by Neil Gillespie

As if it werent enough that integrated supply introduced a complex new form of competition, online marketplaces and supersites such as Grainger.com are positioning to open another piece of the local pie to competitors from outside your local territory. This makes it imperative to reassess your competitive market position and reposition yourself to prosper in an environment where utilizing market alliances for competitive advantage or survival may become the norm rather than the exception. How will this happen? Indulge me in a football analogy to illustrate.

In the early 1900s, American football was a much different game. It was mostly running plays, with a passing game that consisted of occasional short shovel passes that players stopped and caught in their gut like a medicine ball. This contrasts sharply with the way receivers catch passes today, stretching out their hands and pulling in long, bullet-like passes on the run. In 1913, the quick-strike, downfield passing game was legal, but nobody thought it possible to develop the skills to implement it.

Never count out the Irish, though. In a 1913 contest against perennial powerhouse Army, Notre Dame offensive end Knute Rockne ran downfield without the ball during an early second-half play. The Army players wondered where the hell he was going, and offered little pursuit of Rockne, thinking he was running away from the action. Simultaneously, Notre Dame quarterback Gus Dorais retreated into the backfield, another odd maneuver for that time. Then he cocked his arm and fired downfield to Rockne, who stretched out his hands going full speed, caught the pass and ran for an easy touchdown

Its no longer just about local competition
Thats a nice football story, but what does this say for the MRO distributor? Todays technology makes it possible for competitors to fire unexpected long passes into your local market from unexpected sources. Its important to consider local competition, but the biggest potential factors to consider for the future are no longer local competitors by market segment. Though these players currently have the ball, the biggest potential impact on your future success could come from someone without the ball: online marketplaces and distributor consolidators.

The obvious player could be a consolidator with its eyes on one of your local competitors. Less obvious but relatively well-known threats are the e-business initiatives of players such as Grainger, or Home Depot with Maintenance Warehouse. There are other unexpected plays that are part competitive threat, part opportunity, and difficult to predict unless you educate yourself on the way they do business.

To complicate matters further, vertical marketplaces such as VerticalNet, MRO.com, PurchasingCenter.com and supplyFORCE.com are inserting themselves between the distributor and the customer. They perform some functions the distributor used to perform and extract a fee from the distributor to do so (rightly so if they provide better value to the end customer for the front-end functions they perform).

In spite of these recent developments, the fundamentals of competitive assessment still apply. We need to establish these before launching into the more complex subject of competition in the e-business world

Competitive assessment
Here are seven steps to a competitive assessment:

1) Describe the end market
2) Describe key end customer needs
3) Describe the channel structure and competitor types
4) Assess the marketshare position of each competitor
5) Assess product and service strengths of key competitors
6) Describe key trends that could reshape the marketplace
7) Describe the most likely future states of the marketplace

This article focuses on steps 3 to 5, and offers brief explanations of the other steps.

The end market
Strategic thinking isnt dependent on knowing all the answers. It is dependent on knowing how to get the important answers. That means you need to know the right questions. To describe the end
market, ask three major questions: How do you segment the market? How large is each segment? At what rates have segments grown and at what rate will they continue to grow?

These segments also will be used in Step 4, where you assess the market position of each competitor by market segment.

End customer needs
Customers choose among competitors based on how well they satisfy customer needs. The first task is to recognize what those needs are. The second step is recognizing how they are changing. The third is realizing how technology and developing distribution best practices can change how customer needs are satisfied.

Different market segments have different needs, and it helps to describe those needs in terms of what customers expect. Later, you can assess how competent each competitor is at satisfying the key needs of each customer.

Heres a sample list:

  Size of average customer (annual business potential)
  Need for and viability of assigning an outside sales rep
  Business process: MRO vs. project orientation
  Need for delivery speed (same day, next day, weekly, etc.)
  Percent specials vs. stock (important distinction for 
       OEM vs. MRO)
  Need for consolidating suppliers
  Need for technical support and system design assistance
  Need for inventory management services
  Need for 24-hour emergency service
  Need for electronic order management
  Need for convenient will-call
  Relative price level

For an industrial MRO distributor, market segmentation might be as simple as Contractors, Small Industrial MRO, Large Industrial MRO, Non-Industrial MRO and Integrated Supply Customers, because this grouping would show the most similarity of needs listed above.

Channels to market
This should be split into three parts. The first part establishes the structure of the channels to market, including new intermediaries such as MRO.com. The second identifies your role in the channel. The third describes the types of competitors for the end market you serve.

To illustrate how to assess the channel structure, one must incorporate the element of change. Changes in your channel structure are in progress already. The Internet has grown from a million business users in 1993 to over 70 million North American business users today, about 25 percent of the entire population.

The physical infrastructure is in place to carry electronic commerce traffic, and high-speed access is spreading rapidly. All that remains to set the stage for sweeping change is a change in end-user buying culture, development of industry data exchange standards and technology to enable convenient and easy buying over the Web on a large scale.

Heres the point of all that: the Internet enables easy national and regional presence, expanding the reach of a distributor or manufacturer so you can compete most anywhere. It also opens the door for new entrants to add value in the channel. Vertical marketplaces are an entirely new entity that must now be considered as part of the channel.

Back to the main point: It is most useful to segment distributors based on three dimensions:

1) Geographic scope: national, regional, local chain, local independent or far-flung operations.
2) Product scope: Industrial supplies only or multi-commodity (electrical, plumbing, PVF, HVAC, fluid power, paper goods, refrigeration, safety, etc.)
3) Market segment scope: some distributors may focus on the machine tool market, mill supply or OEMs, maybe even utility or government business.

In the industrial MRO channel, your competitor list might look like this:

1) MRO-type industrial distributors, national, regional, local chain, local single house, etc.
2) PHCP type distributors (plumbing, heating, cooling and piping).
3) Multi-commodity MRO distributors (i.e., Grainger nationally, CamBar in the Southeast).
4) Manufacturers selling direct to end-users or OEMs.
5) Big Box retailers.
6) Catalog/telemarketing distributors.
7) Virtual distributors (online presence and warehouses only).

It helps to think about all of the products you sell to bring all competing distributor types to mind. For example, plumbing distributors might also sell PVF, presenting a competitive force in the industrial MRO market for that product alone.

Assess each competitors market position
List all distributor locations in your territory. Use D&B Marketplace Business, the Yellow Pages, your own sales reps and suppliers to generate your list. Make sure to include all locations of each competitor.

The object is to estimate total sales and sales by market segment, so you can calculate your relative position in each segment. Youre not going for deadly accuracy, so dont fret over three decimal points. Close is good enough.

Collect as much information as you can from individual sources first. Then youll be ready to present it to a group who can help you fill in the rest. Gather all of your salespeople, plus your sales manager, marketing manager, technical services manager, warehouse manager, credit manager or anyone else who might know something about competition. Employees who worked for competitors in town may know things you might not even realize.

If you dont know a competitors sales, estimate them by multiplying a proxy such as $400,000 per employee times the number of employees. Then, fine-tune this by estimating the percent of sales in the product lines that compete with yours.

Next, during group sessions, get your people to agree on the percent of sales by market segment for one competitor at a time. Use these percentages to apply to the total sales and then estimate sales and market position by market segment. Now youll have the league standings that show the leader in each segment and where you stand relative to them. After youve done this, you will likely make adjustments.

Your suppliers can help, also. They are usually intrigued with an analysis of this type. Show it to your most trusted ones and ask for feedback. Most will feel compelled to correct your figures if they see something wrong. Accept their feedback and ask for the reasoning behind the changes they propose.

Here are the columns for your competitor database:

  a) Competitor name
  b) Branch location: address, city, state
  c) Competitor type
  d) Employees
  e) Total sales estimate
  f) Sales of products that compete with you
  g) Percent of sales by market segment
  h) Sales by market segment
  i) Marketing/buying group affiliation
  j) Vertical marketplace affiliation
  k) Key brands carried by product category
  l) Number of outside salespeople selling your products
  m) Number of inside salespeople selling your products
  n) Comments

Dont forget to list virtual distributors, Big Box retailers and catalog marketers, then assess their positions in the marketplace. These entities may not get a high percentage of any accounts business, so you might call some customers to find out approximately how much they think they buy from them as a percent of total MRO purchases.

Also, create three- or four-letter abbreviations for each supplier, and enter these into columns for each major product category. This way, you know the product strengths of each competitor you are up against, and it gives you ammunition for vendor negotiations.

More tips:

If a chain has more than one location, consolidate the sales numbers into one competitive presence before computing your share relative to theirs.

When youre done, ask yourself some strategic questions about how things could change in the competitive landscape:

Who could be a candidate ripe for being acquired?
Who are likely acquirers?
How would an acquisition change the nature of competition?
What would change if key suppliers switched distributors or vice versa?
Do you like how your suppliers have authorized different distributors in the territory? Does this analysis make you want to do something differently?

Assess product and service strengths of each competitor
Most likely, you know brand preferences and positions by product category and can make a judgment call on the relative strength of a competitors product mix based on that information. However, you need to assess the service capabilities of each distributor and relate this information to market share position by market segment.

List the key services distributors offer to the market, and rate competitors on their capability to perform. The following lists the type of data to collect.

" Outside sales (number of, capability rating on a scale of 1 to 5 with 5 being best)
" Inside sales (number of, capability rating on a scale 1 to 5)
" Accessibility (rating scale 1 to 5)
" Ease of ordering (rating scale 1 to 5)
" Fill rate (rating scale 1 to 5)
" Shipping accuracy (rating scale 1 to 5)
" Shipment accuracy guarantees (type, amount)
" Delivery capabilities (own trucks? UPS exclusively?)
" Delivery promise guarantees (type, amount, who offered to)
" Internal logistics capabilities scheduled (inter-branch transfer system? How often?)
" Legacy system (ability to interface with online marketplace in the future)
" Billing accuracy
" Training programs offered, curriculum, instructor quality, facilities
" Proactive expediting service on non-stocks and special orders
" Delivery speed (how fast in the vicinity, same day)
" Location convenience for will-call (scale 1 to 5)
" 24-hour emergency service (yes/no and reliability)
" Design assistance (by product type)
" Technical services including product modification and system configuration: list specific services (Yes/No and reliability)
" Integrated supply services
" Tool crib management services

Before you execute this step, collect all the competitive literature you can. If you cant find some information, ask some customers or suppliers about that competitor, or use a secret shopper to get the information.

To get a clear view of competitive services, conduct a customer perception survey, asking customers to rate you as well as competitors on the service attributes listed above. These should always be conducted anonymously, so you will get honest and accurate feedback. For examples, check my Web site at www.infinitygrp.com.

Describe key trends that could shape the industry.
Acronyms are often useful for remembering processes and lists of things to do. The STEEP acronym is useful in competitive analysis. STEEP stands for Social, Technical, Economic, Environmental and Political forces of change.

The object of listing and evaluating these factors is to try to predict the future impact they may have. For example, if you estimate that 25 percent or more of business will be conducted via online vertical marketplaces, how should you respond? If consolidation continues to the point where 25 distribution companies amount to more than 50 percent of industry sales in 2005, what should your response be? If the cost of technology to do business electronically escalates out of reach for distributors with less than $10 million in sales, what should your response be, or what are your alternatives?

How will your key suppliers respond to a rapid acceleration of electronic commerce through sites with broad geographical reach? How protected will your line authorizations be in the future? Not very, I surmise. How would you respond to that?

These are important questions, but for sure, youll have more. Just list all the factors inherent in the STEEP acronym, assess their impact and your response.

Describe the most likely future states of the industry.
Based on the key STEEP factors, create some scenarios that describe possible states of the industry. Answer questions such as:

" To what percent of sales will technology costs escalate?
" What percent of sales will be online?
" What will the future product mix look like?
" What percent of sales will be part of integrated or national account agreements?
" How consolidated will the industry get?
" What will the industry channel look like?
" What will the future sales force look like?
" Who might buy whom in this market, and how would that change competition?

The point of painting future scenarios is to think about how you will respond to them. Often, when I ask management teams what would happen if their key vendor terminated them or sold part of its line direct, they answer, Well, if that ever happened, it would be doomsday, so lets not even got there. However, Ive seen this very thing happen to distributors and they didnt go belly up, but they struggled quite a bit. With a little scenario planning, they could have prevented a few sleepless nights by being in position to either prevent the disturbing event or recover quickly if it happened.

On a more positive note, if you plan for the ever-expanding influence of electronic commerce, you can quickly mobilize your team to realize they have to choose their electronic alliances early in the game to avoid being squeezed out. At the very least, youll need to build the capability to link business systems to these sites to receive referrals and fulfillment orders from customers.

That, my friends, is quite profound. For after all of this meticulous competitive analysis, it points out that business is still about relationships. However, as Army found out against Notre Dame in 1913, the way you connect can change dramatically. If there is one thing your contemporary competitive analysis points out above all, it is this: get better connected.

Neil Gillespie is president of Infinity Strategic Consulting. Reach him at or .

This article originally appeared in the July/August '00 issue of Progressive Distributor. Copyright 2000.

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