Manufacturers and their dealerships all too often become victims of their own success.

The manufacturers add new outlets to fuel growth, which can lead to too many dealers competing for the same customers. The weak dealers see their sales and profits drop, and the strong see growth stall. In rocky times, this is bad news for everyone.

The way out of this downward spiral is not, as many manufacturers believe, to cut costs, offer sales incentives or add even more dealers. Such steps may boost results in the short term, but quickly lead to erosion of dealer profits and long-term sales.

The answer is to strengthen manufacturer-dealer relationships.

Companies can pull out of downturns, strengthen their competitive advantage and position themselves for growth with three simple steps that we have identified through three years of interviews and field research:

¤Make the dealers feel needed—which may require eliminating those with the weakest results;

¤Enhance support for those that remain, developing products that help them maximize profits and eliminate competitors;

¤Go out of your way to incorporate them into your company’s culture and mission.

Companies as diverse as piano and power-tool makers have succeeded using such strategies. Here’s a look at how they did it.

Strengthen the Best

In 1985, Steinway & Sons was in a crisis. Sales were slowing and its 150 dealers were complaining about low profit margins, slow-moving inventory and the costs of supplying concert grand pianos for Steinway performers. Bruce Stevens, the newly hired president and chief executive, spent six months visiting dealers and listening. The result was a new dealer-relationship plan in which weaker dealers were cut off, while those that remained were offered expanded, exclusive territories and profit opportunities in exchange for their stepped-up commitment to display and promote Steinway products.

Dealers initially were reluctant to invest in upgrading showrooms, increasing inventory and adding salespeople. But as they saw Steinway making good on its promises of expanded territories, they signed on.

Steinway, a unit of Steinway Musical Instruments Inc., Waltham, Mass., today has 63 dealerships in the U.S. Sales and margins for both Steinway and the dealers have increased.

“It takes trained people, good displays, a lot of inventory and strong programs to present Steinway pianos to consumers in a way that is consistent with our image and heritage,” says Mr. Stevens, who retired at the end of 2007. “And that requires profitable retailers. Take away the profit and we don’t get the representation in the field we need.”

Consolidation is not the only way to show dealers that they matter. Stihl Inc., a producer of chain saws and other gasoline-powered tools, makes its dealers feel needed by spurning major home-improvement chains and selling exclusively through its network of 8,000 independent tool and hardware stores. The company, which requires its dealers to go through sales and service training, believes that motivated and well-trained dealers are important to help customers understand the performance benefits of Stihl products—and to justify the premium price. Some of its products sell at a $50 to $100 premium. Stihl, the U.S. unit of Germany’s Andreas Stihl AG Co. KG, has enjoyed double-digit growth for 15 consecutive years.

Ensure Profitability

If a manufacturer offers dealers a broad product line, it can squeeze competitors out of those stores.

In the late 1980s, Steinway developed a vision of midpriced and low-to-midpriced pianos with dealer profit margins as large as those of the existing Steinway line. The goal was to offer such a full and compelling line of pianos that competitors would be pushed off the showroom floor. Steinway unveiled the Boston line in 1992, and the Essex line in 2001. By 2007, the two lines accounted for roughly 70% of pianos sold by Steinway.

The new lines positioned Steinway to become the primary, and in some cases only, piano supplier for many of its dealerships. Dealers also liked the new lines because they created a natural upgrade path for customers and drove repeat business.

Build Culture

Manufacturers need to shower dealers with training, merchandising support, promotions and good old-fashioned relationship building.

Steinway hosts an annual dealer conference at an upscale resort where almost 400 people gather to report on results, discuss the future and celebrate successes. It trucks in and tunes almost 50 pianos for the dealers to view and play. Top-name Steinway artists perform.

In addition, salespeople and technicians attend Steinway training programs where they learn company history, production and maintenance techniques. The company helps dealers with all kinds of promotions and events.

Stihl provides extensive in-store displays and merchandising support, sending teams to spruce up displays in some dealerships. This can hurt sales of rival products, Stihl says, but the dealers don’t mind. The Stihl profit margins make up for it.