Across a range of industrial markets, from semiconductors to industrial automation components, OEMs have long relied on independent distributors for their go-to-market (GTM) strategies. Distributors have traditionally helped OEMs access a fragmented customer base, hold inventory as needed, manage working capital, aggregate products for end customers, and offer additional services (such as training, product support, and aftermarket services) to customers. As the eyes and ears for their respective OEMs, distributors have often been in the best position to understand what end customers needed and wanted—and how to best deliver it.
But market forces are disrupting the conventional value proposition of independent distributors. Large and sophisticated B2B end customers are seeking to engage directly with industrial OEMs, a trend that has been accelerated by supply chain disruptions in the wake of the COVID-19 pandemic. The consolidation of end customers has enabled them to more easily establish and maintain direct relationships with OEMs, while the rise of B2B e-commerce has created new platforms for engagement. At the same time, digital offerings are competing with distributors to provide ancillary services, and digital natives are posing new threats to legacy players. These trends are taking hold across B2B industrial verticals, ranging from commercial vehicles to installed residential and commercial appliances to heavy-machinery equipment.
Amid this shifting landscape, industrial OEMs may gain significant competitive advantages by repositioning their GTM strategies and growing or introducing direct-sales channels. For example, they could capture a greater share of margins from the value chain, grow their potential market share, and build a more intimate understanding of end customers and what they value. McKinsey’s Global B2B Pulse Survey indicated that companies that had direct one-on-one marketing grew 50 percent more frequently than companies that had only personalized marketing. Yet many OEMs remain reluctant to act. Transforming a long-held distribution model can seem daunting without existing relationships or traditional GTM capabilities. Furthermore, the misperception that direct sales is an all-or-nothing strategy can lead to a fear of retaliation from distributors.
Distributors will continue to play a key role in the value chain—particularly to reach key end-customer segments and to drive fulfillment. This is particularly true where distributors are needed to integrate products from multiple OEMs to execute an end-customer project, especially when there is no apparent highest-ticket subsystem involved. However, both OEMs and distributors may need to shift the combined GTM model to move toward activities where they create the most value—and generate associated operational improvements. A new model can provide benefits for OEMs and distributors alike.
Semiconductor distributors have delivered robust growth in recent years, even as semiconductor OEMs have increased their share of direct sales. Similarly, automotive players have found ways to ensure the profitability of dealers and distributors even as they pursue direct-to-consumer (D2C) channels. The futures of OEMs and their channel partners are intertwined: only by working together can they redefine their respective roles, boost productivity, and innovate new services for customers.
Industrial OEMs that continue with the status quo may soon find themselves unable to effectively compete—or, in some cases, survive—in the new landscape. While a direct-sales channel is not the answer for every OEM player, even those who remain channel-oriented will need to work with their distributors to make sure they are positioned to succeed in the new competitive landscape. Some distributors will also need to rethink their approach or risk losing shares alongside their partner OEMs. Below, we outline how OEMs can design, execute holistic channel strategies, and reposition their GTM strategies to win.
Direct sales: The new-channel imperative
OEMs that optimize their GTM strategies in a thoughtful way can achieve tangible results. The shift toward direct sales can unlock win–win margin opportunities by capturing non-value-adding distributor margins or by creating incremental value in partnership with distributors. This often translates to market-share growth, especially when preferred channel players are aligned with competitors. After an industrial-automation equipment player increased its share of direct sales from 5 percent to 20 percent, its market share grew by two percentage points in six months. In another example, when a semiconductor OEM took on demand creation instead of relying on channel partners, its share of direct sales nearly doubled from 40 to 70 percent, and revenue grew by 20 percent over four years (after a 20 percent contraction in the prior period).
In addition to margin opportunities, a direct-sales channel offers industrial OEMs a clearer understanding of customers and their needs, which feeds directly into R&D and product development. From an operations standpoint, these data-driven insights can paint a more accurate picture of future demand and drive SKU optimization. The shift toward direct sales enables the marketing function to provide omnichannel experiences, systematically target customer niches, and bundle products to capture a higher share of wallet. For the sales team, a direct channel opens visibility into white space and generates new upselling and cross-selling opportunities. Perhaps most important, direct access to end customers provides OEMs with direct-pricing intelligence (including about competitors), the ability to adjust pricing more quickly (especially in response to inflation), and more effective control over price transparency and equity in the market (for example, when automotive OEMs go directly to customers with standard pricing for electric vehicles). These strategic and competitive advantages also give OEMs an upper hand against large e-commerce players or distributors that may launch white-label or competing products.
The channel litmus test: Ten questions OEM leaders should ask themselves
- Do I know my specific end customers and how their usage patterns are changing?
- Do I understand my end customers’ needs, priorities, and pain points given disruptions in the market (for example, supply chain challenges, COVID-19 pandemic, geopolitics)?
- Do I know what my end customers pay?
- Can I map margins across the value chain?
- Are those margins fair for the value created at each step?
- Are my distributors engaged in the activities for which they are clearly the best owner?
- Do my distributors prioritize my business relative to my competitors?
- Do I represent a major portion of my distributors’ business?
- Are my distributors well positioned relative to other distributors in their markets and territories?
- Is the performance of my distributors consistent?
While all industrial OEMs can benefit, the new-channel imperative takes on a higher level of strategic importance for those most vulnerable to disruption (see sidebar, “The channel litmus test: Ten questions OEM leaders should ask themselves”). Direct sales are critical for OEMs that rely heavily on a single distributor or a few distributors; have high distribution margins, especially those that rely on a multistep distribution, such as building products (Exhibit 1); lack transparency into end-customer pricing; experience a stagnant market share; or face threats from disruptive new entrants. Any of these conditions presents a clear signal that it is time to reorient the GTM strategy and channel mix toward direct sales.
Optimizing the channel model: A road map for success
Redefining the GTM orientation is not easy, but the experience of many industrial OEMs shows that it can be done effectively. While the journey varies, many successful players have followed a tried-and-tested approach (Exhibit 2). Below, we dive deeper into each stage of the channel optimization journey: diagnose, design, and execute.
Diagnose: Set the vision and assess value at stake
The first step is to develop a clear understanding of the optimal distribution channel for each end customer. Customer segments and target channels should be primarily based on strategic importance and the complexity of the sale (Exhibit 3). For example, large customers with high revenue potential are the best candidates for direct sales, while small customers with straightforward requirements may continue to be managed by independent distributors. Channel decisions should also consider customer-backed views of current pain points and needs, potential margins and channel costs, and internal and external benchmarking of current channel performance. Once optimal coverage has been defined, OEMs can map their current coverage against the end-state vision to identify the most important shifts.
The next step is to determine the best direct-to-consumer model for each target segment. A digital-first offering will be the most feasible option for OEMs to avoid channel conflict and the prohibitive cost of building a traditional field sales force. For example, a truck aftermarket company that previously relied on its channel partner for hundreds of potential customizations found that it was able to successfully create an online channel by offering curated, predefined bundles for construction trucks.
OEMs should then assess the value at stake for each channel across four distinct levers: margin capture from direct sales, lower costs to serve through digital channels or inside sales, improved performance of channel partners (or the elimination of underperforming partners), and market-share capture through previously underused channels. In the final stage of the diagnostic phase, OEMs can set targets for each lever and build a detailed road map to guide the rest of the journey.
Design: Build a GTM engine
During the design phase, OEMs must realign their capabilities and processes, launch pilots to evaluate and refine the model, and actively manage and mitigate channel conflict. A resolute GTM organization, separate from distributor sales, can build momentum, and ensure sustained focus.
Build capabilities and redefine the operating model. To support the new GTM model, OEMs will need to build or acquire specific capabilities in targeted areas—including e-commerce and search engine optimization, direct-sales capabilities (such as end-customer marketing, field and inside sales, pipeline management, pricing and transaction support, and post-sales support), and channel performance management. The most successful OEMs also build a strong digital and analytics foundation, putting in place predictive analytics that allow them to identify growth pools and determine propensity to buy; design enablement tools that help drive customer stickiness; advanced CRM capabilities to support full funnel tracking; and a range of other tools.
Some OEMs have successfully set up teams to execute these functions directly while also developing the right capabilities during the transition period.
Launch and track pilots. Optimizing channel structure can be daunting. Pilots offer a way to cut through “analysis paralysis,” build traction, and test and refine the new operating model. OEMs should select and structure pilots to mitigate potential risk—for example, piloting direct sales in an area with weak or nonexistent channel partner coverage or shifting the partnership model with a nonstrategic distributor.
Manage channel conflict. Industrial OEMs will need to assess and mitigate the risk of channel conflict, especially if rolling out direct- or digital sales. Several approaches have been successfully implemented in the automotive industry. For example, when moving from a traditional wholesale model to a D2C agency model, a fixed per-vehicle “handling fee” paid to dealers can potentially maintain the distribution of profit across the ecosystem.
Additionally, OEMs should prioritize direct- or digital-channel growth in territories where distributors are underperforming, or preferential treatment is given to a larger competitor. Deal registration can be introduced to allow strategic channel partners to indicate which businesses they are actively pursuing on behalf of the OEM. And in the newly defined relationship with channel partners, all parties should play to their core competencies—OEMs should drive demand generation for larger customers, while distributors take responsibility for fulfillment and small and midsize businesses.
Execute: Sustain and scale
Finally, industrial OEMs must maintain and scale the new GTM strategy—including evaluating key metrics, developing customer insights, and improving the model over time.
Set up full-funnel tracking. For each channel, OEMs should track progress and metrics at every stage—including the number of leads, lead-to-quote conversion, quote-to-sale conversion, renewal rates, and margins—to build a precise understanding of which aspects are working well and which aspects need to be quickly addressed. For example, one OEM found that a low quote-to-sales conversion rate was driven by a slow quoting process. After identifying the problem, the company worked to quickly develop a solution that led to an improvement in conversion rate of more than 10 percent.
Get customer feedback. A new channel approach should lead to a superior customer experience. OEMs that successfully grow direct sales see the new model as a valuable opportunity to get closer to customers, receive their feedback, and refine the process to be responsive to their needs.
OEMs that successfully grow direct sales see the new model as a valuable opportunity to get closer to customers, receive their feedback, and refine the process to be responsive to their needs.
Drive continuous improvement. Throughout the journey, OEMs should establish a feedback loop, celebrate wins, and quickly adjust based on the lessons they learn. For example, one OEM set up a friendly (and public) competition to highlight successes and motivate teams to embrace the new model. At the same time, leaders actively seek out areas for improvement by, for example, holding monthly or quarterly reviews that incorporate both performance data and input from customers, channel partners, and internal stakeholders.
The new-channel imperative is here. Industrial OEMs must be willing to reevaluate their go-to-market strategies, reposition their channel strategies, and transform existing distribution models to better serve their customers’ needs. By taking bold action today, OEMs can position themselves—and their distributors—to win in the next normal.
ABOUT THE AUTHOR(S)
Chris Angevine is a partner in McKinsey’s Atlanta office; Ben Ellencweig is a senior partner in the Stamford office, where Danish Shafi is an associate partner; and Aritra Gupta is an associate partner in the Chicago office.
