that focused on their business. Often, the distributor will offer to improve your data in flow cost analysis. And yes, this is highly unusual, but it is in their best interest to share the information to sharpen the cost estimates. Sounds good? Okay, The next big question then is how does one do this costly flow analysis that is so convincing. Well, before we start to look at how the sausage is made, let me just stress one point that I don't want you to miss. And that is, that a channel functional analysis is one of the most difficult things to do in channel management, yet it's precisely why the firm faces channel problems. Unless you're a channel strategist, it will never cross your mind to think about how to organize and compensate relevant channel members in your route to market. And this is precisely why most firms have a lot of channel problems. Firms like to blame it on their sales division or the products, but a lot of times it's the channel design that's the problem. So I'd like to illustrate a channel function analysis with a real life example. Now this example occurs in the construction industry, which if you don't know already is worth more than $1 trillion annually. Now one big trend in construction is the creation of what are known as prefabricated wall boards. Most walls consist of layers of materials. The plaster board is what we see from the inside of our buildings, but they also contain layers of fiberglass, light steel, and other components. Now historically, each layer was applied at the construction site by workers who spent their days assembling each layer one at a time. This is a costly and time consuming process, particularly when you consider how many walls are in any building. So anything you can do to speed up the assembly of the building on the building site is a good thing. So there are companies called board producers, who pre-assemble these wall boards in the facilities and then ship the finished product to the site where they are then popped into place. A while back, I was approached by a company that creates new technologies for the wall boards. They don't manufacture the boards, but they are the scientists that improve the building materials. They came up with a wall board that provides superior strength against wind force. It was simpler to install and it saved builders a lot of money and time. There was no question that this product would be transformative in the construction industry. So here's where we come in. They came to me and they asked, how do I get this board producer to sell these products for me? As scientists, they had no interest in working with builders, taking sales orders, providing customer support. They wanted a downstream channel member to do this work, and the technology manufacturer would be satisfied with royalties off of sales. So the plan was to convince their customer, the board producer, to persuade the builder to use the boards in their construction. Now in between there is often a panelizer firm that finishes off the boards before they are sent to the builder. The strategy was to target the top 20 builders in the nation. The top 20 builders alone represent about 25% market share of all home builds in the country. So the target segment is relatively small, but very worthwhile. Now how does the channel strategist solve this go-to-market problem? Well, essentially the tech manufacturer needs to convince the board producer to take on costly but critical functions on behalf of the technology firm. And not only that, but they may have to take on functions or at least be responsible for functions they have never done before, like sales. Now, a channel strategist looks at the situation and says no problem. The firm does a channel benefit analysis like we have done in past sessions, and then it generated a list of six key functions that will need to be done. Now we'll unpack these further, but for now suffice it to say that the product has to be demonstrated to the homebuilder and a relationship needs to be built to facilitate the sale. These are compliance issues related to the technology implementation. And there may need to be some conversion efforts from legacy systems. And of course, there needs to be substantial advertising to market the product. So let's pause here and think about this. We know that each function has an associated cost in order to perform them. And essentially, the board producer is being asked to bear those costs. Well, what's their motivation to do so? And even if they agree to, how do you monitor and enforce all of this? All of these can be addressed with the function analysis. So let's unpack that further. So in this table, I've listed each of the six essential flows needed. And in the next column, I've listed examples of their costs that would come to bear for each of them. So in order to demonstrate the product, one needs a pilot home or facility where it can be explained. The panelizer will need to have some of its equipment converted, and there are compliance issues and legal filings that have to occur. A relationship with the builder must be built to facilitate the conversion and scale the purchases for all of their developments. And the product would need to be advertised to trade shows, which is an enormously costly form of communication. At this point, the question to be asked is whether these are the most critical functions needed for generating the channel benefit value demanded downstream. The next step is to break that down further. And this is what we see in the next column. So this column asks, how important is each flow for creating customer value. Since this is a subjective assessment, the firm indicates whether the flow is high, medium, or low in value creation. Now, some of these flows are more important at the start of the project, but then they become less important over time, which is why you see notation like H arrow M. Now, others are less important at first, and then they become more important over time. So this is the notation of M arrow H. And some are just always important all the time. Now the next column then assesses in light of a function's importance, what share of the new route to market budget can be afforded for attaining this function. So this is the next column. Now these are just approximations. They don't need to be very precise at this point. The goal is to get some directional insights into the share of costs that each function will account for. It's important that this column sums to 100 to reflect the fact that the budget is not unlimited. And as more spent on one function, less will need to be spent somewhere else. Now we take a step back and ask whether these shares and roles or functions makes sense at this point and are at least directionally correct. How did they do this? Well, the channel managers that I worked with first drafted this table. Then we called a meeting in which all the relevant stakeholders were present and we shared this table. So we had heads of sales, corporate people, finance people, etc. They were all there and they were shown these numbers. We sharpen these a bit, but ultimately we got everyone's buy in on these numbers and this table
