Related Expertise: Building Materials Industry, Digital, Technology, and Data, Customer Experience
The threat may be virtual, but it’s starting to feel very real.
On the one hand, companies around the world are increasingly waking up to the advantages of switching to e-commerce in the B2B market. The internet’s relevance is already high—and still rising—at every stage of the customer buying journey—from comparing product information, to ordering, paying, and scheduling, and even procuring after-sales services. The pandemic accelerated this trend, given the obvious advantages of digital transactions during a time of social isolation and business lockdowns.
On the other hand, several digital players—led by global market leaders Amazon, Alibaba, eBay, and Wayfair—are already renewing their efforts to break into the space. So far, these e-commerce giants have disrupted almost every retail category they’ve entered over the last two decades. They are now increasing their focus on the lucrative B2B market, attempting to carry over their business models from the B2C world and using data-driven processes to engage customers and boost sales.
While brick-and-mortar players still clearly dominate the B2B market, they are nevertheless beginning to take the consequences of the “Amazon effect” seriously. Most CEOs now have the need to address the growing digital threat on their strategic agendas. According to the CEO of an international B2B distributor specializing in electrical products and services, “as long as there is a product with a product description, the threat from digital attackers is both real and inevitable.”
Many B2B distributors remain unclear about the full implications of these market changes and how they will influence their businesses. Nevertheless, there’s growing fear: of potential disruption to established business models; of being squeezed out by producers going directly to customers; and of new, online-only distribution channels.
To combat the mounting digital threat, incumbent B2B distributors require a proven, strategic approach to assessing the potential impact, threats, and opportunities of e-commerce in B2B distribution. Once they’ve understood what they’re up against, these businesses should adopt a strategy of resilience that differentiates them from the emerging digital competition.
Our work with multiple clients suggests a highly effective approach in three steps.
We observe two main archetypes of new, online-pure-play distributors entering B2B markets.
The first is established online B2C players that are expanding their coverage. Among these players, Amazon has the greatest foothold, with the largest turnover and a significant presence in developed, mature B2B markets based in the US and Europe. Other global e-commerce players include AliBaba, Ebay, and Wayfair.
The second archetype encapsulates the wide variety of mostly local and specialized startups entering the scene. These startups typically focus on B2B markets with one or more of the following characteristics:
Startups can pose a minor threat in specific categories, but the larger, fundamental challenge for B2B distributors comes from international e-commerce players. They attack incumbents with a much broader scope, reach, and product selection, as well as an established operating model. In addition, they can often draw on considerable financial and operational resources—logistics networks, for example—to launch their attack.
Understanding how these players win in the B2C market offers insights into how they will achieve success in a B2B context. A broad selection, very competitive prices, and seamless customer experience are the main drivers for customer satisfaction in B2C markets. Amazon and others believe that a rigorous focus on customer satisfaction is the foundation for long-term growth, which in turns drives down costs and enables a virtuous cycle. A business model focused on long-term growth, as opposed to short-term profitability, requires a highly scalable platform powered by simplification, standardization, and process automation.
Such a model generates widespread customer satisfaction but discourages deviations from standard procedures. Complex manual processes and tailored solutions for individual customers are inherently detrimental to the way these companies operate. (See “Reviewing Amazon Business’s Market Entry.”)
We expect the e-commerce giants to play to their strengths in B2B markets. They will most likely be successful in segments with relatively simple products that require very little technical service, and by extension, no specialized or expensive resources for customer support. They will also focus on areas that can be covered by established and standardized logistics processes—characterized by common package sizes, lightweight, nonbulky products, and moderate requirements for delivery speed. Lastly, digital attackers will benefit from those segments with transparent pricing, dissatisfied customers, and producers that support new distribution models.
Exhibit 1 illustrates how some of these advantages translate into real industrial B2B products, with a focus on logistical and service needs.
While high-velocity consumables such as lubricants (or other products that are sold with great frequency) perfectly suit the online business model, complex and heavy items, like cleaning systems, are less attractive for digital players. A broad spectrum exists between the two extremes.
Incumbents can draw conclusions from the e-commerce business model to assess how exposed their businesses are to digital attackers. To quantify their risk of disruption and protect themselves, B2B distributors should consider the following six mechanisms for protection:
Although these six barriers to disruption are strong, they do not fully protect all sales. There will be a remainder of unprotected sales that may be scooped up by digital attackers. Exhibit 2 shows the extent to which each mechanism may protect a distributor’s sales.
The specific risk of sales loss to digital attackers varies widely across product offerings. While chemical products and machinery typically have a very low exposure, with unprotected revenue shares between 5% to 10%, other categories, like office supplies or janitorial equipment, are highly exposed, with unprotected revenue shares of up to 50%. In other words, half of these incumbents’ existing business may be up for grabs by new entrants. Exhibit 3 outlines our findings.
As always, the devil is in the details, and for any assessment to be considered thorough, it must be conducted at the company level. Depending on the specific product portfolio of a particular player, the share of unprotected revenues can vary considerably even within a given market. B2B distributors should therefore assess and quantify their individual risk exposure. (See “A Sample Risk Assessment for an MRO Distributor.”)
It’s clear that the threat posed to established players by digital attackers is real, but it is usually limited to a certain business model and logic. Despite the e-commerce giants’ obvious limitations, established B2B players need to understand the risk in detail and identify areas that are most prone to disruption. To stay ahead of the curve, incumbents must act by strengthening their resilience against new entrants and, perhaps even more important, seize the opportunities created by an evolving B2B market.
The following five levers have proven to be largely effective in increasing resilience to digital attackers:
Digital attackers have recognized that B2B customers are increasingly open to e-commerce and, with this recognition, smell an opportunity for market entry.
Despite significant activity, digital attackers have still only seen relative success in B2B distribution, meaning it’s high time for incumbents to increase their resilience. Building resilience won’t be easy, and it will mean transforming at all levels of the organization—requiring top-management attention, sufficient lead time, and a focus on change management. Still, in the wake of digital attackers, the rewards will be well worth the effort.
B2B distributors, take heed: act now to defend your market position and seize on the opportunity for further competitive advantage.