Converging around the mediocre

I had an interesting conversation with a dealer group head this morning about whether the introduction of agency formats would result in suppressing innovation as all dealers were forced to follow manufacturer-defined processes, use manufacturer-supplied systems and present customers with manufacturer-defined offers.  His view was that the opportunity for dealers like his to innovate, and through that to offer customers solutions that work better for them and for the dealer, would be constrained.  Poorer performing dealers would be propped up, whilst higher performing dealers like his would find their returns reduced.  That in turn would force them to reconsider in which business areas to invest, and with which brands to partner.

In our work with manufacturers and dealers, we have already identified the risk that some dealers will feel that their freedom of action is constrained too much by an agency format, that their ability to continue to work as entrepreneurs will be limited to an unacceptable extent.  In putting this forward, we were thinking mainly about smaller owner-operators, but my discussion this morning was with a large group, with well-defined internal processes and controls, so not what I at least would consider ‘entrepreneurial’ in the normal sense of the word.  It is therefore definitely worth thinking further about his question, and I think the challenge hinges initially around two questions.

The first is whether the manufacturer truly understands retail business, and can define processes and systems, and subsequently make decisions day in, day out, around pricing and promotions, that reflect those that a good dealer would make today.  The track record of manufacturers in retail is not glorious.  ICDP analyses over the years have shown that manufacturer-owned retail businesses typically perform at the bottom end of the spectrum in terms of network performance, and whilst some of this is due to business mix and operating costs in the locations where they tend to be based, we don’t tend to see best practices coming out of these groups.  It is also striking that there is little exchange of personnel between the manufacturer sales functions and their own retail groups, so even where there is an opportunity to learn about retail first hand for a year or two during your climb up the career ladder, this does not seem common, whereas I would make it mandatory if it was my business.  In the absence of in-house best practice retail knowledge, manufacturers need to turn to those closest to them who do have this knowledge – their own top-performing dealers.  That implies real engagement, in listening mode, not some cursory consultation with the final script already written.

The second is that truly rigid processes will tend to produce that ‘average’, possibly even ‘mediocre’ result.  Coming originally from a background in engineering and manufacturing, I understand that if you want the highest and most consistent product quality, then this should be engineered in through the design and processes.  Variability and inconsistency are the enemies of low production cost and high quality.  As I have become more involved in distribution and sales, I recognise that customers, unlike car components, come in many different forms, have different needs, and do not want to be forced into precisely the same mould as the customer before and after so that some robotic arm can locate them and fit them into a sales process.  We have often used the examples of top hotel chains like Ritz Carlton to illustrate that whilst they achieve their base – very high – service quality through carefully designed processes and systems, they get the ‘wow factor’ and many of their glowing customer reviews from personalised treatment that responds to some specific need.  That need was not anticipated by the processes and systems, but the business empowers the hotel employees to meet such needs, using their own discretion to find solutions that work.

We’ll be giving this some more thought in the coming months, but as a gut reaction, I suggest that there are two actions that a manufacturer must take if they are considering transitioning their business to operate under an agency format with dealers.  The first is to spend time with their best dealers and define what ‘best in class’ retail processes are, then build your agency model around that.  The second is to ensure that without unduly compromising the basic objectives of agency, to see whether there is still scope to allow individual discretion at the dealership to meet individual customer or dealership needs and preferences.  A genuine consultation that delivers such a high potential and flexible operating model – perhaps moderated by an impartial third party that understands both parties’ interests (like ICDP…) – will give a strong foundation for such a significant move, and hopefully avoid a drift to moderation in terms of retail performance, and the risk of losing talented and high-performing dealers like those managed by the CEO I spoke to earlier.