Case 14 WESCO Distribution, Inc. Synopsis In June 1997, Jim Piraino, VP of marketing for WESCO Distribution, Inc., is preparing for a yearly review meeting with WESCO CEO Roy Haley. Haley wants the firm to reach annual growth goals of 6% to 8% in revenues and 12% to 16% in profitability over the next five years. The centerpiece of this growth strategy is the National Accounts program, which WESCO has developed to serve its major industrial customers in response to recent changes they have made to their business processes. However, as of June 1997, the NA program has not delivered the expected increases in sales and profitability. Jim Piraino has to give Haley his recommendations for the future of the NA program, in particular, whether WESCO should continue to pursue NA business with the intensity it has in the past, or whether to assume a more reactive stance and offer the NA program only when it is requested by current customers. As well, he must account for how WESCO will achieve the desired increases in profitability and overall revenues when its current program already seems to be encountering difficulties in generating the desired numbers. Use Although the "customer" is at the heart of marketing strategy, "effective customer management" is still not a very well understood concept in industrial marketing practice. This case can be used to explore the difficulties encountered in developing and implementing new ways of customer management in mature industries such as component parts, industrial raw materials and consumables,1 and other similar industries. These industries are characterized by an environment in which competitors are able to offer equivalent products at competitive prices and vendors/ distributors have to use service rather than product characteristics to create differentiation and add value to customers. This note was prepared by Professor Das Narayandas with the assistance of Research Associate Sara Frug for the sole purpose of aiding classroom instructors in the use of WESCO Distribution Inc., HBS case No. 598-021. It provides analysis and questions that are intended to present alternative approaches to deepening students’ comprehension of business issues and energizing classroom discussion. Copyright © 1998 by the President and Fellows of Harvard College. Used with permission.
In the 1980s and '90s, over half of the sales dollar of an industrial product-manufacturing firm is made up of these purchased parts and services.
In the 1990s, the standard response of these vendors has been for them to set up a National/Key/Major Accounts Program. While in principle these programs are a good idea, since they lock customers into long-term agreements with volume commitments, there are several factors that can derail this effort. Vendors are learning the hard way that not all of their customers are interested in getting into these agreements. Further, they are finding out that many of the customers who get into such agreements are only interested in getting lower prices in addition to more service from the vendor/distributor,2 and are not willing (or not able) to work with the vendor in a mutually beneficial mode. As the case highlights, the true benefits from these programs come when both sides put in the effort and the investments to make it happen. By using WESCO's partially successful national accounts program as the foundation, this case analysis helps students develop a better understanding of how to develop, implement, and effectively manage a National or Key Account Program with major customers. The case is also rich on distribution and integrated supply management issues, and can serve as an effective recap of the distribution module if taught in a business marketing course. Finally, the case has a lot of information on trends in buyer-vendor relationships through the 1980s and '90s. Given the complexity of the situation and the information provided, the case is best taught in a second year MBA elective such as business marketing, service management, or distribution management. It also works very well with executives, since it deals with customer management-an issue that is very important to every sales and marketing executive who deals with customers in a business-to-business context. At HBS, this case is taught as a transition between the "Managing Distribution" and "Managing Customer Relationships" modules in the second-year Business Marketing elective. Objectives The teaching of this case involves the following objectives: 1. Understanding the role of service in differentiating commodity products. 2. Identifying the factors that determine the success or failure of long-term collaborative buyer-seller relationships in business markets. 3. Defining the notion of customer value and mapping its changing nature over time in a long term relationship. 4. Understanding the role of a NA program in acquiring and retaining industrial customers. 5. Developing a process model for initiating and implementing a NA program.
For those who also use the Signode case (HBS case #9-586-059), these are the Low price - - Hi Cost-to-Serve customers.
6. Building an appreciation of the need for suppliers to be selective in implementing a NA program. 7. Exploring the difficulties involved in managing a portfolio of customers. 8. Understanding trends in supplier management, including recent trends in supply chain management systems such as supplier tiering and integrated supply alliances. Teaching Questions 1. What is your action plan? Do you recommend that WESCO be proactive in managing its NA program or would you prefer that WESCO adopt a passive approach? 2. Where and how does WESCO add value to its suppliers? Its customers? 3. Why did WESCO start the NA program? What are its benefits to WESCO? 4. Why do you think the NA program is not delivering on its promises? 5. What does case Exhibit 5 tell us? Is there something that we can learn about the issues involved in implementing the NA program? 6. What about the NAM capacity issue? 7. Going ahead, what is going to happen? Can this NA program be sustained over time? What will happen if other competitors also develop NA programs? 8. How does all this attention being paid to the NA program affect WESCO's ability to serve its other customers? 9. What should WESCO do with the NA program? What are your recommendations? Analysis What is your action plan? Do you recommend that WESCO be proactive in managing its NA program or would you prefer that WESCO adopt a passive approach?
Key NA customers stages. Being proactive gives us more control over the profile of the customers we choose to work with. Including only those customers who demonstrate a strong interest in the NA program will improve the return on WESCO’s investments in the early stages of the program. Reactive NA Strategies Pursue a Proactive Approach to the NA Program Take a Reactive Stance in the NA Program • Haley's aggressive growth plans for WESCO • The NA program is only highly profitable depend upon substantially increased revenue when fully implemented. Piraino—Strong individual partnerships have brought us to where we are now and they may even be able to keep us going for some time. If the prospecting and selling phases of the NA process could be cut substantially. in turn. Consolidation in the EES industry has made competition fiercer. • The NA program is pitched to headquarters. The selling process could be directed at consultants in order to increase demand for the program. implementation. • Key NA customers allow us the best margins Local branches uninterested in the when including costs to serve in the corporate bottom line can sink calculation (Exhibit 5). improve our margins.The various comments supporting proactive and reactive positions are as follows: Proactive vs. students will also focus on numbers to justify their arguments for either a proactive approach or a reactive one. We need to get as many customers as we can to sign on. NAMs would have more time to work on implementation and maintenance.
. Larger and more predictable orders are more economical for suppliers and allow WESCO to obtain better prices. In the middle from the NA program. which should. Actively pursuing customers improves our chances of becoming a first-tier supplier to our customers. Taking a reactive stance could cause us to lose out on the business of potential key customers being pursued by our competition.
Pushing the NA program could alienate contractor customers by ignoring them or even competing against them. the costs to serve are very high.
In addition to the issues listed above.
The NA program has a lot to offer customers in heavy process industries (Exhibit 13). can ramp up revenues very quickly.
this leaves a need for $266. 15% for focus. However.7% Focus : 25 * 12/5 = 60 (60 . What is it that WESCO provides its suppliers and its customers?” Where and how does WESCO add value to its suppliers? Its customers? WESCO adds value to its suppliers both in general and in its specific initiatives. this means that WESCO must add 12 new NAMs to its team. Given the difficulty of finding suitable NAMS.6 -180)÷ 180 = 18. if each type of customer continues to generate the current average revenues for their category. WESCO increases the probability of a good product-customer fit by helping the customer to find the product that most exactly fits their requirements. By offering customers products from numerous EES suppliers. Further. then this scenario means expanding the number of NA customers to 525 from 300. the NAMs are already quite heavily committed. This means that WESCO needs to double its current NA revenues in the next three years in order for Haley to meet his targets. the instructor can transition the case with the following comment: “It looks like we need to have a better understanding of this business before we can make any judgments about what WESCO should do with its NA program.6 .52)÷ 52 = 15. In the course of monitoring its
.34)÷ 34 = -1.6 (213. he wants revenues to have grown by $725 million and profitability by at least 60%. falling short of the goal by over $50 million. the NA program would reach the $476 million level by the year 2000.4% Other : 14*12/5 = 33. By the year 2000.6 (33.Roy Haley states his revenue and profitability goals for the company.5 million through business acquisitions and $266. we find existing rates of growth of approximately 19% for key customers. In general. and a decline of 1 % for other NA customers as follows: Key : 89*12/5 = 213. The instructor might want to capture these numbers as they come. Extrapolating from the figures given in Exhibit 2. Based on the current levels of growth.2 % Under this scenario. Once some or all these points have been addressed in the discussion.5 million in NA growth. this may be difficult. WESCO adds value to its suppliers by generating demand for their products. assuming the average level of growth from the other segments (as shown in case Exhibit 5) amounting to $192 million. In its specific initiatives. More importantly. so the estimate must be considered conservative. It is better to come back to them at a later point in the discussion. and assuming no seasonal differences in purchasing patterns. Using the current NAM customer loads. WESCO allows EES suppliers to sell to customers too small to purchase directly from them. there is little value gained by getting into further discussions of the numbers at this time. as a distributor. Why don't we take some time to understand the role that WESCO plays in this supply chain.
WESCO offers customers the ability to make better estimates of their MRO costs during a particular year. Under the NA program.acquire MRO products can exceed the costs of the products themselves. Why did WESCO start the NA program? What are its benefits to WESCO? There are several reasons why WESCO initiated the NA program and ways in which the company is benefiting from it: 1. costs-to. by offering standardized. This can potentially lower the customer's price sensitivity and temptation to switch.3) As with its suppliers. Inventory costs (summarized in case Exhibit 9) add to acquisition costs and bloat the total procurement cost for MRO products. the instructor can push the discussion along by asking students to explain why WESCO started the NA program and by highlighting its benefits to WESCO.relationships with its customers. 2. Large industrial customers are demanding it. WESCO offers specific value added services aimed at trimming procurement costs. as well as providing detailed records indicating where and how initiatives for cost reduction can help customers.
. Will this mean that WESCO's role in the supply chain is threatened in the long run? What can WESCO do to ensure its position and its margins? I have found executives to relate a lot to this set of questions. (Case Exhibit 7 provides a schema for this process. Finally. many large industrial customers demanded higher quality levels. in volumes appropriate to their size. which necessitated major investments on the part of distributors like WESCO. Industrial customers currently account for nearly one half of WESCO's revenues and have ongoing and relatively predictable MRO needs. WESCO adds value to its customers both in general and in the particular features of the services it provides. In the interest of cutting these types of costs. Without intervention. WESCO also monitors inventory to ferret out mechanical problems and inefficient energy usage. WESCO offers inventory management and reduction initiatives that range from JIT systems to storeroom management to inventory consignment (see case Exhibits 10-11). It offers national distributors. During the late 1980s. and they are important to WESCO. At this point. WESCO can build a high level of trust and cooperation with its customers. an opportunity to create a unique and sustainable competitive advantage with its customers and suppliers. By constructing the intricate networks between WESCO's sales and customers' purchasing staffs required for the NA implementation and maintenance processes. WESCO obtains information about customer needs and translates that knowledge into explicit demand for vendor solutions by identifying problems and demonstrating the efficacy of solving them. like WESCO. As a distributor. Because the NA program can document the value it adds to
The instructor might choose to use Exhibit 7 to run a short lecture on the role of distributors in the future when technology will reduce the costs for transferring information between customers and suppliers. year-long pricing regardless of volume at a particular site. WESCO can offer customers a one-stop solution to their EES needs that allows them to purchase the products they want from EES suppliers of their choice. Customers: The NA program builds customer value and enhances cooperation.
customers are disincented from price sensitivity because haggling undermines their efficiency. the NA program is important.) By engaging in these types of demand creation activities. In the process of conducting energy audits and the like. 4.
. so once WESCO has its foot in the door. Roy Haley sees it as an opportunity to increase the scope of WESCO's business with each of its major customers. its value proposition should be compelling. most of us feel that this program hasn't been very successful. overcoming some of the natural antagonism and conflict that can arise across the two levels in the channel. WESCO can secure a position as a desirable distributor with which to work. Their demand is relatively predictable and maintenance reasonable straightforward once the implementation phase of the national account management process is complete. particularly in its transaction cost reduction initiatives. the program holds even more potential. Haley knows that certain types of inefficiencies pervade heavy process industries such as pulp and paper and petrochemicals. WESCO gains access to information about the customer's needs that allows it to demonstrate the value of using vendor solutions (see case Exhibit 7 and the discussion of value added in the following question. Particularly in the design of systems for inventory management. Having established the importance of the NA program to WESCO's overall growth strategy. If WESCO can push NA customers through toward tiered integrated supply agreements. Haley wants to increase revenues by 30% and profitability by over twice as much by the year 2000. Can we be more explicit about why we think this program has been a failure to date?" Why do you think the NA program is not delivering on its promises? The two main issues here are choosing the right customer to partner with and developing a proper implementation plan. Suppliers: WESCO can also use the NA program to demonstrate the unique value they add to their suppliers' offerings. the instructor can transition the class with the following question: "Well. 3. the NA program creates technical links that are far easier to continue to use than to dismantle and rebuild with a competing distributor. The only customer segment that can generate the necessary revenues at the required levels of profitability are key NA customers. Also. going back to the beginning of this discussion.customers. The NA program creates demand for its suppliers' products in the course of NA value creation activities for WESCO's customers. NA customers can each generate up to $10 million or more apiece in yearly revenues. Specifically. the NA program builds in some switching costs. Finally. WESCO needs it to meet Haley's ambitious growth plans.
Implementation should be easier when customers are chosen in part on the basis of how easy or difficult it would be to implement an NA program with them. Role of consultants. As Piraino points out.5 million per year.1. over 70 percent of the annual procurement budget is accounted for by the top five to ten suppliers. Using the results of the study done by Piraino. once there is a mandate from the top. and service. of course. Currently. but spending time and energy on office supplies procurement will save only $20. imagine that the customer currently spends $12 to $15 million per year on EES needs and $100.
Being in the customer's procurement sweet spot. WESCO needs to ensure proper implementation. This is where the role of the consultant comes in. Nevertheless.
. These factors are as follows:
1. pockets of resistance in the rest of the organization are relatively easy to overcome. it has been quite common for large firms to hire high-powered consultants to conduct studies of how to re-engineer their organization toward greater efficiency in operations. The problem. is that for a supplier of electrical components. Through the nineties. Pursuing value over price in EES purchases could save the company upwards of $2. manufacturing. for most of WESCO's customers. but if senior management doesn't see the benefit to the company as a whole. For instance. One way that senior management tends to become interested in MRO procurement costs is through the work of consultants. especially given the effort to achieve these savings. After having chosen the right customer. it might be very difficult to get the CEO's attention. It is interesting to note Piraino's comment that there can be an enormous difference between a VP of Purchasing championing WESCO's cause and the CEO spearheading the effort. in case Exhibit 14. WESCO does not have a process for segmenting its customer base. we can develop a list of factors that can ensure a high degree of success. They may
2. This issue is especially important in a bottom-up sell.000 on office supplies. The purchase dollar volume and effort involved in these relationships makes customers willing to go beyond transaction prices and focus on the total cost of ownership. Customers are interested in value as opposed to price when the purchase is of sufficient magnitude. WESCO needs to be more selective in choosing NA prospects. the process needs to be streamlined and responsibility reapportioned. then implementation over the usual two dozen or so customer sites will be an uphill fight. an amount that is too small to attract the customer's attention. It has tried to use a shotgun approach to select customers as partners in its NA program. An individual customer plant may be extremely enthusiastic about the services WESCO is offering. These consultants are more likely to see the implications of the 20% savings figure and be better able to convince senior management of the importance of cutting procurement costs than WESCO.000. As Piraino points out. It is with these suppliers/distributors that customers are usually interested in developing a relationship based on value more than price.
3. Senior management buy-in. 2.
If the company has implemented previous NA programs. For example.and corporate level resistance. WESCO gets caught in the middle and its implementation team quickly loses interest in the face of implementation headaches and small potential sales volumes. Local customer plants may have been doing business with a particular distributor for decades and not be interested or motivated to break off a relationship in which they are successful at getting good prices.
Relationship with the local customer. Uniformity of needs across customer plants.also help the customer's organization become more conducive to change. often with no cooperation from the local customer. Purely top-down initiatives have the reverse problem of bottom-up initiatives. Even the NAM shift focus to other accounts that might be easier to manage. when a local plant's bill of materials turns out to be very different from the list covered by the NA agreement. in several less successful NA relationships. The negative aspect of this factor is that the first movers might lock WESCO out of the customer site for good. then management is usually interested in and prepared to work under such a structure. As Piraino points out.
Having identified these factors. The customer's corporate staff accuses WESCO of not working hard enough. unanticipated differences in procedures and purchases across customer sites have made implementation difficult. the analysis can now shift to how WESCO can use this information to improve the performance of its NA program. The instructor can motivate this discussion by asking students two questions: "Are each of these factors within WESCO's control and. can WESCO use this information to select customers for its NA program?"
6. and individual plants are used to conform to top-down initiatives of this sort.
The customer has initiated NA programs with suppliers/distributors of other product categories. the local WESCO branch has to resolve all matters locally.
5. This point addresses both plant. aiding the implementation process. NA implementation is ultimately dependent upon each distributor's branch being able to meet the needs of each customer's plant. Their local purchasing and materials management staff will not cooperate because they would need to make major changes to their systems in order to do so.
The reality. however. This point entails a chicken-and-egg problem. WESCO's successful NA programs have been those in which WESCO branch personnel had already established good working relationships with local customers. given limited resources. however. These customers are either potential NA customers or not. 2. it is unappealing
4. especially those that focus on reengineering and supply chain management initiatives. this information can be used by WESCO to segment customers. If not. WESCO can develop good relationships with consultants and gain access to their customers. WESCO should selectively pursue customers whose profile looks like that of the customer in case Exhibit 16. is that CEOs might not be interested or have the time to get into looking at cost savings from light bulbs and switches. 3. it remains a question whether WESCO has the time to pursue grass roots customer development. WESCO can work with the customer's senior management and convince them about the benefits of the NA program. Before an NA agreement is signed. might view WESCO as a competitor rather than as a collaborator. The issue here is that consultants. On the other hand. insofar as WESCO needs the local relationships to make the NA program work.
. As the case suggests. Relationships with local customers are a very critical piece of the NA puzzle. while needing the NA program to give an incentive to develop local relationships.Factors
Controlled by WESCO? No Partly Yes Partly Yes Yes No No
Being in customer's procurement sweet spot Senior management buy-in Role of consultants Relationship with local customer Uniformity of needs across customer plants Customer has NA programs for other products
Can WESCO use it to Segment Customers? Yes Yes Yes Yes No Yes
1. However. WESCO cannot control a customer's purchase profile. the branch personnel will tend to want to work with the customers who will make the largest purchases with the least effort.
5. at which point it is too late. It is evident to the students by now that not only does WESCO need to be selective. As the case suggests. make the investments.
. The instructor can therefore direct the students' attention to the case Exhibit 5. At each stage. there is still an incomplete understanding of the patterns of relationship development. If WESCO waits for the customer to initiate NA programs with other distributors. WESCO cannot control it. since it is almost never the case that WESCO branches working separately would happen to serve all of the branches of a potential NA customer. the only way that WESCO can get access to this type of information is during the implementation stage.to give them up to pursue a corporate goal.” The reality is that customers get into these relationships in a gradual manner. there need to be a lot of factors in place for customers to participate willingly in the program. 6. Producing concrete gains (and higher value) through collaborative endeavors can improve the chances of WESCO being selected as a national distributor and of the customer being fully committed to the relationship from day one. WESCO gets the information haphazardly. students may say that WESCO should get its customers to commit up-front. this is an issue even after the NA agreement has been signed.
Even after the discussion to this point. there is a downside here. they are likely to look at the return on their current investments before they make any further investments in the relationship. The presence of existing NA agreements is not controllable by WESCO and is an effective mechanism for segmenting customers. they also need to have a very clear implementation plan after they have been selected. and work collaboratively with WESCO to achieve mutual gains. However. and if they don't. The collaboration process represents an opportunity for WESCO to gather information about the customer that is useful in determining their suitability as a long-term partner. Further. Although uniformity of needs is very important. The instructor should push them at this point and ask them to justify their arguments by asking the following question: “Why will industrial customers commit to investing in the relationship?” The instructor can also ask students a question like. Students will recommend that one way to accomplish this goal would be for WESCO to have the customer agree to collaborate on a few minor projects. it runs the risk of the customer also asking the other distributors to manage WESCO as a second tier distributor. do you recommend that WESCO drop these customers? Clearly. However. “Are you suggesting that WESCO ask customers to invest in these relationships. Otherwise.
I have the students interpret these curves. and that it is therefore difficult for a customer to anticipate the dramatic nature of the change experienced in becoming a "key NA" customer unless they have already reached that stage. From the data. then WESCO is going to lose a lot of money. in fact. three stages in the process of relationship development. then WESCO ends up in a situation where it has made significant investments while the customer has probably not made any investments at all.
Having drawn the three curves on the board. The Evolution of NA Relationships: Other NA customers and focus NA customers Prior to initiating the NA program. In this situation. it is clear that WESCO's costs-to-serve "other NA" and 'focus NA" customers are significantly higher than for other industrial customers. This is because of the investments that
. It also helps to ask students whether the three NA segments are. if the volume of sales are not realized. Another attribute of this analysis is that it proceeds through time based on current and past experience. There is usually a lot of support for this line of reasoning. all customers have "other industrial customer" status. Students will relate to this issue by pointing out that if an implementation program is not executed properly.What does case Exhibit 5 tell us? Is there something that we can learn about the issues involved in implementing the NA program? I find it useful to quickly get some students to provide the information from this exhibit as I draw a diagram like the one shown below.
reduced administration costs. Case Exhibit 13 gives the breakdown of savings for a fully implemented "key NA" customer. Since "key" prices have a discount of around one percent and "other industrial" customer prices have no discount. From the point of view of the "other NA" and the "key NA" customer. Thus. we know that the customer's annual savings exceeds 20% of $12 million for a savings of over $2. local plants have probably not seen the situation this way.000. These customers are not interested in going any farther. Unfortunately for WESCO. the price discount works out to approximately one percent.
. Case Exhibit 2 lists the mean annual purchases per “other NA” customer as $227. Purchasing agents are probably viewing the NA agreement as amounting to a discount of one telephone call.4 million annually. the discount offered by WESCO to "other NA" customers works out to about one half of one percent.
Some students are likely to conduct the following analysis. we see in the price index that ten index points separate "key" prices from "other industrial" customer prices.6 million-per-year "key NA" customer. In summary. This is probably because the joint activities and detailed implementation plans developed and executed with the customer are leading to better ordering patterns. we know that this customer purchases $1 million per month from WESCO. Thus. With this in mind. The instructor should clarify that these are volume discounts of the list price as stated in the agreement. which the instructor needs to manage carefully. since their talents in negotiation will be irrelevant to such purchases. the value of the NA contract lies almost entirely in the discount. From case Exhibit 5. we can estimate discounts for “focus NA” customers at 0. etc. these customers do not see a significant increase in value.7% and for "other NA" customers at 0.WESCO makes in these relationships that it does not incur in its relationships with other industrial customers. They usually get quotes from other distributors. the story is very different. They will calculate the dollar value of price discount for the “other NA” customers as follows. Case Exhibit 5 suggests that WESCO gives its best discounts to its largest NA customers. WESCO's costs-to-serve these customers go down dramatically. and whatever marginal increase they do see is because of lower prices that they are now getting.5%. Many of them have possibly gotten into these agreements just to cherry-pick the best prices.4 Key NA customers In the case of 'key NA" customers. From the case. using WESCO's price list as a benchmark from which to negotiate with WESCO’s competitors. Although standardizing prices across all plants would have the potential to cut costs involved in obtaining quotes and improving the accuracy of budget forecasts. standardized pricing might mean that they will be disincented from purchasing from WESCO. In all likelihood. we know from case Exhibit 13 that five percent of the savings (~$120. A worse scenario: because purchasing agents tend to be evaluated on the basis of the discounts they can derive from distributors. so it seems reasonable to assume that the customer profiled is receiving as good or better a discount than the average $3. they have little or no power to take any legal action given the incompleteness of these agreements/contracts and the relative power imbalance in the customer's favor.000) derives from price improvement. these list prices would be negotiated by the two sides and would be significantly lower than list prices available to other non-NA customers. Of that.
and WESCO maintains profitability. SKU deletions. so prices for the customer can go down without hurting WESCO's margins.
1. Once the customer reaches the "key NA" stage and the relationship is fully implemented. This is a big learning point for students and the instructor might want to ensure that everybody is clear about the shift in the process as one moves from "other NA" and "focus NA" to "key NA" customers. they know that it will be difficult to get the same level of benefits from any other supplier. require that the customer and WESCO undertake an inventory audit and jointly improve the process. there is little or no involvement from the customer.Under the NA program. national pricing regardless of volume at any one customer site.
3. once implementation has been successfully completed and the customer moves to the "key NA" stage. the productivity improvement and transaction cost reductions that together account for 50% of NA savings cannot occur until the customer treats the NA agreement as being exclusive and actively participates in the relationship. 95% of the value derived in the NA program lies in areas other than price. As this exhibit points out. Further. insofar as the customer is extracting value at WESCO's expense. WESCO's costs plummet because the customer is now investing in the relationship. the customer is beginning to see much greater value in this relationship.
. WESCO offers year-long. reaping efficiency gains through relationship management. Customer Value Line: See TN Exhibit 3 . they are also collaborating with WESCO to continuously improve processes and systems. in the "key NA"
2. and product substitution. In addition. the competition is shut out. the relationship is adversarial. In fact. Both sides have a lot to gain from maintaining this relationship and stand to lose a lot if the relationship were to terminate. However. the instructor should take a few minutes to summarize these issues in the following manner. Since the value received by the customer has been achieved through the joint collaborative activities of the customer and WESCO. It is important for the instructor to bring the students' attention to case Exhibit 13. For "focus NA" and "other NA" customers. they are adapting their processes to match WESCO's capabilities and vice versa. The main point here is that key NA customers not only benefit from the relationship. WESCO is able to get better prices through better planning. In these stages. However. which together account for nearly 40% of value added through the NA program. Unless the customer has the time or inclination to sit down with another supplier and recreate this process. However. Prices have gone down slightly further. concrete savings through inventory reduction.At the same time. WESCO is probably able to delight the "key NA" customers and do it in a way that is very profitable to WESCO. WESCO pays for the lower prices by giving up margins.
Price Line: See TN Exhibit 1 . Cost Line: See TN Exhibit 2 . Overall.The early stages of the NA program involve substantial investments on WESCO's part in order to acquire the customer.The instructor can point out that in the "focus NA" and "other NA" stages.
The instructor can use this hockey stick to show the fact that WESCO can make money only if the firm is able to execute the implementation and get the customer to invest in the relationship as well.customer stage. the building of a successful NA program is not just about getting the right customer. This can also serve as an ideal learning for the instructor to return to later in the discussion and ask the students whether it makes sense for WESCO to try to convert existing other NA and focus NA customers into key NA customers. that is. As is highlighted in the case. At this point. At this point. This is critical to the success of the relationship. If this is not done right. there is an explosion in customer value and this is achieved in a collaborative mode. then WESCO can wind up in the shaded region and continue to lose money indefinitely in the relationship. It is also about developing an implementation plan that ensures buy-in from both sides at all levels. The instructor can highlight this issue by drawing the hockey stick that captures the impact of acquiring and retaining customers. The instructor should be very deliberate in this part of the discussion to avoid losing the students’ attention to this point. One way to do this is to push the issue of WESCO being stuck with focus customers and ask a question in the vein of what it means for WESCO that the ranks of focus customers are swelling nearly as fast as those of key customers in the program: how many focus customers can eighteen NAMs convert to the next stage. it is vital to discuss the importance of the implementation program. make into “key NA “ customers?
. the instructor may choose to segue into the issue of the organizational limitations of WESCO’s NA program.
and so on? Can this affect WESCO in the long-run? Does WESCO have the competency to manage non-traditional lines of business?
. then there remains little or no time at all for prospecting. industrial gases to another. NAM’s responsibilities in the evolution of NA agreements work out as follows: Stage NAM commitment Timeframe Prospecting Active Selling Flexible Varies 30-40% 6-9 months Implementation up to 50% 2-3 months Maintenance 15%+ Indefinite
Looking at the time the NAMs spend on the second through fourth stages.Is NAM capacity an issue here? WESCO currently has 18 NAMs managing an NA program that involves 50 key customers. A second option involves minimizing NAM’s responsibility by expanding the support service staff to take over much of the maintenance role. what is going to happen? Can this NA program be sustained over time? What will happen if other competitors also develop NA programs? The sustainability of the NA program is going to be affected by changes in supplier management approaches and competitive threats. Having reduced the procurement costs in relationships with the top 5 to 10 suppliers. with the time and customer allocations. This works out to an average of slightly under three key customers. In the case of supplier tiering. In order to reduce these procurement costs. these customers now find that procurement costs for other categories of MRO supplies equal or even exceed the costs of the supplies themselves. Hiring more NAMs is difficult because the process of professional development takes time and needs to be planned out far in advance. Going ahead. WESCO developed the NA program in response to EES customers consolidating their supplier bases. 100 focus customers. implementing quality certification programs. and 8 other NA customers per NAM. This means that barring change. This plan could serve the double purpose of decreasing the NAM’s commitments while creating a group of managers that could serve as a pool of candidates for NAM positions in the years to come. the NAMs will end up over-committed once their fifth key customers move into the implementation stage. Should WESCO take on supplying janitorial supplies to one customer. the maximum number of additional key customers is 32. and 150 other NA customers. if a NAM is in stage two or three and is maintaining three key accounts. Possible solutions to these problems are somewhat complicated. and have expanded to over 80% of total procurement costs. and demanding low prices. these customers are already shifting to new procurement model modes: suppliers tiering or forming supplier alliances. In addition. 6 focus. The most important one is the issue of what business is WESCO in. several important issues arise.
Further. Second. It is important for the instructor to highlight the fact that there is always a chance that vendors can take customization to a point where each relationship unprofitable. Especially if the customer and WESCO have collaborated and shared the huge gains in the relationship. They will suggest that the approach can lead to a lot of chaos. Students are less enthusiastic about the alliance option. There is usually a lot of energy in this part of the discussion.
. Their reservations stem from the fact that WESCO will have to make further major investments in working with other MRO suppliers without the compensation that goes along with tiering. confusion. there is consensus that this can be good for WESCO if done right. Overall. then the economics of the program may be further skewed against WESCO’s goals. and losses if the local branches are allowed to customize offerings to local customers. it may be unlikely that the customer will walk away from the relationship or that competitors will be able to replicate the gains either in supplier learning or in the process of role definitions. If. so the threat posed by potential competitor NA programs is real. as soon as WESCO gets through one stage. goals and objectives setting. and continuous monitoring. in either case. becoming a fully implemented key NA customer is not the end of the period of heavy investment but instead only a hiatus before the next ramp-up. competitors will follow and develop their own NA programs. customers begin to demand even more service and support from WESCO. customers are migrating all the time. This is not as much of an issue. This is part of Haley’s Integrated Supply concept. Those who are against it will point to the face that this approach will work only as long as it is managed from Pittsburg. WESCO’s competitors are pursuing similar customer management strategies to its own. Overall. According to Haley. This problem can be compounded if customers want first to purchase through an NA agreement. then to purchase from an alliance of distributors who will team up to provide a one-stop solution. however. then to have WESCO serve as a first-tier distributor in a supply tier. As well. there is a larger peril as well. Students may point out that profits will not be sustained for several reasons.Those in support of this move will use the same logic as that used by Haley. First. WESCO should take on any new business as long as it is profitable and it ensures the continuity of WESCO’s relationships with its important customers. there is sometimes very little learning from one relationship that can be transferred to other relationships. The NA program is designed to exploit efficiencies that arise form the predictable demand ensured by long-term contracts to the benefit of both customer and distributor alike. As described above.
where he says that his branch has been forced to change the way it does its business to an extent that it might not be in a position to serve its traditional customers.. the contractors. in order to manage NA accounts sales reps need to have a farmer mentality. and to manage contractors they need to be like hunters. WESCO has twice as many focus and three times as many other NA customers as it does key customers. Further. where he says that NA customers demand a lot of service that is not commensurate with their sales volume-either current or potential.The instructor can use the diagram shown below to capture this line of thought:
At this time.e. There is also information in the case on the sales approach required to serve the different types of customers. The case has details on customer. and other issues that highlight the impact of the NA program on other customer types. Whitney is referring to the fact that spending more time with NA customers comes at the expense of attention that he can pay to his traditional customers. any more.
. the instructor can pose the following question to bring students back to the issues that Piraino is currently faced with: “Clearly WESCO is short on NAM capacity. Another example can be found in Larry Worthington's quote. For example. As Piraino points out. organization. What is your advice to Piraino?” How does all this attention being paid to the NA program affect WESCO’s ability to serve its other customers? Students usually lose sight of the fact that WESCO has other types of customers that it needs to serve as well. there is John Whitney's quote. i.
The instructor might want to run a short lecture on the difficulties of organizing the sales and marketing effort to maintain and manage a portfolio of customers. This issue also exists at the level of the branch. If the existing NAMs could each develop one or two of these potential NA customers into such a "key NA" customer during the four-year period. In the most optimistic of scenarios. Although it might make it possible to reach revenue and profit goals in the short-term
. Nevertheless. the chances of finding ones who will be amenable to full NA implementation are somewhat improved. The problem that remains is that this approach requires WESCO to stick with customers collected through a less well-refined segmentation process than the one they now have. The problem of the evolution of profitability means that growth in the number of focus customers threatens the ambitious profitability goals set out by Haley. then the sales goal could be met without increasing the ranks of the NAMs. The issue of NAM capacity means that. given a better customer segmentation process. the NAMs would be freed up to do more prospecting. What should WESCO do with the NA program? What are your recommendations? There are several areas that need to be covered here. This works well for me since I get into issues in this area in greater detail in the WESCO case than I do in the session immediately following this one. WESCO needs to think through very carefully whether it should adopt a generalist approach where a salesperson sells to all types of customers. I take a few minutes in class to bring this to their attention. changing the growth profile of the NA program becomes a key factor in achieving success. after all. This would also help by reducing the number of other NA and focus NA customers. when WESCO signed the first 300 customers?). while also being slightly more realistic. Given the richness of issues with the NA program design. it will be very difficult to add many customers to the NA program. Consequently. as 28 new and perfect customers might be difficult to find (where were they.The instructor needs to ensure that students are keeping this issue in mind as they make decisions on the NA program. which. in order to do this successfully. I have found that this is an area that gets passed over by the students in this case. it is possible that WESCO could use a segmentation process to find a group of 28 new customers who come close to fitting the ideal profile for an NA customer and whose total EES purchases fall between $12 and $15 million per customer per year (and whose purchases from WESCO could reasonably reach the $10 million mark at the key level). One way to handle the NAM capacity issue is to hire executives to take over some or all of the maintenance functions that the NAMs currently do. By cutting down on the time spent on maintenance. has the potential to yield better results for WESCO. given the current number of NAMs and the difficulty of adding more than a very small number to that staff in the short term. Another approach would be to find a group of as many such customers from among the current focus NA and other NA customers. by sticking to customers with whom WESCO already has some acquaintance. For example. Thus. or a specialist approach where a salesperson sells to only a specific type of customers.
I would make sure that it was not squashed prematurely. as there is precious little space for mistakes). I have not had a student or executive who has recommended that WESCO scrap its NA program If I did get some sentiment in that direction. I have found that at the end of this discussion. As far as Haley was concerned. WESCO hired managers to take over the maintenance functions. Theme 1: The best place to start this case is with an action plan. there is an even split between those who think that WESCO should use the NA program only in the reactive mode in the future and those who would like WESCO to be more proactive. It is also important to spend time on the impact of supplier tiering and the formation of supplier or distributor alliances/ consortiums on the NA program. and how the NA program was initiated. the instructor might want to break the discussion into several themes. the NA program was critical to his growth strategy. it may not be a good longterm strategy. Teaching Strategy In order to facilitate a proper analysis of the wealth of issues discussed in this case. Theme 2: The next part of the discussion focuses on the role of WESCO as a distributor. I would try to get this student(s) to identify the sources for filling the gap left by the NA program. leaving the instructor with about 5 minutes to summarize the learning points in the case. This part of the discussion takes about 15 minutes. how WESCO adds value to its customers and suppliers. This part of the discussion should take around 15 minutes. The central question here is whether WESCO should be proactive or reactive in managing its NA program. This is a very important part of the case discussion and the instructor should allocate at least 30 minutes to it. thereby relieving the NAMs to focus on the development of new
. Postscript WESCO refocused its efforts in managing the NA program. Rather. Theme 3: Here the discussion centers on the reasons why the NA program has not delivered on its promises to-date. This part of the discussion should take about 15 minutes as well.(even this is doubtful. Theme 4: The instructor now needs to get students to recommend any changes that they would like to make to the NA program and the implications of these changes.
WESCO continues to take on non-traditional lines of business requested by its large and important customers. after an extensive recruitment effort. In addition. Piraino also conducted a thorough review of the existing "other NA" and "focus NA" customers to identify customers that were good prospects but with whom the implementation program had not been handled correctly.NA customers. WESCO was able to add several NAMs to its current teams. the NA program appeared to be back on track. the decisions are still made in Pittsburg on a case by case basis. However. There is no current plan to pass this responsibility on to the branch offices.
. Overall. based on numbers in the second half of 1997. Current results suggest that this effort was very successful as well. Piraino and his team then developed a comprehensive plan that focused on re-implementing the NA program with these customers.
Exhibit 1 Presentation on the Evolution of Customer Value
Exhibit 2 Presentation on the Evolution of Customer Value
Exhibit 3 Presentation on the Evolution of Customer Value
Case 15 SaleSoft, Inc. (A) Synopsis Greg Miller and Bill Tanner, Executive Vice President and CFO, founded SaleSoft in July 1993 with the objective of marketing PROCEED, a Comprehensive Sales Automation System (CSAS). While PROCEED had received very favorable responses from prospects, converting interest to actual sales was taking a long time with only five PROCEED systems having been sold to-date. In September 1995, with limited funds and the need to show performance before seeking additional venture capital, Gregory Miller, the president and CEO of SaleSoft, and William Tanner, the executive vice president and CFO, now need to decide the future course of action for their company. They are faced with the question of whether or not to introduce a Trojan Horse5 product. This product can be developed, with some work, using the existing modules of PROCEED's Sales System that have already been developed. Trojan Horse (TH) could potentially distract SaleSoft from its primary objective of becoming a leader in the high end of the Sales Automation (SA) software industry. In addition, there is a risk that it might cannibalize sales from the PROCEED product that SaleSoft is currently marketing. Finally, TH can potentially prevent SaleSoft from forming relationships with consultants whose support is critical to the success of PROCEED. Yet, TH might offer an easy way for SaleSoft to get into new customer accounts, gain quick sales, and generate much needed revenues. The situation is complicated by the fact that current PROCEED customers are expecting SaleSoft to deliver the complete PROCEED solution as soon as possible. Should Sale5oft complete the development of the PROCEED product and continue trying to sell PROCEED to select customers? or, should the firm make an all out effort to launch TH to a much larger customer base? This note was prepared by Professor Das Narayandas with the assistance of Research Associate Sara Frug for the sole purpose of aiding classroom instructors in the use of SaleSoft, Inc. (A), HBS case No. 596-112. It provides analysis and questions that are intended to present alternative approaches to deepening students comprehension of business issues and energizing classroom discussion. Copyright @ 1998 by the President and Fellows of Harvard College. Used with permission.
The term "Trojan Horse" is used to refer to an object or action used to gain easy entry into areas that might otherwise be difficult to access. The Trojan War is the subject of Homer's Iliad and is thought to reflect a ten- year siege of Troy by the Greeks circa 1200 b.c. The fall of Troy is recounted in Virgil's Aeneid: according to Virgil, the Trojans, having held out against the Greeks for 10 years, were tricked into hauling inside their city walls a large wooden horse (the so-called Trojan Horse) left as gift for the Trojans by the Greeks. The belly of the wooden horse was full of Greek soldiers who, once inside, opened the city gates at night and thus let in their compatriots to sack Troy.
Positioning This case can be used to illustrate the challenges faced by suppliers with limited resources that operate in markets with long buying cycles. It can also be used to link buyer behavior, product design (bundling), and pricing issues. The case is best taught in a business marketing, entrepreneurial marketing, or a high technology marketing course. It can also be used very effectively towards the end of a basic marketing strategy course. At HBS, this case is taught as the transition between the "Understanding the Customer" and "Managing the Value Proposition" modules in the second-year Business Marketing elective, and on the last day of the Business Marketing Module in the Strategic Marketing Management program for senior marketing executives. Objectives The teaching of this case involves the following objectives: 1. Linking product policy and pricing issues with the customer acquisition and retention process. More specifically, • Understanding the role of a Trojan Horse product in developing a customer migration path that facilitates customer acquisition and enhances their retention. • Quantifying a product's benefits or value to a customer, and integrating this value with other strategic and tactical issues to set price. 2. • • 3. Understanding the complexity of a decision making unit (DMU) and the associated decision making process (DMP) in the purchase of complex, technological products. More specifically: Understanding the decision making process (DMP), its stages, time frame, and the people (the DMU composition) involved. Understanding the link between a customer's DMP (or buying cycle) and a vendor's selling cycle. Understanding sales and marketing issues faced by a start-up operating in an embryonic market by comparing/contrasting approaches required to sell products of varying complexity.
4. Exploring the role of a vendor's organizational structure in defining its ability to implement marketing strategy.
5. Understanding the role of automation in linking sales, marketing, and service functions in a firm.
5. 4. 7. What is the buying cycle for PROCEED? Who are the people involved in the purchase of a CSAS solution? What is the role of consultants? What is SaleSoft’s current approach to selling PROCEED? Quantity the benefits of CSAS to a customer using the information given in Exhibit 7. What is your plan? Do you plan to continue with PROCEED or will you introduce the TH product? Provide support for your plan.Recommended Readings • • Major Sales: Who Really Does the Buying? – HBR-82305 Automation to Boost Sales & Marketing – HBR 89105
Teaching Questions 1. 8. or will you introduce the TH product? The various comments supporting going ahead with TH or PROCEED are as follows:
. 3. 2. 6. What value does TH provide a customer? How is this different form the customer value delivered by PROCEED? What is a Trojan Horse? How does it facilitate customer acquisition and retention? How will you price TH? How do you think SaleSoft’s organization structure will affect its ability to sell PROCEED or TH?
Details of the Discussion Flow What is your plan? Do you plan to continue with PROCEED.
Given that there are just five players in CSAS and we are better than the others. The competition is going to heat up very quickly in • the TH market – Microsoft and Lotus are planning to enter. Customers don’t need to be educated on the benefits of TH. gain quick sales. Most Sales VPs will grab it at any price. TH Continue with PROCEED
• • We have spent too much time on PROCEED to walk • away from it now. There are too many players involved in the purchase of PROCEED (pg. TH needs only 1/3rd the time taken for selling PROCEED (pg. All the CSAS competitors are small and like SaleSoft – this is an easier battle for SaleSoft.400/seat * average of 400 seats per prospect * 6 = 5. TH is easy to sell – only the sales VP needs to get on-board. It is easier to quantify the benefits of TH. The cost involved and the time required to develop the TH product are not very high. Industry experts think it is unlikely that one vendor will be able to do it all (pg.$2. Tanner – It’s a much bigger and broader market than the PROCEED market.7 million in sales**. generate much needed revenues (pg.
(** . He has shown that he • can make it work – he was successful in bringing order to chaos in the MRP area. Miller knows what he is doing. 9).
SaleSoft has committed to current customers that • remaining modules of PROCEED will be read by June 1998. We can afford to do it. •
Sell Trojan Horse
PROCEED has only generated interest-Selling TH is very much like selling CMS and there are so many success stories in the CMS market.PROCEED vs. Creating awareness for TH is very expensive – half a million dollars over the next six to eight months.76 million)
. 2). 9) Tanner – We will not relinquish the PROCEED market if we go after TH (pg. 10)
We just need to convert 6 of the 20 prospects to hit • $5. Tanner – We don’t need consultants to sell TH. 1). Tanner – We will lose our first mover advantage in the CSAS market if we divert our attention to TH. 2)
TH will prevent SaleSoft from partnering with consultants who are very important to the firm. We don't have the skills to mass market products – • we don't know how to sell TH. TH is an easy way to get into customer accounts. (using Exhibit 3) this is not difficult. •
• • •
Customers are very skeptical about CSAS and the ability of CSAS vendors to survive in the long-run (pg. 9). and it needs no customization (pg. Twenty Prospects for PROCEED want to see • completed product before making any purchase commitments.
2 on the general belief that there was no standardized approach to sales order cycle). Using these three sources of information. Next. Rather than trying to clarify these issues. It is useful to ask the students what the catalyst is for this stage to happen. marketing.” What is the buying cycle for PROCEED? The buying cycle begins when the senior management realize that a CSAS might solve existing sales. The case doesn’t provide any details about how long this stage takes.
. There is a lot of energy at this point and it doesn’t help to challenge students on their views. inventory. Let’s understand the CSAS buying cycle as given on case page 4. and service processes. their concerns. and materials handling functions. like Miller (pg.). it seems that understanding the purchase process for the PROCEED product will help us understand why some people think that PROCEED is the wrong product for SaleSoft and others think it is the right product. They also believe that TH will not have the same problems as PROCEED. Once top management have seen that they are able to bring order to the manufacturing. this job is well done by other students who will object to comments with which they disagree. Some students might counter these comments by pointing out that automating sales and marketing functions is very different from MRP systems (see pg. and service problems. the instructor can push the discussion to the next theme in the following manner: “It looks like both sides have legitimate reasons to support their action plan. I take them as they come. 7) they think that automation might provide answers to managing sales.Once some of these issues for and against have been brought up. Consultants get involved very quickly in the cycle and get more powerful over time. there is a lot of information in Exhibits 4 and 5 on the issues raised by different members of the DMU. It is important that the instructor captures the following points: 1. the subsequent stages of the CSAS buying cycle can be captured in the following manner. Those who are against PROCEED seem to be disturbed by the lack of sales in the last eighteen months. Those who support it believe that more PROCEED sales are just around the corner and that selling TH is no different from selling PROCEED in terms of difficulty. marketing. and the benefits they seek from CSAS solutions. Invariably. In addition to text on pg. and service issues. I have found that there is wide variance in the student analysis on who is involved in each stage and what are their motivations. 4. the instructor needs to push the students to answer the following questions for each stage: What is this stage in the buying cycle all about? Who are the people involved in that stage? What are their roles? What do they want at this stage? Are they positive or negative about the CSAS product? (This format is what the students would have read in the assigned reading “Major Sales: Who Really Does the Buying?” by Tom Bonoma. marketing. In either case. Typical responses here focus on the top management’s frustration with the inefficiencies that exist with current systems and their inability to control and improves sales.
The customer’s senior management wanted to pilot test using skeptics in a low profile market.
Senior management plays a bigger role in the beginning and in the end. This is not clearly spelled out in the case and students will debate this issue. IS Managers. VP Mktg. Line managers are involved more in the intermediate stages that involve systems design.6
Below. I usually take a minute to bring this issue to the attention of the students. and analyzed Decision on which system (h/w & s/w) to purchase.
. SaleSoft Buying Cycle
Stage Need Identification Need Clarification Involvement CEO. SA consultant. Sales Managers. SA Consultants VP MIS. CSAS vendor Activity Realization by senior management that CSAS might solve existing problems Evaluation of potential to automate existing processes and specification of the order in which functions are to be automated Evaluation of how different functions to be automated are related and how data is to be collected. SA Consultants CEO. VP Service.2. VP MIS. or should it be done with a group of people who are very skeptical about it? Should the test site be one of the more important markets for the customer. Sales. Some will insist that users will be involved throughout. CFO. They felt that this would given them a higher chance of success. or should it be done in one of the secondary markets where there is less at stake for the customer? I had the opportunity to sit in on a couple of pilot test design sessions and found that these were issues on which the parties involved had a lot of trouble coming to any sort of agreement. stored. MIS dept. VP Marketing.. VP Sales. Users might only be involved towards the end. The vendor and product champion (on the customer side) wanted to have a sample of favorably disposed users in a high profile office of the customer. However. 3. Others will quote the case and suggest that it is only with the pilot test that users get involved in the process. SA Consultants Sales Reps. I usually don’t get into a long distance on this issue. VP Service VP Sales.. is an example of a table that came out of a class discussion in my Business Marketing Class. CFO. Marketing Managers. in the middle stages they have a limited role to play. short-listing of vendors Customization of CSAS and pilot testing Timeframe (months) 21-30 3-4
Need Definition and Specification Evaluation of Software/hardware And vendor Alternatives Pilot Testing and Customization Rollout
There is an interesting question here about how one would select the sample for the pilot test: should the test sample constitute people who will be most comfortable with the product. Managers. 4. Given the time constraint. VP MIS.
the instructor can also separately capture the orientation of each DMU member towards CSAS. In this case. One way to run this part of the discussion is to draw a ladder on the board. On a side board. DMU Member CEO Orientatio n to CSAS +/UnderInterest in standing of Implementin CSAS g CSAS Low +/Reasons
+Would like more control and higher sales & marketing efficiency . Erodes power
VP Sales VP Service Sales Reps
Low Low Low
same as above same as above • -Worried about sharing customer information—if everyone knows everything about my customer.An important point for the instructor to point out here is that it is common for the DMU composition to change as we go from one stage to another. I usually turn to the student who is giving me this information with a total look of bewilderment and disbelief saying something to the effect of “Is this firm out of its mind? Doesn’t it understand the process of selling?
. This is a very big learning point for students and is worth the drama. with one vertical line for the customer’s buying cycle for PROCEED and the other for SaleSoft’s selling cycle. the process highlights the fact that SaleSoft does not have an approach that maps onto the customer’s selling cycle. and that too only if it happens to be selected as a CSAS vendor. and build the rungs as links between the two vertical lines.Has other things to think about
• CFO VP Marketing + +/Low Low +/+/-
same as above • +Wants more control • -Fears that other will have access to data. what is my role? +This will make me more efficient +This is my livelihood
Consultant What is the SaleSoft’s selling cycle for PROCEED?
Students will be quick to point out that SaleSoft enters into the picture at the end of Stage 4 of a customer’s buying cycle.
. the instructor can then add the following information that highlights the role of consultants.To the above figure.
this translates into $7. For Company A (a financial services firm). In many high-tech business this is considered to be more than half the battle won. Case Exhibit 7 provides more numbers that students can use to calculate these benefits.8 At the point. I have found that vendors that do a win / loss analysis of orders. 8 In my own personal experience.5 million in additional sales. “Well. An example that the instructor can use here is the important of getting the product specified in a customer’s RFQ (request for quotation). clearly the selling approach is not right. selling time
I have had executives come back to me after class with their versions of ladders and how they just realized what was missing in their own sales approach. the instructor can say something like.1 million / year 60 120 300 Selling time reduction x ($ sales/ year) Avg.7 In cases where a competitor’s product was specified. and employee turnover reduction. startup time reduction for new employees. What about the economics of a CSAS purchase? Does SaleSoft have a good story to tell the customer? How much value does a customer get from PROCEED?” What are the benefits of CSAS? Case Exhibit 1 fleshes out the benefits of CSAS. There are three sources of benefits detailed out in Exhibit 7: sales cycle reduction.The instructor can also use the point out how intermediaries can become powerful in buyer-seller transactions by getting in between the two sides very early in the process and keeping the two sides apart after that. Additional Sales due to Sales cycle reduction= = 6 x $120m = $6 million / year 120 Additional Sales due to reduction in start-up time for a new sales rep = Days reduced in startup x ($ sales / rep / year) x Days to startup x (# of new reaps) # days to startup Workdays / year =14 x $120m x 60 x 24 = $1. very often find a dramatic difference in the probability of winning a bid when the specifications have been designed to favor a competitor’s product as compared to when the specifications are more favorable to their own product
. vendors should realize that there is a good chance that they have already lost the sale.
the results are even more dramatic and the pay back period is less than a year.76 = $1. Using PROCEED.5 m + $600k + $200k + $180k + $150k = $2. the firm gets $7.Additional sales due to reduction in sales rep turnover = (% reduction) x (current turnover) x ($ sales / rep) x Days to startup Workdays / year
= 0.52 million in the first year after implementing PROCEED.30 = $36 million. the analysis is as follows: Additional Sales due to Sales cycle reduction = = 15 x $350m = $29. If we assume that selling costs don’t change. then the company saves 30 percent (row 3 of Exhibit 7) of the additional sales in costs less commissions of 10 percent.6 million = 36 + . Thus.6 million $38.6 million w/o PROCEED Sales Costs (at 30$ of sales) Selling Costs (at 30$ of sales) on $127. cost of sales remains the same as it would be if sales volume were $120 million w / o PROCEED.16 million / year 180 Selling time reduction x ($ sales / year) Avg. the pay back time for the CSAS investment is around 1 ¾ years.20 = $1.1 x 7. We can also get to this number by working directly from the savings.000 / year The total additional sales for Company A from using CSAS are = $7.28 million with PROCEED $127.6 million $36 million * + commissions $7.6 = $36. The Costs of implementing CSAS for Company A are: Initial Costs = H/w + PROCEED license fee + start up + Implementation & training costs + annual costs of internal resources = $1.52 million *-$120 million x . For company B that is in computer h/w. selling time
.76 million Difference 38.1 x 24 x ($1m) x 60 = $480. For Company B.28 – 36.6 x .63 million Thus.
5 – 124.15 x 88 x ($1. Thus.6 m + $1.5 million + commissions on $42.9 million $122.5 + .44m + $450K + $430k + $350k = $6. then the company saves 35 percent (row 3 of Exhibit 7) of the additional sales in costs less commissions of 4 percent.3 million
We also get this by working directly from the savings: if we assume that selling costs don’t change.2 million / year 90 250 300 Additional sales due to reduction in sales rep turnover = (% reduction) x (current turnover) x ($ sales / rep) x Days to startup Workdays / year = 0.
.9 million $137.2 = $13. the pay back time for the CSAS investment is less than half a year (.2 million 137.27 million Thus.9 million = 122.Additional Sales due to reduction in start-up time for a new sales rep = Days reduced in startup x ($ sales / rep / year) x Days to startup x (# new reaps) # days to startup Workdays / year = 20 x $350 x 90 x 88 = $8. The Costs of implementing CSAS for Company B are: Initial Costs = H/w + PROCEED license fee + start up + Implementaiton & training costs + annual costs of internal resources = $3.04 x 42.4m) x 90 300 The total additional sales for Company B from using CSAS are = $42. the firm gets $13.9 million w/o PROCEED Sales Selling Costs (at 35% of sales) $392.3 million in the first year after implementing PROCEED.47 years).9 = $124.5 million with PROCEED $392.
3. the instructor can draw a stacked column of the benefits and call it the “value column” or the “value line. and other ways in which their firms represent customer value
At this point. The CEO and CFO need to be convinced that the system will work and that SaleSoft will not go out of business leaving them with no support. 2. "I think that SaleSoft has a good selling story. the investment pays for itself in less than 6 months for Company B. shouldn't it?" There will be a skeptic who is primed to get into this discussion now (and there will always be one. don't worry) saying that the value line is just a part of the selling story. Not every person in the DMU cares about the sources of benefits as defined by the value line. pies. this student will bring up several issues highlighting the following: 1. stars. The economics and other benefits that we spoke about should make this an easy sell.
.Using the above information.” Executives are very likely to get in at this point with their own versions of bars. the instructor can push the class by saying something like. In addition. Further. there will be arguments that the three sources of benefits are very hard to measure and unrealistic. it will have reduced sales rep turnover and higher sales rep morale. The VP MIS needs to be convinced that the operation of the system will be as promised. Not only is the firm going to get additional sales. The value of PROCEED needs to be sold at every level of the organization. Using Exhibit 5 ("Typical Concerns Regarding CSAS Solutions") that provides a breakdown of specific concerns about the benefits of CSAS for each member of the DMU.
I reiterate the fact that it is here the most large companies are facing problems in implementing their new strategic marketing initiatives. TH is focused only on sales. Some students will point out that TH might not really by a TH for PROCEED. 5. Not all PROCEED prospects would necessarily want to start their automation efforts with TH. the instructor can mention to the students that this is a potental area where things can break-down between marketing and sales.4. since it appears to be addressed to a market segment that is not the same as the PROCEED product. How does TH compare to PROCEED? Selling TH is different from PROCEED in several ways. students will point out that all the benefits listed for PROCEED are also applicable to TH. unlike PROCEED. Thus. and what is the link between TH and the customer acquisition and retention process. the instructor can move the discussion along by shifting the focus from PROCEED to TH. Marketing is so consumed by figuring out the process of where and how they create customer value that sometimes they don’t pay attention to what they need to do to help Sales develop a strategy to extract the value that they have created. However. This signficiantly reduces the number of people involved in the buying cycle as well as the need to build consensus between the traditionally diverse sales. First. TH might be an easier sell than PROCEED. This is the point where the instructor needs to run a discussion on what is the role of TH. The Sales Reps need to be reassured that the system will benefit them. Next. when they then toss it over to Sales to take it to their customers. Compared to PROCEED. how does one design a TH product. These Sales VPs find it difficult to provide their firms with accurate forecasts. Sales find it very difficult to manage. Also. "So creating these value lines is not the end. there is a breakdown in the initiative. Looking at the value line created for PROCEED. We also need to take this value line and convert it into a legitimate selling story that our sales reps can take to their customers. which in turn affects the firm’s ability to plan operations and resources.
. marketing. Marketing develops value propositions with all these benefits quantified." At this point. TH delivers enormous value to Sales VPs of firms that are involved in selling big-ticket items with long. This sets the stage for the instructor to say something like. and services departments of customer firms. not all TH users might be interested in the complete PROCEED product. The Sales managers and VP Sales need to be assured that their salespeople will use the system well. TH needs minimal customization (customizing the program requires only small alterations such as changing the number and names of segments in the opportunity pipeline). and complex selling cycles. The next thing you know.
and Tanner has suggested a price of $400 per user.000.400. Other students will suggest that if SaleSoft were to go after prospects that had never seen PROCEED or used a CMS product. “at this price. How much of the functionality of the full product should be incorporated in the TH product? What should the price of the TH product be compared to the full product? How should the vendor manage the migration of customers from the TH product to other products? Exhibit 1 provides a set of PowerPoint slides that I use to discuss these issues in greater detail.. At a price of $400 per user to below. students are likely to suggest a price anywhere from $200 to $400. Designing the TH product involves the integration of product bundling/unbundling issues with pricing issues. vendors are able to generate interest in the product but are not able to convert this interest into actual sales. and it is also possible for the customer to add modules over time without risking any loss in past investments. This is base on the fact that the value line for TH is the same as that of PROCEED. in the case. Students that suggest a low price will point to the fact that SaleSoft has to minimize customer resistance and reduce marketing and sales costs.400 or even higher. TH provides with an opportunity to penetrate a customer account faster and more economically. then TH can be a very effective tool for the vendor.e. $2. given that TH is closer to a CMS product. i. customers might not be willing to make the investments in the vendor. Using competition as a basis. For the customer. Based on what we have discussed. Vendors can use TH to create a barrier to entry for competitors by increasing the switching costs to the customer.400 per user. then it is possible for SaleSoft to price TH at $2. the vendor should be careful not to design a TH that becomes an end in itself such that customers do not see the need to buy the full product. our salesforce will have to just go out and pick up these orders. As is the case with PROCEED. Some students will point out that this price is difficult to justify given that SaleSoft is having trouble selling PROCEED at $2. They will quote Tanner who says. if there is an opportunity to unbundle the complete product into distinct products that can be sold and used independently. TH also provides the vendor with an opportunity to make some money relatively quickly. In these situations. A good TH product will also facilitate and ensure future sales of other products to the customer. one could potentially make the case that TH should be priced at the same level as PROCEED. TH offers an opportunity to reduce the risk and the investments involved. It also gives the customer a chance to assess the capabilities of the vendor to support and serve them over time. Miller has suggested a price of $1. Finally. In these cases. In designing a TH product.”
.What is a Trojan Horse? How does it facilitate customer acquisition and retention? TH is a good solution in situations where the complete product is very expensive and involves a high level of risk for customers. The customer is able to use the TH product and experience the benefits fro that product before making any further investments. how will you price TH? Based on customer value. they will suggest that TH will sell like hot cakes.
SaleSoft is leaving money on the table. TH Cost = Development cost + Init.000 + $200 / user At $1.000 + $500. with the next largest number of individuals working in support services. The instructor can then ask the students how many prospects they think SaleSoft is likely to be able to get in the next 9 to 12 months.000 per user will argue that at a lower price. like Miller. It is also possible to do the following break even calculations to determine the price of TH. Given the enormous benefits TH provides customers.200 Using the results of this analysis and information from Exhibit 7 that suggests that SaleSoft can expect to get 200 users per prospect. The instructor can push students on this point
. This is also the ideal spot for the instructor to draw the attention of students to Exhibit 8. Students will look at all this information and suggest that this firm is still organized to develop products—not to sell them.200 And at $400 (as per Tanner). They will suggest that Miller completely re-organize the firm and build up selling capability very quickly.000 = 875 users to break even 1000 . Both the sales and the marketing departments are small.Those that suggest a price closer to $1. one can conclude that SaleSoft needs 875 / 200 = 5 customers at $1000/seat and 3. respectively. SaleSoft would need = 700. SaleSoft would need = 700. “What do you think of the way this firm has been organized? Do you think the organization has been set up to sell PROCEED? Would it need to be changed if TH were introduced? How do you think SaleSoft’s organization structure will affect its ability to sell PROCEED or TH? A look at Exhibit 8 suggests that a plurality of employees comprise the development department. Marketing cost + ongoing marketing costs = $200.000 = 3500 users to break even 400 .000 (as per Miller). with only five and four members. these students. It is interesting to point out that Miller seems to recognize this when he points out that SaleSoft has neither the resources to have separate sales forces for the two products nor the will in the sales department to sell PROCEED if TH is available.700 / 200 = 18 customers at $400 per user to break even. will want to charge a higher price to extract a reasonable value for themselves.
the VCs demanded that SaleSoft put the PROCEED project on the back burner and push ahead with the TH product. it was more or less clear that SaleSoft had pulled out of the CSAS marketplace. Clearly.). There is usually an even split in class with support for both products. the need to innovate continuously and develop new product only complicates issues further. However. Theme 1: As the case revolves around a binary decision. TH sales did not take off quickly and Miller and Tanner had to back to the drawing board to think of how they were going to manage the whole process.
. As a condition to giving more money. students have to understand that this is a non-trivial issue. when asked to sell the TH product. What Happened? As the case points out. Add to this the competitive reaction and there is little doubt about what happened. Two things happened as a consequences. competitors that were trying to sell CSAS to these prospects immediately seized upon this chance. The VCs did not allow the organizational structure to be changed in any manner since they saw this as major and unnecessary expense. Late in 1995. with SaleSoft calling itself the pipeline manager. they decided to use the TH proposal as their trump card to get more investments from the venture capitalist (VCs. “If you are an entrepreneur in a high tech industry and have been developing products for a while. SaleSoft made a big announcement that it had now positioned itself as an “Opportunity and Pipeline Management” company. First. if they were looking for a complete CSAS solution (which these prospects were) then TH wouldn’t cut it. In these businesses. Teaching Process One way to manage the wealth of information in the case is to break up the discussion into several times. The other thing that happened was that these prospects had moved so far down the buying cycle that they were not willing to go back and put everything on hold and shift their attention to buying TH. They started telling the prospects that if they wanted a sales forecasting and opportunity pipeline manager. the best way to begin the discussion is with a comparison of PROCEED and TH. The instructor can lead the class to the next theme by pointing out that people who support TH appear to suggest that SaleSoft will not be successful if it continues to sell PROCEED. As a result. then possibly TH was a good bet. Miller and Tanner were looking for an additional $2 million of venture capital. when will you change the organization? How will you change it? It is very easy to say that Miller should do it. the firm’s sales reps took the standalone TH product to the same set of prospects to whom they had been trying to sell PROCEED. The instructor can highlight that the transaction from being product development oriented to becoming marketing/sales oriented is a very tough one and is usually the place where many high tech startup firms falter. However. Further. and those who support PROCEED appear to suggest that SaleSoft is on the verge of getting a major break in PROCEED sales.by asking the following question. it is the interpretation of the current PROCEED sales that is at the heart of their analysis of both sides.
it is also important for the firm to figure out how it is going to sell these benefits to the customer. the instructor needs to walk the class through details of the different stages in the CSAS purchase process (or buying cycle). their needs. The instructor can initiate this part of the discussion by asking a question like. “What do you think about this organization? What is it designed to do? The discussion then revolves around the issue of whether one should organize proactively. The instructor should then ask the students if they think that the TH product should be sold to PROCEED prospects. This leads to the next theme in the case discussion. a line) of benefits to a customer. the instructor then can ask the class to map SaleSoft’s selling cycle onto the customer’s buying cycle. The instructor can then summarized by saying something like “With these kind of numbers and a pay back period of less than a year. customers should be lining up at SaleSoft’s door to buy the product. Most of the students will say that the TH product has to be sold to a different set of customers and that it is good for those customers who don’t want to buy PROCEED today but might be prospective customers for PROCEED in the long-run. But that’s not what is happening. The instructor can also choose to use this time to do a short lecture on the role of TH: how does TH help manage customers better over time? When is it useful to think about a TH product? What factors should be considered in the design of a good TH product? etc. Linked to the pricing decision of the TH product is the issue of whether SaleSoft has the capability to sell this product. the instructor can move the discussion to the other side and ask how students see TH solving all these problems. Theme 5: The instructor can then bring the attention of the class to the organization chart in case Exhibit 8. How should a start-up firm that is still focused on product development develop an organization that will take care of market development? SaleSoft’s organizational structure. The instructor should capture this issue on the board since it will be very useful to go back to in the summary.Theme 2: Here. or reactively in developing markets. might make it difficult for the firm to be successful in a mass marketing strategy. not atypical for a start-up firm. and what they are looking for in that stage of the buying cycle. “Okay. It is important that the instructor needs to push the discussion on who is involved in each stage. The instructor can build a column. What’s wrong with our analysis?” This leads to the idea that it is not enough to come up with these value lines. Will a customer see this value? Are there other factors that were not considered? Theme 4: Next. (or. do they have a good selling story to tell? Does PROCEED deliver value to a customer?” Theme 3: The third theme is all about understanding and quantifying the benefits of PROCEED to the customer and revolves around the numbers in Exhibit 7 of the case. It becomes evident that SaleSoft enters the picture very late in the game and is at the mercy of consults. the instructor can get details on costs to a customer of buying PROCEED. the instructor can transition the class to the next theme by asking the following question. Once this issue has been identified. The associated decision that needs to be addressed is about how to price the TH product. With the customer value line developed. we have found that SaleSoft is very late in getting into the game. but let’s live with that for the moment. That is clearly not good. At least. Having done that.
I ask them how this customer would react. TH also can be very effective in providing vendors with resources in the beginning that will help them survive and support themselves in the market development stages. Managing the product line across customer life cycles and providing customers with a clear-cut migration path that reduces their risks and maximizes value to them will always ensure that vendors retain customers. However. the people in the booths seem familiar. and require major changes on the customer’s part. After this discussion. I tell students that SaleSoft decided to launch TH and that it did not change its organization very much. we asked several vendors to tell us more about their product. This is an issue that cannot be
. Finally. Next. I have visited the Sales and Marketing Automation Conference that is held in Boston every year.Theme 6-7: Here the instructutor can tell the class what happened and ask them how they would respond to SaleSoft’s decision to market the TH product. That it is difficult to understand how SaleSoft did not anticipate this when developing the system. Interestingly. I run a short 10 minute lecture on the role of TH in helping vendors manage customers more effectively and link product line management (bundling) issues with pricing (value extraction)—especially when the products are expensive. I then ask them to tell me what they thought would happen. and who were their main competitors. complex. Exhibit 1 of this teaching note is a PowerPoint slide presentation that I use to discuss the role of TH in managing customers and managing the firm. it is possible that some students raise the issue that cost of converting the existing modules of PROCEED’s Sales System appears to be too high. and also that SaleSoft would be unlikely to deliver a CSAS product to the customer in the long-run. and (b) we really don’t think we have any competitoin. It is amazing to see the turnover of firms in this business. They just have changed jobs and work for new firm every time I see them. In the last twenty minutes of the class. Students very quickly get to the point that SaleSoft must have gone back to its PROCEED prospects with this new product. there are some who think that these prospects have not bought because they have doubts about CSAS. the instructor can do a short 5-10 minute lecture that summarizes the learning from this case discussion. and customers are risk averse. Most say that there will be a signficant customer resistance to this move by SaleSoft. First. I take these comments as they come and then ask students to tell me how competitors would react to this move by SaleSoft. There are a few students who come up with the point that the competition can do best by acknowledging that the TH product is good but something that the customer really doesn’t want. It is important to get the customer and competitor’s veiwpoint here. Issues to Manage There are a few issues that the instructor will need to watch out for. More than half the firms seem to be new ones. The most common answers were (a) we are the only ones who have truly integrated sales and marketing automation software in the business. During one visit with Professor Ben Sharpiro. Some Additional Thoughts For the last three years.
some students try to take the easy way out and suggest that Miller should sell SaleSoft to a large software firm that is seeking to enter this market. would Miller be able to get a good price for the firm. The instructor can address this by saying.
. The instructor can manage this issue by directing the students to the information on the page where Miller clearly explains why this happened. Given the current situation. Second. “What would Miller think of your idea? Miller says he brought order to chaos in manufacturing and is going to do the same in selling. How are you going to make him walk away from what he sees as a tremendous opportunity?" Students quickly understand the passion that the entrepreneur has in his baby.answered satisfactorily using information in the case. or would he be better off getting some more sales before trying to sell the company. marketing. and service. I also ask students whether this is the time to sell the firm.
Exihibit 1 The Role of Trojan Horse in Managing Customers and Managing the Firm
Case 16 Arrow Electronics. CEO of Arrow. by being on an Internet-based trading system. There are several factors that can act as an impediment in building a lasting relationship with the customer. Businesses that transact on the Internet are realizing that they have to keep up and improve on the service level they have promised or else they will lose out their business to someone else who is either providing a better service or a faster one. a subsidiary of Arrow Electronics is reviewing a proposal from Express Parts Internet Distribution Services with her colleagues Skip Streber. In principle. This case can be used to explore the obstacles in developing and implementing new ways of doing business on the web. Express had developed an Internet based trading system that would allow distributors to post inventories and prices on a bulletin board that customers could access to compare prices and place orders. and effectively manage customers in the dynamic environment of Internet. The majority of the transactions on the net are being conducted between the business to business category. the services and solutions provided should be innovative. the issue still remains of how to lock the customers into a longterm agreement with volume commitments. In other words. But. Salsgiver needed to give her recommendations on how to adapt their business model to the new equation put forth by Express. This new medium gives the power of information in the hands of the customer.
. senior vice president for sales at A/S.
This case solution was prepared by Stephen Samuel. This case analysis helps students develop a better understanding of how to develop. how will Arrow address the issue of creating value for the customer in a way that they will select their product over their competition and the suppliers. using the Internet is a great way of reaching out to new customers whom you could have never reached before. Use The Internet is seen as the new way to conduct business. Finally the case has a lot of information on trends in customer-distributor-supplier relations through the '90s. She must also address the issue of how Arrow will use the Internet to its advantage and Arrow's strategy for building and maintaining relationship with suppliers and customers using the new technology.9 Synopsis In the spring of 1997. president of the Arrow/Schweber group. Another issue is developing and implementing new ways of managing customer relationship especially when you do not see your customer. Jan Salsgiver. The case is also rich in understanding what information is required to develop a web-site where one can conduct transactions. and Steve Kaufman. E-commerce is still in its infancy and is still a topic of speculation. Further. Inc.
It also works very well with executives. What is your action plan? Do you recommend that Arrow be proactive and build its own web-site and conduct transactions besides joining hands with Express Parts Internet Distribution Services. Developing a process model for initiating and implementing an Internet service program. 4. Understanding the role of service in differentiating commodity products. the case is best taught in a second year MBA electives such as Internet Marketing. How can Arrow use the Internet to its advantage? 4. Understanding the role of Express Parts Internet Distribution Service and Arrow's use of its homepage in acquiring and retaining customers. 6. Identifying the factors that determine the success or failure of long-term collaborative customer and supplier relationships in business markets on the Internet.Given the complexity of the situation and the information provided. Understanding trends in business transactions over the Internet. Objective The teaching of the case involves the following objectives: 1. Teaching Questions 1. 7. or would you prefer that Arrow adopt a passive approach? 2. 5. 2. Exploring the difficulties involved in managing a portfolio of customers over the Internet. 3. Defining the notion of customer value and mapping its changing nature over time in a longterm relationship. What strategies should Arrow adapt to develop and maintain competitive advantage in doing business on the Internet?
. how is Arrow going to address the issue of creating value for the customer so they will select their product over their competition and the suppliers? 3. By being on an Internet-based trading system. Service Management or Business Marketing. since it deals with customer management an issue that is very important to every sales and marketing executive who deals with customers in a business-to-business context.
As the customer does not see the distributor's name. We need to get as many customers to sign on.Analysis What is your action plan? Do you recommend that Arrow be proactive and build its own web-site and conduct transactions besides joining hands with Express Parts Internet Distribution Services. Being proactive gives more control over the profile of the customers we choose to work with. By building the home page. Ordering on the site will help in getting larger and more predictable orders and the customers can be offered better prices. reduce inventory and predict the customer requirements better. Arrow will lose out on its current customers who will switch to buying parts from Express.
• • • • •
Take a Reactive Stance • • • • • Arrow will be able to add on new customers only when they are selected. It will help in reaching out to new customers in new regions. Arrow will now be a supplier to Express. or would you prefer that Arrow adopt a passive approach? Proactive vs. Reactive strategies Pursue a Proactive approach • The offer from Express could potentially affect Arrow's relationship with its current customers as they would switch to buying parts they require from Express. Actively pursuing customers improves our chances of becoming a first-tier supplier to the customer.
. Arrow will not be able to capitalize on its brand name or the relation it has made with its customers. The competition over the web is going to be more intense. Arrow will ensure that they will maintain this relationship by having a customized page for each customer. The new medium of managing customers will help to get more information on the customer.
2. It can customize pages for its loyal customers wherein they can order online. And the sales reps will run the customer-specific areas for that customer. It offers an opportunity to create a sustainable competitive advantage with its customers and suppliers.
With distributors like Express Parts using the web as another source of distribution. where they can display the different semiconductors and passive components. Online reps can be a part of every sales pitch to major customers. It can get smaller distributors to supply and deliver parts to customers on its behalf. Customers can use Arrow's web site to track their orders. As with the suppliers. Thus. it will soon be the order of the day to order online for electronic parts. By getting the customer to order online through their customized page. They will act as
. This can potentially lower the customer's price sensitivity and temptation to switch. review recent purchases and electronically page Arrow's sales representatives. so that the manufacturers can better schedule production and further reduce inventories. A group of these customers can be allocated to Field Application Engineers. With the help of the web site. How can Arrow use the Internet to its advantage? There are several reasons why Arrow should initiate the Internet trading program on its web site as well as have a presence on the site with Express Parts Internet Distribution Service. Arrow can also extend its Web site to its own suppliers. how is Arrow going to address the issue of creating value for the customer so that they will select their product over their competition and the suppliers? By allowing transactions on its homepage. with the customers ordering online. Arrow adds value to its customers both in general and in the particular features of the services it provides. Arrow can offer customers a one-stop solution to their need for electronic parts in a similar manner that Express Parts is doing currently.
1. Arrow can add value to its suppliers by generating demand for their product in new regions to new customers. Arrow obtains information about customer needs and translates that knowledge into explicit demand. including the guides that Arrow's Field Application Engineers use to diagnose problems. Arrow can post the pages of service information for their customers. it becomes imperative on Arrow's part to use the Internet to its own advantage. These specific value added services will aim at trimming the procurement costs.By being on an Internet-based trading system. In the course of monitoring its relationships with its customers. Business customers can get their own password-controlled area inside Arrow's site. Arrow builds customer value and enhances cooperation.
Once the customer starts ordering through their customized pages. Arrow can try to use the web to exchange more and more timely information with its suppliers. By being proactive. particularly the customized web pages. Customers: The mid and small-sized Original Equipment Manufacturers accounted for 56% of Arrow's sale. This can be based on the information that has been collected from the sites that the customers have been visiting on its web site and their purchase pattern. Arrow will be able to generate more demand for its supplier in terms of new products. 4.be it in case of searching for information on a product/design or a purchase.
. 3.they need the distributors to win business in their commodity products to help them grow and gain both profit and market share and they need them to represent their new technologies and products to the customers. Arrow can also learn a lot about its customers by watching how they use the Web site. the customer can be sent information regarding the same. new markets and getting to help customers design the suppliers' new proprietary devices into their products. With its direct model giving it a clearer view of actual sales. they will start designing new proprietary devices that are offered on-line. With the help of the Internet. This can be followed by a visit by the Field Application Engineer along with a Field Sales Representative. What strategies should Arrow should adapt to develop and maintain competitive advantage in doing business on the Internet? Suppliers: The suppliers have two fundamental needs . The Internet solution for ordering online through customized pages will attract the large OEM's. Once they have information on the customer of a requirement . Arrow sales reps can monitor their customers' browsing for potential problems or prospects. Arrow generated demand by helping customers engineer end products and making Arrow's suppliers' chip integral to these designs.technical support for the sales force when customers want detailed design assistance or problem solving on specific product design issues. with the end consumer reaping some of the savings. That will help customers to reduce on their procurement cost. where suppliers can "see" their products being purchased. There is a switching cost associated with this process. It will be able to quote a better price because of its better inventory management system. which will help pass on the cost benefit to the customer. Arrow can now look at the large OEM's as well. Online purchase will help in reducing the inventory costs. Arrow's web site can be used to its advantage. It is also very critical to help customers design the supplier's new proprietary devices into their product. Arrow can predict the demand and market the new proprietary devices to the customers. Arrow can manage a low inventory. Therefore Arrow will be at a competitive advantage against its competitors. The goal is a "virtual" corporation. And better forecasts can help its suppliers shrink their inventories as well.
The central question is whether Arrow should join Express Parts Internet Distribution Service or to start transactions on their homepage. and they now have much better information about what their customers want to buy. the finished goods inventory is dramatically reduced. You can also have a forum that brings users together to talk about their views of the electronic industry. Theme 3: The instructor needs to get students to recommend the strategies that Arrow should adapt to get a competitive advantage in doing business on the Internet. The fixed assets are reduced as operations are streamlined and fixed infrastructure declines. Teaching Strategy In order to facilitate a proper analysis of the wealth of issues discussed in this case. Finally. how Arrow adds value to its customers and suppliers. Theme 2: The next part of the discussion focuses on the role of Arrow as a distributor. This site could be made accessible only to the suppliers. precisely in the way they want-an element of customization which provides a much better use of assets. the instructor might want to break the discussion into several themes. By linking the suppliers and the end users together.
. The key benefits that can come from a system like this are tuning one's business to exactly meet customers' needs. It can build an additional service to encourage the customers to exchange information about the products and designs they use. This site will provide them exact information about Arrow's requirements and allows them to see their quality results in real time. Theme 1: The best place to start this case is with an action plan. This can be extended to building a two-way relationship over the web with both the customers and the suppliers. This will help to build an onlinecommunity. there could be a closer collaboration with the suppliers.The online customized pages help Arrow to understand the customer's needs better and therefore serve them better.
and distribution of HASP and Hardlock. This note was prepared by Professor Das Narayandas with the assistance of Research Associate Sara Frug for the sole purpose of aiding classroom instructors in the use of Aladdin Knowledge Systems. What is it that a firm buys when it buys a competitor? Is it the technology. an anti-piracy hardware and software security firm.
. 598-018. customer base. relative positioning. HBS case No. As a result of the merger. Copyright © 1998 by the President and Fellows of Harvard College. had just purchased its German competitor FAST Software Security AG and the major FAST distributor in the US. Aladdin's founder. must decide whether or not and how to integrate the worldwide marketing. Yanki Margalit. Glenco. president. HASP and Hardlock each have loyal customers and distributors in ten countries. sales. and the go-to-market strategies for products vary across countries.Case 17 Aladdin Knowledge Systems Synopsis In May 1996. and CEO. Should Aladdin push HASP forward as a global brand and phase out the Hardlock name? Should they choose a primary brand for each country? Should they allow HASP and Hardlock to continue to compete against each other? Positioning Growth in high tech markets is very often through mergers and acquisitions. This case allows for a detailed analysis of the benefits and problems associated with a growth through acquisitions strategy. Used with permission. Aladdin's Hardware Against Software Piracy (HASP) now overlaps with FAST's Hardlock product offering. The case is also suitable for a Marketing Strategy or International Marketing Management course. At HBS the case is taught in the "Global Nature of Business Marketing" module of the second-year elective in Business Marketing. or a combination of all three? The case also highlights the complexities involved in merging product lines when the market shares. distribution channels. Aladdin Knowledge Systems. It provides analysis and questions that are intended to present alternative approaches to deepening students comprehension of business issues and energizing classroom discussion.
and perceptions of the channel members. buyer behavior. This discussion revolves around the data in case Exhibits 8 and 9. There is usually support for each of the strategies. The instructor can use these points to push the discussion toward specific analyses of what prompted Aladdin to buy Hardlock and what they gained in this acquisition. Understanding the motivations and complexities involved in acquiring a global competitor. One way to manage the information in the case is to break the discussion into a set of themes. and the nature of the distribution process in each market. revenues generated from each brand. Many students are likely to come up with a variant to one of the three strategies suggested in the case or a combination of these strategies. It is also useful here for the instructor to distinguish between the general reasons for deciding to acquire a competitor. Key points to tease out here include the dominant brand (if there is one). Developing a global marketing strategy to integrate an acquisition by • • • Analyzing the performance and prospects of products in the context of their individual markets. Teaching Suggestions The heart of this discussion is the acquisition of a competitor and the integration of the two competing product lines. Rather than trying to resolve that issue. Students may group
. the instructor can make the transition to the third theme by asking a question such as. Was it the customer base? Was it the product/technology? Was it the distribution channel? This is a very important point and the instructor should be patient in getting the various points of view. Assessing the needs of newly acquired customers. 2. "There are various views on what it is that Aladdin bought when they acquired HASP. There will be a need to understand the product. and the selection of a specific target. Theme 1: As the case has a strong strategic focus. Theme 2: This part of the discussion should focus on what it is that Aladdin bought when they acquired HASP. let us decide what the acquisition decision supported when we take a closer look at the effects of the acquisition in each of the relevant markets?" Theme 3: The third theme involves a deeper understanding of the ten markets in question. Evaluating synergies and incompatibilities between product lines.
Evaluating the role of distributors in the selling process. Pushing the latter discussion. the discussion can begin with a point-bypoint argument for one of the options posed in the discussion at the end of the case.Objectives 1. market share for each brand.
an American software company that generated $50. Before the acquisition. The Competitive Angle: The market for anti-piracy software is $120 million in 1995 and is expected to grow by 20% during the next year.3 million before merger income. Aladdin was a somewhat distant second to Rainbow Technologies. the instructor needs to go back to the action plan and take a closer look at what Aladdin needs to do going ahead. Theme 4: At this point. Theme 5: The instructor may choose here to speak about the short-term and more long-term effects of the acquisition that are not covered in the case. which can also work so long as the relevant distinctions are kept clear. and the importance of forming a viable long-term strategy.like countries together and analyze that way. Who will be affected by the acquisition? What synergies do you see in this acquisition? 5. 4. Why did Aladdin buy FAST? There are several ways in which this issue can be answered. Why did Aladdin buy FAST? 2. The main issue here is the balance between the pressure to respond to the short-term demands of the stock market. Rainbow is rumored to be in merger discussions with the number four competitor. Who are the customers for each product? How do they buy these products? How does this affect the nature of the customer acquisition and retention process? 3. From here. How do HASP and Hardlock measure up on a country-by-country analysis? 6. Such a purchase could put Aladdin even farther behind in overall market share and
.8 million in software sales in 1995 compared to Aladdin’s $11. Software Security. Inc. the instructor can push the discussion to the more detailed development of Aladdin's marketing strategy for the future. Assignment Questions 1. What is your plan? How should Aladdin go about merging its business with FAST? Should it phase out Hardlock? Analysis 1.
(Case Table B gives the National Software Testing Laboratories test results for HASP. The choice of FAST over other competitors: The second phase of the decision involves choosing the particular competitor to acquire. Margalit points out that this was not an easy sell. as evidenced by the slowdown in growth during the past year. the acquisition of FAST makes Aladdin the share leader in Europe. The second argument is product based. There is also the organizational angle. Second. In most measures and overall ratings. This is not detailed in the case but some students are likely to bring it up. Finally. If Rainbow chooses to purchase Software Security. there are some that see the software security market maturing. FAST has a significant customer base that Aladdin has access to through the acquisition..) The third argument is one of manufacturing and development efficiencies. FAST also provides Aladdin access to the German market and enhances Aladdin’s position in the US market. Inc. attempting to preserve market share against the threat of the market leader. there might be an opportunity to benefit from scale economies once the two lines are merged. coming closest overall to HASP’s ratings. Who are the customers for this product? How do they buy these products? How does this affect the nature of the customer acquisition and retention process? Customers that buy software security products are firms that sell relatively expensive software
. This process is detailed in the comments of Margalit and others toward the end of the case. Margalit considers the latter product offerings to be weaker. Students will argue that customers are unlikely to switch vendors and hence provide a captive market for future sales.) 2. Instead of picking the number-three competitor in US market share. Software Security’s management team is not as well aligned with that of Aladdin. Hardlock. Three types of arguments are used here. They will suggest that although the products are different. they believe the smartcard technology and license management would have been better areas for investment. some students will wonder about the fact that it is an Israeli company buying a German firm (In the video.the US market in particular. In addition to shoring up Aladdin’s number two stake in the US market. The case also presents several reasons against the decision to acquire FAST. In comparing FAST’s Hardlock with Software Security’s UniKey and Activator lines. In the case. The decision to purchase a smaller competitor is thus presented here as a reactive stance. Aladdin elects to go with the firm with a broader base. and Activator. Hardlock exceeds Activator’s performance. Aladdin’s overall competitive position will not be altered tremendously – it will remain second in the US market and first in Europe. First. Margalit points to the cultural fit between Aladdin and FAST. The fourth argument is customer/market based. insofar as each firm has an entrepreneurial culture and young management teams. The first is an argument based on the market share analysis presented above.
once installed. customers rarely mixed security technologies from several vendors since. the program could check whether the correctly coded HASP key was connected.and that are interested in protecting their revenue streams. The software developer who purchased the hardware and licensed the software would insert “checks” for the HASP key into the source code so that when the system was running. technical specialists evaluate alternatives. to capture this issue. dongles could not easily be retrofitted to fit alternative programs. The security product delays the rate at which software is going to be pirated – it does not eliminate piracy completely. The software security customer base is composed of approximately 70% software publishers and developers. Purchasers generally choose between two product lines and rarely mix technologies because of compatibility problems. presidents and sales managers make the decision to purchase software security. As mentioned in the case. like the one below. 15% vertical market software developers. As mentioned in the case. by installing the upgrade a customer changes the insides of the lock and changes the combination key that opens the lock. The instructor could use a diagram. In small firms. This is where the upgrades become important. upgrades extend the useful life of the product. Price was a very important factor since it was not passed on to the end customer.
It should be noted that the customer does have to make some adjustments to their software system that integrates their product with the chosen vendor's products. while in large firms. Thus. and 15% multinationals. then they will have to supply the new dongle to all their customers that buy the upgrade – a cost that their customers might not be willing to pay for and an expense that the firm might not be willing to
. If the customer chooses to switch products when introducing an upgrade. Sooner or later someone is going to break the code and render the security system useless.
If Aladdin wishes to keep these customers. The two products could theoretically address the needs of similar customers. distributors and customers. is usually positioned as the value product.
. From this analysis. Having developed customers for the Hardlock product. For example. Where the products differ is in their positioning in the various markets. it in unlikely that a customer is going to switch vendors once the initial decision has been made. with HASP prices ranging from $20 to $100 per unit. it should be possible to cut the real difference further. unless Aladdin develops a clear cut product market plan and communicates this quickly to customers and distributors. and given anticipated reductions in manufacturing costs for Hardlock. unless the firm takes quick actions. It is also possible that they approach other competitors of Aladdin and try to sell competing product lines. HASP. it stands to lose a significant portion of the investment it made in acquiring FAST. There are several reasons that need to be understood here. 4. price is clearly flexible. It is possible that they lose interest and stop supporting the product. one issue to focus on here is the somewhat precarious position Hardlock customers are finding themselves in at the moment. with prices running about 20% higher than those for HASP. they must convince Hardlock customers that their interests will be protected and that the firm will be there for the long haul. they may now be hearing from Aladdin’s competitors that Hardlock may disappear. In summary. FAST employees can get disenchanted and leave if they get the feeling that the FAST product is not going to be supported in the future by Aladdin. What synergies do you see in this acquisition?
Both HASP and Hardlock are at the high end of software security. Thus. Having invested in a software security system. these distributors will be staring at the prospect of losing their customers to their competitors. Who will be affected by the acquisition?
The issue is more serious for FAST employees. with Hardlock enjoying a reputation for the sophistication of its dongle and HASP reaping the benefits of technological advances and a highly reliable manufacturing process. In countries where there are distributors for both products. FAST distributors are likely to think that they will lose the franchise. they are unlikely to switch. it becomes clear that customers that have invested time in evaluating different software security products and chosen to use a specific product. There is a chance that customers might consider switching products when introducing new products. 3. The same line of argument holds true for distributors. Both products are considered to be of excellent quality. Hardlock has a reputation as more of a premium product. Finally.absorb. Nevertheless. earning the highest marks in independent product tests.
and Hardlock sales alone comprise nearly 20% of the combined firm’s total revenues. the Israeli market is heavily dominated by HASP which is distributed directly through Aladdin. On the other hand. Aladdin’s primary investment in the Italian market is in maintaining the presence of local manufacturing assembly of HASP products. If software security products were completely interchangeable. Italy Hardlock outsells HASP in Italy two to one and has a strong. Countries dominated by HASP: Israel As Aladdin’s home country. then purchasing a competitor would mean purchasing a manufacturing apparatus and distribution infrastructure that could be assimilated into the company to increase efficiency and therefore market share by increasing ability to offer a low price. and customer management. Hardlock’s reputation is primarily one of quality. HASP distribution is weak.
. whereas HASP’s is primarily one of value. The market share for HASP can be measured at between 8% in revenues and 16% in units sold. forward-looking distributor. and the concentration of high-tech firms suggests that the market will remain stable if not increase. Although the list price for both is similar. Hardlock’s market share is 6%. the nature of the acquisition. HASP is often sold at a heavily discounted price through a franchised distributor. 5. Software piracy is high enough to have led to the founding of Aladdin. then the firm would be purchasing long-term customers who are likely to be very loyal if their service is maintained and are likely to jump ship if it is not.Another important point that is likely to come up here is the relationship between the nature of the product. Countries dominated by Hardlock: Germany Hardlock commands a 75% market share of the German market. How do HASP and Hardlock measure up on a country-by-country analysis?
See TN-Exhibit 1 for sales and market share figures derived from Case Exhibits 8 and 9. if the entire value to the customer were in the value added by the manufacturer and distributor. In the German market.
the high rate of software piracy in France compared to the rest of western Europe makes it a potentially lucrative market. boasting greater compiler and operating system compatibility and outselling Hardlock four-to-one.
. With its purchase of FAST. HASP dominates the Russian market with a 50%-60% market share. Combined US sales for HASP and Hardlock account for 43% of Aladdin’s revenues. though the high rate of software piracy in this area makes it an attractive target. Nevertheless. Nevertheless. HASP is currently positioned as the value product. purchased by Aladdin in the wake of the FAST acquisition. and both distributors are focused primarily upon other products. Russia Sales in Russia account for slightly over 1% of Aladdin revenues.Japan HASP dominates the Asia-Pacific market. and dismantling this distribution structure could require some restructuring. Countries without a clear leader: US The US market has the highest software sales of all the markets in question. Distribution for the two product lines is separate. specializes in selling Hardlock’s products in the US as well as the AsiaPacific and Latin American markets. UK The UK market is characterized by price sensitivity. Glenco. Hardlock’s market share is about 16%. with HASP providing 60% of US sales dollars. Sales in this market account for 10% of Aladdin’s revenues. positioned as a high-end product. Aladdin inherited a 50% stake in a UK Hardlock distributor. this distributor is more interested in FAST’s multimedia products than software security. HASP currently generates about twice as much revenue as Hardlock and is distributed through a wholly owned subsidiary. Using a specialized distributor. France Sales of HASP and Hardlock are nearly even in France. The wrinkle in this market is that newly acquired Glenco is responsible for Hardlock distribution in Asia. making HASP an easier sell. The US market is characterized by price sensitivity and stiff competition from number-one software security company Rainbow Technologies. Both are sold through subsidiaries. whereas Hardlock commands a price premium. with prices running 5% to 10% below those of Rainbow.
Postscript Aladdin decided to do several things. 6. Students supporting this strategy will also focus on streamlining operates and development in addition to eliminating inefficient distributors. product. if a customer calls in asking for the Hardlock product. Benelux Although Hardlock has twice HASP’s annual revenues. Existing Hardlock customers continue to be supported. This strategy is supported in varying degrees as a form of the strategy of picking a winner. they have scaled back on promoting the Hardlock product. distributors are somewhat disgruntled. Further. or even grow it by keeping the brands separate and continuing to develop and market each. HASP sales are growing 60% annually. The firm has made sure that employees in both organizations have felt no change after the acquisition. Yet. Some students will also favor HASP when the two brands are close to even in a particular country. students will recommend that Aladdin could hold onto the Hardlock business. The argument for picking a winner in each country also depends upon considerations of efficiency. since customers generally consider two options when deciding upon a software security solution. Since each brand already has its own marketing apparatus. One group of Aladdin executives argues that having a single brand would allow the firm to increase the efficiency of advertising dollars and immediately cut the costs to advertise Hardlock.retention strategy than the latter two options. six times as fast as Hardlock sales. The argument for phasing out Hardlock is made on the basis of crowding in the software security market. so either product could take off.and distributor. choosing a single brand allows for continuity while eliminating duplications of effort. The argument for marketing both products as before is based more on a customer. the firm does not try to move them towards the HASP product. The rationale behind this strategy is that one of the major aspects of the FAST acquisition is the acquisition of Hardlock market share.
. students will point out that customers are unlikely to switch products and will expect continued support from the vendor. However.Spain HASP and Hardlock are approximately equal in unit sales. Although Hardlock revenues are higher. discussed below. Finally. and distribution issues. most of the promotion is for the HASP product. several plans are usually put forward that are a combination of the strategies suggested in the case. Students will support their judgments on a combination of customer. In the US and UK market. What is your plan? How should this company go about merging its business with FAST? Should it phase out Hardlock?
Using a detailed country by country analysis.
Hardlock continues to be aggressively supported and its market share has not gone down at all.000 500 2. a year after the acquisition.4 1. Some of these HASP distributors were not interested in taking on additional lines and tried to convert customers to using the HASP line—a task that they found to be very difficult. This affected sales in the short-run. However. There has been some trouble with distributors. In some countries.200 10.000 1. The firm did combine development and manufacturing operations and was able to achieve significant savings internally.125 600 500 300 HASP Market Share (units) (000) 16% 22 85 11 20 50-60 18 5 25 12 Hardlock Revenues ($000) 11. In the two quarters following the acquisition. the Hardlock distributor either dropped the line altogether or cut back on sales effort.5 3.400 900 600 Hardlock Market Share (units) (000) 66-75% 12 6 9 5 10 7 10 25 18
Germany US Israel France Japan Russia UK Italy Spain Benelux
Hardlock HASP HASP HASP/ Hardlock HASP HASP HASP Hardlock HASP/ Hardlock Hardlock
. the Hardlock distributor sold the business to the HASP distributor.2 5.4 10 1.4 2.575 1. most of the issues had been ironed out and the firm began to record significant increases in profitability.350 150 1.625 2.100 175 1.717 117 400 480 50 460 367 80 87 % Total Aladdin Revenues 23% 43 3. Market Total Market (units) (000) 500 2.050 1. In several small country markets where Hardlock was weaker. earnings dropped and Aladdin stock prices fell.Hardlock employees have been assured that there will be no change in the support and commitment.575 5.5 Dominant Brand HASP Revenues ($000) 2. Exhibit TN-1 Country by Country Analysis The following chart summarizes information given in and derived from case Exhibits 8 and 9. In Germany and Italy.7 5.400 14.