Is the Obvious the Answer?

Ed Denton

Imagine a distributor of processed raw materials (metals, plastics, paper and forest products) specializing in a small but profitable product category and seeking new ways to grow after a generational change in leadership.  It has already pursued regional sales expansion, so management considers two additional options:  either become a full line distributor, or expand offerings to include custom processing and light manufacturing.  In choosing the latter, this firm begins a migration away from its history as a trading house and towards being a value-added service center.  Early in this journey the company experiences moderate growth in a stable market environment.  Then, as the industry comes under cyclical pressure, managers begin to express doubts about the selected strategic course.

 

Has the company gone down the wrong path, saddling itself with capital equipment and operational staff previously ruled out as distractions? Not necessarily.  Changing market conditions often expose poor visibility into customer needs, a symptom of larger issues that can cause a business to suffer disproportionately even though its strategy makes sense. 

 

What could explain this situation?  Here are a few reasons.

 

  1. Organizational design and performance metrics across the enterprise that are only loosely aligned to the new strategy.  
  2. Old spending practices, such as related to inventory, that limit flexibility without advancing the strategy and signal managerial ambivalence to the new direction.
  3. Under investment in commercial capabilities needed to drive the strategy.

 

Any of these factors can impede the necessary strategic adjustments for sustainable advancement in the marketplace.  While several areas of the company are likely to underperform, the results of the commercial team can be the most critical.

 

We frequently see sales organizations that are too small, constrained by budget from making a sufficient number of visits to customer locations, and starved for field sales training.  Organizations fitting this profile can also lack a marketing team capable of effectively analyzing market trends and customer segments necessary to strategic selling.  Such a lean approach comes at a cost.  Without the capability to formulate a unified, factual viewpoint about the market environment, commercial endeavors can dissipate to tactical responses that erode revenue and margin.

 

In one example, despite having a large number of customers, a company made money from only a handful of them.  Its top 5% of accounts generated 50% of income and 40% of unit volume, while the top 20% yielded 80% of profits and 60% of unit volume.  The remaining 80% of accounts mostly represented churned dollars in small transactions, often at a breakeven price or with outright losses.  Although these customers represented activity with little accomplishment, all accounts were given the same basic level of attention.

   

Example: Cumulative Profits and Unit Sales by Customer

Marketing analytics are fundamental to sound strategies and strategic selling.  In this case, basic customer segmentation revealed that profitable accounts shared several common characteristics:  they bought the highest value substrates, used the highest proportion of value added manufacturing steps, and were relatively differentiated in their own end markets.  Customers at the opposite end of the scale also had common traits, but these were almost the inverse.  However, these distinctions were not fully understood by the organization so they had little impact on decision making.

 

An obvious response that would not break the bank for this company would be to develop better understanding about its customers’ needs and strategies as a means to enlarging the population resembling the top-20%.  Upselling customers at the bend in the curve (the next best 20%) would be a good place to begin.  The application of tools such as market maps to evaluate market adjacencies would uncover where and how to develop new customer relationships.  In addition to higher revenue and profit potential, sharpened customer insight would liberate cash by enabling greater inventory selectivity.  It would also improve opportunities for innovation and lead to increased efficiency on the production floor.  Net, a higher investment in marketing and sales capabilities would deliver positive ROIs.

 

What we have described is a relatively common occurrence in B2B companies.  The obvious is not always the answer, but developing the correct response may be temporarily out of reach due to skill gaps.  We help companies discern the critical differences and address opportunities for higher rates of profitable growth.  

 

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DENTON/NEELY & CO., LLC is a management consulting firm that works with companies to identify and address growth and differentiation opportunities through market insight, strategy development and programs for commercial follow-through.

 

  

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