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. 

Getting Aligned

There are many programs and options and understanding these options will reduce the chances of creating an ineffective program by having too narrow a perspective.

If after assessing the alignment of your company's existing sales compensation programs and your company's strategic objectives you conclude that enough misalignment exists to warrant changes, the next step is establishing a necessary level of clarity on redesign objectives.

Many companies make the mistake of jumping straight to the Excel spreadsheets and playing with formulas.  This is incorrect for two reasons: first, most companies do not have a manager of sales compensation design.  As a result, most companies that jump straight to "tweaking the commission formal" do not have enough exposure to the breadth of sales compensation structures or mechanisms that exist.   There are many programs and options and understanding these options will reduce the chances of creating an ineffective program by having too narrow a perspective.

ACTION POINT: Consider alternate approaches to compensation.

Misalignment Identification III

If you were a sales rep and were informed of the company's current and long-term business objectives, what would your reaction be, considering the current sales compensation plan? 

The best way to answer the question "do the prevailing sales compensation programs encourage sales representatives to achieve the desired objectives?" is to place yourself in the sales rep's shoes.   If you were a sales rep and were informed of the company's current and long-term business objectives, what would your reaction be, considering the current sales compensation plan?  Don't answer this question solely based on how you would maximize your income, but also factor in quality of life and cash flow. Start with the assumptions that most sales representatives, especially those with more than a few years' tenure, have developed a lifestyle consistent with the income they are currently making.

Ask yourself questions such as: What's the downside for a rep if he or she doesn't support the strategy? How much change would be required in terms of learning new products and their applications or understanding a different group of customers?  How long is the sales cycle?  Will it take months or years to see the desired results? Reflecting on questions such as these will help identify the degree of potential misalignment that exists with the prevailing sales compensation program and the company's strategy.  Ultimately, it is a senior management decision as to whether enough misalignment exists to merit changes to the sales compensation program.

ACTION POINT: Make clear the results you want your sales comp plan to achieve.

Misalignment Identification II

...there are some indicators that can prove helpful in identifying misalignment.

There are no formal diagnostics that can be used to determine whether a company's sales compensation program is aligned or misaligned.  However, there are some indicators that can prove helpful in identifying misalignment.  They include the following scenarios:

• Making a good business decision is financially punishing (or at least not financially rewarding) for a sales representative.
• The difference in the rate of change for sales reps' incomes and company profitability are significantly different --for example, rep incomes have appreciated much more than company profits.
• It is difficult to change account assignments between representatives even when they seem obvious.
• There are frequent discussions between sales representatives and management about what is "commissionable" and what isn't. 
• The annual budgets or goals assigned to sales representatives are either accepted suspiciously easy or with an undue amount of difficulty.
• An identifiable trend exists in which sales reps manage their results be as close to 100% of budget as possible, or an every other year pattern in which one year a rep hits the goal but always misses the following year.
• There is ongoing negotiation around employment terms and conditions--car allowances, travel and entertainment expenses, and house accounts with an increasing frequency of "special deals" being cut.
• Sales reps either never leave the company or turnover is higher than in peer companies.
• It is difficult to get the sales force to effectively respond to short-term opportunities such as new product introductions.
• Sales reps and managers are satisfied with current levels of business and equate stable territory revenue with acceptable performance.

ACTION POINT: Look for any of the above scenarios in your business.