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Company Sales & Strategy

The gap between a company’s sales and strategy are important now more than ever. While we may or may not be recovering from a lengthly recession, it has been a slippery slope towards recovery for many years. The average S&P company decreased its COGS by over 250 basis points, indicating that the prolonged recession has had an impact on firms. While this seems like a large number, SG&A has increased a percentage of the firms’ total costs. Shifts being made to include customer-acquisition, back office, and supply-chain costs as well as other go-to-market strategies have steered the focus to productivity improvements.

Aligning Strategy and SalesMost executives are surprised by the amount of money that is spent on sales. U.S. Companies spend 3-times their total media ad spend, more than 20-times their spending on all online ads, and 100-times their current spend on social media annually. The greatest point of implementation for most firms is selling yet, research indicates that less than 50% of employees fully understand their firm’s strategy. In relation to sales and service people at companies, the percentage beings to decrease even further. The outlook is not much better at the board level. A 2013 McKinsey survey of 772 directors found that only 34% of those surveyed believed their boards understood their companies’ strategies, proving that it is not only about sales but good governance as well.

Reducing operating costs is a good way to increase profitability. Aligning both strategy and sales has an impact on cost and revenues. Consider how costs and asset-utilization patterns are established in companies, specifically in B2B organizations that account for much of the economic activity in most countries. For the seller in a transaction, an order touches several functions as it transfers from a customer’s RFP or quote to a purchase order, through pre-sale applications, and post-sale services (ex./warranty or field engineering). The sales process continues through nearly all activities. The sales rep generally receives the customer’s questions, complaints, and is the one who interactions with other functions in order to respond appropriately to the customer’s need. Cost management without the proper attention to the relevant procurement and selling process is essentially limited.

Going back to the basics: profit is the difference between the price paid by the customer and the seller’s actual cost-to-serve that same customer. Cost-to-serve varies greatly in most businesses. Naturally, some customers require more sales calls while others require less expense due to their geographic location. Some customers require large bulk-orders with expedited shipping that may impact setup time, logistics, delivery, and additional cost-to-serve elements.

If you, or your investors are serious about return-on-investment capital, the differences between what a customer pays and the seller’s cost is extremely important; many capital costs are embedded in the cost-to-serve differences. If you are unable to measure your cost to serve (including customer acquisition costs), then you may expect several challenges ahead. The cost-to-serve cannot be ignored, your salespeople will be driven by competing price proposals. Chasing only volume, and ignoring the cost-to-serve can damage not only profits but the business model. Available resources cannot be allocated optimally in sales or otherwise. Lastly, not knowing your cost-to-serve will place you at the mercy of competitors who actually can measure real, customer profitability effectively.

In any business, value is created or destroyed in the market not in board meetings. Executives must understand their market. The market consists of the industry that you compete in, the customer segments in which you service, and the customer’s buying process. Those factors should dictate an effective strategy and required sales tasks, things that all salespeople need in order to delivery value and implement your strategy seamlessly.

Selling behaviors should be aligned with the above tasks. Managers have three vehicles by which to ensure that the alignment takes place: People: who your sales people are, what they know, how you hire and develop their skills so that they may execute the tasks in your strategy (not those listed in a generic selling methodology or something they learned from a firm with a differing strategy). Control Systems: performance management systems to include sales incentives and metrics to measure effectiveness. Sales Environment: the larger company context in which sales initiatives are developed, how communication works (or fails to work) across functions, and finally how sales managers (not just sales reps) are selected and developed to perform. Effective selling is an outcome of the aforementioned factors, not just the end-result of heroic efforts executed in the field.

There is no such thing as effective selling if it not linked in some way to strategic goals. There are practical implications for how you select and utilize available resources for selling, how to measure and reward sales effectiveness, and how to get the C-suite talking about the right things. As a CEO or CFO, it may save time and money to redirect how the money is spent. If you are a sales manager, it not only reminds you what you are paid for but, it confirms that money cannot be substituted for management.

Below are two examples that are discussed in further detail in my book. Dealing with both ends of the spectrum, one is about an anonymous start-up and the other is about a large corporation in the wake of market changes.

I will call the start-up Business Processing Inc. (BPI). Like many young companies, it grew to a certain level only to stall. Driven to start the business, BPI accepted any business without identifying its core customer segment. As part of a cost-reduction study prompted by the start of the recession, BPI, when it did this sold more and earned greater profitability with a smaller sales force.

I selected this example because surprisingly, few firms are actually clear about who their customer is. Most comp plans are centered merely on volume, encouraging salespeople to “go forth and multiply!” and that is exactly what those salespeople do. The sales force brings back a diverse set of customer types that fragment the selling company’s investments and resources, consequently driving up operating costs in other areas within the firm. I have another chapter by the way, that discusses how to identify your best customers. There is a process involved in doing so and it is important at this stage because the goal is to lower your selling costs without harming the selling.

The second example is Dow Corning. For decades, Dow enjoyed double-digit growth profits by selling through a high-end solutions-oriented sales force that bundled products with relevant technical services. As lower-cost “disruptive” sellers entered the company through online channels, growth stopped. Dow cut costs and realigned its sales approach by analyzing the sales tasks for different customer types. The business later developed different business models for each segment using the levers I pointed out earlier: People, Control Systems, Sales Force, Environment.

I chose this example because as a leader, you can worry with diligence about “disruptive innovations” but, you need a sales effort that is aligned with a strategy to do something about it. Otherwise, all you are doing is worrying.

There are take-away lessons for those in sales and functions such as Finance, Operations, and HR. The goal of any strategy is profitable growth which equivocates to a positive return on invested capital. There are two ways that any company can do that: 1). invest in projects that earn more than their cost of capital; 2). increase profits from already existing capital investments. Most CFOs are aware of this but very few understand the sales factors that materially affect the routes to value creation.

Companies invest because most cap-ex is driven by revenue-seeking activities with customers. Customer acquisition, the place where sales lives, directly impacts areas in which the firm invests. A CFO should understand how compensation plans and key sales management practices determine call patterns and de facto customer priorities in their firm; it is my experience that most do not. Earning more from existing investments requires high sales productivity and closing the right sale with the right customer. Although technology is improving opportunity at every stage along the sales funnel, two-way communication for Operations Managers with the field is essential.

The importance of cash was of importance for companies during the financial crisis of 2008-09 and this still holds true today. Consider the basics: financing needs are determined largely by the capital available on hand along with the working capital needed to conduct and grow the business. The selling cycle is the single biggest driver of cash-out and cash-in (accounts payable accumulate during the selling process and accounts receivable are determined by what is sold, what price it is sold at, and how quickly the sale is closed). Accelerating the selling cycle is not only a sales task, but a strategic issue.

Finally, the take-away key for sales managers is always about people. You need disciplined hiring practices that are directly linked to your company’s strategy, customized training initiatives, and on-going attention to expanding salespeople’s skills as marketers; sales takes inevitably change. Documented research about people in business underscores these fundamentals, debunking the many glib prescriptions about talent acquisition and this is where HR can help. Sales managers must be willing to partner with HR and HR must take the opportunity to get into the field and learn more about the sales tasks in their companies. The challenge is worth it because the competitive advantage and selling effectiveness depend on how you carry out these fundamentals.

In December 2014 I interviewed Frank Cespedes – listen to the original interview here:,


 

This article is a follow up from that interview and is written by Frank Cespedes who is a Senior Lecturer at Harvard Business School and author of Aligning Strategy and Sales: The Choices, Systems, and Behaviors that Drive Effective Selling (Harvard Business Review Press). You can learn more about his work at frankcespedes.com.

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