NAW Association Executives Council Innovation In Association Business Models

1. NAW Association Executives CouncilInnovation In Association Business Models The Fairmont Hotel Grand Ballroom 1, Ballroom Level Washington, D.C. January 28, 2013 1:15 to 4:30 PM Discussion Leaders Mike Marks & Steve Deist

2. About IRCG • Mid size consulting firm founded in 1987 that provides advisory services for manufacturers, distributors, private equity and other ownership groups • Our expertise is in market accesswhich measures how well a firm’s resources are aligned with their real opportunities for growth • Services include strategy development and execution, channel management, operational alignment, incentive design, and sales force optimization • We are well recognized for our industry depth and experience • Many completed industry research projects for NAW and their member associations, and we are both permanent faculty members at the University of Industrial Distribution (UID)

3. Agenda 1:15 to 2:45 The Short List Of Member Challenges A Recap From Quebec On Business Models 2:45 to 3:00 Break 3:00 to 4:30 Group discussion: Reenergizing An Association Association Vitality Index Addressing Capability Gaps It’s not about what we’re selling, it’s about what they’re buying

4. Segment #2 Don’t Care Segment #1 Nice to Have Don’t Care Nice to Have Critical Needs Critical Needs Death of the Generalist $$$$ $$ $$ “The specialization trend has been unkind to the association incapable of serving an increasingly diverse membership” A “one size fits all” model means spending more money but providing less of the critical services Targeting segments allows us to tailor our investment for maximum effect

5. Strategic Evolution

6. Key Future Forces If we want to skate to where the puck is going to be, we need to understand the fundamental forces affecting our members The buffet of choice: customers are taking control of the sales process and information flow The search for growth: mature markets and a stagnant economy drive consolidation, impersonation and invasion Workforce issues: the imminent loss of tribal knowledge has now become an emergency 1. 1. 3. 2.

7. #1 The Buffet of Choice: SoLoMo Some factoids from Grainger’s Geoff Robinson in emarketter.com, June 2012 Grainger’s mobile activity has increased 400% in the past 12 months Over 50% of its users feel comfortable ordering over mobile devices. Google reported that 1 in 7 searches are now done on mobile devices. Customers are no longer just passive consumers of a product or service. They help to create it! Information can be accessed from anywhere at anytime Solutions are tailored based on time and place

8. Judo Moves Your members largely know what the issues are. Their challenge is how to approach and address them. The following are the top techniques that have proven to be the most powerful for IRCG clients who best reflect your membership Intentional selling Tailored service levels Customer centered innovation Market driven priorities The right tool for the job Analytically led decision making • Judo is about working with the forces of nature rather than trying to confront negative energy head on.

9. Intentional Selling Example

10. Executive Insight Roy Vallee, Executive Chairman, Avnet What should keep distributor managers awake at night? Finding pathways for continued profitable growth that in today’s uncertain environment requires risk taking and innovation Being able to attract and engage the new generation of workers Being able to effectively allocate your resources (people and money) in a changing environment (sometimes reallocating is the biggest challenge) Source: MDM October 25, 2012. Full interview available at www.mdm.com/ext/html/executivebriefing-7min-archive.html Consultant takeaway: these issues represent a profound and fundamental challenge to the risk averse, tactically focused “owner operator” distributors that represent the bulk of association membership

11. Building on the Foundation Ideas from Quebec (and elsewhere) We need to get closer to members and their customers (insight rather than anecdote) Stay away from competitive levers: focus on the size of the pie, not how it’s sliced • Market strategy • Best practices Huge value in timely, relevant and credible data • Flash market reports • True benchmarking based on consistent process metrics Raise the profile of wholesale-distribution for Gen X and Y employees Great value in network effects • Leverage by providing extra services or functional discounts for value added participation Offline association strategy development (conspiracy of effectiveness)

12. Agenda 1:15 to 2:45 The Short List Of Member Challenges A Recap From Quebec On Business Models 2:45 to 3:00 Break 3:00 to 4:30 Group discussion: Reenergizing An Association Association Vitality Index Addressing Capability Gaps We will draw heavily from this book and it may be challenging

13. Business Models A business model describes the rationale for how an organization creates, delivers, and captures value At the simplest level there are two parts; how you add value to a market, and how you extract value (get paid) If your model provides better value/cost ratio then you will grow with those customers who choose you over other alternatives You will start to fail if you don’t provide a better value/cost (time & money) ratio in the increasing range of alternatives At the time failure is described as being subject to the economy, rising cost & time pressures, technology, and competitive alternatives Remember that your association started as a monopoly but your members have many more choices today

14. The Business Model Canvas 4. Relationships are established and maintained with each Customer Segment 7…by providing a number of key activities 8. Some activities are outsourced and some resources are acquired outside the enterprise 1. An organization serves one or several Customer Segments 2. It seeks to solve customer problems and satisfy customer needs with value propositions 6. Key resources are the assets required to offer and deliver the previously described elements… 3. Value propositions are delivered to customers through communications, distribution, and sales channels 5. Revenue streams results from value propositions successfully offered to customers 9. The business model elements result in the cost structure Efficiency Value Creation

15. Generic Trade Association Canvas Group events in multiple venues Advocacy Standards promulgation No next best alternative (monopoly) Committee engagement Specialized knowledge that is hard to obtain Early warning on specific threats and opportunities Access to trading partners Education Affinity meetings Third party service providers Buying & marketing groups NAW/AEA/NAM • Categories of distributors • Suppliers • Service providers • (Aren’t there discrete groups within each category?) Internet Print communication Member outreach Intellectual property Owned patents and standards LMS or other software Talent Trade shows/conventions Member dues Paid seminars and workshops Licensing fees Staff Marketing & sales Event costs Research investments The interesting part is in the specifics when looking at each customer segment

16. The Apple i-Tunes Business Model

17. The Multi-Sided Business Model Multi-sided platforms bring together two or more distinct but interdependent groups of customers The platform is valuable to one group of customers only if the other groups of customers are present The platform creates value by facilitating interactionsbetween the different groups • What specific interactions (not just activities)? The platform grows in value to the extent that it attracts more users, a phenomenon known as the network effect • Growing numbers of members is the old measure • The other measure is engagement (depth and numbers per member) which measures largely unseen and unmet demands

18. Multi-Sided Platforms The Apple App Business Model The spooling of the turbocharger is called the network effect

19. Select the person who has traveled to the most exotic location as your spokesperson The network effect occurs when the needs of all customer segments are met with balance- so compare notes with team mates around: How are distributors treated as a favored class? How much association revenue is linked directly or indirectly to supplier participation (imagine that they are gone)? What other constituencies or sub segments can be supported? How well are you being balanced in facilitating interactions? Be prepared to share your answers You will need this insight for the group discussion after the break Short Team Exercise (from Quebec)

20. Agenda 1:15 to 2:45 The Short List Of Member Challenges A Recap From Quebec On Business Models 2:45 to 3:00 Break 3:00 to 4:30 Group discussion: Reenergizing An Association Association Vitality Index Addressing Capability Gaps

21. Agenda 1:15 to 2:45 The Short List Of Member Challenges A Recap From Quebec On Business Models 2:45 to 3:00 Break 3:00 to 4:30 Group discussion: Reenergizing An Association Association Vitality Index Addressing Capability Gaps The fundamental principle is to find unmet needs (pain or frustration in a few members) and create a fulcrum to leverage this energy to scale into the larger group It is inherently about a narrow focus that is small and bright

22. From the 2004 AEC Meeting in Colorado The Generalist Value Proposition Consultants & Studies Personal member agendas Tradition Newsletters & spam Member surveys Trade show New ideas Education Foundation Trade Association Since 2004 we have added Facebook, Twitter, and LinkedIn

23. Factors Affecting Association Growth 1. Market Convergence (DHI) As product silos evaporate nontraditional players begin competing with your members. This is driven by “the grass is always greener” scenario and customers’ desire to consolidate their supplier base (a zero sum game) 2. Industry Concentration (NAED) Consolidation is really about concentration for the sake of market power. Is the market share for the 10 largest suppliers or the 10 largest distributors increasing or decreasing? Is it fast, slow, or accelerating? 3. Imminent Threat To Survival (HIDA’s medical device tax) This is an external threat that disrupts the fundamental value propositions of your members to their customers, most often created by changes in legal frameworks. Advocacy may be the only viable solution.

24. 4. Value Proposition Erosion (OPEESA) Remember that a value proposition is focused on a served customer segment • Generalist models erode the quickest • All erode over time (Edgar Schein’s Adaptive Coping Cycle, e.g. John Deere) The real strategic question is what are your multiple value propositions and which group do they serve? Association membership is generally 1-10% of published NAICS firm counts • Members believe they are the elite and the other 90%+ is not • We focus on meeting needs of the existing few, not the missing many • Measures are around views of existing members How does the other 90% view your 10%? Is asking the 10% the right way to find out?

25. 5. Value Proposition Competition (SEDA) Associations, as monopolies, were built on providing: • Networking among peers • Supplier access to their “customers” • Creation of specialized information • Education on common issues • Advocacy on common issues How much are emerging value alternatives gaining traction in your industry? • Buying and marketing groups, TEC and Vistage groups, major suppliers doing their own distributor meetings and PAR Reports, the Internet, your distributor member’s end user associations • If your association were hit by a bus tomorrow what would be the first critical thing missed that isn’t provided elsewhere? • Are your core member needs becoming polarized by size, focus, globalization, or ownership structure? Most distributor trade associations offered a generic service package and they were separated by the vertical product silo defined by the supplier base

26. Modified from the 2004 AEC Conference in Colorado Association Vitality Score

27. Creating A Fulcrum Always relying on the big launch with lots of involvement is effectively solving every problem with a hammer Sometimes finding something small, bright, and resilient and setting it on fire has a higher probability of becoming self sustaining over time Don’t forget that you are not in a rush http://sethgodin.typepad.com/seths_blog/2013/01/understanding-idea-diffusion.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+typepad%2Fsethsmainblog+%28Seth%27s+Blog%29

28. Group Activity Pass in your five number scores and we will tabulate the groups responses during your activity The energy to start a brushfire is contained in three broad ideas Addressing members’ critical business needs (although they may not be widely recognized yet), not ours Creating new value propositions for smaller segments of members that can be isolated from the whole Letting go of some current activities where we are being held hostage to history, so market forces become a wind at our back instead of in our face The task for each table is to consider the factors and apply them to our associations to identify a small and bright source of energy for change or renewal This is actually very difficult and it is not about making your members successful (vitamins) rather finding anger and frustration (pain killers) We will share our results starting at 4:10 so good luck!

29. The Path Forward We all need to develop and execute on a coherent strategy The lodestar is understanding and meeting unmet or unrecognized member needs (they don’t know so asking them is pointless and irritating) • 20% of your members use 80% of what you actually provide • Significant resources are wasted trying to make members successful in spite of themselves “They shuddaoughtawannna do it!” • When they don’t respond we raise our voice with more email, faxes, and phone calls so they often avoid us • Sometimes the best strategy is to let everyone see a small group move ahead and then they will act so they don’t fall behind It is hard to kill a trade association quickly - they slowly fade away • The last Senior Staff Executive with a strong comp package is the easiest position to fill

30. Your Personal Game Plan Buy the book and do a business model canvas with your own board • Have them design a competitive trade association to help determine what you can change (ask Nancy how to do it) Start a dialog with your best and brightest members to: • Start doing some segmentation to find some unmet needs or shared pains • Because pain pills outsell vitamins • Examine future forces for key opportunities • Start creating smaller group value propositions that involve non executive members Build a real strategy that starts with the external market and then does tradeoffs Most important for most is finding stuff to STOP doing