Professional Documents
Culture Documents
CHAPTER
Chapter Consultants:
Scott Smith, Vice President—Sales & Marketing, SABRE Group, Inc.
Joseph P. Clayton, President and Chief Executive Officer, Sirius Satellite Radio
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
Describe the major elements of business strategy.
State the basic elements of strategic marketing planning.
Explain what is meant by strategic implementation process decisions.
Describe the purpose of a sales force program and list its major elements.
Tell what an account relationship strategy is and explain its purpose.
deliver, and support its business solutions. SET bought the Reynolds dealer management sys-
tem because it was a critical step in a long-range strategy that would lead to a solid partnership
and greater business results for many years. The basis for the partnership was the account team
selling SET corporate on developing the next generation of the dealer management system.
Over the next two years Reynolds installed its dealer management systems in 80 percent
of the SET dealerships. While these installations were going on, Reynolds people were inter-
viewing more than 200 SET associates to capture their requirements and to develop the next
generation of solutions and services. After the systems had been in place for a period of
time, SET and Reynolds sat down together to quantify the value that Reynolds had delivered
to SET. Some of the performance metrics utilized in this review were annual net profits and
new business from the Internet lead generation system. It was discovered that dealers using
the Reynolds system were, on average, realizing $200,000 more in annual net profits than
dealers not using the system.
The benefits of the relationship to Reynolds are equally impressive. After the partner-
ship began, Reynolds’ sales to SET jumped from $1.8 million to more than $16 million in 5
years, resulting in a compounded annual growth rate on sales of 53 percent per year.
The Reynolds account team is currently implementing a plan to provide financing and
support services to all SET dealers for Toyota’s Technical Information System. This is the
first time Reynolds has ever financed and supported a third-party system. Reynolds’ goal
continues to be that of helping SET meet its business objectives. SET is also a solid refer-
ence for new Reynolds prospects.
The Reynolds-SET account case exemplifies many of the changes in the sales force role
that will be discussed in this chapter: sales teams, selling to top management, partnering for
mutual benefit, and the type of supplier-customer intimacy that can be achieved. It is also
important to note how the role of the salesperson, the account executive in the Reynolds case,
has changed. Salespeople still communicate and close the sale with the customer, but notice
that salespeople must also spend much more time getting to know the account and working
with many different areas of the account. The other side of the coin is that the account execu-
tive is also spending more time gathering and coordinating the resources and expertise inside
Reynolds that can be brought to bear on a customer opportunity. The financial commitments
being made to the account and the revenue opportunities are very significant and important to
Reynolds’ overall performance. The actions of the account executive and account team there-
fore must be consistent with Reynolds’ overall business and marketing strategy. Achieving this
consistency and its impact on the sales force is one of the primary focuses of this chapter.
There is a natural sequence when making sales force and sales program decisions as
depicted in Figure 2-1. The level 1 decisions, business and marketing strategies, are made by
the firm’s top management along with the participation of the top sales executive, sometimes
referred to as the chief sales officer (CSO). Level 2 decisions are concerned with implement-
ing a firm’s business and marketing strategy. As strategy implementation is likely to be
cross-functional, top sales executives participate along with managers from other functional
areas in the firm in making these decisions. Level 3 decisions are largely under the control of
the sales management team and are the focus of the remaining sections of this text. This
hierarchical sequencing of decisions also guides the organization of the book.
This chapter shows that a firm’s business and marketing strategy and implementation
decisions impact sales force program decisions. In other words, a firm’s strategy and imple-
mentation decisions provide the context within which sales program decisions are made and
implemented. We do not attempt to fully explain business or marketing strategy; this is bet-
ter accomplished elsewhere. Instead, we offer an overview of marketing strategy, while
focusing mostly on the four-strategy implementation decisions because they more directly
influence a firm’s sales force program.
Following this chapter, two Management Resources are presented: “Estimating Potential
and Forecasting Sales” and “Sales Force Investment and Budgeting.” These are considered
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BUSINESS STRATEGY 35
Customer
Go-to-market relationship
strategy management
Level 2 (CRM)
Strategy
implementation Supply chain Product
decisions management development
(SCM) management
(PDM)
:
cess Stru
s Pro ties ctu
e i re
al ctiv
A
S
Level 3 Account
Sales force relationship
program strategy
om
C
decisions hi
p
p et ers
e n cie
s Lead
important resource topics because sales executives need to know how to perform these activi-
ties when either starting up a new sales force or completing their annual planning exercises.
BUSINESS STRATEGY
Strategic planning is employed to make better use of company resources and to create and
sustain an advantage over the competition. Business strategy involves defining and articulat-
ing an overall business mission, developing specific business goals, and designing a strategy
for achieving these goals. The factors influencing the strategic management planning
process are depicted in Figure 2-2. Both marketing and sales personnel should be intimately
involved in an organization’s strategic planning process because they understand the cus-
tomers’ requirements and the sales force is often responsible for implementing key aspects
of a firm’s strategic plan. This is especially the case when the product is expensive, com-
plex, and of high risk to the customer.2
Business Mission
A well-defined business mission provides a sense of direction to employees and helps guide
them toward fulfillment of the firm’s potential. The basic character of an organization’s
business is defined by the three Cs—customers, competitors, and the company itself. Top
managers should ask, “What is our business?” and “What should it be?” A business mission
statement should include information regarding (1) the types of customers it wishes to serve,
(2) the specific needs to be fulfilled, and (3) the activities and technologies by which it will
033-092_Dal9e_c2 9/19/05 5:19 PM Page 36
Environmental constraints
Legal & regulatory
Demographics
Economic conditions
Technology
Competitive conditions
Sociocultural factors
Firm’s history
Management culture
fulfill these needs. Thus, organizations will not only know the focus of their business, but
they will also be able to identify strategic opportunities.
Establishing Goals
Once the mission for an organization has been decided, the next step is to translate the mission
into the organization’s goals—specific objectives by which performance can be measured.
These objectives are usually stated in terms of profits, sales revenue, unit sales, market share,
survival, and social responsibility. Firms will typically pursue multiple objectives. Procter &
Gamble, for example, has historically sought a 10 percent after-tax profit and a doubling of
sales revenue every 5 years. In a recent survey, 200 B2B senior executives indicated that their
most important goal for the current year was increasing sales and revenues.3
When priorities change, the sales force is often affected. Faced with major competitors
such as Procter & Gamble, demanding retailers, and mature markets, Scott Paper Company
switched its mission from gaining volume at any cost to profitability. This called for massive
changes in how Scott’s 500 salespeople related to the retail trade. “It’s no longer a volume
or promotional approach to customers,” states one Scott marketer, “it’s a lot more than that.
It’s understanding brands and how the consumer’s response to various actions on our part is
timed so we can eliminate waste and improve profit.”
The Scott Paper example illustrates another important characteristic of organizational
goals: the hierarchical nature of the goals. Measurable organizational goals must be commu-
nicated down the organizational structure. Figure 2-3 illustrates this point by showing how
an organizational sales goal is translated into a major account goal.
Strategies
Once business objectives have been identified, the next step is to translate them into strategies.
A strategy is the means an organization uses to achieve its objectives. Several strategy typolo-
gies have been developed to describe the overall thrust of a firm’s strategy. One of the most
popular is Porter’s generic business strategies.4 According to Porter, all successful businesses
focus on creating superior customer value by achieving one of the following market positions:
low cost, differentiation, or a niche. Each of these positions is described in Figure 2-4.
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MARKETING STRATEGY 37
Corporate goals
Maximize shareholder wealth
Marketing objectives
Increase product A’s market share by 2 points
Grow contributions after sales & marketing by 20%
Salesperson objectives
Achieve sales revenue of $1.2 million in product A
Obtain $0.8 million in gross margin dollars
To successfully execute a firm’s strategy in the marketplace requires that the sales force
program be properly aligned with the strategy. This assertion was recently tested with a
sample of business-to-business organizations. The results supported the idea that different
sales programs are associated with high-profit execution of each of these strategies.5 The
high-profit sales program characteristics associated with each strategy are summarized in
Figure 2-4.
For a closer look at how a firm’s strategy will influence its sales program, see the
Strategic Action Competency box, “We Aren’t Selling Lightbulbs.”
MARKETING STRATEGY
Marketing strategy is the set of integrated decisions and actions a business undertakes to
achieve its marketing objectives by addressing the value requirements of its customers. As
such, marketing strategy is concerned with decisions related to market segmentation and tar-
get marketing, as well as development and communication of a positioning strategy.6 Each
of these decisions has important selling and sales management implications, as discussed in
this section.
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Philips Lighting Company, the North American division of the Dutch company Philips Elec-
tronics, recently decided to take a different approach to the lighting business by selling light-
bulbs on the basis of customer value. Traditionally, the industry focused on the customer’s pur-
chasing managers who bought on the basis of how much the lightbulbs cost and how long they
lasted. Everyone competed on price and length of life, which resulted in constant margin and
profit pressure.
After a closer study of the customer, Philips came to understand that the price and life of
bulbs did not account for the full cost of lighting to the customer. Because lamps contained
environmentally toxic mercury, companies faced high disposal costs at the end of a lamp’s life.
So Philips introduced the Alto, an environmentally friendly bulb.
What was the impact on the sales force? Huge. The purchasing agents whom they had tra-
ditionally called on were not held accountable for the costs of lamp disposal, but the CFOs
were. So instead of calling on the purchasing agents, Philips’ salespeople called on the key
influencers, including CFOs and public relations people. The Alto reduced customers’ overall
costs and garnered customers’ positive press for promoting environmental concerns. The new
market Alto created has superior margins and is growing rapidly in stores, schools, and office
buildings throughout the United States.
For more on Philips Lighting Company visit www.lighting.philips.com.
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MARKETING STRATEGY 39
Positioning Strategy
Having settled on specific marketing goals and identified the target market(s), the third step
in the planning process is to develop and implement a positioning strategy based on product,
price, distribution, and promotion decisions. Positioning occurs in the mind of the consumer
and refers to how the consumer perceives the product, brand, and company vis-à-vis com-
petitors. Some of the fundamental questions that customers ask about brands are: (1) Who
are you? (brand identity); (2) What are you? (brand meaning); (3) What do I think or feel
about you? (brand responses); and (4) What kind of association and how much of a connec-
tion would I like to have with you? (brand relationships).8
A clear and strong position in the customer’s mind is achieved by designing the proper
marketing mix—price, product, promotion, and channels. A significant change in any of
these elements will usually have ramifications for the sales force program. It was found in a
recent study, for instance, that when a company chooses to introduce a new product, the
most likely sales program changes are a change in sales quotas, the compensation plan, and
the sales support material the sales force has at its disposal.9
In some cases, repositioning involves helping your channel partners to reposition them-
selves as well. Due to commoditization of its network products, Cisco found it necessary to
reposition itself to providing network-related solutions for leveraging voice-, video-, and
data-based applications. To accomplish this repositioning, Cisco needed to help its more
than 36,000 resellers redefine their business as providers of value-added network-based
solutions. Cisco now helps each reseller partner select appropriate target markets, and then it
provides the reseller with the appropriate training, tools, and support to succeed in those
market segments.10
Up to this point we have talked about Level 1 decisions, business and marketing strat-
egy, and discussed how these decisions will impact the sales force. Although sales execu-
tives have a voice in Level 1 decisions, they have a much greater voice in Level 2 decisions,
which focus on the implementation of an organization’s strategy. The Strategic Implementa-
tion or Level 2 Decisions require cross-functional cooperation and coordination. Sales exec-
utives will likely work with top executives from marketing, finance, operations, logistics,
033-092_Dal9e_c2 9/19/05 5:19 PM Page 40
engineering, customer service, and other areas of the organization in making these decisions.
We now turn our attention to these critical Level 2 decisions.
Go-to-Market Strategy
A world-class sales force is a powerful resource for any company, but the sales force is only
one of the options companies have for going to market. In addition to direct sales force,
advertising and promotions, value-added resellers, the Internet, and telemarketing can all
play roles in connecting a supplier with its customer base. An essential set of activities must
be performed in order to attract and retain customers. A go-to-market strategy defines who
will perform these activities and for which customers. The process for determining a go-to-
market strategy consists of answering the four major questions shown in Figure 2-5.12
Segmenting the Market. The first step is to identify market segments. As described earlier
in this chapter when discussing marketing strategy, market segmentation involves identify-
ing different groups of customers with similar characters, product needs, and responsiveness
to marketing efforts. Since segments are identified in developing an overall marketing strat-
egy, we can also see here the fundamental relationship between a firm’s overall marketing
strategy and its go-to-market strategy.
Customer segments and go-to-market strategies will vary depending on the product
sold. Adult diapers and baby diapers are very similar in how they are manufactured, but they
have very different go-to-market strategies. Most adult diapers are sold in bulk to nursing
homes via distributors, and with very little advertising. Most baby diapers are sold at retail
with massive advertising support.
Customer characteristics commonly used to segment a market for purposes of develop-
ing a go-to-market strategy include, but are not limited to, the following:
• Industry What business is the customer in?
• Size What is the revenue size of the customer? How many employees? What is the sales
potential?
• Geography Where is the customer located? Does the customer have global operations?
• Behavior Who are the key decision markers? What are their adoption tendencies? Does
the customer currently use our product? A competitor’s product? Does the customer buy
centrally for all its plant locations?13
For purposes of developing a go-to-market strategy, the best approach to segmenting a
market is one that generates groups of customers whose members require similar customer
attraction and retention activities. For example, some segments may require significant
prospecting and attraction activities because the customer is still learning about the offering,
while other segments may require significant servicing activities because they are already
current customers.
Sales Process Activities. From the first time a prospect is identified to the first time a cus-
tomer hears about a product, to the first sale, to the last service and system upgrade call,
many activities must successfully take place. The sales process activities consist of all the
activities needed to serve a customer properly.
Essential activities can be divided into four groups: interest creation, prepurchase, pur-
chase, and post-purchase. These activities roughly mirror the selling cycle and are shown in
Figure 2-6. Notice that the activities recycle, as good post-purchase activities and support
can lead to interest creation, building a continuing relationship with the customer.
Interest creation activities include all the ways that customers can learn about the bene-
fits of the product and the company. After all, only customers who want to buy will buy. Spe-
cific activities involved in interest creation include prospecting, generating leads, creating
awareness and interest, and providing information about the company’s products and ser-
Interest
creation
Post-purchase Prepurchase
Purchase
Agents Advertising
Direct sales Tele-
Distributors Integrators Alliance Promotion Internet
force marketing
Retailers Direct mail
Direct Indirect
Company
vices. The prepurchase phase is different from interest creation in that customers are actively
considering and evaluating competitive product offerings. Essential activities in the prepur-
chase phase include explaining features and benefits, qualifying prospects, assessing customer
needs, cooperating in problem solving, and demonstrating company and product capabilities.
The purchasing phase includes the set of activities culminating in a purchase. As such, it is
the set of activities most likely to involve direct salespeople. Activities in this phase include
negotiating, bidding, finalizing terms and conditions, and writing proposals. The essential
work does not conclude with the purchase. The post-purchase activities may include delivery,
installation, and servicing of products; addressing customer questions that need answering;
providing information about new features; and collecting payment. These and other essential
activities are discussed further in the next section in Chapters 3 through 5.
Go-to-Market Participants. Once the set of essential activities has been identified, the next
question is, who will participate in performing these activities? Figure 2-7 provides several
go-to-market participants, including the Internet, telemarketing, advertising, promotion,
direct mail, and face-to-face selling (including a direct sales force, independent agents, dis-
tributors, integrators, and alliances). Most large companies today access their markets in
more than one way. To defend their customer base, expand market coverage, and control
costs, companies today are adopting multiple methods for reaching different target markets.
IBM, for example, once sold all its computers through the company’s 5,000-person sales
force. When low-cost computers hit the market, IBM reacted by expanding into new chan-
nels. Now they sell through dealers, value-added resellers (VARS), catalog operations,
direct mail, telemarketing, and the Internet. In total, IBM added over 18 new channels in
addition to its own sales force to communicate with customers.
The combination of go-to-market participants that is most appropriate for each customer
segment and type of essential activity will depend on a number of factors, including cost,
efficiency, and effectiveness. The efficiency of a marketing instrument refers to its ability to
generate customer contacts for the money spent. On the other hand, the more results created
from the number of customers contacted, the more effective the marketing instrument is.
Figure 2-7 illustrates the relative efficiency and effectiveness trade-off for the major go-to-
market participants. Following is a brief discussion of the major non-sales force go-to-mar-
ket options: advertising and promotions, telemarketing, and the Internet.
Low cost
per exposure
Advertising
Direct mail
Internet
Efficiency
Telemarketing
Sales force
contact. Although advertising and direct mail are efficient, they are not always very effec-
tive. This is why companies ask these marketing instruments to raise awareness and interest,
and then utilize other means to drive the purchase behavior. Consider Hewlett-Packard’s go-
to-market efforts in a recent introduction of a new printer. First, Hewlett-Packard sent sales
kits to customers and dealers, followed by a mailing program and telemarketing. Next, they
sent sales reps to the dealerships to make follow-up calls and give management briefings.
This marketing program required a coordinated effort among advertising, sales promotion,
channels of distribution, and the sales force.
Internet. The extensive use of the Internet to gather information and to make pur-
chases is a key business go-to-market development. As household penetration of computers
increases and the speed of the information access over the Internet increases, the importance
of this channel of distribution also increases.
The Internet can be used in all phases of essential activities that need to be performed.
Its advertising and streaming qualities can be used on a company’s Web site to create inter-
est. Prepurchasing and purchasing activities are accomplished on e-commerce buying sites.
Automated reordering, tracking of transactions, billing information, and other post-transac-
tion activities are also efficiently and effectively executed on the Internet. Although the
Internet costs a little more per contact than direct mail, overall it is more effective at gener-
ating desired customer behaviors. With continued technological advances, the Internet’s
effectiveness is likely to continue to increase.
Many companies are finding that the Internet is able to increase the effectiveness of
their sales forces.17 Hewlett-Packard, for example, has aggressively pursued electronic
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TEAM EXERCISE
“Web Sales”
channels with HP Shopping Village (for consumers), HP Commerce Center (for busi-
nesses buying from authorized resellers), and Electronic Solutions (for contract cus-
tomers). Thanks to a tight integration between HP’s own intranet and resellers’ home
pages, HP will take the customer’s order and, at the last moment, kick the order over to
the reseller’s home page. The reseller completes the order, ships the product, and gets the
commission. In this way, HP helps to alleviate the conflict that often arises when selling
through multiple channels. How would you deal with the conflicts described in Team
Exercise “Web Sales”?
Even companies that are 100 percent committed to the Internet are finding that they
need to understand their customers better. An executive at Intel noted, “Today we notice that
trying to get our customers to purchase through the Web has not worked. But we do know
that buyers will make their purchasing decisions because of the Internet. They continue to
want to talk to our salespeople about price—maybe if we had a ‘haggle’ button on the Web,
they’d use it.”18
Face-to-Face Selling Alternatives. Upon deciding that a face-to-face sales force should
perform some of the essential activities, a company must still address another question.
Should the selling be performed by a direct company sales force, a selling partner, or some
combination? The main outsourcing options available to most companies are agents,
resellers, integrators, and alliances. A brief discussion of these indirect sales options follows.
Independent Sales Agents. An important alternative to the direct sales force is to hire
independent sales agents (sometimes referred to as manufacturer’s reps, reps, or brokers) to
perform the selling function. Independent sales agents are not employees, but rather inde-
pendent businesses given exclusive contracts to perform the selling function within specified
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TECHNOLOGY COMPETENCY
“Too Many Software Acronyms”
Software technology has advanced at such a rapid pace that it is difficult to keep up with the lat-
est developments, let alone the acronyms for this technology. Yet, you will need to know the
acronyms to stay current. To help you, here is a summary of some of the most frequently used
acronyms for software used in business and sales.
• ERP (enterprise resource planning): Software focused on bringing new efficiency and pro-
ductivity to employee and supplier-facing “back-office” activities such as inventory and sup-
ply chain management, just-in-time delivery, accounting and financial automation, and total
quality management.
• SFA (sales force automation): Software for use by salespeople in keeping track of leads,
account information, territory management, presentations, time management, and entering
orders.
• CRM (customer relationship management): Software that evolved from SFA software to
enhance customer-facing “front-office” activities such as automating internal sales, customer
service processes, direct sales force, and the Internet. Modules may include direct sales lead
and information management systems, sales force automation systems, call center, and cus-
tomer service systems.
• PRM (partner relationship management): A whole suite of Web-based software solutions tar-
geted to building closer and more productive supplier-reseller relationships. Core functions
include lead management, reseller profiling, front-office modules, reseller fund management,
and reseller training.
geographic areas. Unlike distributors, they take neither ownership nor physical possession
of the products they sell and are always compensated by commission. Agents are often used
to develop new markets through a combination of persuasive selling skills and technical
competence. This technical competence exists in part because agents usually handle five to
eight noncompeting but related product lines that they know fairly well and sell to similar
types of buyers. In certain situations, independent sales agents represent a cost-effective
alternative to a direct sales force. This issue is explored more extensively in Chapter 6 when
discussing sales force organization structure.
Resellers. Resellers are channel members, retailers, and distributors, who take title to
the offerings they sell to end-users. They perform many functions within the channel,
including warehousing, breaking bulk, extending credit, and providing information, but one
of their primary functions is to market their suppliers’ offerings to their own customers. It is
in this capacity that they function as a possible substitute in performing the activities of a
supplier’s sales force by calling directly on the end-user. Distributors have many, even hun-
dreds, of salespeople calling on thousands of customers, in effect multiplying the efforts of
the supplier’s salesperson.
Integrators. In a number of industries new channel members have arisen called inte-
grators. An integrator is a service supplier unaffiliated with specific products, whose advice
the end customer has sought to help them with a complex choice. Earlier in this section we
have already introduced one of these integrators, value-added resellers (VARS) in the com-
puter industry. They may advise a client to buy an IBM computer one day and advise
another client to purchase a Dell computer the next day. Other examples of integrators are
Personal Financial Advisers, Building Contractors, and Systems Integrators. Because they
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typically do not take possession of the supplier’s offering, as do distributors, and are not
under contractual agreement with a supplier, as are sales agents, integrators represent a new
and complex situation. Since the end-user seeks out the integrator’s advice, a supplier must
sell to the integrator as well as to the end customer. On the other hand, integrators are also
considered a competitor to the extent that they may advise clients to purchase a competing
offering. At a minimum, they have changed the role of the supplier’s salesperson in that they
represent a new and powerful buying influence.
launched products and that on average it takes 3,000 new product ideas to produce one suc-
cessful new product launch.22
Figure 2-9 lists some of the subprocesses involved in PDM. The arrows in the figure
indicate that the sales force is most likely to be directly involved in the initial and final steps
of the process. Although the sales force has traditionally played a large role in the introduc-
tion of new products, especially business-to-business products, its role in identifying new
and modified product opportunities is growing with the emphasis on customizing products
to address individual customer needs. In fact, executives in business-to-business firms rate
the sales force as the most important source of information for new product development,
more important even than primary research.23
One notable example of sales involvement in new product development is the case of
an alert U.S. Surgical Corporation (USS) salesperson. The salesperson saw an opportunity
to satisfy a surgical need that was not being met with existing products as a result of work-
ing closely with surgeons in operating rooms. The salesperson observed surgeons inserting a
tiny television camera into a body with very small laparoscopic instruments. USS responded
quickly to the need by designing and introducing a laparoscopic stapler for skin closure. The
product is now used regularly for internal surgical applications.24
The other phase of the PDM process in which the sales force is most likely to be
directly involved is the launching of a new product into the marketplace. The sales force
will almost always play a major role in the launching of new products. Professors Wotruba
and Rochford have shed new light on the changes that most companies make in their sales
force programs when introducing new products.25 Some of the more common changes are as
follows.
• Motivation: 37 percent changed their quota systems. Expense budgets were also very
likely to be changed as a result of introducing a new product.
• Sales Competencies: 35 percent of firms made changes to their training programs. The
most likely change was to focus on product training.
• Leadership: 30 percent made changes in their supervision programs. The most likely
change was to increase the amount of time management spent accompanying salespeople
on sales calls for the purpose of training and coaching.
• Compensation: 27 percent of firms changed some aspect of their compensation plan. The
most likely changes were in product commission rates, sales incentive programs, and
guarantee draws.
• Sales Structure: 21 percent of firms made changes to their sales force organization struc-
ture. The most likely change in sales force structure is to organize around different types
of customers.
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The next section addresses another key management process, supply chain management
(SCM), that is becoming increasingly important in today’s competitive environment.
annual Medal of Professional Excellence award. Lucent has created a position called a cus-
tomer general manager (GM) whose job is to identify ways in which the supply chain can
help customers address their issues. The GM is an advocate of the customer inside Lucent.28
When first created, GMs spent a lot of their time expediting deliveries, but the position is
evolving to one in which the GM is getting involved in bids and demand planning and
developing the implications for the back end of the supply chain. The customer now has one
point of contact for all their supply chain issues. So, if a customer has a technical question
about a product or has a quality concern, the GM can answer the question or find the appro-
priate function in Lucent to address the customer’s issue. In other words, Lucent’s customer
GMs are getting more involved in the earlier steps in the supply chain management in an
effort to integrate the customer’s needs into these steps.
As the Lucent case suggests, a shift to an SCM perspective raises the level of complex-
ity that salespeople must face. Following are some of the important implications of SCM for
the evolution of the sales force.
• Knowledge of the entire upstream and downstream supply chain. The experience of a
leading consumer foods processor is a good example of the opportunity that is available
to firms. This company makes a perishable product with no more than a 12-month safe
shelf life. As a consequence, it shipped the product 2 to 4 days after its manufacturing.
What it didn’t know was that the distribution chain was exceptionally sluggish. It took
anywhere from 2 to 12 months for the item to reach grocery shelves. Had there been
trust and shared knowledge between the food processor and its channel members, the
sales force would have known this information and conveyed it back to the home office.
• Thinking strategically about partnering. Consider again the case of the food processor.
The most important “success item” for this company’s sales force should not have been
generating more orders, but working with distributors and retailers to decrease the time it
took for the product to get to the grocery shelf. This necessitates talking to people other
than the purchasing agents and merchandisers for their product, the traditional customer
targets for this sales force. The sales force would also need to develop skills in process
analysis and logistics operations.
• Establishing good lines of communications and influence with senior corporate man-
agement. In a benchmark study by consultants Meritus-IBM, suppliers and customers
all recognized and emphasized the importance of openness, honesty, good communica-
tions, and mutual strategy creation. But the study found that in reality, suppliers and
customers were rarely entirely open and honest with each other and often didn’t even
try. To understand why this is the case, consider the example of the retailer who
planned a special promotion but refused to tell the beverage bottler which of its prod-
ucts was involved. Why would the retailer not share this information? Because he was
afraid that details would leak out to other retail competitors. Probably every grocery
retailer can readily recall an instance in which a competitor sabotaged a special promo-
tion after finding out about it ahead of time. So the bottler had to build up inventory lev-
els of several possible products and be prepared to incur extra costs of fulfilling late-
breaking orders. Naturally after the promotion was launched, the bottler ended up with
excess inventory for several weeks, or even months, in those products not selected for
the promotion.
Although the sales force is mostly involved in the downstream processes of the supply
chain, high-performance supply chains are not likely to come into existence without a fun-
damental change in the role and style of the sales force. As mentioned earlier, Lucent has
made a commitment to supply chain management such that it organized a separate special-
ized sales function, a customer GM, to address supply chain issues for specific customers.
Although this organization may not be right for all companies, it does suggest the critical
role the sales force can play in executing a world-class SCM program.
033-092_Dal9e_c2 9/19/05 5:19 PM Page 50
In the second phase, companies look for possibilities to manage customer relationships
as drivers of profits. Successful CRM initiatives have focused on using customer knowledge
and emerging new channels to decrease cost to serve and frequently on using advanced price
mechanisms. A good example of a second-phase CRM program is the Major Business Divi-
sion of BT plc (formerly known as British Telecom). It concluded that it was relying too
heavily on a long-standing face-to-face selling model and was also paying too much for it.
Research indicated that many of BT’s largest accounts were having difficulty resolving rou-
tine service and account management issues. The field salesperson in charge of helping a cus-
tomer implement a complex new customer-contact system, for example, was also in charge
of overseeing the addition of new phone lines. To solve the dilemma caused by balancing
these two very different opportunities, BT decided to add low-cost, efficient channels such as
the Internet and Telemarketing to handle simple transactions and free up field sales time for
larger, more complex deals. Integrating each of these channels to provide better service at a
lower cost required that a complex information backbone be added to BT’s CRM program.30
Some of the most advanced companies have now reached a third phase of CRM, which
is to view the management of customer relationships as a driver of economic value added
(EVA). At this stage, customer relationships and sales are regarded as a true driver of share-
holder value. The market value of the company is considered the sum of the net present
value (NPV) of all current and future customer cash flows. The CRM task in this phase is to
increase shareholder value by leveraging the customer base. The driver of business profits in
this phase is based on improving the profitability of customers. A phase 3 CRM sales pro-
fessional adds value by being a customized solutions provider and a business relationship
manager who oversees and nurtures all the players and processes in the sales, marketing,
and customer service continuum.
The GartnerGroup recently studied the skills that distinguished top salespeople in a
phase 3 CRM environment. Some of the traditional skills are still on the list, but they are
enhanced by new, critical management skills. The four skills most important to top sales
professionals in a phase 3 CRM environment are the following:
• Collaboration Truly having each stakeholder’s interest in mind—customers, the selling
team, the enterprise—is needed for true collaboration. Management must make sure that
compensation and motivation strategies reinforce good collaboration fundamentals. At the
same time, IT systems for sharing customer information such as Opportunity Management
Systems, Web Chat, and collaboration platforms must be in place to provide the necessary
infrastructure for broad collaboration.
• Relationship Management One of the most critical skills needed in selling today is
management of business relationships. The skills needed are effective listening, diagnostic
analysis, and interpersonal communications. Sales executives are emphasizing good lis-
tening skills in their interviews. As one said, “I look for salespeople that rarely make
statements, but orient client communication in the form of a question.”
• Finance and Business Skills The effective salesperson must speak the vocabulary of
business and analyze customer needs in the context of financially viable solutions. Pric-
ing, logistics, inventory management, and customer service must fit into the context of the
selling proposition and the related financial proposition to position the offerings well with
senior business executives.
• Consultative Skills In many industries, the salesperson must apply consultative skills in
analyzing customer needs, processes, and operational requirements. A Xerox executive
put it this way, “Our business is no longer about selling boxes. It’s about selling digital,
network-based information management solutions, and this requires a highly customized
and consultative selling process.”31
Effective and successful selling over the next years in many companies will require an
understanding of customer value, a consistent demonstration of behaviors that foster good
033-092_Dal9e_c2 9/19/05 5:19 PM Page 52
customer relationships, and IT literacy. In short, companies will need to develop a CRM
strategy and define the sales force’s role within the organization’s strategy. The sales force’s
role will dictate the skills the sales force needs.32
Estimates of sales
potential and Account relationship strategy
sales forecast
Leadership system
Feedback
TEAM EXERCISE
“Looking Forward to Next Year”
Last year had been a very good year. Sales had increased by 10 percent to $134 million, due
mostly to increased sales to existing customers. Tom Thornton, president and CEO, is even
more excited about the coming year because of an exciting new product development and plans
for a geographic expansion beyond last year’s Southeast Atlantic Coast sales area. He is meet-
ing with you, the vice president of sales and marketing, to discuss next year’s budget.
“I’d like to thank you for such a great year in pushing our sales over $130 million,”
greeted Tom. “As you know, I’ve been working on our budget for next year and feel that we
have an opportunity to become one of the real players in this industry. With our earnings from
last year, we are finally in a position to expand beyond our present eight-state geographic sales
area by adding on New York, Pennsylvania, and West Virginia in the North and Louisiana and
Arkansas in the South. On top of that,” he continued, “I believe that at least 10 percent of our
sales will be in the new packaging technology. What I really like about the new product is that
it is best suited for the high end of the market—expensive products that are easily broken if not
handled correctly. We’ve needed a product of this kind for some time and it shouldn’t cannibal-
ize our existing products, which are really appropriate for the middle of the market.”
“Now we just have to aggressively execute our plan,” added Tom. “I’ve forecasted sales
next year for $174 million, which is right at a 30-percent increase over this year’s projected
sales. We’ve got to maintain our bottom line to help finance our growth plans, so I’m setting a
sales and marketing budget of $19 million, which is the same as this year’s projected 10.9 per-
cent of revenue. This is nearly a $5 million increase in your budget, which should be enough to
reach our target of $174 million.”
As vice president of sales and marketing, what would be your reaction to Tom’s budget?
How would you begin to analyze this budget? What are the possible budget implications of the
expanded geographic selling area? What about the new product introduction?
e
ris ip
e rp nsh
t o
En lati
Re
Investment e
by tiv
l ta ship
Supplier u
ns ion
Co elat
R
l
na
t io hip
c
sa ns
r an atio
T el
R
Investment by Customer
Although suppliers may want to establish a consultative relationship with their customers,
the success of consultative relationships rests on the ability of the salesperson or sales team
to get very close to the customer and to intimately grasp the customer’s business issues. In
these relationships, the sales force attempts to create value for the customer in three ways:
• Helping customers understand their problems and opportunities in a new or different way
• Helping customers develop better solutions to their problems than they would have dis-
covered on their own
• Acting as the customer’s advocate inside the supplier’s organization, ensuring the timely
allocation of resources to deliver customized or unique solutions to meet the customer’s
special needs
The role of the salesperson in a consultative relationship is quite different from his or
her role in a transactional relationship. Much more time is spent learning the special needs
of the individual customer and marshaling resources inside the supplier’s company to meet
those needs. A good example of a company implementing a successful consultative relation-
ship program with its key customers is the Boise Cascade Office Products Corporation
(BCOP), a business-to-business distributor of office products. BCOP has repositioned its
salespeople as business consultants, through the application of value-added techniques.
Using database marketing software, the salesperson examines a customer’s buying pattern.
The BCOP salespeople seek areas in the customer’s organizations where process improve-
ments are possible. Sales usage reports enable the sales representative to advise customers
on buying trends in the categories of paper, furniture, computers, and office supplies. Sales
representatives also use a software program called Activity-Based Cost Management
(ABCM) to measure costs by activity, customer, and product. ABCM enables Boise to
directly assign more than 90 percent of actual costs to specific customer-related activities.
As a consequence, opportunities for cost savings can be explored and presented to cus-
tomers, hopefully resulting in improved financial results for both the buyer and Boise.
Boise Cascade’s efforts at establishing consultative relationships with its customers
illustrate several important characteristics of this type of customer relationship and how it
differs from purely transactional relationships. Notice that the additional customer value
resides in the nonproduct resources that the salesperson brings to the relationship. This type
of relationship also puts a premium on gathering and analyzing information about customers
and their business issues. As a result, the selling process is usually longer, so the value of the
customer to the supplier must be great enough to cover the higher selling costs. The relation-
ship must usually be long term in nature for the customer equity to justify Boise’s invest-
ment in the customer. Notice also that the salesperson must have a great deal of skill in gath-
ering customer information, business acumen, and technical competency.
Figure 2-13 indicates that the seller and the buyer’s investments in the relationships are
greater in consultative relationships than in transactional ones. The Boise Cascade example
clearly shows that the seller’s investment increases, but what about the buyer’s investment?
Information sharing to understand the customer’s problems and opportunities requires, by its
very nature, an investment of time and a sharing of information by the customer. A vice
president with a large utility firm put it this way: “It’s a big investment of time bringing a
new vendor aboard. You need to know that the time you spend with them is worth it. You
can’t just give a free education to everyone who comes knocking at your door.”39
It is critical to choose the right situations in which to invest in consultative relation-
ships. Experience indicates that a consultative relationship is most appropriate when one or
more of the following conditions are present:
• The product or service can be differentiated from competitive alternatives.
• The product or service can be adapted or customized to the needs of the customer.
033-092_Dal9e_c2 9/19/05 5:19 PM Page 57
• The customer is not completely clear about how the product or service provides solutions
or adds value.
• The delivery, installation, or use of the product or service requires coordinated support
from the selling organization.
• The benefits of the product or service justify the relatively high cost of consultative rela-
tionships.
When these conditions are present, the sales force may have an opportunity to create cus-
tomer value through consultative selling.
Enterprise Relationship. In recent years, customers have been downsizing their supplier
base and replacing their myriad vendors with a very small number of possibly long-term
relationships offered only to a select few suppliers. A widely quoted figure is that customers
are working today with one-third fewer suppliers than they did 10 years ago. Combined with
merger mania and market consolidation, the trend toward purchasing from fewer suppliers
has resulted in customers capable of leveraging the volume of their purchases for enhanced
services and cost-cutting opportunities. The response of many sellers to the emergence of
very large and powerful customers has been to develop a system of enterprise relationships
to better meet the needs of their major customers. According to one study, the number of
enterprise relationship programs within the Fortune 1000 companies has tripled over the last
5 years.40
An enterprise relationship is one in which the primary function is to leverage any and
all corporate assets of the supplier in order to contribute to the customer’s strategic success.
In such a situation, both the product and the sales force are secondary, and the customer
must be of strategic importance to the selling organization. Adjectives to describe this cate-
gory of relationships abound and include Major, Strategic, National, Global, Corporate, and
Key Account Programs. To achieve successful enterprise relationships, the supplier must
deliver exceptional customer value while also extracting sufficient value from the relation-
ship. This is always challenging, especially when the customer has worldwide needs. To
better understand this point, see the Global Awareness Competency box, “An International
or a Global Company?”
Many of the United States’ premier industrial firms such as GE, IBM, Du Pont, Mon-
santo, and Honeywell have established enterprise relationships with customers such as
American Airlines, Ford, Milliken, Procter & Gamble, and the federal government. The cus-
tomer generally initiates this radically different type of relationship.41 When Chrysler was
on the ropes in the early 1990s, one of its responses was to change the way it did business
with its key suppliers. Figure 2-14 lists some of the ways in which Chrysler changed its sup-
plier relationships. Instead of forcing suppliers to win its business anew every 2 years and
focusing on lowest list price, it decided to give suppliers business for the life of a model and
beyond. Excruciatingly detailed contracts gave way to oral agreements. Instead of relying
solely on its own engineers to create the concept for a new car and to design all the car’s
components, Chrysler now involves suppliers. Instead of Chrysler dictating price, the two
sides now work together to lower the costs of making cars and to share the savings. Today
DaimlerChrysler has improved its market share and profitability significantly by speeding
up product development, lowering development costs, and reducing procurement costs.42
The DaimlerChrysler example illustrates some ways in which enterprise relationships
differ from traditional supplier relationships. Following are some of the ways in which other
companies have made strategic partner relationships work.
• Suppliers are involved in the early stages of need identification, specification, and new-
product development. Texas Instruments targets key emerging accounts in which they
participate in the product design process of these firms as early as possible and, in doing
033-092_Dal9e_c2 9/19/05 5:19 PM Page 58
Little recognition of credit for past performance Recognition of past performance and track
record
No responsibility for supplier’s profit margins Recognition of suppliers’ need to make a
fair profit
Little support for feedback from suppliers Feedback from suppliers encouraged.
No guarantee of business relationship Expectations of business relationship
beyond the contract.
No performance expectations beyond the contract. Considerable performance expectations
beyond the contract.
Adversarial, zero-sum game. Cooperative and trusting, positive-sum
game.
so, suggests improvements that enable these firms to design products that fully capitalize
on the strengths and capabilities of TI system products.
• In conventional relationships, the primary players were the salesperson, the customer service
representative, and perhaps a design engineer. With enterprise relationships, the supplier
fields a team that interfaces with the customer on a regular basis, and includes a variety of
functional areas and management levels. See the Team-Building Competency box, “An Advi-
sory Board,” for another example of the selling teams in an enterprise relationship situation.
It was a shock when IBM discovered it was an international company but not necessarily a global
one. For instance, McDonald’s, a major IBM account, was operating in more than 90 countries, as
was IBM. McDonald’s needed standard solutions that could be delivered to any location globally,
but IBM was not equipped to deliver the consistent solutions that the world headquarters of
McDonald’s was seeking. Each of IBM’s local operations had evolved its own processes. As a
result, McDonald’s needs in Indonesia were handled very differently by IBM Indonesia than the
way in which, say, IBM UK dealt with McDonald’s requirements in London.
In the late 1990s, IBM began to rethink its approach to the global market. The company
designed what it calls a customer relationship management process. The process redesign put
the issue of creating customer value firmly at the center of the new strategy, while beginning
with the best local practices and adapting them for worldwide use. As the general manager of
IBM North America explains, “Our intention was to create value for our customers worldwide,
and that meant centering everything on customer wants and needs. We could no longer afford
the old functional ways of thinking.”
In McDonald’s case, IBM created a cross-functional global team to work with McDon-
ald’s worldwide headquarters. The team is designed to mirror McDonald’s own worldwide
management structure. It includes a senior IBM executive sponsor and specialist food service
representatives for each of McDonald’s major markets in the Asia Pacific, Europe, and Latin
America. Together with global pricing and improved responsiveness to McDonald’s needs, the
process approach has been successful in creating customer value at the corporate level. As
IBM’s client executive for the McDonald’s team says, “Our ability to communicate efficiently
and effectively a common message around the world is a tremendous competitive advantage.”
See www.ibm.com and www.mcdonalds.com.
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TEAM-BUILDING COMPETENCY
“An Advisory Board”
To add value to the customer’s business, General Electric Industrial Control Systems (GE ICS)
has reorganized into Local Customer Teams that work within their specialties to fully research
and understand a customer’s business and to solve complex customer problems, including pro-
ductivity issues. GE ICS provides a complete line of AC and DC electric motors for commer-
cial and industrial applications. GE ICS provides customer value beyond its products through
sharing its process and application engineering knowledge, providing complete industrial sys-
tems, as well as the services to improve, maintain, or monitor the system.
To bring GE ICS’s capabilities to bear on their customers’ issues, 20 Local Customer
Teams (LCTs) composed of 30 to 70 people have been established throughout the Americas.
An advisory board of seven individuals runs each LCT. An LCT could have an account man-
ager from sales, a representative from distribution, and a representative from OEM (original
equipment manufacturer) sales on its advisory board. There are only two management-level
functions on the board: a business development leader and an engineering manager. The LCT
teams also select two individuals from the technical ranks (field engineers and application engi-
neers) and one who holds an “at large” position that does not fit into any of the other categories.
Within the team framework, the advisory board is responsible for establishing the sales strate-
gies and tactical plans, allocating and positioning its resources to best meet the customers’ chal-
lenges. See www.ge.com/indstrialsystems/index.
Cautionary Notes. In today’s business world strategic decisions can be quite complex. At
IBM, for example, American Airlines is viewed as both a customer and a supplier; that is,
American sells airline seats to IBM, but IBM is also a primary supplier of computer equipment
and software to American. This type of relationship requires that the supplier’s account man-
ager navigate within his or her own procurement area as well as that of the customer.
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Fair
10%
Good
27%
Very
Good Poor
10% 53% FIGURE 2-15 Partnering Effectiveness Index
A critical mistake is to assume that more investment in the customer relationship will
automatically create a better relationship with improved results. The experience of a pack-
aged materials manufacturer provides a typical example of this mistake. Because the manu-
facturer’s costs were slightly higher than competitors’ costs, they were losing business. This
manufacturer decided that the best way to halt this decline was to upgrade its sales force.
Their “packaging consultants” were charged with adding value to their products through
providing customers with help and advice. The investment in upgrading the sales force,
including retraining and recruiting, together with the development of a new marketing strat-
egy, was in excess of $10 million. The average cost of each sales call increased to $890, and
the average sales cost to acquire a new account was $112,000. It turned out, however, that
most customers simply didn’t want advice or help. They needed packaging material, pure
and simple, and that’s all they were prepared to pay for. The company was soon taken over
at a fire-sale price. Studies suggest that this case is not unusual. As indicated in Figure 2-15,
more than half of the companies offering enterprise-level relationships to their strategic cus-
tomers rated the performance of these programs “Poor.” The challenges of these programs
are significant, and the risks of revenue and profit loss associated with losing these accounts
to competitors are often of even greater significance.
SUMMARY
The sales force strategy and management structure should be planned and designed within
the context of an organization’s overall business strategy and marketing strategy. Competi-
tive advantage resides in the firm’s ability to develop and perform a set of basic business
processes for implementing a firm’s business strategy. As the primary customer contact, the
sales force and sales management are likely to play an important role in these processes.
This chapter has given numerous examples of how sales force decisions are subject to and
contribute to the overall strategy of the company and its marketing strategy. You should be
able to do the following:
1. Describe the major elements of business strategy. The strategic management process
includes defining a business mission, setting specific measurable goals for the organiza-
tion, and deciding on a strategy for meeting these objectives. A well-defined business
mission should provide a sense of direction for the organization. The mission should be
defined in terms of customers to be served, competitors with whom an advantage must be
achieved, and the processes by which the company will achieve these advantages. Goals
should be measurable and should guide goal setting throughout the organization. Strate-
gies should be based on developing a sustainable competitive advantage through creation
of customer value.
2. State the basic elements of strategic marketing planning. Strategic marketing plan-
ning is a process whereby an organization attempts to meet the value requirements of its
target markets. This process starts with a situation analysis that consists of taking stock of
where you have been, where you are now, and where you are likely to go in the future.
The next step is to define market segments from which to target. Once you have made
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KEY TERMS
Account relationship strategy Go-to-market strategy Sales force program
Alliances Independent sales agents Sales process activities
Brand identity Integrators Strategic implementation decisions
Brand meaning Low cost Strategic management planning
Brand relationships Market segmentation Strategy
Brand responses Marketing mix Supply chain management (SCM)
Business mission statement Marketing strategy Target marketing
Consultative relationship Niche Telemarketing
Customer relationship management Organization’s goals Transactional relationships
(CRM) Positioning strategy
Differentiation Product development management
Enterprise relationships (PDM)
Generic business strategies Resellers
been growing rapidly and taking business from full-service brokerage houses owing pri-
marily to the low price per transaction and the record bull market since 1994. With the
Internet now accounting for 30 to 35 percent of all stock trades by individuals, Merrill
executives finally decided they could no longer afford not to embrace such trading. Not
only is this a major change in strategy for Merrill, but the move to the Internet could
spark rebellion within its army of 14,800 well-paid brokers. An internal Merrill Lynch
study, for example, suggests that brokers who are paid chiefly in commissions might see
their incomes decline by 18 percent initially. How big a problem does Merrill face? What
would you suggest they do about their brokers? For more information on Merrill Lynch,
visit its Web site at www.ml.com.
2. Technology. The marketing plan for 2004 was recently released to the 30-person sales
force of Access Radiology Corporation. The salespeople were unhappy with what they
saw, and Mary Callaghan, vice president of sales at Access, had received more than a
dozen angry e-mails, voice mails, and memos from her salespeople. Complaints ranged
from not enough money for lead-generation activities and too much image-based adver-
tising to a lack of a comprehensive Web-based marketing initiative. The last issue has
salespeople worried about Access’s marketing direction. Customers have said that they
mainly want to interact and buy products from Access on-line. Callaghan had already
relayed this information to Access’s senior management in an effort to create new on-line
initiatives at Access. It doesn’t seem that this is happening, and Callaghan and her sales
force are extremely concerned. How should Callaghan address these issues with senior
management, and what can she do to ensure that the company’s marketing department
listens to the needs of the sales force and its customers?
3. Coaching. Perhaps one of the best role models for today’s sales and marketing managers
is Lou Gerstner, the former chairman of IBM. Major problems faced IBM when Gerstner
became chairman at IBM, and it was probably tempting for him to turn all his energy
inward to resolve these difficulties. Instead, he decided to become actively involved in
the company’s sales efforts. IBM’s relationship with Monsanto, the St. Louis-based agri-
cultural and pharmaceutical giant, is a good case in point. Gerstner hosted a number of
one-day strategy seminars for small groups of chief executives from significant compa-
nies in a variety of industries. The chairman of Monsanto, Robert Shapiro, who was an
attendee at one of these events, asked whether any of IBM’s research or cutting-edge
technology might have an application for Monsanto, which was involved in genetic
research. IBM found some interesting material on gene mapping in both animal and plant
cells that IBM thought might be useful to Monsanto. A few weeks later an IBM executive
team arrived at Monsanto headquarters, and discussions began. As the discussions pro-
gressed, it became apparent that IBM had other more important strategic-level contribu-
tions to make. Within a year, Monsanto and IBM signed a contract, reputedly worth sev-
eral hundred million dollars, that had IBM running the total Monsanto mainframe and PC
network of more than 20,000 personal computers. What did Lou Gerstner do right?
Which type of customer relationship do IBM and Monsanto have, and what makes it
work? IBM: www.ibm.com. Monsanto: www.monsanto.com.
4. Team Building. The need for coordination and teamwork has been emphasized through-
out the discussion of relationship management in this chapter. WESCO Distribution, Inc.,
a $3 billion electrical equipment and supplies (EES) distributor, presents an interesting
case study on the issues involved in coordinating the implementation of a national
account contract with large customers.
WESCO regularly carries and sells more than 210,000 products from over 6,000 sup-
pliers to satisfy the electrical equipment needs of any customer anywhere in the world.
What it is really selling, however, is the capability of a single source of supplies, cus-
tomized delivery, technical support, application development, and customer product
training. In other words, WESCO offers the latest in integrated supply chain systems,
including inventory management options, inventory reduction initiatives, and related effi-
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four skills (rate from 1 to 10) of a person who would be successful at each of the three cus-
tomer relationships discussed in this chapter: transactional, consultative, and enterprise rela-
tionships. For more on H. R. Chally, see www.chally.com.
T
he First-Plus plan was designed for D & M’s
larger customers, even though many of the said, “we would like to get a better handle on our
salespeople at D & M were very successful risks, but we need a lot of help. Every one of our
with smaller business owners. Getting salespeople to offices is used to doing things its own way, and that
refocus their efforts on larger customers was a major includes the liability and workman’s compensation
issue with Doug Bloom when he took over the Des plans they’ve purchased. We don’t have a common
Moines office. Tiffany Williams, the top salesperson set of procedures for determining our risks or han-
for the past 8 years, had been particularly upset at the dling claims. Making matters even more difficult, we
first sales meeting by this change in direction. Doug haven’t got a common information system. We might
had a lot of experience with selling business owner, be willing to write a lot of business with you if your
liability, workman’s compensation, and other forms of people are prepared to work with each office individ-
insurance to small businesses when he was a sales rep ually. Study their particular needs and help them get
in Atlanta. Although price was of primary concern for their act together.” The discussion proceeded with the
most of these businesses due to their focus on cash vice president explaining the background of how
flow, smaller accounts were faster to close because one decentralized decision making has traditionally been
person generally made the decision and the business in his company. This was changing, however, and
risks were fairly straightforward and addressable. As a insurance was one of the issues that he felt should be
result, the selling cycle—the time it took to close a standardized throughout.
deal—was fairly short. Even a new account would take Doug and Tiffany thanked the vice president for his
only 2–3 calls to close. time and the information. Doug promised that he and
Doug realized that First-Plus was a more complex Tiffany would get back to him with some ideas. In
plan, requiring more time to explain and understand. fact, Doug was not sure how to respond to this request.
He also knew from experience that the buying process This was an entirely different type of situation than he
in large firms could be more complicated. A committee was used to seeing. On the other hand, he knew that
often made the purchase decision and more people they could not afford to lose this opportunity and that
could veto the deal or delay the purchase for an this could really turn things around in the Des Moines
extended period. On the other hand, these accounts office. He also wondered if this situation was typical of
could potentially be exceptionally large sales opportu- other large businesses.
nities, with high testimonial value. If a large well-
known company chose your plan, it was a natural
opener for more companies in the same business. Questions
Doug decided to tackle the problem head-on and
1. How fundamentally different is the role of the sales
the next time he was riding with Tiffany to see some of
force in addressing these new customer needs from
her accounts asked if they could stop to visit a large
that of addressing the needs of more traditional
prospect to which Tiffany had made an initial sales call
brokers?
to determine their interest in purchasing insurance
from D & M. He was really pleased when Tiffany 2. How will the selling effort change when addressing
agreed and was able to make an appointment with the these new broker needs?
vice president of Human Resources for that afternoon. 3. How will the changes affect sales management?
After introductions and some initial small talk, they got 4. What are the threats and possible downside of
down to business. addressing these emerging broker needs?
033-092_Dal9e_c2 9/19/05 5:19 PM Page 65
WHY FORECAST?
One of the keys to success in sales is knowing where customers are located and being able
to predict how much they will buy. Firms have found that sales potential data are indispens-
able to developing a sales program, particularly in setting up territories, assigning quotas,
developing budgets, and comparing sales performance of individual salespeople. Sales fore-
casting is so important that more than 50 percent of firms include this topic in their sales
manager training programs.1
Inaccurate demand predictions can have disastrous effects on profitability. For example,
recently Hewlett-Packard was unable to predict the proper mix of products demanded by its
customers for two quarters in a row. Demand for low-end printers and workstations was
high, and demand for commercial computers was low. As a result, earnings were 14 percent
lower than analysts expected. The stock market was dismayed with Hewlett-Packard’s fore-
casting problems and knocked the company’s stock down 5 percent in one day. This case
example demonstrates the importance of being able to measure the size of market opportuni-
ties. In this Management Resource, we will show you how to measure demand for today and
how to forecast sales for tomorrow.
Resource Consultant: Beth Forbes, Director of International Results & Analysis, GTE International
033-092_Dal9e_c2 9/19/05 5:19 PM Page 66
Market potential
Industry
forecast
Basic
demand
gap
Industry sales
Company potential
Company
Company forecast
demand
gap
Actual
Company sales
Forecast
1 2 3 4 5 6 7 8 9 10 11 12
FIGURE SMR2-1 Relations Among Market Potential, Industry Sales, and Company Sales
Estimating Potentials
All estimates of potential are based on two key components—the number of possible users
of the product and the maximum expected purchase rate. Sometimes you can get estimates
of these numbers from trade associations or commercial research associations, but you have
to come up with your own potential figures, broken down by geographical area, industry,
and customer type.
The initial approach for estimating the number of buyers is to use secondary sources.
A wide variety of commercial data are available that provide the potential number of buy-
ers, size of firms, age of consumers, income levels, and locations. Dun’s Marketing Ser-
vices and Sales & Marketing Management magazine sell these data on diskettes for use
with personal computers. You can also access potential data banks through computer net-
works on a fee basis. Large firms often have their own data banks that can be mined for
potential information.
Purchase rates are usually derived from trade organizations or government publications.
For existing products, you can use the ratio of current sales to the number of households or
sales per person. These ratios can be obtained from trade publications such as those from the
Conference Board, or they can be calculated from published data. For example, average
demand per household could be derived by dividing total industry sales for an area by the
number of households. In the case of new products, managers may estimate conversion rates
from experience with other items. If a similar product was sold to 4 percent of U.S. house-
holds during the first year, this rate could be applied to obtain demand estimates for new
merchandise.
Duracell, a division of Gillette, is the world’s leading alkaline battery manufacturer.
Every month, five standard alkaline battery sizes are built into thousands of stock-keeping
033-092_Dal9e_c2 9/19/05 5:19 PM Page 67
units that are shipped to customers. Forecasting’s mission at Duracell is to provide manage-
ment with forecasts to help prepare strategies and set goals. The basic formula at Duracell is
that Shipments = Retail Market × Market Share +/– Changes in Retail Inventories. Thus,
forecasts are a function of the size of the market times anticipated market share with an
adjustment for inventory changes. The company currently uses six different statistical mod-
els to determine market size. Marketing executives estimate market shares based on plans
for advertising, product enhancements, distribution strategies, and pricing. Changes in retail
inventories are the most difficult to estimate. Duracell uses five forecasting cycles: competi-
tive view, strategic business plan, tactical plan, latest estimate (monthly), and supply chain
management (weekly). To ensure coordination of resources, marketing, finance, and produc-
tion planning activities all use the same forecasts. Their forecasting toolbox includes judg-
mental, time series, and causal model approaches. No single procedure meets all forecasting
needs, and so Duracell selects methods that best suit the situation. This often means using
simple naive methods for tactical forecasts of less than one year. They also use linear regres-
sion, optimized exponential smoothing, moving averages, and causal models for long-term
situations. Duracell often selects forecasting methods on the basis of those shown through
tests to be the most accurate with company data.
1.7636 percent of the U.S. sales potential, should receive about 1.7636 percent of the per-
sonal selling and advertising budgets for products in national distribution.
sion of forecasting techniques by focusing on subjective methods that are based on interpre-
tations of business conditions by executives and salespeople.
The continued popularity of the jury of executive opinion shows that most managers
prefer their own judgment to other less well-known statistical forecasting procedures. How-
ever, available evidence does not suggest that the jury of executive opinion method leads to
more accurate forecasting. Perhaps the main problem with the method is that it is based on
experience, and it is difficult to teach someone how to forecast using this method.
Leading Indicators
Where sales are influenced by basic changes in the economy, leading indicators can be a
useful guide in preparing sales forecasts. For example, 19 percent of the firms in Table
SMR2-3 regularly use leading indicators in sales forecasting. The idea is to find a factor
series that is closely related to company sales, yet for which statistics are available several
months in advance. Changes in the factor can then be used to predict sales directly, or the
factor can be combined with other variables in a forecasting model. For example, General
Electric has found that sales of dishwashers are closely related to the number of housing
starts that occur several months earlier. Thus, if GE observed a 4-percent increase in housing
starts in California, it could expect demand for dishwashers to increase by about 4 percent
2 months later. Obviously, the key issue is finding indicators that have forecasting value for
particular products. Some of the more useful leading indicators include prices of common
stocks, new orders for durable goods, new building permits, contracts and orders for plant
and equipment, and changes in consumer installment debt.
Perhaps the greatest contribution of leading indicators is their ability to predict turns in
sales trends. If sales have been increasing, for example, leading indicators may indicate a
leveling-off of sales or a decline. Most of the quantitative forecasting techniques that we will
discuss in the next section do a very poor job of telling managers when sales are going to
change direction. Leading indicators are sensitive to changes in the business environment,
and they often signal turns in the economy months before they actually occur.
Seasonal Adjustments
Before we discuss data-based forecasting techniques, it’s important to understand how sea-
sonal factors influence predictions of the future. Sales forecasts are often prepared monthly
or quarterly, and seasonal factors are frequently responsible for many of the short-run
033-092_Dal9e_c2 9/19/05 5:19 PM Page 71
changes in volume. Thus, what appears to be a good forecast may turn out to be a poor one
because of the failure to consider seasonal factors. When historical sales figures are used in
forecasting, the accuracy of predictions can often be improved by making adjustments to
eliminate seasonal effects.
The first step in seasonally adjusting a time series is to collect sales figures for the past
several years. Next, sales for months or quarters are averaged across years to build a sea-
sonal index. In Table SMR2-4 four years of quarterly sales are averaged to give a rough
indication of seasonal effects.4 The quarterly averages are then divided by mean sales for all
quarters to give seasonal index numbers. For example, when average sales of 58.0 for quar-
ter 1 are divided by the mean for all quarters of 79.25, a seasonal index of 0.73 is obtained.
This number indicates that seasonal factors typically lower first-quarter sales by 27 percent.
Once seasonal index numbers are developed for each time period, it is easy to adjust a
set of sales data seasonally. Actual sales, such as those shown in Table SMR2-4, are simply
divided by the appropriate index numbers to give a set of deseasonalized data. Sales fore-
cast are then prepared using the deseasonalized sales figures. For example the deseasonal-
ized sales data for the four quarters of the first year in Table SMR2-4 would be 67, 68, 78,
and 81 for quarters one, two, three, and four, respectively. The resulting forecasts must be
multiplied by the seasonal index for the forecast period to make them comparable with reg-
ular sales figures.
Computer programs used in sales forecasting take these indexes and make forecasts for
future periods. Nabisco Biscuit Company uses computer programs to forecast sales of new
cracker and cookie brands soon after they have been introduced. Because new products have
no sales history, Nabisco’s program uses an exponential smoothing approach that can start
forecasting with only two periods of data. The first 6 weeks of sales figures are discarded in
the Nabisco model because these shipments are used to build store and warehouse invento-
ries. Then the program deseasonalizes the sales figures using weekly seasonal factors from a
similar product, brand, or category. Nabisco initially used seasonal indexes based on retail
store scanner data supplied by the independent marketing research firm IRI. When these
indexes did not significantly reduce forecasting errors, Nabisco decided to calculate the
indexes from Nabisco’s weekly shipment data. These indexes led to a 14-percent reduction
in forecasting errors for 4-week projections for cookies and 21-percent reductions in errors
for crackers. The Nabisco forecasting program also includes adjustments for trend and sales
promotions. Nabisco’s new computer forecasting program led to a 34-percent overall reduc-
tion in errors in national weekly projections and a 53-percent reduction in errors in 4-week
projections compared to their old method. Nabisco’s program has been employed success-
fully for several years and has been adapted for use with existing products that have been
hurt by new items or have been affected by mergers or acquisitions.
Some students think that because seasonal adjustments complicate the forecasting
process, they may not be worth the time and effort required. However, there are two truths
about seasonal adjustments that you should remember:
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Naive Forecasts
Time series forecasts rely on past data to provide a basis for making projections about the
future. The naive forecast is the simplest numerical forecasting technique and is often used
as a standard for comparison with other procedures. Thirty percent of the firms in Table F-3
use naive forecasts on a regular basis. This method assumes that nothing is going to change
and that the best estimate for the future is the current level of sales. For example, actual sales
of 49 units observed in quarter 1 in Table SMR2-4 can be used to predict sales in quarter 2.
Naive forecasts for the last three quarters of year 1 would be
Quarter
1 2 3 4
Actual sales 49 77 90 79
Naive forecast 49 77 90
The error in the forecast for quarter 2 is the difference between 49 and 77. The for-
mula for the percentage forecasting error is
forecast – actual
Percentage of forecasting error =
actual
This means the percentage error for the naive forecast in quarter 2 is
49 – 77
Percentage error =
77
MAPE
In order to compare forecasting accuracy across several time periods, most forecasting pro-
fessionals use the mean absolute percentage error (MAPE) method.5 The formula for calcu-
lating MAPE is:
n
Σ |forecast – actual| /actual
i=1
MAPE = × 100%
n
50
Sales
20 Naive forecast
Moving average forecast
10
1 2 3 4 5
0
Time period
periods being forecast. The main advantage of MAPE is that it allows easy comparison of
forecasting errors across product categories and companies. For practice in calculating
MAPE, see the problems at the end of this Resource. Notice also that Excel worksheets are
available at www.wiley.com/college/cron. Go to “Student Resources.”
Trend Projections
The use of trends to project sales is a popular technique among business firms. With this
method, the analyst estimates trends from past data and adds this figure to current sales to
obtain a forecast. For example, in Figure SMR2-2 sales increased from 10 units in period
2 to 20 units in period 3, suggesting a trend of 10 units per period. A unit rate of change
forecast for period 4 would combine current sales of 20 plus 10 units of trend for a total of
30. Trends can also be expressed as a percentage rate of change. With this method, the 10
units of trend would be divided by the base of 10 units of sales to give a 100-percent
growth rate. A 100-percent growth rate applied to current sales of 20 units would give a
forecast of 40 units for period 4. Note that the percentage rate of change method and the
unit rate of change procedure give different sales forecasts. When sales are increasing,
forecasts prepared with the percentage rate of change approach will normally be higher
than those obtained by other projective techniques. Research reported in Table SMR2-3
shows that the percentage rate of change method is the most popular projective forecast-
ing technique, followed by the unit rate of change. Trend projections are often combined
with exponential smoothing and moving average forecasts to help improve forecasting
accuracy.
Moving Averages
With the moving average method, the average revenue achieved in several recent periods is
used as a prediction of sales in the next period. The formula takes the form
St + St –1 + … + St –n+1
Ft +1 =
n
where
Ft+1 = forecast for the next period
St = sales in the current period
n = number of periods in the moving average
033-092_Dal9e_c2 9/19/05 5:19 PM Page 74
This approach assumes that the future will be an average of past achievements. For
example, if sales in the last two periods went from 10 to 20, then a two-period moving aver-
age forecast would be 15 (30/2) as shown in Figure SMR2-2. Thus, when there is a strong
trend in a time series, a moving average forecast without a trend adjustment lags behind.
However, this lag can be an advantage when sales change direction (suddenly increase or
decrease).
Students must remember that a moving average really does move. For example, sales
data from Table SMR2-4 can be used to make two-period moving average forecasts as follows:
Quarter
1 2 3 4
Actual sales 49 77 90 79
Thus, periods 1 and 2 are averaged to give a forecast of 63 for period 3. Then period 1
is dropped, and periods 2 and 3 are averaged to produce a forecast of 83.5 for period 4. This
process would be the same when using deseasonalized data, but do recall that the forecast
must then be seasonally adjusted. If forecasting for the third quarter, for instance, then the
forecast would be multiplied by the seasonal index for that quarter.
A crucial issue in using moving averages is determining the ideal number of periods (n) to
include in the average. With a large number of periods, forecasts tend to react slowly, whereas a
low value of n leads to predictions that respond more quickly to changes in a series. The opti-
mum number of periods can be estimated by trial and error or with computer programs.
A characteristic of moving averages that distracts from their ability to follow trends is
that all time periods are weighted equally. This means that the oldest and and most recent
periods are treated the same in making up a forecast. A popular technique that overcomes
this problem is exponential smoothing.
Exponential Smoothing
An important feature of exponential smoothing is its ability to emphasize recent information
and systematically discount old information. A simple exponentially smoothed forecast can
be derived using the formula:
_ _
St = αSt – 1 + (1 – α) St – 1
where
_
St = smoothed sales forecast for period t.
α = the smoothing constant, greater than 0 and less than 1
St – 1 = actual sales in period t – 1
St – 1 = smoothed forecast for period t – 1
The formula combines a portion (α) of current sales with a discounted value of the
smoothed average calculated for the previous period to give a forecast for the next period.
The following example uses data from Table SMR2-4 with a smoothing constant of 0.4.
Quarter
1 2 3 4
Actual sales 49 77 90 79
Smoothed forecast 60.2 72.1
The forecast for period 3 is obtained by multiplying 0.4 times the current sales in period
2 of 77 plus 0.6 (1– α) times 49, which is the actual sales for period 1 that can be used as a
033-092_Dal9e_c2 9/19/05 5:19 PM Page 75
proxy for the prior period’s forecast to get the process started. The resulting forecast for
period 3 would be 60.2 units [(0.4 × 77) + (0.6 × 49) = 60.2]. A forecast for period 4 would
be obtained by multiplying 0.4 times the period 3 sales of 90 plus 0.6 times the smoothed
forecast for period 3. The forecast would be 72.1 units. [(0.4 × 90) + (0.6 × 60.2) = 72.1].
Remember, once again, that if you are using deseasonalized numbers, then you would need
to seasonally adjust the smoothed forecast.
The major decision with exponential forecasting is selecting an appropriate value for
the smoothing constant (α). Smoothing factors can range in value from 0 to 1, with low
values providing stability and high values allowing a more rapid response to sales
changes. Using a smoothing constant of 1.0 gives the same forecasts that are obtained
with the naive method. Forecasts produced with a low smoothing constant, such as 0.2,
lag behind, and forecasts generated with high values, such as 0.8, will likely overestimate
sales at turning points. When historical data are available, analysts should search for the
optimum smoothing constant by trying out different α values to see which one forecasts
best. In the case of two consumer products, a smoothing constant of 0.2 produced the low-
est MAPE values.6
Regression techniques have advantages in situations in which managers wish to incor-
porate other variables in their forecasting program.
90
80
3.6
Sales
70
0 1 2 3 4 5 6
50
Time period
Another problem is knowing how much past data to include in the calculation of the
forecast. Usually, all past data points are used to provide greater stability. Sometimes,
however, regressions using data from a shorter period of time will do a better job of track-
ing changes. For example, Procter & Gamble’s Italian division produces powdered and
liquid detergents for Europe. Its annual sales volume is about $385 million per year. It
regularly prepares sales forecasts for two powdered detergents and one liquid detergent
for use with washing machines. For established products, P&G Italy looks at the history of
a product, adjusts for advertising effects, and uses three years of historical data to prepare
these forecasts. Forecasts for new products are based on estimates of expected market
shares. Sales forecasts at P&G Italy are medium to long term, and its most detailed fore-
casts are for 3 years. P&G Italy has difficulty in forecasting liquid detergents because they
are new and do not have an established sales history. Forecasting errors at P&G Italy are
usually a few percentage points, and the company is fully satisfied with their sales fore-
casting efforts.
The simple regression equations that have been described use time as the independent
variable, which is common in sales forecasting. With time as the independent variable, a
regression approach becomes a trend forecast. Other variables such as income or the rate of
growth in GNP may be used if they are found to closely relate to sales.
When sales seem to be associated with several independent variables, multiple regres-
sion procedures should be used to build a forecasting model.
Multiple Regression
With multiple regression, a computer model is used to build forecasting models based on
historical relationships between sales and several independent variables. Sales managers first
have to find an appropriate set of independent factors that are related to the series being pre-
dicted. Some of the best variables for multiple regression equations are leading indicators,
such as housing starts, new orders for durable goods, and contracts for plant and capital
equipment. Leading indicators have the advantage that known values from an earlier time
period (e.g., last months, quarter, or year) can be plugged into multiple regression equations
to predict the future. However, in some cases, indicator values for the prediction period are
needed; then you have to predict these indicator factors for future time periods before load-
ing them into the forecasting equation.
The decision of whether to use a simple or multiple regression forecasting model often
depends on the values of three statistics that are calculated by forecasting programs. One of
these statistics is R2. If the R2 value is .70, your equation explains 70 percent of the varia-
tion observed in your data. Forecasting equations with high R2 are generally preferable to
equations that explain only 5 to 10 percent of the variation. Another statistic indicating the
quality of your forecasting model is the standard error of the estimate. This statistic tells
you the range within which you can expect to find the true value of the variable you are
predicting. Yet a third statistic is the error in each of the coefficients. The errors in the coef-
ficients for the variables in your equation should be smaller than the coefficients. If the
errors are larger than the coefficients, then there is good reason to drop that variable from
your forecasting equation. With regression forecasting, you need five observations for
every independent variable in your equation. Thus, an equation with one predictor variable
would need 5 observations, and an equation with 3 variables would need 15 observations.
If your data set does not meet these requirements, then another forecasting method should
be selected.
Despite the complexities of multiple regression forecasting, this technique was the most
popular quantitative method reported in Table SMR2-3 and was used regularly by 13 per-
cent of the firms. A real data set that you can use to build a multiple regression forecasting
equation is included with Problem 5 (Table SMR2-5) later in this chapter.
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Turning Points
At several points in this discussion we have mentioned the idea of turning points. A turn-
ing point is a sudden change in a trend. For instance, a decline in sales after several years
of moderate growth would be considered a turning point, if sales continued to decline in
subsequent years. The numerical forecasting methods we have discussed make projections
from historical data, and most of them do a poor job of predicting turning points in a time
series. Percentage rate of change, unit rate of change, and time series regression are all
notoriously poor predictors of series that change direction. Naive, moving average, and
exponential smoothing are somewhat better because they tend to lag and then adapt to
new information. If the identification of turning points is important to you, then the use of
qualitative procedures is often the best approach. These methods can pick up environmen-
tal cues that signal turning points frequently missed by numerical methods. Sometimes
leading indicators can be included in multiple regression equations to help predict turning
points.
For practice in all the quantitative techniques discussed here, see the problems that fol-
low this Management Resource. Excel worksheets are available for working these problems
under “Student Resources” at www.wiley.com/college/dalrymple.
and move on to more complex models only when they are needed. It is rare that one tech-
nique is best in all situations, so you may want to base your predictions on the average of
several methods to help reduce forecasting error.
Finally, you must select techniques that can be sold to management. If managers can-
not understand how forecasts are prepared, they are likely to reject the techniques in favor of
their own judgmental forecasting methods.
PROBLEMS
Note: Excel spreadsheets for these problems are available at www.wiley.com/college/dal-
rymple. Go to “Student Resources.”
1. Using the following sales data, forecast revenue for periods 4 through 7, using naive,
trend projections, moving average, and simple exponential smoothing. Compare MAPEs
across methods for time periods 4 to 7. What length of moving average and smoothing
constant works best? What are your forecasts for periods 8 and 9?
Period 1 2 3 4 5 6 7 8 9
Sales 12 15 17 14 16 19 18 ? ?
2. Quarterly sales (thousands of dollars) for the Chester Furniture Company for the past 4
years have been as follows.
Year
Quarter 1 2 3 4 5
1 230 240 264 328 ?
2 245 266 290 344 ?
3 193 259 221 275 ?
4 174 218 202 281 ?
Calculate seasonal indexes and adjust the data. Run seasonally adjusted naive, moving
average, exponential smoothing, and linear regression forecasts through the data to see
which method has the lowest MAPE. Select the best method and forecast sales for quar-
ters 1 through 4 in year 5.
3. Sales (in thousands of dollars) for the Busy Bee Bakery for the past 15 time periods have
been:
Period Sales Period Sales Period Sales
1 2005 6 2360 11 3442
2 2150 7 2354 12 2948
3 1940 8 2682 13 3020
4 1770 9 2504 14 3079
5 2285 10 2329 15 3275
Prepare sales forecasts for periods 6 through 15 using the naive, projection, moving aver-
age, exponential smoothing, and regression techniques. What length of moving average
and smoothing constant work best? What method does the best job of tracking the data
over periods 6 through 15? What is your forecast for periods 16 through 24?
4. The following table shows the first 6 years of sales of retail optical scanners in the United
States. What forecasting method seems to track quarterly sales best over the period from
quarter 4 of year 1 through quarter 3 in year 6? What is your forecast for the number of
scanners installed in the fourth quarter of year 6?
033-092_Dal9e_c2 9/19/05 5:19 PM Page 79
Quarter
Year 1 2 3 4
1 0 1 3 1
2 3 4 7 12
3 10 15 17 19
4 27 25 31 23
5 47 67 95 137
6 173 196 235 ?
5. You are the sales manager for a manufacturer, and you have been asked to forecast com-
pany sales for the next 6 months. You have collected data on company sales and other
variables for the last 38 semiannual time periods (Table SMR2-5). In addition, you have
estimates for period 39 for most of your variables. Using the Excel spreadsheet file
accompanying this text or another multiple regression program, calculate a correlation
matrix and explain what it tells you about your variables. Create an equation to predict
sales using all or a subset of your variables. Explain why you have included each variable
and discuss the power of your equation. Forecast sales for period 39 using your multiple
regression model.
Chapter Consultants: Scott Smith, Vice President—Sales & Marketing, SABRE Group, Inc. and Joseph P. Clayton,
President and Chief Executive Officer, Sirius Satellite Radio
033-092_Dal9e_c2 9/19/05 5:19 PM Page 81
Sales Carryover Exists. Sales carryover refers to the phenomenon in which a portion of cur-
rent sales is a function of customer relationships established through prior selling efforts. Fig-
ure MR2-2 shows how current sales can be attributable to selling effort in prior years. In some
rare instances, ZS Associates reported seeing vacant territories leading their regions in sales.
The amount of sales carryover is likely to vary considerably from one industry to the
next and even from company to company within the same industry depending on their cus-
tomer relationship strategies. To understand why differences exist, consider the case of two
pharmaceutical product categories: acute-care and chronic-care products. Acute-care prod-
ucts, such as antibiotics and antihistamines, have low sales carryover. Patients typically take
these medications for a short period of time, so salespeople can often persuade a physician
to prescribe a new acute-care medication for their patients, particularly when the medication
has very little risk associated with it. On the other hand, chronic-care products, such as dia-
betes and heart disease, typically have a high sales carryover effect since patients stay on
these medications for a long time. The physician is reluctant to switch if the current medica-
Sales due to
2005 effort
Sales due to
2004 effort Sales due to
2004 effort $95
$80 million
million
Pre-2004 Pre-2004
carryover carryover
sales sales
tion is effective since there is typically some risk involved. Conditions that are likely to
influence sales carryover are listed in Figure MR2-3.
It is important to understand the extent of sales carryover because it will affect the
sales consequences of sales force size changes. If sales carryover is high, then there will
likely be little short-term sales reaction to a reduction in sales force size. The sales impact of
the reduction is not likely to be felt for some time, the appropriateness of the decision is
therefore difficult to evaluate, and a reduction in the sales force is tempting since short-term
profits and productivity are likely to be enhanced. The total impact of the size change is not
immediate—reduced sales and profits will occur over time.
Launch Hard, But Protect Your Strengths. New product launches almost always require a
considerable selling effort. In the short term, the total amount of selling effort is fixed, so
that any effort redirected toward new products must be taken from the effort devoted to cur-
rent products. It is not unusual for a new product launch to take as much as 50 percent of the
sales force’s time. Sales carryover may sustain the sales of current products for a short
period of time, but eventually sales will suffer. Eventually, existing products will fail to
make their sales goal.
According to ZS Associates, the best strategy is to “launch hard, but protect your
strengths.” This means that a company should both support the new product launch with an
appropriate sales effort and also continue to put the right amount of support into current
products. This necessarily requires an expansion in the total amount of sales effort.
What if the increased effort is only for a short period of time? Often, launching a new
product line requires a lot of effort, but then things settle down to a degree and the required
effort diminishes. One solution would be to “outsource” selling resources by borrowing sales-
people from another division, hiring temporary sales support, or hiring brokers. Outsourcing
has several advantages. It turns largely fixed costs into mostly variable costs since temporary
salespeople and brokers are paid on commission. Also, some of the temporary salespeople
may wish to join the company, thus providing a good pool of potential sales candidates.
In a worst case scenario, attrition can be used to manage the size of the sales force
when the need for increased selling effort is for a restricted period of time. The average
turnover rate in sales is about 20 percent. This means that the size of the sales force can be
managed by increasing the size of the sales force and then letting attrition systematically
bring the sales force size back to a steady-state level. The risk in this approach is the dis-
ruption to the sales force and to customer relations that may result from the need to adjust
territory balance. Nonetheless, it will produce the temporary support needed for new and
existing products.
Watch Out for Company Politics. Consider the following case. The product manager is
asked to make a forecast of product sales to help determine the appropriate level of sales
support for the coming year. He arrives at a reasonable number but decides to take a little
off the number before reporting it to the vice president of sales. “After all,” he reasons, “I’ll
look a lot better if I make my number.”
033-092_Dal9e_c2 9/19/05 5:19 PM Page 84
When the vice president of sales sees the number, she decides to reduce the number
slightly before making a promise to the company president. “I’ll stay out of hot water by
making my number,” she reasons. Then the president decides to add a little more “cushion”
before making a promise to the board of directors. By the time the final number has been
agreed on, so much cushion has been added that the sales forecast is drastically lower than
the product’s real potential. Too little sales effort is allocated to the product, and a signifi-
cant profit opportunity is lost.
The lesson is to be aware of the individual incentives at different levels in the organiza-
tion when making a sales forecast. These incentives may undermine efforts to have the right
size sales force.
Workload Approach. The workload approach to determining a sales force size derives the
investment figure from the workload required to meet a revenue target. An example may
best illustrate this approach. Loctite North America sells adhesives and sealants to heavy
industry. To improve short-term profitability, Loctite allowed its field sales force to decline
through attrition. Because of the resulting greater size of the sales territories, however, Loc-
tite’s salespeople were unable to provide adequate service to existing customers. Industrial
adhesives are a special applications business that requires a lot of technical support. Loctite
decided to hire 30 additional salespeople during a 1-year period. The added expense
depressed profitability for 6 months, but soon afterward, sales began to grow. Loctite’s deci-
sion to add salespeople incorporated the idea behind the workload method of calculating
sales force size, which is to focus on the work to be done in determining the number of
salespeople needed to do the work.
A common method for implementing a workload approach is to determine the size of
the sales force based on the amount of activity that a customer segment requires. Customer
activities are specified in terms of:
• Reach: The number of customers that need to be covered
• Frequency: The average number of sales calls per year that should be made on the average
customer
• Duration: The average number of hours that will be needed for typical sales call
An estimate of the total number of sales people required using the workload approach
could be made using the following formula:
Number of Frequency of Length of a
× ×
accounts sales calls sales call
Number of salespeople = —————————————————————
Selling time available for one salesperson
For example, if a computer software development firm had 5,250 midsized customers to be
called on five times per year for 2 hours (including travel time), and if available selling time
per salesperson is 1,500 hours per year, the size of the sales force would be:
5,250 × 5 × 2
Number of salespeople = —————— = 35 people
1,500
If the same sales force is also expected to call on electronic distributors and large retail
chains, then the workload associated with these additional customer segments will also need
to be calculated in arriving at the total number of salespeople the company will need.
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Remember to consider new customers that you intend to add in the coming year in the above
calculation. The sales force investment is then calculated based on the cost of hiring, train-
ing, supervising, and supporting the desired number of salespeople.
Some accounts within a segment will require heavier workloads, while others will have
lighter workloads. An average workload figure is probably appropriate for sizing the sales
force since accounts requiring heavier and lighter workloads tend to cancel each other out.
In the end, the salesperson will determine the most appropriate sales coverage for each
account. We will pick up this discussion in the next chapter when discussing opportunity
management.
Data for developing the workload calculations may be obtained from several sources.
Salespeople and sales managers can articulate what has worked in the past and make adjust-
ments for current competitive situations. Channel partners are also a good source of infor-
mation. Finally, the firm may investigate how competitors treat their customers and how
noncompeting sales forces organize their activities.
Sales Response Approach. The sales response approach is based squarely on the concept
that the sales force drives sales. If the relationship between sales effort and sales response
can be estimated, then different sales force size scenarios can be evaluated in terms of their
sales and profit impact.
Figure MR2-4 shows a simple sales response relationship for two customer segments.
To determine the right sales force investment for each segment, the anticipated sales
responses to different call frequencies are compared with their associated costs. In Figure
MR2-4 the textile accounts generate incrementally more sales and consequently more profits
than a similar investment of selling effort in the carpet segment. The recommended sales
force investment depends on the cost of the sales force. For example, assume that all the
accounts are now receiving a low call frequency. If the additional sales cost needed to
implement a high-frequency call pattern for textile accounts is less than the profit increase,
the best sales force investment strategy will be to increase to a high call frequency on textile
accounts. On the other hand, the sales response to even a moderate call frequency is modest
for carpet accounts, so the best sales force investment will be to keep a low call frequency
for carpet accounts, assuming that the additional sales force costs for a higher call frequency
are higher than the incremental profit impact.
The data for developing sales response relationships are of two types: historical data and
judgmental data. Historical data may be based on variation in call frequency at the territory
level or on time-series data showing variation in sales and call frequency over time. Judgment
data are derived from interactions asking salespeople and sales managers to judge the response
of customer segments to various call effort levels. For instance, salespeople could be asked to
Textile
segment
Sales
Carpet
segment
estimate the sales expected to arise from zero call effort; 50 percent of the current call effort;
150 percent of the current call effort; or twice the current call effort. From their responses, a
sales response curve similar to the curves shown in Figure MR2-4 can be derived.
Research has demonstrated that historical and judgmental sales response forecasts are
almost equally effective. However, historically derived forecasts perform better when mar-
kets and products are stable, while judgmental data are most appropriate for dynamic mar-
kets and when products are new.
Percentage of Sales Approach. To ensure a certain level of profitability, almost all firms
will monitor their sales force costs as a percentage of sales. When used as a tool for deter-
mining the sales force size, the sales forecast is multiplied by a predetermined percentage to
derive the total amount of money available for the sales force. In other words, this approach
bases sales investment on what managers think is a reasonable percentage of planned rev-
enues. The percentage is usually derived from historical spending patterns and industry stan-
dards for a particular line of trade Table MR2-1, for example, provides the average sales
force expenses for 19 major industries. A typical firm selling industrial services spent 6.4
percent of sales on sales force related expenses.
Let’s say that the management of a company is trying to determine how much to spend
on the sales force next year. They have forecasted sales for $10 million and have noted that
manufacturing companies spend 13.6 percent of their revenue on the sales force. Let’s also
say that traditionally 15 percent of the sales force budget was spent on sales management. In
this case, the sales force budget and the number of salespeople the budget supports could be
derived as follows:
The preceding example indicates that of the $1,360,000 expected sales budget,
$1,156,000 would be available to pay for salespeople after supervisory expenses had been
deducted. If salespeople cost an average of $57,600 per year for wages and expenses, then
the company could afford a sales force of 20 people.
Despite its widespread use, the sales percentage approach is essentially a backward-
looking approach. There are several notable drawbacks to utilizing this approach for setting
sales force budgets. First, there is no guarantee that the use of industry percentages in setting
sales budgets will lead to optimal results for individual firms. Note in Table MR2-1 that
smaller firms tend to spend a larger percentage of sales on the sales force than do larger
firms. Another drawback to this approach is that budget allocation for selling expenses
changes in the same direction as sales. This can lead to premature downsizing, resulting in
millions of dollars of sales opportunities being left on the table. If a firm is losing market
share, for instance, an intensified selling effort may require greater funding than would be
appropriated under the percentage of sales method.
Despite its drawbacks, the percentage of sales method is practical and provides useful
standards for comparison. A company might adjust the industry average according to its
own needs and plans, using sales budgets that are higher or lower than average to see if they
lead to greater effectiveness.
Each of the methods for determining sales force size focuses on a particular aspect of
the problem—workload, sales and profits, and cost. Since the decision involves considera-
033-092_Dal9e_c2 9/19/05 5:19 PM Page 87
tion of each of these factors, the best approach may be to triangulate the problem by using
all three methods to determine the boundaries of the budgeting problem. With the results of
this analysis as decision aids, management judgment is needed to determine the final choice
of sales force size.
Total Contributions after Sales Force Expenses with 10 additional salespeople: $59.55 million
Forecast sales
advertising and sales promotion. Once these demand creation factors are determined, sales
forecasts can be made (forecasting is discussed in the Management Resource, Estimating
Potentials and Forecasting Sales). The sales forecast, in turn, provides a guide for estimat-
ing how many salespeople will be needed. Sales managers must also project travel and
other expenses for the sales force. Next, the actual expenditures for a period are compared
with the budget. When expenditures exceed planned levels, the sales manager has to revise
the categories or ask for more funds. The main concerns in preparing budgets are to decide
how much to spend on personal selling and how to allocate the money to various selling
activities.
Account Leverage
Current management selling
$ $
Current New
Products
tomer-product matrix should be budgeted so that the total of the four quadrants equals the
company’s total sales volume target. This analysis will help considerably in determining
expense budgets and in designing an overall sales program.
11.5 As one sales manager noted, “If ten salespeople from around the country traveled to
Dallas for a four-hour training session, it would cost us about eight thousand dollars. With
videoconferencing, the cost is twenty percent of that.”6
Budget Administration
One of the prime benefits of sales budgets is that they force managers to think about how
marketing funds should be spent. Decisions must be made about whether sales representa-
tives should receive more training, whether more money should be spent to purchase com-
plementary hockey tickets, whether to provide more sample books, whether to increase
bonuses, and so on. Budgets, therefore, aid sales managers in designing the optimal combi-
nation of the marketing variables under their control.
A budget also facilitates the control of sales operations. If sales objectives are not
being reached, for instance, the manager can see from the budget how much money has
been spent in each expense category and where adjustments are needed. In this case the
sales manager might be able to use funds from the training budget to buy prizes for a sales
contest.
Budget administration has been greatly simplified in the past few years with the devel-
opment of the electronic spreadsheet. Computer programs, such as Excel and Lotus, have
made it easier to keep track of sales force expenditures. Companies have come to rely on
these programs for their analyses, and so it is increasingly important for you to be comfort-
able using these programs, particularly Excel. To help you develop these skills, Excel
spreadsheets can be downloaded from www.wiley.com/college/dalrymple to work the fol-
lowing problems.
Cost control is so important in today’s competitive environment that many companies
are rewarding sales managers and salespeople for sticking to their budgets. At one company,
for instance, sales managers receive a quarterly bonus that is based on three key elements.
One of these elements is ability to control costs. This part of their quarterly bonus starts to
pay out if they meet their quarterly travel and entertainment budget, and it increases until
they max out at 5 percent below budget. The company feels that this has been very effective
in controlling budgets.7
PROBLEMS
Note: Excel spreadsheets for working on these problems are available at
www.wiley.com/college/dalrymple. Go to “Student Resources.”
1. Your company has 2,500 regular customers on which your sales force calls on once
every other month. In addition, you would like to obtain 500 new customers to meet your
company’s growth target. The average number of calls to convert and service a new
account for the year is expected to be six calls. Your salespeople are in the field calling
on accounts 40 weeks a year. They spend 60 percent of their time calling on customers
and prospects, with the average sales call taking 30 minutes. If the average number of
hours your salespeople work each week is 50 hours, how many salespeople would you
need in your sales force to maintain this level of customer service and also generate 500
new customers?
2. SOMA Inc. has been in business for a little under 2 years. SOMA is a Web-based infor-
mation technology training company currently employing one salesperson and a sales
manager. It has been successful in two rounds of financing and has a $5 million cash
balance. Its target for 2008 is to have revenues of $4 million. Revenues in 2007 are
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