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Where's it all headed? Part 2

Dec 1, 2002 12:00 AM


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10 EMERGING BUSINESS PRINCIPLES
1. Account Development is Replacing Sales Management | God has not singled out your industry or your company to face the challenge of differentiation. Every company in every industry faces this challenge. It means that every company is working to separate itself from its industry counterparts, to create a unique customer constituency by offering unique, credible, meaningful benefits to a segment of the marketplace.
In this environment, it is essential that a one-size-fits-all operating philosophy be abandoned. The key to success is satisfaction of customer needs perceived to be unique. Traditional sales management assumes that short-term sales performance is the key determinant of success and that the sales force is the sole instrument in generation of company sales. Believers in that scenario are advised to abandon that perspective as quickly as possible. Feedback, anecdotal and statistical, is overwhelming.
As recently as five years ago, written comments by customer survey respondents who praised a supplier's employee by name mentioned a salesperson in the majority of cases. Today, that is no longer the case. The customer service representative has emerged as the primary everyday contact. A driver, receptionist, or someone else in a supplier's organization is likely to be mentioned frequently.
The bottom line: Management needs to think in terms of customer development rather than management and control of activities of sales representatives. The individual customer is the issue. A salesperson is an important instrument, but not the sole instrument, in customer development.
Customer development needs to be seen as:

  • Selective and targeted

  • An organizational exercise that may actively involve individuals other than the salesperson

  • Systematic and organized

  • An exercise motivated by regularity of business and the projected lifetime value of the customer, not simply sales volume.

2. The Changing Salesperson-Customer Service Relationship Balance | Not long ago, many salespeople were exhorted to "run your sales territory as though it were your own company." Sales representatives were expected to operate alone, gathering and communicating all pertinent job specifications and handling every aspect of the buyer-seller relationship. For several reasons, some of which are related to compensation issues discussed later in this article, the fundamental role of the salesperson in America has undergone a major change.
Here again, there are no absolutes. We are describing trends. Certainly, there are sales representatives considered indispensable to a supplier relationship by many buyers and buying organizations. However, the trend is unmistakable: The customer service representative is in the ascendancy in terms of credibility, responsiveness, and most important, in the belief that the C.S.R. truly represents the best interests of customers. Increasingly, the salesperson's primary responsibility is information gathering and information delivery. The objective: nurturing of the relationship. The role of the customer service representative is best described as "the air traffic controller of job-related information." It is no longer simply problem-solving, walking behind the proverbial elephant with a giant shovel.
Salaries and stature of customer service reps have been escalated substantially in recent years. In many companies, there has been a shift in allocation of resources, with a decline in the number of salespeople and an increase in the number of customer service reps. In most companies, customers benefit most from an improved, cooperative working relationship between the salesperson and his/her customer service rep. This teamwork is valued by customers, if only because of the increasing complexity of many jobs and projects.
The fact remains that, in some areas of the business community, the role of the salesperson is in disrepute. Wal-Mart and some other large corporations refuse to buy from sales representatives, preferring to work with management in the belief that the extent to which sales force compensation adds to the price of products is not justified by the value and benefits derived from these salespeople.

3. Reassessment of Sales Force Compensation | This issue has received little notoriety in recent years even though it may be among the most significant management issues. In some industries, there is a development that would have been almost unimaginable only a few years ago: the advent of the straight salary sales force. In the printing industry, Printing Industries of America and independent research by Gorelick and Associates, Inc., indicate that the number of companies now operating on the basis of straight salary is approaching 25%.
There are several reasons for this phenomenon:

  • There is great interest in development of long-term, major agreements. These relationships typically require a year or more to sell. It is difficult to interest salespeople paid on the basis of short-term sales performance to devote a year or more to development of a "mega-account."

  • Buyers know the basis of compensation of sales representatives calling on them. Many of them would rather do business with a salesperson who, in their mind, is paid a straight salary and has no vested interest in increasing the sum on an invoice. Trust has emerged as the single most important factor in selling. If you are inclined to disdain this explanation, think about the experience of buying an automobile. Who in a dealership does a prospective buyer least want to deal? The salesperson!

  • An increasing number of people with outstanding sales ability prefer to work totally or mostly on the basis of fixed compensation. Totally variable compensation is seen as too risky, especially to those starting to build a sales territory.

  • Commerce in North America is becoming increasingly seasonal in many industries. As is discussed below, this presents cash flow and cash management challenges to suppliers. Those cash management challenges are no less daunting to a sales representative compensated on the basis of straight commission, with no advance against commission.

Totally variable compensation for salespeople is rooted in the notion that salespeople are "born, not made"...are motivated strictly by money...and need little day-to-day management outside of the motivation provided by a compensation scheme with no cap on income. While it is likely that straight commission compensation will always be popular, the fact remains that fixed compensation is becoming more common as a result of market conditions described above. Having said that, it should be added that there is no one wrong or right program.
The role of the salesperson within a company, the people, customers, and other variables should be considered carefully before a sales compensation plan is changed. And understand that the growing interest in straight salary compensation is linked to the changing role of the salesperson, and to a lesser degree, pressures from customers. Finally, it can be argued reasonably that there is truly no such thing as a straight salary sales force. The reason: Superior performers have a higher salary than their less productive colleagues. In any compensation plan for sales representatives, income, whatever its basis, is almost always based on performance.

4. Senior Management is Involved in Selling | Like it or not. Two other major trends place a premium on involvement in the selling and account retention process by the owner, C.E.O., and/or senior management of a supplier. Those trends:

  • Consolidation of vendor lists, a phenomenon that has permeated the purchasing behavior of most companies (your company is probably buying materials and services from fewer suppliers today than five years ago)

  • Vending of products and management processes so that purchasing organizations can devote resources to the core business.

A manifestation of these trends is the infamous RFP-Request for Proposal. This usually reflects a reassessment of the entire purchasing process by an organization. This process, which usually results in a reduction in the number of suppliers, is a "higher stakes game" for the buying organization: More eggs are placed in fewer baskets. Supplier selection occurs, at least initially, at a relatively high level of the buying organization. It can be classified as a strategic decision, compared to the tactical decisions of selecting suppliers at a lower level of the organization based upon the suitability of a supplier relative to the specifications of individual jobs.
In this environment, it is critical that the buying organization and the suppliers on the shortened list of vendors establish expectations, terms and conditions of sale, documentation, reports, and all other aspects of the relationship carefully-and that typically requires assurances, if not decisions, by the management of both parties. Senior managers and owners of suppliers may have been trained, and feel most comfortable in the disciplines of finance or production. They may feel uncomfortable with customers, in general, and the act of selling, in particular, but their involvement is essential if only because it is considered necessary by customers and prospective customers.
Senior management involvement in key customer relationships is also essential in the retention of existing accounts, particularly those deemed to be of above-average importance and above-average potential. There is little question that a customer perception of neglect is the single most common cause of account loss. Addition of an important account to a company's portfolio should not be celebrated as a triumph. Instead, it should be treated as an obligation and opportunity demanding ongoing attention by senior management, not simply as another customer whose jobs need to be processed by the sales representative and customer service representative.

5. New Definition of Marketing | This writer has avoided use of the word "marketing" whenever possible. There's an inherent problem with a word that lacks a common understanding of its definition. Seemingly endless hours are spent at seminars and conferences defining the word. On the one hand, there are those who have a difficult time separating "sales" from "marketing." (It has been said that "sales" is getting rid of what you have. "Marketing" is making certain you have what you can get rid of.)
The terms "account development" and "market development" are, in my opinion, more accurate and descriptive than the word "marketing." They connote the gathering and use of information rather than one-way mass communication. Even if you prefer use of the word "marketing," let's agree that its objective is the targeted, systematic development of customers or markets-and the information-gathering, strategy, and daily management that supports it.
Consultant Regis McKenna years ago articulated a key issue that, unfortunately, received little attention. He declared that marketing could no longer be defined as manipulating the minds and behaviors of people and is best considered as a two-phase process: creating customer loyalty to the company while, at the same time, creating staff loyalty to customers. This is likely to become an important management theme during the next decade.
In many companies, it will require a series of steps to undo history, to break down the traditional walls between customers and the Sales Department, on the one hand, and production and finance areas, on the other hand. This is an important challenge: Customers are naturally reluctant to place work with a supplier in which there is divided opinion regarding desirability of its work.
Assuming that individuals are born without opinions and predispositions regarding customers, what is the reason for the different departmental perspectives? Much of it is traceable to the fact that some operating departments are taught to revere routine, regularity, and consistency. Historically, that has been assumed to be the source of profitability. However, commoditization of a product or service means that customers tend to place little unique value on the routine, believing such a product or service is available from many resources. Profit is increasingly the result of producing the difficult, extraordinary product or service.
Fostering an organizational understanding of this subtle but important change is a challenge to senior management. The customer is not the culprit. Market conditions are dynamic. Old paradigms are unlikely to change by themselves. Changes in staff behavior toward customers and their representatives need to be preceded by conscious, repeated management steps to build an understanding that (a) the marketplace has undergone fundamental change and (b) the customer may not always be right, but the customer is still the customer.

6. Selectively Breaking the Rules | Most industry seminars, particularly those held in conjunction with trade shows, have a technical orientation. There is emphasis on process improvement, consistency of production, documentation, processes, measurement of existing activities, and standards. Certainly, improvement in these areas has a direct effect on productivity and, hence, bottom-line profit. Related to the issue raised in the previous section of this newsletter, profit can also be the product of handling extraordinary customer needs as the product of improved processing of more routine products and services.
It is likely that most readers of this article are managers of companies that are providing products and services that weren't among the respective companies' capabilities only a few years ago-and that these newer products and capabilities were added as the result of requests or extraordinary needs by selected companies. Consider the five highest-volume or highest-profit customers of your organization. In at least some of the cases, it is likely that some of your company's own unwritten "rules" were violated in the interest of serving special customer needs.
In the next decade, success often will be the result of violating the conventional industry wisdom or adopting unconventional processes and products. These opportunities derive from understanding, and listening to, customers rather than investing on speculation in production of new products and services. Among recent successes: a printer now storing bedpans and other materials for a regional hospital and a forms distributor selling a coffee service.

7. The Differentiation Issue-It Looms Larger and Larger | A Converting Management article published earlier this year dealt at length with this critical issue. Differentiation is at the core of the conduct of all business, regardless of the industry, size of company, type of product, geographic location, or any other demographic factor. An owner or manager can run, but cannot hide, from the subject. Few employees, customers, or suppliers will ask about differentiation on any given day but the fact remains that the extent to which the issue is successfully (or unsuccessfully) addressed governs every aspect of corporate life, including customer relations and the perceived buyer value that can lead to price elasticity and, hence, increased profit.
All other trends discussed in this article elevate the importance of meaningfully, credibly elevating the importance of differentiating a company to the marketplace. There is a terrible price for ignoring or unsuccessfully addressing this matter: intensifying price competition. It's inescapable. In a commoditized environment, price becomes the primary factor in the purchase decision when no other benefit is offered.
Meaningfully differentiating a company will not solve every corporate problem and automatically result in burgeoning sales. After all, it is a reality of life that one cannot (and probably should not) appeal to every potential customer. Many owners and managers will need to make a major personal effort to address competitive differentiation. The reason: It is more emotionally rewarding to fight the more urgent day-to-day battles than spend time on an esoteric subject, such as competitive differentiation.
However, nothing can be more important to the growth and corporate health of a company than formulation of differentiated strategy/mission/direction-and it is a decision that only can be made by ownership. It is possible that your company is already seen by many customers as differentiated from competition. It is increasingly likely that this perception is NOT product-based. A good place to begin the process: a detailed understanding of the reason(s) that your existing customers do business with your organization.
In researching that explanation, don't accept the initial answer. Keep digging. Ask questions. Invest in a survey or focus group, if necessary. Don't confine the questioning to the product. Finally, don't make this fact-finding exercise a short-term project. Attitudes, perceptions, and the nature of competition are changing constantly. As someone said, "Unless you're out front as the lead dog in a team, you won't notice that the scenery is changing."
Avoid the differentiation issue at your own peril.

8. Think Differently About Configuring Your Company | If your organization continues to experience a fairly even work flow from month to month, it is fortunate and rare. In general, the economy has assumed unprecedented seasonality. That seasonality becomes more pronounced at the industry level. Lawn care, travel, retailing, and other industries have assumed greater seasonality-and that is reflected in the sales patterns of printers, packaging companies, transportation firms, and other firms that serve them. Printing, once considered to be an industry with a steady, consistent flow of work, has taken on seasonality that is unprecedented. Among the reasons: flow of day-in, day-out informational printing (such as manuals, directories, price lists, parts lists, and schedules) has dwindled as the Internet emerges as the predominant medium of information. Consequently, research by Gorelick and Associates Inc. indicates that the median printer in the U.S. has a difference of 2.3 times between its best sales month and worst sales month.
The implications for staffing and investment are major. This scenario is likely to become more exaggerated during the next decade as buying organizations learn to use information, especially data bases to more productively target business. In the case of graphic arts companies, it is reasonable to project that the median company will have a difference of about 3.0 times between its best sales month and worst sales month within the next five years.
This suggests that ownership and management fundamentally re-think the organization of its business. Staffing for peaks of production, usually the months during which the greatest profits are generated, may incur excessive risk as sales during the worst months become worse, minimizing utilization of staff, equipment, and other resources. As work flow becomes increasingly uneven in many companies, it may be appropriate to consider configuring the organization to reach break-even during the poorest sales months rather than planning to maximize profits during the best sales months. During the past two years, many executives complained that sales and profits were acceptable during most months, but there were one or two months during which "sales were so poor that we surrendered the accumulated profit of previous months."
That scenario is unlikely to change even if the overall economy suddenly and magically becomes robust. Its cause is linked to structural changes in the economy. In fact, it can be argued reasonably that robust economic recovery will magnify the seasonality challenge. This trend puts a premium on customers that can offer a steady flow of work. It also makes relative lack of seasonality or seasonality that is counter to the current sales pattern a first-order consideration in adoption of new products and services.

9. Cash Management Will Be Assigned Higher Priority | Some companies have done poorly and some have done very well during the sluggish economy of the past two years, but virtually all companies have experienced a slowdown in collections as well as elevated credit risks. Cash management issues will become as important as profit during the next several years in:

  • Selection and selling of customers

  • Consideration of new products and services

  • Sales compensation

  • Pricing

  • Treatment of the financial area of your company as a front-line operating, rather than simply a service, department.

This development is likely to be accelerated when interest rates increase, a trend many believe to be inevitable.
Greater attention to cash management means more than policing accounts-receivable laggards and vigilance in approving new account applications. Reinforcement of positive behavior can be as effective as attempts to address negative behavior. This means periodic thank you letters to customers who consistently pay bills within stated terms. In many cases, a brief mail survey regarding the format, detail, speed, and accuracy of invoices sent to both the buying contact and the person in the customer's Accounts Payable Department handling your company's account.
Regardless of general economic conditions, there is little question that the management and shepherding of cash will become increasingly important in the years ahead.

10. Understanding Transaction Costs | The industry has been relatively successful at controlling manufacturing costs, largely a consequence of improved technology, changed work flow, and more effective management of spoilage and other aspects of productivity. It is a rare company in which the same can be said of so-called "transaction costs." Think about the differences between customers in such areas as:

  • Rate of payment

  • Number of estimates required to win a job

  • Condition and acceptability of artwork

  • Timely responsiveness to proofs

  • Customer service history

  • Number of sales calls required

  • Your company's market share within a specific acount and the likelihood of continued business.

This is simply a small sampling of transaction costs. Averaging these overhead costs when calculating costs and a quotation can be ruinous: The result is underestimating costs attributable to the accounts with the highest non-manufacturing costs and over estimating costs on work emanating from the accounts that incur the most modest transaction costs. In the coming years, the process called Activity-Based Costing (ABC) will grow in popularity as companies need to measure non-manufacturing costs on an account-specific basis. Implementation is typically not as daunting as it first appears; it can occur piece-meal. Without ABC, continuation of averaging of transaction costs will result in the most profitable accounts unwittingly subsidizing the costs of doing business with a company's least profitable customers.
A word of explanation regarding Activity-Based Costing: It addresses an understanding of actual costs, both manufacturing and non-manufacturing. It does not, and should not, directly deal with pricing. Costing and pricing are distinctly different concepts. However, an understanding of true costs will help those charged with establishing pricing to make more intelligent, customer-focused decisions.

SUMMARY
These ten trends may help readers' companies in the process of business planning. They are all driven by the marketplace and to some small extent, have taken root but have not grown or blossomed. These trends should not be seen as "fads du jour" that have characterized American business for several decades or as aberrations fueled by a sluggish economy. Instead, they are a response to fundamental, irreversible changes in buyer-seller relations.
Other issues need to be addressed by companies striving for excellence in the next decade, including but not confined to:

  • Account retention

  • Employee retention, especially among staff

  • Members approaching retirement age

  • Management of suppliers

  • Improved information management

  • Managing change of organizational culture.

The intention of this article is to provoke thought and discussion about steps that can be taken to insure corporate prosperity in the short term and intermediate term.