In our previous post on channel transitions in Latin America, we discussed how to identify your needed transitions in order to attend to capability gaps. Today we will conclude our three-part blog series by discussing how to execute on a flawless Transition.
While the key pitfall when identifying appropriate channel transition is failing to act (being complacent), the process of enacting a transition is littered with potential traps that can result in significant revenue losses for your company. Indeed, FSG’s research shows that 33% of companies that enact a channel transition in Latin America are inflicted with sales losses.
Below we will begin by providing a brief case study regarding a major pitfall confronted by a multinational that underwent a channel transition in Colombia. We then look at what the company could have done in order to diminish such risk. Finally, we conclude the post with a brief recap of our three-part series looking at channel transitions in Latin America.
A case study of a pitfall when transitioning channels in Latin America
As previously mentioned, enacting a channel transition is loaded with potential pitfalls (FSG clients can review the full list with associated case studies by clicking here). However, one of the highest cost pitfalls confronted by FSG clients when conducting channel transitions in Latin America is the failure to set clear expectations with channel partners.
What does this mean exactly? Poor expectation setting occurs when companies fail to adequately communicate with their channel partners regarding their performance against predetermined metrics. The failure to set expectations can lead to significant conflict and unexpected costs when undergoing a channel transition (either via the introduction of a new partner to your distribution network or the elimination of an old partner).
This is exactly what happened to company Alpha, a consumer goods company operating in Colombia. Company Alpha entered the Colombian market via a diverse set of small and unsophisticated distributors. While this provided company Alpha with certain advantages in the partnership, it also meant that the performance of its channel partners could at times be erratic.
As the Colombian market for company Alpha’s product took a downturn, and its channel partners failed to adequately adapt in order to defend market share and seek new opportunities, it became necessary for company Alpha to enact a channel transition. However, when company Alpha approached its existing channel partners with the bad news, several of its partners reacted emotionally, choosing to empty inventory into the market at rock-bottom prices. The reaction ended up polluting the channel for an extended period, severely weakening company Alpha’s revenue performance in Colombia.
Avoiding revenue loss through a sound process
While not all pitfalls can be avoided 100% of the time, when implementing a channel transition, multinationals can limit losses by putting into place a sound process. In our full report entitled Channel Transitions in Latin America (available for current clients), FSG lays out a 5-step process for ensuring smooth transitions:
In the case of company Alpha, there was a clear breakdown in its communication plan. Indeed, while the construction of a communication plan is the fifth step in the process, expectation setting actually begins well before a transition is even considered. Ideally, company Alpha would have instituted a sound calendar of periodic partner check-ins, augmented by a distributor scorecard that would have allowed its channel managers to adequately set expectations with company Alpha’s channel partners in terms of specific behaviors (for a full briefing on FSG’s distributor management process, current clients should contact their Client Relationship Director). By communicating early and often, companies can avoid negative reactions from their channel partners by allowing their partners time to adjust emotionally and financially to the new reality.
Recapping our Channel Transitions in Latin America blog post series
FSG’s three-part blog series on channel transitions in Latin America began by looking at the importance of channel transitions for driving higher sales in Latin America. We then looked at the determinant factors for selecting appropriate transitions in the second post.
In the first post, we showed that channel transitions should be aimed at filling capability gaps in your channel structure, which will help strengthen performance and thus drive higher sales. Indeed, internal research shows that high-growth organizations (those with revenue growth > 20%) tend to enact channel transitions with greater frequency than low-growth organizations.
In the second post, we identified customer demands, competitor strategy, and the operating environment as the key inputs for identifying capability gaps and thus for selecting appropriate transitions. We also saw that these three factors should not be considered in isolation, and that companies should not only be considering current dynamics but also expected dynamics in two years time (analysis of channel transitions should be dynamic and also forward-looking).
Finally, in this last post we have discussed why a sound process for the implementation phase of channel transitions is so important. We have also taken a deeper look at one of the five major pitfalls confronted by companies when implementing transitions, and then suggested a process for avoiding this pitfall.
Before signing off, it is important to emphasize that the process of channel transitions is an ongoing one. FSG emphasizes the need for companies to implement a yearly review of its channel structure to consider potential transitions, as market conditions and your needed channel capabilities are always evolving. This is more true than ever as global economic conditions are rapidly changing, putting financial pressure on partners, driving competitors to cut operating costs through new go-to-market strategies, and pushing customers to demand more from the channel.
For our latest updates and insights, FSG clients can visit the client portal. Not a client? Contact us to learn more.
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