30 Mar Building successful distribution partnerships
Medical device companies that attempt to expand their international business into new markets can be met with limited success. Onboarding local distributors can see sales ramp up and revenues increase, and the entry is viewed as a successful move. But after a while, momentum is lost, sales plateau and over time the client decides that the distributors are underperforming and changes must be made.
These can include finding an alternative distributor, buying the local distributor or reacquiring the distribution rights to start their own subsidiary. In each case, it’s far from an easy process. Changing distributor or moving from indirect to direct sales can be costly in both the short and long term, with the overcorrection leading to an inefficient sales network.
At Ortho Consulting Group (OCG), we have worked with many clients to analyse their international distribution strategies and avoid the pattern of underperformance and overcorrection. We have found that, in most cases, the problem isn’t as simple as poorly run distributors, it’s sometimes attributed to the distributor not knowing how to grow the market. Good initial sales growth of core products is achieved, but they are unsuccessful at introducing new products to areas that are not yet established. The assumption is that the distributors don’t have the necessary skills or didn’t invest enough in business growth.
Distributors are often given national exclusivity to encourage investment, with contracts stipulating minimum levels of marketing investment. Even then, some companies still think distributors don’t invest enough. In some cases, the sales plateau is attributed to a lack of drive by distribution organisations.
A common opinion is that the typical distributor is looking not for market domination but for a stable, medium-size business that is not too big to control. Distributors often have their own ideas about why the relationships don’t succeed over time, usually being a combination of a lack of support for growing the business, unrealistic expectations and that company politics were too complicated.
We endeavour to help companies avoid this scenario by developing and overseeing their market strategy. In many cases, our clients come to see that it makes sense to continue working with independent local distributors and benefit from their unique expertise and knowledge of their markets.
Market-led vs Distributor-led
Entry into a new international market should be a strategic decision based on a thorough market assessment but this is not always the case. Initial moves into new countries can arise in response to partnership proposals from potential distributors. Companies can be inclined to go ahead because marginal costs are low, and the distributor bears most of the risk.
Sometimes the most obvious, vocal and eager distributors might not be the best ones to partner within the long term and companies end up with the distributors that also serve their competitors, because they’re in the strongest positions within the industry. Powerful, incumbent distributors certainly have the market contacts, but they also want to control the category and keep the companies they represent in balance. We have seen time and time again, that distributors with strong positions in the status quo are more likely to deliver a sales plateau, given their desire to maintain the market structure.
We focus on identifying the country that a client wants to enter, then finding a distributor. Being market-led rather than distributor-led results in a better outcome because of a more systematic and thorough assessment of potential partners.
Company fit vs Market fit
The choice of distributors and the terms of the relationships should serve our client’s long term goals, however the most obvious distributor is not necessarily the best partner for the long term. Companies expanding internationally, usually look for partners with the best market fit, meaning those already serving major potential customers with similar product lines. We have found that the closeness of the market fit can be a hindrance as well as an advantage, because the distributors represent the market’s status quo, and the companies that we represent are often are selling a replacement or new technology and are attempting to disrupt the market.
We look for a partner with a culture and a strategy that we feel will suit our clients in terms of communication, the investment they’ll make, the training they’ll give their staff, and the support they’ll ask for.
Long-term partner vs market-entry vehicle
Many companies actively communicate to distributors that their intentions are only for the short term, negotiating contracts that allow them to buy back distribution rights after a few years. But under a short-term agreement, a local distributor doesn’t have the incentive to undertake long-term business development.
We help our clients structure their relationships so that their distributors become marketing partners willing to invest in long-term market development. A common way of doing this is to give national exclusivity to a distributor, although such an agreement can become unproductive if conflicts of interest arise once an entry is established.
We have seen that a more effective solution is to create an agreement with strong incentives for achievable goals, such as customer acquisition or new product sales which instils confidence and assurances for both parties. The local distributor then acts on the client’s behalf as a local marketing arm in its country to help nurture their brand.
If you would like find our more about how we can support your distribution partnerships, please get in contact via info@orthocg.com.