If I shut my eyes the threats will disappear and I'll have all the time in the world for the opportunities.

Text of a talk by Mike Rigby given to the North West BMF Conference in 2004

Charles Handy, the management writer, tells the story of a frog in trouble to illustrate how different organisations react to evolving markets and the changing environment.

Drop a frog into very hot water and it will jump out and save itself. But a frog in cold water will stay put if the water is heated slowly. Eventually it will let itself be boiled alive. The changes in temperature are so subtle the frog doesn't notice. By the time the frog perceives the danger it is too weak and groggy to act, and it slowly dies.

Where change is sudden and immediately obvious, we react quickly to the threat or opportunity. But most change is imperceptible. It happens at a snail's pace. We are blind to the difference from one day to the next. It is only by standing back, and comparing what it was some time ago with what it is now, that we recognise how much has changed. Unless we see a big or sudden difference, or someone draws our attention to it, we probably won't notice.

Within a limited range of temperature - not too cold and not too hot - the frog is happy, perfectly adapted to its environment. Like the frog, at a point in time, builders' merchants are also content and well suited to their environment. Perfectly adapted to market conditions they can grow and make money with ease. But nothing stands still. The market - in effect the sum of all the actions of customers, competitors, channels and suppliers - is constantly changing. You may not be alert enough to notice the transition, but your business feels every stress and strain as gaps open up between what your company needs to do to compete effectively and what it does do. What was perfectly matched to the market at one time is progressively less so. The lead you have over your competitors starts to shrink. Unless you act quickly they will draw level and overtake you. They may have already done so, but because the economy has been kind your business may not have suffered. From day-to-day, month-to-month and year-to-year, your customers' needs are developing. It is hard to measure the rate of change when you are in the thick of it, but change is inexorable. You may feel you're standing still, but it's an illusion, and a dangerous one at that.

At some point, customer satisfaction will get cooler and colder, the gaps will prove too much and sales will suffer.

If the frog had the benefit of an independent, objective measure of the temperature of the water it would sense the danger in good time to save itself. It's the same for merchants. If your market intelligence isn't up to speed you don't have the objective, independent information you need to tell you where you are and how you are doing. You are running your business as if the changes in your external environment, your markets, don't matter. Wallowing in hot water when the temperature is rising might feel good to begin with, but it is high-risk and foolish.

Twenty years ago I left Dulux Paints to become the marketing executive of UBM Building Supplies. At the time there was not much between UBM, the Graham Group and Jewsons, and a hundred branches was a seriously big number. Now, with nearly 2,800 branches and £5.4 billion between the big three at the start of the year, one hundred branches is small potatoes. Even the next two national merchants, Grafton and BSS Group, with 511 branches and just over £1 billion sales between them - a fifth of the big three - are more than twice as large as the biggest groups twenty years ago. Estimates vary, but between them the five merchant groups account for 60% to 70% of the builders' merchants sector.

The nationals achieve vast economies of scale in buying to squeeze ever larger amounts out of their suppliers. It boosts their profits, supports their share price, and indirectly it funds further acquisition. Their scale also enables them to tie up national deals with house builders and large contactors. What's left over may filter down to branch level to support their marketing and improve their performance. But on a one-to-one basis, regional chains and smaller independent merchants have little to fear on their own turf. Indeed the advantage is often the other way. But if the large chains keep on acquiring, won't it get to the point where their buying muscle and prices mean they can grab any sales they want? Are there limits to market consolidation? There are parallels in animal evolution.

Natural selection is blind to the future. So it is possible for a species to evolve itself to extinction by adopting a strategy that works in the short term, but not in the long. Recent research, published in Science magazine, to explain the extinction of many carnivores confirmed an old idea called Cope's Rule.

Excluding special circumstances, such as the evolution of dwarf animals on isolated islands, the rule is that small animals evolve into large ones, but not vice versa. This makes sense. Size brings security from predation, success in competition for mates (at least if you are male) and a lower surface area to volume ratio (which reduces heat loss). The downside is that big animals have to eat more than small ones.

If you are a carnivore the easiest way to eat more is to specialise in larger prey. But the problem is that large prey are rarer than small ones, so specialising in them leaves you vulnerable to relatively small ecological changes. If your preferred food supply vanishes you may not, as a smaller species would, have any suitable alternatives. And extinction thus beckons. Research suggests that in Earth's history the average lifetime of large carnivore species was 6 million years, against 11 million years for smaller less specialised species. Smaller species are better able to survive the changing environment than their larger predators.

Last month, smelling blood in the water, the Sunday Times surveyed 20 Sainsbury stores across the country. They tried to buy 30 everyday items including chicken breasts; Heinz baked beans and Haagen-Dazs ice cream.

In Camden, 11 items out of the 30 were out of stock. Hull did not have 6. Only at one store, Bradford, were all 30 items in stock. On average, each Sainsbury store had 3 of the 30 items out of stock - more than double the industry average, and way behind Tesco and ASDA. This is not a flash in the pan. “I consistently find things are out of stock,” says a customer. “Today it was French Beans and soft fruit. If they have not run out of one thing it is another.” “It is not that they do not have a wide range,” says another, “but they have massive gaps on their shelves.” Out of stock items don't just reduce customers' spend. If Sainsbury disappoints too often, even loyal shoppers will try out rival stores. And getting them back will not be easy. In less than a decade Sainsbury has lost its place as Britain's largest supermarket chain. Relegated to third place behind Tesco and ASDA, it is at risk of being overtaken by a merged William Morrison and Safeway and it is cutting its prices. But that isn't working.

Sainsbury is not the only retailer in trouble. Marks & Spencer, Boots and WH Smith are all suffering. Asda now sells more clothes than Marks & Spencer, and £1 in every £8 of the UK's retail purse is spent at Tesco. WH Smith just announced its worst results in 212 years, falling £135 million into the red. Boots, Marks & Spencer, Sainsbury and WH Smith are charged with being inward looking and complacent, whereas Tesco and ASDA have put the customer first.

Once you have to visit two supermarkets to complete your shopping it makes more sense for shoppers to split their purchase more evenly between them, or shop around for better prices.

If merchants offer plumbing, or timber, then it makes sense to try and supply all their customers' requirements for plumbing or timber. That leads to repeat purchase, trust, loyalty, growth and much greater profits. Shopping around costs customers time, money, disruption and hassle. And it is not appreciated. If they are working away they will want to buy locally or on the way. But if you fail them you will be punished.

For years merchants have been advised to cut their stock of slow moving, not moving and obsolete stock to release cash and improve financial performance. But cutting stock is only a short term expedient. Long term, having the right stock, in range and depth, for your customers is what merchants are there for. You can only do that by getting to know your customers and their markets, and by getting closer to them by better selling and marketing. Sainsbury and Marks & Spencer have messed up their stock, but our own research confirms that this is an ongoing and serious problem for builders' merchants too.

People like me who run PR and Research agencies don't normally experience it at first hand, but I don't think our experience was unusual.

It was meant to be a simple job. We had to obtain timber, using a typical selection of boards, for a project to determine the quality of material from different sources a builder or carpenter might use. The four sources were a timber specialist, two branches of leading builders' merchants and a DIY shed. We had a strict deadline.

The branch of one national we had selected didn't have what we wanted in stock, and wouldn't have by our deadline. We switched to another. Another left us on hold - twice - while they looked for someone to take our order, forgot about us and left the phone swinging while we listened in to their conversation. Two were helpful and efficient.

With the help of a friendly builder and a hired truck we arrived to collect our first order from one of the nationals. The yard was tidy and well organised and the staff quickly loaded the timber on to the van with a fork lift.

Our next call to a timber merchant took longer. The stock was neatly stacked and the uniformed staff looked professional. But the boards weren't cut to size. It's not part of our normal service, but we'll do it for £5, they said. Loading took longer, as the forklift wasn't available and no one wanted to help.

Our driver was pleasantly surprised by the DIY store. Everything was ready and cut to size as promised. We got a cup of tea, while the staff loaded up the truck for us.

The final pick up from a national builders' merchant took longer than expected. We arrived at 8am Friday, but our order wasn't ready. The yard looked disorganised. “We're understaffed and busy. Come back tomorrow morning,” we were told. At 9am Saturday it was the same story. “Sorry mate. It'll be Monday.” By Monday we were under pressure to meet our deadlines and had to deliver to the other side of the country by midday. The timber was not cut to size as ordered, so our driver had to saw it up. “If you could have waited till next week it would have been different,” we were told.

The timber was standard stuff, ordered in plenty of time. We'd expected no problems getting what we ordered from the merchants, but wondered about the DIY store. They say if you want to know what it's like doing business with yourself, become a customer for the day. How was it for us as a customer? Terrible! How is it for your customers?

Years ago, when Marks & Spencer was a revered icon, they boasted that the only market research they did was to listen to the sound of the ringing of the till. It told them all they needed to know about quality, product popularity and customer needs. They were arrogant, complacent and short sighted.

Now, they are losing customers and sales, their shares are down, and their reputation is wrecked. Sure they listened to the sound of the till, and analysed it in mind numbing detail. But what they didn't hear was the sound of what wasn't there - customers leaving empty handed. Those who defected to rival stores because they couldn't find the clothes they wanted, stayed away, and bought their food and furniture elsewhere too. It was a costly mistake. They measured what was under their noses, but ignored what they couldn't see. Ex-customers were invisible. They also overlooked the progress their rivals were making. Some of them they barely classed as competition. They did not see what was happening until too late, while those who did do their research, Tesco and Asda, have taken them to the cleaners.

Mention research to most builders' merchants and you get one of two responses. Either they say they know all about their customers and their preferences. Or they see it as the supplier's job to research the market and provide it free of charge. That is short sighted. The interests of suppliers and merchants are not the same.

Unless you take share from your competitors, your business can only grow as fast as the mix of markets you supply. If they grow slowly or shrink, your business will struggle to do better. Every business needs new markets and growth to make good the sales gap and attract new customers to replace those who retire or fail.

But in the last twenty years merchants have let several large growth markets slip through their fingers. Wood windows and doors, a market where merchants had a firm grip, lost out to PVC and merchants missed the boat. Conservatories, another major growth market, have largely bypassed merchant distribution. Roofline - cellular foam PVC-UE fascias, soffits and bargeboards - is another growth market that has gone elsewhere.

This multi-billion pound loss has long term implications. Associated products are lost too. Rainwater sells alongside roofline, and when installers and traditional builders have to buy elsewhere, because what they want is not in stock, they take their rainwater purchases with them. No surprise that rainwater sales through merchants are falling, while rainwater sales in specialist stockists are growing. They take other business too.

A generation of small to medium sized, profitable tradesmen are getting used to buying elsewhere. These growth markets boost the sales of the DIY sheds, and encourage new distribution to set up and flourish. Small trade centres and trade counters selling roofline, rainwater, conservatories, doors and windows with all the associated products have become a major route to market within a ten year period. Many are starting to stock internal decorative cladding for bathrooms. Some have added hardwood and laminate flooring too. These are all natural merchant markets that have slipped away, or are at risk.

Hard landscaping is a merchant success story. It's large, fast growing and profitable. But are merchants doing enough to secure it?

Twenty-five years ago builders' merchants were in a great position to exploit another exciting new market: DIY. It was fast growing and high margin, but it was difficult to serve both trade and DIY within the same format. With the perspective of hindsight it could have gone either way.

Is it too late to compete for a significant share of DIY? It's a valuable market. Merchants have many advantages up their sleeve, if they look. But they will have to challenge their assumptions about what the trade and consumers want, and research what they have to do to win. There are common threads, but each market is different. What works in hard landscaping or self-build is different from conservatories or roofline. Turning the tables won't be easy, but battles are won locally not globally, one market at a time, one town at a time.

Perhaps we should start by looking at what we mean by DIY. It's almost defined by what people buy in a DIY store. But that is no help to merchants. Who are these people? What do they buy, who else is involved and what sort of a purchase is it, are key questions. Apart from DIYers there are moonlighters, and professional tradesmen and builders buying on their own account. In an affluent, time hungry society many who now DIY might, given a choice, pay for the freedom to do other things. And in the interface between homeowners, installers and builders we have exciting lifestyle markets and self-build. The fight is still on for self build, where merchants are not doing badly. But in lifestyle markets it's a different matter.

Lifestyle projects are about dreams - remaking our homes and gardens and transforming the way we lead our lives. They are about improving our lives - extra space, or enabling us to entertain, show off or enjoy life at home. Some of these lifestyle markets are up for grabs. The good news for merchants is that the sheds are not doing so well in these areas. B&Q has done well in kitchens, but no one has really cracked bathrooms. The sheds are also missing out on one of the most exciting markets, conservatories. They do have showrooms, but they really haven't got their heads around how to sell conservatories, and by far the greatest part of the market has bypassed merchants and sheds. Hard landscaping is exciting but few are really exploiting the potential of this market. Garden roofs are opening up.

Importantly, lifestyle markets are growth markets, and more product sectors are becoming lifestyle markets. Others are on the horizon. It's a big opportunity.

Lifestyle markets are good news for those who attract homeowners and help them find what they are looking for. Whoever controls the process controls the products, prices and the installation. It is more complex than selling a product at a price, but the rewards are greater. Generating leads for your customers and selling them the products they need to complete the project could be an enduring win-win.

The internet is both a threat and an opportunity. It is an equaliser where size is not necessarily an advantage.

In just a few short years the Internet has established itself firmly as a serious retail channel. If, like many merchants, you haven't yet taken the plunge, time is running out. After all the frenzy and confusion of the late 90s the Internet is here to stay. It is being used by an increasing number of individuals and businesses to search and to buy an ever widening range of products and services. It is transforming the way we do business.

58% of those over 15 in Great Britain used the Internet in the last 12 months - 60% of men, and 49% of women. 28% use it every day at home. 25% bought books, 20% music, 15% clothes, 12% electrical goods, and 7% bought their groceries online.

In the USA 4 out of 5 people research the car they intend buying before going to the dealer they have chosen. Increasingly, conservatories in the UK are being bought the same way. By the time they contact you they are more than half way towards making a buying decision.

The builders, McCarthy & Stone recently reported a slowdown although one element of their business was speeding up. A growing number of silver surfers - internet savvy pensioners - are not just enquiring online, but buying homes online rather than through traditional routes. The web now accounts for £20 million of their turnover, more than 1 in 20 of the homes they sell.

Things could hardly be better for merchants. The economy has been strong, consumers have been spending, the government has been investing, and the market has been good. If you didn't make good profits in the last two or three years, you probably never will. National merchants have done particularly well. Everything - growth, profits, power and influence - seems to be going their way.

After a few false warnings the housing market is cooling. Few are forecasting a sharp downturn in the economy, but what if there is a prolonged slow down, a housing market overhang and a correction to the economy, when consumers and Government cut their borrowing or start to pay back current debt? What then?

National builders' merchants may start to use their rebates and market support war chest for what they tell manufacturers it was intended for - developing and supporting their efforts locally, rather than boosting their bottom line. They may put more effort into specialist distribution and new formats such as Platform, which is already showing up the failings of the mainstream branch network. B&Q will speed up its drive for trade business to compensate for lower consumer purchases. There will be a new, cutting edge to competitive trading. With lots of capacity and a smaller market to go for, it could be painful. Where will you find your edge then?

Improving your buying and maximising the benefits of scale through collective buying is an obvious first step.

But getting closer to customers is vital. What do they think of you? How easy are you to do business with? How do prospects see you? Are you top of mind or an afterthought? What is the gap between what customers want and what they get from you? What would it take to bridge that opportunity gap? How do you compare with your rivals? Do you do this benchmark research on a regular basis? Guess who does.

Then there is merchants' biggest blind spot: marketing. Traditionally merchants have relied on manufacturers for their marketing, but suppliers should only be relied on to support what you are already doing. Traditionally merchants have seen themselves as traders, whose job it is to buy and to sell, and exploiting the price difference between the two. But B&Q see buying and marketing as equally important. And they are good at both. It is a powerful combination that has driven their growth and profits, whatever the state of the economy.

Reviewing your role in the markets you serve and your position in the supply chain is particularly important when both markets and supply chains are evolving. Builders' merchants have to ask what business are they really in? Who are your customers? And who are their customers? How are they changing and how are they doing? Indeed what does it mean to be a builders' merchant today? Does the term merchant, or trader, make it harder to spot and exploit the enormous opportunities that present themselves? Ignore those questions, or answer them in too traditional or narrow a way and you dig your own grave. Get them right, and you'll pave the way for a sustainable and profitable future.