Legitimacy of Management

It is the purpose of the organization, and the grounds of management authority, to make human strength productive.

It is the task of management to make the institutions of the society of organizations, beginning with the business enterprise, perform for the society and economy, for the community, and for the individual, alike. This requires, first, that managers know their discipline.  It requires that they know management.  The first task of the manager is indeed to manage the institution for the mission for which it has been designed.   The first task of the business manager is, therefore, economic performance.  But at the same time she faces the tasks of making the work productive and the worker achieving, and of providing for the quality of life for society and individual.  But a leadership group also has to have legitimacy.  It has to be accepted by the community as “right.”  They need to ground their authority in a moral commitment, which at the same time, expresses the purpose and character of organizations.  

There is only one such principle of morality.  It is the purpose of organization, and, therefore, the grounds of management authority, to make human strength productive.  Organization is the means through which man, as an individual and as a member of the community, finds both contribution and achievement.

ACTION POINT: Use your position of authority to bring out whatever strength there is in the people you are responsible for.

Absolute vs Relative Performance V

...sales representatives see the incorporation of hitting management-established goals as a logical evolution to their pay program. 

Most sales reps are astute when it comes to dissecting a sales compensation program.  The first question most reps will ask when relative performance metrics are introduced is: "How will the goals be set?"  We have been part of successfully implementing relative performance metrics into sales compensation programs that were previously based on absolute measures many times.  In these instances, success was due in part to accountability within the sales organization.  Sales representative may not have been paid on achieving objectives such as monthly or quarterly sales goal, but the goal was important to them because their manager made it so.

In these situations, sales representatives see the incorporation of hitting management-established goals as a logical evolution to their pay program.  On the other hand, there are companies in which an almost irrational fear of the sales force exists.  In these companies, the view is that the sales force will leave the company en masse if their pay program were to change to a system that links any portion of their pay to achieving objectives.

Some questions to consider in order to get a sense of how well relative performance metrics would work based on the degree of accountability in your organization are:

• Do goals exist for sales reps today?
• If goals exist, do sales reps pay attention to them?
• Does a sales manager regularly meet with sales representatives to review performance?
• Does the company have a history of success when emphasis is placed on short-term objectives-for example, product promotion?
• Are sales reps special deals mostly absent?

ACTION POINT: If most of the answers to the questions are "no," an absolute approach will be less disruptive and easier to implement.

Absolute vs Relative Performance IV

It is better to not waste time discussing goal-driven program options if a company is unable to implement them.

Assessing the feasibility of using relative performance metrics is the first challenge your sales compensation design team should tackle.  If relative measures are not appropriate, the sales compensation structures and mechanisms available are rather narrow as you are essentially left with absolute program options, the most common of which are detailed later in this chapter.  

It is better to not waste time discussing goal-driven program options if a company is unable to implement them.

ACTION POINT: Does enough accountability exist within our sales organization so that we can use management-defined objectives?

Absolute vs Relative Performance III

Sales rep incomes are tied to goals, budgets, or quotas, creating a degree or accountability for the rep to contribute his or her part of the company's overall objectives.

The distinction between absolute performance is critical when considering sales compensation options.  A sales executive once explained the difference between absolute and relative performance in the context of sales compensation by saying, "On approach is sales rep regulated and the other is management regulated."

The point the executive was making is that relative measurements mean that performance is evaluated relative to management expectations.  Sales rep incomes are tied to goals, budgets, or quotas, creating a degree or accountability for the rep to contribute his or her part of the company's overall objectives.

By saying "rep regulated" the executive was expressing his view that the the only accountability that exists under an absolute program is the amount of income the rep wants to earn.  In other words, the rep is solely accountable to himself or herself and the income the rep wants to make.

ACTION POINT:  Decide how you want to manage performance expectations.

Absolute vs Relative Performance II

It wouldn't matter if the sales rep that generated $1MM missed his or her budget by 30%, was down 20% in sales from the prior year, lost 200 basis points of margin, and had sales in only 2 out of 10 of the company's product categories... 

From a compensation perspective, absolute performance means more is better.  A sales rep that generates $1MM in gross margin would earn more than a sales rep that generated $900K in gross margin using an absolute measuring approach, such as a straight commission program that pays 15% of gross margin dollars.  

It wouldn't matter if the sales rep that generated $1MM missed his or her budget by 30%, was down 20% in sales from the prior year, lost 200 basis points of margin, and had sales in only 2 out of 10 of the company's product categories while the sales rep that generated $900K in gross margin was up 25% from the prior year, beat their budget by 10%, increased gross margin percentage, and had sales balanced throughout the company's product categories.  None of this would matter because in absolute terms, $1MM is better than $900K.

ACTION POINT: Understand that absolute performance make everything but the the total GP irrelevant.

Goal and Vision for Work

“All my life as a musician, I have striven for perfection.  It has always eluded me.  I surely had an obligation to make one more try.”

I have never forgotten these words-they made an indelible impression on me.  Verdi, when he was my age, that was eighteen, was of course already a seasoned musician.  I had no idea what I would become, except that I knew by that time that I was unlikely to be a success exporting cotton textiles.  

At eighteen, I was as immature, as callow, as naive as an eighteen-year old can be.  It was not until fifteen years later, when I was in my early thirties, that I really knew what I am good at and where I belong.  But I then resolved that, whatever my life’s work would be, Verdi’s words would be my lodestar.  I then resolved that if I ever reached an advanced age, I would not give up, but would keep on.  In the meantime, I would strive for perfection even though, as I well knew, it would surely always elude me.

ACTION POINT: Strive for perfection in your work knowing that it will always elude you.

Absolute Versus Relative Performance

Relative performance differs from absolute performance because there is an interpretive or contextual component. 

The first key decision-point deals with how performance can or should be measured.  There are two means of assessing performance: in absolute terms or in relative terms.  For instance, if I told you my daughter shot 90 the last time she played golf, what would you think?  Is this a good score or a bad score?  

If I told you that my daughter plays on the LPGA tour, you would probably offer me condolences.  If I told you she was eight years old, you would either ask me if she only played nine holes, or make some comment about being impressed.  In some cases, 90 is a great score and in some cases 90 is a terrible score.  Measured in absolute terms, 90 is 18 over par.  In relative terms, 90 could range from an awful score to an incredibly good score.  Relative performance differs from absolute performance because there is an interpretive or contextual component. 

ACTION POINT: Understand the distinctions between absolute and relative performance.

Keys to Sales Force Structrue

The sales structure should enable individuals to thrive by providing clear marching orders, realistic performance expectations, the right tools, and a productive, supportive environment. 

Organizational structure decisions can frequently determine financial success.  The following takeaways are ones to consider for your sales force structure:

• Structure should follow from strategy.  Properly aligning your sales organization to fit the evolving marketplace is essential--more important than the specifics of how you manage, reward, and equip your sales reps.  It is also potentially disruptive, which is one of the reasons that many wholesaler-distributors fall into the trap of relying on incremental changes, which, over time, may leave them far away from their ideal market position.
• Your target customers' needs should be the basis for evaluating your sales structure.  There are many established models that can provide useful ideas.  Market gap analysis and role maps are great tools for defining clear sales positions starting from an external, customer-centric viewpoint.
• Sales roles should also consider the inevitable trade-off between accountability and specialization.  It is easier to measure performance when a single individual has end-to-end responsibility for all aspects of the sales process.  However, a competitor who offers specialists for quotations, project management, or application support may be able to provide these services more cheaply and effectively.
• Estimating the average cost of sales force "coverage" for a customer is an important part of structure and, ultimately, compensation design.  This evaluation provides an economic reality check of both your sales roles and your cost to serve different customer segments.
• At the end of the day, every sales position is filled by a flesh and blood human being.   The sales structure should enable individuals to thrive by providing clear marching orders, realistic performance expectations, the right tools, and a productive, supportive environment.  Tacking training, technology, or incentives onto a fundamentally dysfunctional structure will not work.

ACTION POINT: Establish your sales organizational structure based on the key takeaways above.

Human Factors in Sales Roles

Is wearing a red cape a requirement?

Once you have completed role assignments for your sales team step back and think about the positions you have defined to support your strategy.  At the end of the day, these will be filled by living, breathing human beings.  It is management's job to provide a system under which people can be successful.  Consider the following human elements:

• Can a human being do everything you are asking in the role/? Is wearing a red cape a requirement?
• Does the structure provide sufficient autonomy?  Sales reps in particular are highly driven by a desire to control their own destiny.  Putting too many shackles on their role may be highly de-motivating.
• Are the jobs fun and meaningful?  It may be logical to have a quotations specialist position but will it be so monotonous that no one will have any interest in it?
• Does the organization provide enticing career paths, with a clear progression of status and options for different personalities?
• Do we end up with one person in every position?  Our experience is that you should try hard not to have "one" of anything.   Sales reps thrive on internal competition, and management needs to have a relative yardstick for each position.
• Do the positions offer sufficient clarity and focus?
• Does the new organization represent a realistic level of change management?  Is the transition between current and desired state manageable? Will the changes crease so much fear, uncertainty, and doubt that you run a real risk of losing high performers?
• Are the spans of management control realistic?  If you end up with a different boss for each person in a branch who is located hundreds of miles away, you may want to reconsider.

ACTION POINT: There are no simple answers to these questions, but you need to ask them as a reality check before finalizing your organizational structure.

Accountability and Cost of Coverage

Specialization increases efficiency in several ways. 

There are trade offs between a specialized rep focus and the general end to end model.  With end-to-end ownership, there is zero ambiguity about who is responsible for the customers in the reps territory.  As a result, we can measure performance simply by calculating the customers contribution.  Under this scenario the salesman can be held accountable by paying them for performance for their customers.

The salesman has both clarity of objectives (make profit dollars) and sufficient influence (total account control).  However, it is pretty rare to find a single individual sales rep that is really good at merchandising, estimating, relationship development and customer service, not to mention data entry, warehouse picking, and accounting.   Needless to say, the wholesaler-distributor that does not do at least some specialization would be out of business pretty quickly.

Specialization increases efficiency in several ways.  First it allows us to use the lowest-cost resource for a particular function.  Order processing is one example; the typical warehouse picker is paid less than the FSR, so it makes sense to outsource this function to that department.  Second, productivity almost always increases as tasks become narrower. By repeating the same activity over and over, we work at least 15% faster and make fewer errors(Sassons, 1996).  By reducing the number of distractions and amount of "task switching," productivity can be increased by 28% or more (Jackson 2008).  Studies show that it takes almost a half hour to "recover" from a phone call or text message interruption.

Specialization also supports investment in technology and training, since a smaller set of users can be more deeply immersed in the tools.  For example, CRM software implementations are often more successful at wholesale distribution companies that limit them to the telephone sales force because these reps use the same customer history screens hundreds of times a day.

After you have defined the roles for each position in your sales structure, the next question is: how many of each do I need?  By completing the role map in the fourth column below you will identify the performance drivers.  These are the activities that a rep should perform to be successful (as indicated by the metrics in the third column) in the roles (second column), which support the strategy (first column).  Building on this will provide an example of how a sales rep spends his time as seen in the last table.

ACTION POINT: The key to driving accountability within the context of a strategy is to identify the specific areas in which the benefits of specialization outweigh those of end-to-end ownership. Cost coverage is about identifying the performance-driving activities and determining an appropriate time allocation for each.

Work

“The devil finds work for idle hands.”

Work, we know, is both a burden and a need, both a curse and a blessing. Unemployment we long ago learned creates severe psychological disturbances, not because of economic deprivation, but primarily because it undermines self-respect.  Work is an extension of personality.  

It is achievement. It is one of the ways in which a person defines himself or herself, measures his worth, and his humanity.

ACTION POINT: Don’t let your self-respect be undermined by being unemployed.  Remind yourself that there are other ways to define yourself besides work.

Accountability for Performance

But this independence works against the execution of a market strategy and keeps companies from leveraging their scale. 

After you have developed the strategic objectives and roles column on the role map, the next step is to identify the success metrics.  These are measurements you will use to determine success in fulfilling the roles that support the strategy.

The process for defining these metrics is one of the most powerful exercises you can do.  It forces you to clearly translate your strategy into the real world.  It requires that you confront head to head two factors that drive accountability:

• Clarity of objectives
• Sufficient influence over results

The sharp-eyed reader will pause on the word "sufficient."  Defining what constitutes a "sufficient" degree of control over the delivery of customer service has been a stumbling block in wholesale distribution for years.  Traditionally, wholesaler-distributors have relied on a high degree of local branch and sales force autonomy to ensure accountability.  But this independence works against the execution of a market strategy and keeps companies from leveraging their scale.  For sophisticated wholesaler-distributors with mature management processes, the trade-off between accountability and strategy has proven to be false.  They have been able to achieve both by clearly understanding when and how to specialize.

ACTION POINT:  Understand how to specialize to achieve both accountability and strategy.

Role Map II

The more clearly and concisely you can write down a role description, the higher the probability that the role will successfully accomplish its objectives.  

It is important that as you write down objectives for the position, you ask yourself whether they really represent a strategy rather than a goal or a wish.  Strategy is bout "how" the objectives should clearly indicate the segment being addressed and the repositioning needed.  If your objective for the position is something like "grow profitable sales by 30%," you are leaving your strategy in the hands of your sales force--which means you do not really have a strategy.

In the second column of the role map--next to each strategic objective for the position--you can now determine the role that each person in a given position must fill in supporting the corresponding objective.  For example, it it is clear that migrating transaction-only customers from FSRs to ISRs is a key strategic objective, then the FSR's role in supporting this strategic objective might be to allocate at least 75% of his or her time to large account demand-creation activities.   

The small size of the role map is deliberate.  The more clearly and concisely you can write down a role description, the higher the probability that the role will successfully accomplish its objectives.  

ACTION POINT: If you are asking a single sales rep to do 20 different thing, how can you expect him or her to give any one of them real priority?

Mapping Model to Strategy

As a rule of thumb you should have no more than six objectives, and ideally two or three.  

Each of the sales models includes several different sales or marketing positions.  The next step is to map these positions back to your strategy.   The role map in the table below is a powerful tool for this exercise.  It enables you to connect your strategic objectives to roles that the position plays in meeting your objectives and to the measurements that will be used to demonstrate successful performance in the role.  The performance measurements become the baseline for goth your sales management system and your compensation plan.

The first column identifies the strategic objective for the position.  These objectives should be based on your strategic market gaps.  As a rule of thumb you should have no more than six objectives, and ideally two or three.  

ACTION POINT: If you find that you end up with dozens of items, then you do not have sufficient strategic clarity to finalize your organizaiton structure--much less dive into sales compensation. 

Structural Sales Models

At a minimum, you will need to make adjustments to fit your particular situation and market.

The following models outline some generic structural options found in wholesale distribution.  These models are just a starting point.  At a minimum, you will need to make adjustments to fit your particular situation and market.

• Classic Field Sales - Field sales reps (FSRs) act as generalists and are assigned to customers based on geographic territories.  They perform demand-creation activities.   Customer service reps (CSRs) provide demand-fulfilment services such as quotations, transaction processing and so forth.  Specialist reps (SRs) provide episodic product technical, or functional support to FSRs when such support is requested by the customer (that is, when thee is a new business requirement  or problem).  The class field sales model is best for early life cycle products, narrow, deep expensive customer coverage and pioneering demand creation.   They provide high value, high-trust solutions and work in undifferentiated segments within the same geography.
• Inside Sales - FSRs act as demand-creation generalists but are only assigned to the highest opportunity accounts.  Inside sales reps (ISRs) are assigned to customers by geography or segment.  They perform demand-creation activities (outbound calling for example).   CSRs provide primary demand-fulfillment services.  Online services (websites, mobile phone apps) provide supplemental customer service functions.  This model is best for mid-life cycle products, medium cost coverage and low density markets.  Selling is based on product or service differentiation.
• Telesales and marketing - Dedicated market research function identifies prospects.  Telephone sales reps (TSRs) conduct high-volume outbound calling.   Targeted marketing (paid web search, search engine optimization, traditional advertising and so forth) generates awareness.  Online services (websites, mobile phone apps) provide primary customer service functions.  CSRs provide supplemental customer service functions.  This modes is best for late life cycle, highly commoditized products where low cost coverage and selling based on price and availability is directed toward transactional and infrequent buyers.
• Team Sales -Groups of various combinations of FSRs, ISRs, TSRs, CSRs, and SRs assigned to customers based on geography or segment.  This model is best for customers that migrate frequently between segments or different stages of the product life cycle and where there are high-value, complex sales transactions.
• Segmented field sales -  Similar to classic field sales, but with FSRs assigned to customers based on segment.  CSRs may play a stronger role in relationship, awareness, and demand-creation activities to offset reduced FSR call frequency.  This model works best for pioneering demand creation and where industry or segment specific expertise and solutions are required in high density markets.  It provides high value, high trust solutions.
• Functional or staged sales - FSRs or SRs provide demand-creation services and are assigned to customers based on geography or segment. Project teams or implementation experts are used for complex customer conversions (for example, inventory consignment, technical engineering support).  At well-defined stages in the sales cycle, account ownership is passed to ISRs.  CSRs or online services provide demand fulfillment.  This model works best in markets in which different customers are in different stages of the product life cycle or where decision makers in the customer organization change at different stages of the sales cycle.  It is also best for high-value, complex sales transactions.
• Multilevel sales - Similar to functional sales except that FSRs typically retain account ownership at the corporate level.  ISRs and CSRs are typically assigned to specific (local) customer locations.  This model is best for major account selling to large, multi location, decentralized organizations.

ACTION POINT:  Review the various structural models and how they may apply to your organization.

Taking Information Responsibility

Information specialists are tool makers… They can tell us what tool to use to hammer upholstery nails into a chair.  We need to decide whether we should be upholstering a chair at all.

A requirement of an information-based organization is that everyone takes information responsibility.  The bassoonist in the orchestra takes information responsibility every time he plays a note.  Doctors and paramedics work with an elaborate system of reports and an information center, the nurses’ station on the patient’s floor. The district officer in India acted on this responsibility every time he filed a report.   

The key to such a system is that everyone asks:  “Who in this organization depends on me for what information? And on whom, in turn, do I depend?”  Each person’s list will always included superiors and subordinates. But the most important names on it will be those of colleagues, people with whom one’s primary relationship is coordination.  The relationship of the internist, the surgeon, and the anesthesiologist is one example.  But the relationship of a biochemist, a pharmacologist, the medical director in charge of clinical testing, and a marketing specialist in a pharmaceutical company is not different.  It, too, requires each party to take the fullest information responsibility.

ACTION POINT:  Take information responsibility by getting the right information to the right people at the right time.  

Target Customer Alignment

Wholesaler-distributors' confusion over organization and roles is often the result of trying to meet each and every perceived customer requirement a little better than the competitors. 

Market gaps are "big picture" differences between what or how your customers ideally want to buy and what or how you are currently selling to them.  Closing these market gaps is the basis for aligning your organization.   Or course, some gaps may require new capabilities that are outside the realm of your sales force organization.   

We have found that it can be very powerful to use the Jack Palance line from the movie City Slickers  and ask yourself, "What is the one thing?"  Wholesaler-distributors' confusion over organization and roles is often the result of trying to meet each and every perceived customer requirement a little better than the competitors.  They end up deciding that a Field Sales Rep (FSR) must be an expert in all products, visit each customer in person weekly, personally follow up on every service questions, and then match Costco's in store price!  This confusion is a classic result of applying a sales mentality ("more, better, faster, cheaper") rather than a strategist mentality ("what are the fundamental business drivers?").  

ACTION POINT: By limiting your focus to a few key market gaps you can usually define one or tow overarching design criteria for the sales force organizational structure.

Aligning The Sales Organization

Make sure that success does not require every rep to be Superman or every manager to be Gandhi.

There are four factors that wholesaler-distributors should consider in designing sales force structure.  The acronym TACH can be used to guide the process of aligning your sales organization.

• Target customer alignment.  The fundamental criterion for any sale organization is how well it meets the needs of the market.  Using an external perspective ensures that your structure is not held hostage to history or internal politics. 
• Accountability for performance. Reward and punishment can only affect behavior if the individual has clear objectives and the means to reach them.  An appropriate organization structure is the best way to ensure that these prerequisites are met, and is thus the foundation of real accountability.  Paying reps on net profitability when they have limited control over warehousing, delivery, installation or project management is a great example of false accountability.
• Cost of coverage.  The sales organization should be designed to provide key services to target segments at the lowest cost possible.  This can often mean hiring more staff so that costly FSRs aren't tied up with customer service and administrative duties.
• Human factors.  This is the reality check on the model.  It may be unrealistic to expect a harried counter sales rep to make effective outbound calls in his or her "spare time," or to have a technical specialist traveling out of his or her home territory 80% of the time.  Make sure that success does not require every rep to be Superman or every manager to be Gandhi.

ACTION POINT:  Align your sales team to the market needs, hold them accountable, provide them the necessary support and recognize reality.

Sales Structure IV

Organization structure issues can't be tackled solely by new pay plans, better sales tools, or more skills training.

Now imagine instead that you had a process for reviewing your strategy and structure every two years. This activity forced you to ask the tough questions and make a sober evaluation of your market gaps.  You realized that your products were following the classic life cycle in which traditional sales rep services (for example, application support, value-added solutions, new product information) were becoming less important.  Meanwhile, the declining market was making customers far more price sensitive and savvy. 

You concluded that your sales force was not the most appropriate channel for a large and growing portion of your customer base.  As a result you created a new telesales organization, invested in on-line self service capabilities, and established a process to gradually but deliberately migrate your field sales force, with some reps transitioning to new roles and others focusing on new markets.  The average number of accounts served by each rep remains about the same--and so does each rep's compensation--as the lower value customers move to the new channels.  Your company takes market share even while it remains profitable--perfectly positioned for a "last man standing" strategy. 

It is important to apply sound diagnostics and use the right tool for the job.  Organization structure issues can't be tackled solely by new pay plans, better sales tools, or more skills training.

ACTION POINT: Redefine roles and reallocate resources as the market evolves.

Sales Structure III

Because they are "top guns," the reps are experts at making themselves indispensable at their big-dollar accounts.

Imagine that you are selling a mature product line to a declining customer base.  As sales drop, you use the opportunity to upgrade your field sales force, terminating the lowest performers and spreading their accounts over the higher performing survivors.  Over time, the territories grow--along with average commission checks--even though company revenues are declining.   Because the are "top guns," the reps are experts at making themselves indispensable at their big-dollar accounts. They grow accustomed to sailing their yachts through the seas of poverty, believing that their performance is the only thing keeping the company alive.  At some point the CFO recognizes the problem and the company decides to "re-examine" the compensation plan.

Unfortunately, considering the pay plan in isolation at this point is ineffective at best and probably downright dangerous.  Only radical compensation reductions will bring selling costs back in line.   But such big changes would drive the best reps into the arms of your grateful competitors, taking "their' best accounts along with them.  

ACTION POINT:  Reorganizing a pay plan only is ineffective and dangerous.

Sales Force Structure II

The competitive landscape has changed significantly in most lines of trade...

Your company's organizational structure determines how you allocate your most important asset: human resources.  Organizational structure decisions can frequently determine financial success.  As a simple illustration, consider a company that has a residential division and an industrial division.  Over the past three years, the effect of shifting reps out of the moribund residential market and into the industrial market would have dwarfed any conceivable residential division performance improvements.

No amount of training, measurement, "incentivizing,' or management focus would have been as powerful as simply re balancing resources to fit the market opportunity.

While this may seem obvious at a high level, we have found that a large portion of wholesaler-distributors fail to fully apply the concept of structural alignment.  The competitive landscape has changed significantly in most lines of trade, but many wholesaler-distributors continue to operate under the same sales structure they have had for the past 20 years.  It's easy to fall into the trap of making a series of incremental, tactical changes which, over time, leave yo miles wide of the ideal market position.

ACTION POINT: Recognize that the market landscape has changed, significantly, and look at realigning your sales force structure.

Sales Force Structure

To win in today's market, distributors need to apply a more modern approach--one that focuses on meeting these evolving service needs.

In the 1930's, the French built a series of military fortifications called the Maginot Line.  When these were completed in 1935, the French believed they were safe from German offensives in the West.  We all know how well that worked out.  The fault in French logic was that the Maginot Lines was designed to defend against weapons and tactics used in World War I, but times had changed.  Germany's fast-moving blitzkrieg was light years ahead of the masses of slow-moving troops and trench warfare for which the Maginot Line was built.

The corollary in wholesale distribution is the sales organization.  Historically, wholesaler-distributors had outside sales representatives and customer service representatives (frequently, but mistakenly, called inside sales reps [ISRs]).  These groups often had separate managers and distinct roles.  The customer service group took orders and handled routine inquiries, and outside sales did everything else. If you wanted to win the "war" in the marketplace, you bot more or better, or both, outside sales reps.  Unfortunately the "everything else" for which outside sales representatives are now responsible has grown and morphed far beyond the tranches of the last war.  To win in today's market, distributors need to apply a more modern approach--one that focuses on meeting these evolving service needs.

ACTION POINT: Recognize that sales roles must change for the marketplace of today.

Getting Strategic Clarity

It does not need to be sophisticated or complex, but it does need to be clear before you begin the process of designing your sales compensation plans.

Strategy is about how your company will achieve its financial goals.  It does not need to be sophisticated or complex, but it does need to be clear before you begin the process of designing your sales compensation plans.

An external market perspective (that is, seeing through the customers' eyes) is the essence of a successful strategy.  The process for developing this perspective into an actionable plan is abbreviated as STP: segmentation, targeting, positioning.

Segmentation is the act of grouping similar customers into categories based on what they want to buy, which is often quite different from what you are currently trying to sell them.   Good segmentation involves analyzing the economic and organizational drivers of buying behavior, which are typically not proved by your sales force.  The insight uncovered by segmentation is often eye-opening.

Targeting is the process of identifying the most attractive segments based on their cost to grow and potential to grow.  It can be uncomfortable because it involves going beyond our everyday "manager as cheerleader" mentality and making strategic trade-offs.  Targeting drives discretionary investment and focus; it does not mean turning down business or ignoring markets.

Positioning is the identification of market gaps; Those areas where there is a divergence between what a target customer wants or values and what your are currently offering.  By closing the most critical gaps, you will ensure that your limited resources are aimed at the biggest opportunities.  Positioning is the essence of ensuring that your sales force is working smart, not just hard.

ACTION POINT: Establish the financial goals you wish to achieve and develop an actionable plan using segmentation, targeting and positioning to achieve them.

Management Minute: Staying on Top

The next day, after eating some more dung, he reached the second branch.

A turkey was chatting with a bull. "I would love to be able to get to the top of that tree," sighed the turkey, "but I haven't got the energy."

"Well, why don't you nibble on some of my droppings?" replied the bull. They're packed with nutrients."

The turkey pecked at a lump of dung, and found it actually gave him enough strength to reach the lowest branch of the tree. The next day, after eating some more dung, he reached the second branch.

Finally after a fourth night, the turkey was proudly perched at the top of the tree. He was promptly spotted by a farmer, who shot him out of the tree.

ACTION POINT: Bull shit might get you to the top, but it won't keep you there.

Identifying Market Gaps

Key gaps are usually small in number and pretty fundamental.  

How do you identify key market gaps?  The best place to start is by developing ideal supplier descriptions  for the segments and targets you want to go after.   The following are some additional pointers:

• Get back to basics.  Key gaps are usually small in number and pretty fundamental.  They are often chronic, meaning that you have been talking about the symptoms for a long time.  As a rule of thumb, if you never feel uncomfortable during the positioning process you are not doing real strategy.
• Examine your service levels.  Gaps are often the result of providing undifferentiated levels of service (for example, sales coverage, delivery, price point) to all customers and segments.  This results in under servicing some customers (a capabilities gap) while over-servicing others (a profit gap).
• Consider your overarching message.  Message gaps often extend far beyond blurbs on a brochure or getting sales reps to "talk about the right things with customers."  Every aspect of your business, from the appearance of the counter to the efficiency of the delivery driver to the courtesy of the all center agent, reinforces your brand image in customer's eyes.
• Be specific.  Gaps should be described as specifically as possible.  Don't say "poor communication" if you really mean that "sales doesn't get new product information from marketing in a timely manner," or "poor technology" if the issue is simply that you can't produce accurate small job estimates.
• Look to the competition.  Evaluating suppliers and competitors can be a great way to uncover or clarify your market gaps.  However, it is essential that this analysis comes after your customer segmentation analysis, so that you don't fall into the trap of solving a problem that isn't critical.

ACTION POINT:  Review the pointers above to identify market gaps within your business.

Discovering your true message gap

Facilitating customer migration is now a core focus, and the company has achieved record revenue growth over the past two years.

More than 10 years ago, an industrial distributor recognized that highly centralized customers had fundamentally different needs than those that were more locally run, and created a separate "major accounts" division to handle them.  Although the group was successful, its account base had stagnated. Worse, revenue through the traditional sales channel had been shriveling for several years.

During this time, the company tried a series of tweaks to its sales compensation plan, adding promotions and bonuses for key products, increasing the commission rate on new business, and penalizing sales reps for customer churn.   Ultimately, the CEO determined that the compensation plan needed to be radically overhauled.  A team was appointed to design a new structure that would address the issue.

Fortunately, the team was sufficiently empowered to question some fundamental assumptions.  Using a positioning exercise, they determined that the two existing sales channels were in fact appropriate for the market.  The gap they discovered was that customers were unable to migrate freely between the different sales organizations as their needs changed. --and that they were largely ignorant of the twin capabilities the distributor offered. 

For example, the distributor's large corporate customers had often gone through several waves of consolidation (remember the procurement outsourcing and online marketplace fads of the early 2000's) and decentralized (think of hollowing out corporate overhead in 2009).  This clearly caused their support needs to change.  Due to the separation of the sales forces and territory based measurement, however, reps would never give up accounts to the other side.  As a result, customers that were centralizing abandoned the distributor because the viewed it as a local "mom and pop" with limited scale and sophistication.  Customers that were decentralizing had no local contacts or support.  There was a clear message gap in that customers were not aware of the company's full capabilities. 

In the end, the distributor changed its organizational structure and eliminated all"ornaments" from its sales compensation plan, replacing them with a simple formula plus a residual for all transferred business.  Facilitating customer migration is now a core focus, and the company has achieved record revenue growth over the past two years.

ACTION POINT: Sometimes a critical evaluation of your external positioning can lead to a true breakthrough, especially if you take a rigorously external approach and question your own assumptions.

Positioning III

You simply haven't given the customer anything else to distinguish you by except your price. 

Other issues that may explain market gaps from your customers perspective are:

• Capability is the problem.   The customer values some of the services that you could provide, but you fail to deliver them reliably.  You simply haven't given the customer anything else to distinguish you by except your price.  In this case, you have a capability gap, not a message gap.
• Profit is the problem.  Your vaunted service provides limited economic value to the customer--or at least less value than a lower product cost.  In this case you have a profit gap, not a message gap.  No matter how well you communicate your value, you will not meet a critical customer need.

ACTION POINT: Ensure your capabilities deliver real value that the customer recognizes as real economic value.

Positioning II

you have accepted price complaint feedback from your sales force at face value rather than recognize it as normal negotiation posture. 

Many wholesaler-distributors are frustrated because customers seem to "want the value of our service but aren't willing to pay for it."  At first this may seem like a message gap because, "if customers just came to understand how great we really are they would be happy to pay our premium."  However, if you frame the issue in terms of the customer's business drivers you can see that there are several other possibilities:

• There's really not much of a gap.  The customer really does value your service, at least in some situations, and has demonstrated his or willingness to pay for it by his or her actions.   However, you have accepted price complaint feedback from your sales force at face value rather than recognize it as normal negotiation posture.  Many buyers have been professionally trained to exert constant pricing pressure, and it is only natural to take any opportunity to push for a lower price if there is no real consequence for doing so.  In this situation, you have made the classic mistake of relying on your sales force as the sole channel for customer insight.  In contrast to their words, customer's actions indicated recognition of your value an imply that there may not be a (significant) market gap.

ACTION POINT:  Don't always accept price complaints at face value.

Management Minute: Staying informed

The priest apologized "Sorry sister but the flesh is weak."

A priest offered a Nun a lift. She got in and crossed her legs, forcing her gown to reveal a leg. The priest nearly had an accident. After controlling the car, he stealthily slid his hand up her leg.
The nun said, "Father, remember Psalm 129?"

The priest removed his hand. But, changing gears, he let his hand slide up her leg again. The nun once again said, "Father, remember Psalm 129?" The priest apologized "Sorry sister but the flesh is weak."

Arriving at the convent, the nun sighed heavily and went on her way.

On his arrival at the church, the priest rushed to look up Psalm 129. It said, "Go forth and seek, further up, you will find glory."

ACTION POINT: If you are not well informed in your job, opportunities for advancement will pass right by you.

Positioning III

Rather than running around trying to fix every perceived deficiency, the strategically led firms focuses on fully addressing a few critical things. 

For most wholesaler-distributors, the great merit of going through a disciplined positioning process is that it helps them set priorities based on gaps between external market needs and current internal capabilities.  Rather than running around trying to fix every perceived deficiency, the strategically led firms focuses on fully addressing a few critical things.  

This often involves eliminating harmful practices as much as improving or developing new ones.  Just as targeting was a process of focusing on a narrower group of customers, positioning is a process of focusing on a narrower set of capabilities so that you can be decisively better than everyone else where it really counts.

ACTION POINT:  Focus on the capabilities you can excel in delivering to your targeted customers.

Positioning II

...their biggest weakness is their "inadequate, outdated technology" (even though there is zero correlation between technology infrastructure and profitability).

Many companies run through the usual evaluation of their strengths, weaknesses, opportunities and threats (SWOT) based solely on the opinions of the employees attending the meeting.  They convince themselves that their biggest strength is their "great people" (even if they have performed below industry medians for years) and their biggest weakness is their "inadequate, outdated technology" (even though there is zero correlation between technology infrastructure and profitability).

Bottom line: a strength is only a strength if it provides value to a target customer.  If your customers are manufacturers who are really buying flawless logistics to support 100% up time  your technical expertise is not a strength--even if every single sales rep in your company holds a PhD in engineering.

ACTION POINT: Know and understand what strengths your customers want.

Positioning

The greatest deficiency in most wholesaler-distributor's strategy and business planning is their internal focus.

Every company (except a start up) holds a current position in the market.  This position is based entirely on your customer's perception of you and your competitors.  Aside form the foundation laid by segmentation and targeting, the key to successful positioning is in viewing your capabilities through the lens of your target customers' perspective.

The greatest deficiency in most wholesaler-distributors' strategy and business planning is their internal focus.  They simply fail to examine every issue in light of "how much does this really matter to our target customers?"

ACTION POINT: How much does what you are doing really matter to your target customers?

Benefits of Targeting

Think of every sales call as an investment.  targeting helps ensure that this investment is made thoughtfully, 

Segmentation and targeting always produce critically important insight that often leads to a company making fundamentally different decisions about its sales management practices and compensations structures.  Experience has shown targeting will yield one of the following levels of outcome:

• Minimum. Targeting provides the strategic clarity necessary for tactical sales compensation, management, and territory assignment.   Think of every sales call as an investment.  targeting helps ensure that this investment is made thoughtfully, based on the company's objectives, rather than reactively or based on individual rep's habits.

• Typical. The process produces a strategic reallocation of resources to take advantage of competitive strengths and profit opportunities.  In some mature lines of trade, wholesaler-distributors have made giant leaps in sales productivity by moving from a 2:1 ratio of outside to inside reps to 1:1, 1:2 or even more.

• Ideal. Targeting enables you to identify a market segment in which you have an opportunity to create a truly differentiated value proposition that competitors cannot match.  One national distributor had an epiphany when targeting revealed that its scale provided an opportunity for dominance in a segment that it was not currently even serving. 

ACTION POINTS: Use segmentation and targeting to improve your sales and business focus.

Management Minute: Credit and Risk

After thinking for a moment, the woman drops her towel and stands naked in front of Bob.

A man is getting into the shower just as his wife is finishing up her shower, when the doorbell rings. The wife quickly wraps herself in a towel and runs downstairs. When she opens the door, there stands Bob, the next-door neighbor.

Before she says a word, Bob says, "I'll give you $800 to drop that towel."

After thinking for a moment, the woman drops her towel and stands naked in front of Bob.

After a few seconds, Bob hands her $800 and leaves.

The woman wraps back up in the towel and goes back upstairs. When she gets to the bathroom, her husband asks, "Who was that?" "It was Bob the next door neighbor," she replies.

"Great!" the husband says, "did he say anything about the $800 he owes me?"

ACTION POINT:  If you share critical information pertaining to credit and risk with your shareholders in time, you may be in a position to prevent avoidable exposure.

Targeting V

...you are making hard decisions about where your efforts and investments will be focused.

Determining the relative attractiveness of a segment is the first part of targeting.  The second part is deciding what your company's basic posture will be for each segment.  This is where the tough trade-offs come into play.

Although you are note yet determining exactly how  you will attack each segment, you are making hard decisions about where your efforts and investments will be focused.

ACTION POINT: The most important outcome of targeting is agreement on the areas of the business that will not receive further investment.

Targeting IV

Using current customer profitability to evaluate the market is internal thinking at its most poisonous. 

Some common criteria for the process of evaluating cost to grow and potential to grow are listed in the table below:

One element you do not see in this table is customer profitability.  This is one topic in which there is a substantial degree of confusion and theory abuse.  For our purposes, it is sufficient to say that customer profitability is the net result of your strategy, not your starting point.  How much money you make from doing business with a  customer is a function of the value you deliver (which should be considered in your potential to grow analysis), the competitive landscape (considered in cost to grow), and how you position your organization to deliver and capture the value, which is under your control.  

It makes no sense to include customer profitability under your current cost structure when the entire point of the exercise is to determine the right cost structure for the market.  Using current customer profitability to evaluate the market is internal thinking at its most poisonous.  This does not mean that customer profitability isn't important; it just means that it should dome later in the process.

ACTION POINT: Focus on determining the right cost structure for the market you want to serve.

Targeting III

Targeting generally involves ranking customer segments on two dimensions: cost to grow  and potential to grow. 

Being second or even third choice for some customers is okay, but you want to be the first choice for a certain group of customers.  The big question is: which ones?  Targeting generally involves ranking customer segments on two dimensions: cost to grow  and potential to grow.  Cost to grow refers to the incremental investments that you would have to make to enjoy more business from a given customer segment.  

Potential to grow refers to the realistically available opportunity should you choose to make these investments.  Segments that offer the best combination of relatively high investments.  Segments that offer the best combination of relatively high growth potential and low cost are obviously the most attractive.  The art of targeting is determining the criteria that should be considered in calculating cost and potential to grow.  The science is collecting and analyzing the mass of quantitative data required to score each segment on each criterion.

ACTION POINT: Consider the cost to grow and the potential to grow of the market segments you are targeting.

Targeting II

 If you do not make clear trade-offs, you will do everything poorly and be vulnerable to more focused competitors: 

Most wholesaler-distributor executives spend the majority of their time managing.  Managing involves constantly exhorting others to do more with less.  We cajole, sweet-talk and brow beat our teams into working harder, better, longer, and cheaper.  We tell them things like "put yourself in the customer's shoes" and various versions of "we can do it all."  We create mission statements that promise to prove premier products with flawless service at highly competitive prices.  Playing the role of cheerleader-in-chief becomes second nature--the default approach to our business.

In contrast to the manager, the strategist recognizes that you have to make trade-offs.  Is is simply mathematically impossible to simultaneously provide the industry's highest fill rates, best sales support, and lowest prices to everyone.  If you do not make clear trade-offs, you will do everything poorly and be vulnerable to more focused competitors:  the generalist with deep inventory will capture customers that need the best service levels: the specialist with great technical support will get the customers who want better solutions; and the desperate, under capitalized distributor-on-a-shoestring will take the price shoppers.  Being every customer's second choice is a recipe for bankruptcy.

ACTION POINT: Evaluate the trade-offs you will have to make to drive your business forward.

Management Education

Management courses for people without a few years of management experience are a waste of time.

What I would like to see-and what I have practiced now for many years in my own teaching-is:

• Management education only for already successful people.  I believe management course for people without a few years of management experience are a waste of time.
• Management education for people from the private, the public and the not-for-profit sectors together.
• Planned, systematic work by the students while at school in real work assignments in real organizations-the equivalent to the MD residency.
• Far more emphasis on government, society, history and the political process.
• Teachers with real management experience and enough of a consulting practice to know real challenges.
• Major emphasis on the non quantifiable areas that are the challenges-and especially on the non quantifiable areas outside the business-at the same time much greater quantitative skills, that is, in understanding both the limitations of the available numbers and how to use numbers.

ACTION POINT: Take executive development course that pertain to your current position and the position to which you aspire.  Apply the concepts directly to your work assignments.

Targeting

When you choose to invest more in one group of customers, you are also choosing to invest less in another.

Targeting is the process of deliberately selecting specific customer segments for strategic focus and investment.  Of all the subjects covered in seeking strategic clarity, targeting has proven to be the most difficult for wholesaler-distributors.  Why? We believe it is because of their sales-centric management and history.

When you choose to invest more in one group of customers, you are also choosing to invest less in another.  The true essence of targeting is deciding what not to do, and to whom you will say "no."  Saying "no" does not mean turning away business; it means not giving best pricing or same-day delivery or some other means of service differentiation.  We have found that saying "no" to anything is often a highly unnatural act for sales-driven companies such as wholesaler-distributors.

ACTION POINT: What segment of customers do you want to say "yes" to?

Segmentation V

There are no definitive standards, but based on our experience, adequate segmentation for a wholesaler-distributor business unit with revenue between $50 million and $1 billion would include:

You could spend your entire career segmenting your market, but the question is, when is it sufficient to move ahead?  There are no definitive standards, but based on our experience, adequate segmentation for a wholesaler-distributor business unit with revenue between $50 million and $1 billion would include:

• Between 3 and 12 distinct segments representing both existing and potential customers

• Two-to-three-page descriptions of each segment, including business and economic drivers, key decision makers, buying behaviors, and typical examples

• Validation of the segment categories through assignment of current customers or external sampling

• Validation of segment categories by experienced customer-facing staff (also known as the smell test)

• Short descriptions of the ideal supplier for each segment.

ACTION POINT: Begin to evaluate your territories, markets and business from a segmentation point of view.

Focusing On Your Customers' Customer

We have found that qualitative insight, especially when based on executive-level interaction, can be eye opening. 

Demographic information about customers, such as industry category or company size, is readily available and provides a good starting point for segmentation.  However, don't confuse the precision of the data with the level of insight provided.  Many businesses that look exactly the same on the outside (for example, when researched on business websites such as manta.com or Hoovers) operate very differently from one another.  We have found that qualitative insight, especially when based on executive-level interaction, can be eye opening.  For example, a floral distributor segmented its small florist customers based on the professional background of the owner.

It found that some were businessmen who happened to be selling flowers; others were flower lovers who decided to go into the business.  You could never uncover these distinctions by looking at a business directory, but they proved essential for the success of the distributor's strategy.  The distributor created separate sets of sales tools (for example, foot-traffic estimation spreadsheets for the first group and arrangement-of-the-month promotions for the second group) and ultimately used this information to make market-growth projections and allocate sales resources.  These tools are now part of the distributor's integrated sales management system, which includes compensation and the annual budgeting process.

ACTION POINT:  Seek insight from the executive level of your customers.

Focusing On Your Customers Customer

For the price leadership group, they largely eliminated field sales reps, focusing instead on corporate contracts, flawless logistics, and compliance reporting. 

One of the most powerful tools for segmenting customers is evaluating their customers.  As a genera rule, businesses focus more on the sell side than the buy side, so assessing the markets in which they operate can provide major insight into their business behavior  For example, a large facilities supplies distributor segmented its national accounts based on each account's "generic" strategy, not just the usual hotel, restaurant, office building type demographic categories.

They recognized that businesses pursuing a price leadership strategy were primarily driven by transaction and product costs, while those adopting customer intimacy or product leadership strategies were more interested in carrying differentiated products.   For the price leadership group, they largely eliminated field sales reps, focusing instead on corporate contracts, flawless logistics, and compliance reporting.  For the customer intimacy or product leadership group, they added product specialists and intensified their local presence.  The compensation programs they developed under this strategy were far different--and far more effective--than what the company would have developed without this critical customer segment distinction.

ACTION POINT: Understand your customer's customer.

What to do in a Value Conflict

I saw no point in being the richest man in the cemetery.

There rarely is a conflict between a person’s strengths and the way that person performs.  The two are complementary.  But there is sometimes a conflict between a person’s values and that same person’s strengths.   What one does well-even very well-and successfully may not fit with one’s value system.  It may not appear to that person as making a contribution and as something to which to devote one’s life (or even a substantial portion thereof).

I, too, many years ago, had to decide between what I was doing well and successfully, and my values.  I was doing extremely well as a young investment banker in London in the mid-1930s; it clearly fitted my strengths.  Yet I did not see myself making a contribution as an asset manager of any kind.  People, I realized, were my values.  And I saw no point in being the richest man in the cemetery.  I had no money, no other job in a deep Depression, and no prospects.  But I quit-and it was the right thing.  Values, in other words, are and should be the ultimate test.

ACTION POINT: Does what you do well fit with your value system?

Segmentation IV

 It is strongly recommended that you go beyond segmentation by internal categories... 

Segmentation based on economic drivers for your customer defining the commercial relationship is the most advanced form of segmentation..  It provides by far, the most useful market insight--but determining which characteristics and how to use them can be challenging.  The table below shows three levels of segmentation maturity.  It provides, by far the most useful market insight--but determining which characteristics to use and how to measure them can be challenging.

The lower levels of segmentation are common and are based on simpler criteria, but they provide more limited.  It is strongly recommended that you go beyond segmentation by internal categories (low on the maturity table), as these generally proved almost zero insight into customer behavior and are likely to simply reinforce internal perspectives and biases.

ACTION POINT: Keep in min that strategy is about competitive differentiation.  If you are using the same segment categories as your competitors, you are far less likely to distinguish yourself in the market.

Segmentation III

In many cases it is simply about getting a single individual within your organization to be accountable because your company has made it so difficult to get smooth service or straight answers.  

If you look at the situation from a business perspective, you will usually find that very tangible economic value lies behind the term "relationship."  For example, it may mean that a buyer can trust the sales rep not to slip in a price increase without notice, enabling the buyer to avoid the costly, time-consuming process of checking each line item by hand.  Or the relationship may refer to the project leads or competitive gossip that the reps provide--again, things that offer very real economic value.

In many cases it is simply about getting a single individual within your organization to be accountable because your company has made it so difficult to get smooth service or straight answers.   The entire value of the relationship may be in having "one butt to kick"' when deliveries are late or the invoices don't match the purchase orders.  We have seen many situations in which sales openly blame others in their own organization for causing all the problems.  In such a situation, your focus should clearly be on improving service levels; the last thing you need is to further entrench the mysterious sales rep rapport.

ACTION POINT: The key point is that real segmentation means digging a bit deeper into the economic and business drivers behind behavior.  Don't accept fuzzy words like "relationship," "service," or "quality," without really understanding the specific business or organizational need they fulfill.

Segmentation II

This leads us to one of the most common strategy traps for wholesaler distributors: the sales "relationships." 

In the business-to-business (B2B) arenas in which most distributors operate, segmentation is generally most powerful when it deals with the economics behind business.  Although companies comprise individuals (with all their psychological baggage), organizational and financial pressures tend to drive B2B buying behavior over the long term.  A buyer is unlikely to care about he "cool factor" of a product or how funny the sales rep's jokes are if the buyer is in danger of losing his or her job  because there is a material shortage that shuts down the production line.

This leads us to one of the most common strategy traps for wholesaler distributors: the sales "relationships."  Companies that rely on their sales force as their primary source of customer information are especially susceptible to the idea that performance is determined by the personal rapport between individual buyer and seller.  We are very cognizant of the value sales representatives offer customers and do not want to come off as belittling, but the paradigm in which sales rep value equals company value presents a serious roadblock to proper compensation design. 

Accepting the mystical power of the buyer-seller relationship at face value leaves your company ignorant of customers, unable to execute a strategy, and held hostage by "high-performing" sales reps.  Systematically obtaining customer insight from sources outside of the sales organization is simply a requirement for good segmentation because it adds needed perspective and objectivity.

ACTION POINT: Look past the buyer-seller relationship to better understand your customers.

 

Segmentation

Segmentation is the process of defining these characteristics and assigning customers into categories based on them.

Every customer is different, but customers share common characteristics that can be useful for understanding their behavior.  Segmentation is the process of defining these characteristics and assigning customers into categories based on them.  Although segmentation is an analytical exercise, it is never perfect and there is no simple rule for preferring one set of segmentation criteria over another.  

You have to make a judgment call on when it's "good enough" based on how well it fits market data and how actionable it is.  Ultimately segmentation is not an end in itself, but simply a means for explaining the market and developing a strategy.

ACTION POINT: Find the customers with common characteristics and assign them to segments.

Individual Development

The important thing is not that you have rank, but that you have responsibility.

The person with the most responsibility for an individual’s development is the person himself-not the boss.  The first priority for one’s own development is to strive for excellence.  Workmanship counts, not just because it makes such a difference in the quality of the job done, but because it makes such a difference in the person doing the job.  Expect the job to provide stimulus only if you work on your own self-renewal, only if you create the excitement, the challenge, the transformation that makes an old job enriching over and over again.  The most effective road to self-renewal is to look for the unexpected success and run with it.

The critical factor for success is accountability-holding yourself accountable.  Everything else flows from that.  The important thing is not that you have rank, but that you have responsibility.  To be accountable, you must take the job seriously enough to recognize:  I’ve got to grow up to the job.  By focusing on accountability, people take a bigger view of themselves.

ACTION POINT: Strive for excellence.

Assessing Customers Needs: External versus Internal Focus

The method for closing these market gaps is strategy.

You are likely to find very little overlap between your internal view and what the customer really thinks.   The table below shows the results of one such exercise for a sole-proprietor construction contractor segment. 

What are the biggest challenges or pains in the construction 

contracting business for a sole proprietor like you?

Identified by Distributor Executives                                 Listed by Contractor Themselves

High Material Cost                                                                 Winning Bids

Late deliveries                                                                         Finding and keeping good help

Competitors getting same pricing                                       Surviving the winter slowdown

Financing/cash flow                                                              Health care/Insurance costs

The column on the left reflects what you are selling.  the column on the right indicates what the customer is buying.  The technical term for the differences between the two is "market gaps."  The method for closing these market gaps is strategy.  The potential payoff from closing them is monumental.

ACTION POINT: What market gaps are you missing?

Strategic Clarity

Ask your team members to envision a "good" or "typical" customer, and then have them write down what they believe are that customer's top three pains.

Developing a real strategy requires a strong understanding of the market.   The key to developing market insight is simplicity itself: looking at the world through your customers eyes.   Here is a simple exercise you can try.  

Ask your team members to envision a "good" or "typical" customer, and then have them write down what they believe are that customer's top three pains.  chances are they will be guessing--because they have never actually taken time to ask--and that all three will be related to your business rather than the customers business.   Now have someone else in your organization call a key decision maker at those same customers and actually ask him or her the question.  You are likely to find very little overlap between your internal view and what the customer really thinks.

ACTION POINT: Seek to understand your market through your customers eyes.

Strategic Clarity

Reaching $10 billion in revenue is a goal, not a strategy.   

A strategy is a plan for succeeding in the market.  It is fundamentally about how.  A surprising number of companies think they have a strategy when, in fact, they only have financial goals.  Reaching $10 billion in revenue is a goal, not a strategy.   

Breaking down the $10 billion into specific divisions, regions, customer types, or product categories is just a finer dissection of the goal; it is still not a strategy.  Adding probability bans, performing sensitivity analysis, or doing complex "what if" scenarios is simply further manipulation of numeric goals.  These spreadsheet exercises are not strategy because they don't show how you will reach the excruciatingly precise numbers.

ACTION POINT: Don't confuse financial or numeric goals with strategy.

Structure Matters

The first is often the greatest challenge, which is establishing the proper foundations for your program.

There are two primary challenges when designing a sales compensation program.  The first is often the greatest challenge, which is establishing the proper foundations for your program.  Company objectives need to be clear, as do the desired results that the new sales compensation programs are expected to deliver.

An appropriate organizational structure must also exist to ensure the optimal balance of focus and cost.   

ACTION POINT: Establish the proper foundation and organizational structure to support any sales compensation program you build.

People as Resources

People are a resource and not just a cost.

The Japanese heeded first and best my point of view that people must be viewed as your colleagues and as one of your prime resources.  It is only through such respect of the workers that true productivity is achieved.  

People are a resource and not just a cost.  The most enlightened managers have started to understand what could be realized managing people toward a desired end or goal.  Management is so much more than exercising rank and privilege; it’s so much more than “making deals.”  Management affects people and their lives, both in business and in many other aspects as well.

ACTION POINT: Look at people as resources to be developed.  Take steps to expose your people and yourself to the best ideas and see to it that they are trained in how to apply them.

Getting Aligned II

Nothing will pressure test the work done previously and  nothing will cement the reality of a strategy better than aligning pay with it. 

The second reason jumping into formulas doesn't make sense is because changing compensation programs is not a task to be taken lightly, which you already know if you have ever been through it.  

As a general rule, the broader the level of inclusion in the process, the better the output will be.  Different functional areas have different perspectives on what will be required for the company's strategy to be successful.   Having a variety of functional voices has many benefits.   Nothing will pressure test the work done previously and  nothing will cement the reality of a strategy better than aligning pay with it. 

Senior management has a very clear role in the process.  It is this group that was responsible for establishing the strategy and creating the supporting structure.  It is only this group that can make the difficult decisions on what dollars of gross margin are more valuable than others. 

While laying this groundwork, do not forget the importance of communication.   It is best to have a simple, consistent, proactive message to explain the effort right up front.   This explanation should not set any expectation as to the ultimate plan design.  As a general rule do not ever communicate any details of a new compensation plan until you are prepared to present all the details.

ACTION POINT:  Focus your strategy by determining what dollars of gross margin are more important than others.