You are on page 1of 11

Key Account Management Practices of Small Firms in Dakshina Kannada and Udupi Districts: An Exploratory Study

Abhishek Singh1, B Shashidhar Reddy1, B Nagabhushan Rao1, Prashant Mallya1 and Gururaj Kidiyoor2
Emphasis on Customer Relationship Management in recent years has broadened the scope of Key Account Management (KAM) and increased its complexity. Previous researches have focused on various issues covering strategy, process, implementation, performance metrics and organization structure for KAM. However, the treatment is mostly generalized (in some cases specific to B2B) and lacks sector focus. This paper aims to highlight KAM initiatives and practices among small firms in Dakshina Kannada and Udupi districts given their constraints in size, resources and competence. The study explores the linkage between the elements of KAM framework with practices of small firms.

INTRODUCTION Key Account Management is concerned with initiatives taken by a selling firm towards maintaining mutually beneficial long term relationship with few of its select buyers. McDonald et al (1997) explain KAM as an approach adopted by selling companies aimed at building a portfolio of loyal key accounts by offering them, on a continuous basis, a product /service package tailored to their individual needs. Maister (1999) refers to KAM as giving special attention to high quality clients that meet pre-established criteria. Kempeners and van der Hart (1999) define KAM as process of building and maintaining relationships over an extended period, which cuts across multiple levels, functions, and operating units in both the selling organizations and in carefully selected customers that contribute to the companys objectives now or in the future. KEY ACCOUNT MANAGEMENT PROCESS AND FRAMEWORK The process of Key Account Management involves identifying buying firm for account management using predefined criteria, understanding of the buying process of such accounts, developing buyer seller relationships and sales coordination. (Cespedes, 1989). Though the selling firms objectives are supposed to drive account selection, the criteria for defining an account as a major account have also been arrived by purely looking at buyer characteristics such as high volume purchases, involvement of several persons in buying, centralized purchase, desire for a long term cooperative working relationships and

1 2

PGP I Students, TAPMI Faculty, TAPMI

68 Abhishek S, B. Shashidhar R., B. Nagabhushan R, Prashant M.,Gururaj K

expectations of specialized attention and service.(Colletti and Tubridy, 1987, Nepolitano 1997).

Figure-1 Buyer Characteristics Size, Nature, End Market Selection Criteria Volume Profit Cost to serve Prestige Growth

Buyer Readiness Attentive Articulate Evaluation

KAM Program

Seller Readiness Orientation Skill, Consequences

Buying Process Buying Centre Orientation Decentralization

Structure Adaptation Incentive Investment

Effectiveness Measures Objective Measures Subjective Measures

Key Account Management has been researched from the perspective of its implications to functions such as sales (Colletti et al, 1987) and staffing (Kempeners 1999). Cespedes (1989) discusses about the criteria for account selection and Nepolitano (1997) highlights the need for and benefits of Key Account Management. The different stages in buyer-seller relationships under Key Account Management have been discussed by Homburg et al (2002) and
Compendium of Research Papers

Key Account Management Practices of Small Firms 69

McDonald et al (1999). Spencer (1999) points towards the strategic dimensions of KAM and switching costs in key accounts have been studied by Sengupta et al (1997). Buyers perspectives on account management have been studied by Sharma (1997) and Pardo (1997). Though an integrated framework is not available, based on the research work carried out in different areas of KAM, a framework is given in Fig-1. The framework provides a comprehensive landscape by integrating relevant variables such as buyer characteristics, buyer readiness, buying process, seller readiness, selection criteria, KAM programme, structure and effectiveness measures. Each variable is explained below -

Buyer Readiness:
No matter how eager the seller is to treat and develop a customer as key account, unless the customer is also prepared for the same, there is a very thin chance of its success. Key Account Management is accepted by customers as long as it does not generate additional constraints and when it brings a real and tangible addedvalue (Pardo, 1997). Not all buyers desire long-term relationship with their customers and the buyers who are ready can be judged from the degree to which a buyer is capable of articulating specific requirements, the degree to which he is capable of appreciate the initiatives proposed, and the degree to which he is attentive to the seller offering the KAM program. Bonner et al (2005) have conceptualized buyer attentiveness as the degree of attention directed towards a manufacturer relative to other manufacturers. Buyers would also be able to articulate specific requirements only if there is a perceived gap in their relationship with the sellers and the buyers are able to articulate this gap in those terms that can be translated as deliverables by a seller. Customer Characteristics & Customer Buying Process: Customer characteristics and buying processes have a direct impact on whether they are ready for account management or not. Research has shown that large organizations prefer key account management as compared to small organizations (Sharma, 1997, Cespedes 1989). On the other hand Government who is a large buyer may not see any value in KAM as its buying is highly formalized. Certain firms do not perceive specific advantage linked to the special treatment they receive. They see supplier as an actor who is not interested in tackling the real problem. Firms of this type are usually found in industries where hard price competition prevails (Pardo, 1997). Customers whose markets are volatile and whose customers are demanding may prefer key account management more than customers operating in stable markets. Customers buying orientation can be adversarial where the sellers are seen as adversaries and each selling situation is viewed as zero sum game. Such customers will not be receptive to KAM initiatives. Similarly customers who have decentralized buying in their multiple departments / locations would be less prepared to accept long term relationship with one vendor as compared to a buyer with highly centralized purchasing.
Compendium of Research Papers

70 Abhishek S, B. Shashidhar R., B. Nagabhushan R, Prashant M.,Gururaj K

Buying centre composition also plays an important role in assessing a customers leanings toward KAM. Research has shown that when more persons are horizontally involved in the purchase decision, KAM is preferred. (Sharma, 1997) and similarly research has shown that when a product is critically important to a buyers operation, the buyer is likely to open the purchase process to new vendors as well as the incumbent.(Heide & Weiss, 1995 ) Selection Criteria & Seller Readiness: Not only the buyer but the seller too needs to reach a state of readiness for KAM. KAM requires immediate investments for return at a future date. This involves risk and therefore if the managers are risk averse, productive investments are likely to be lower (Jacques-Bernard Sauner-Leroy, 2004). KAM STRUCTURE & PROCESS Three aspects have been identified under the structure and processes part for Key Account Management seller adaptation, incentives to customers and customer investments (Sengupta, 1997). Seller adaptation is concerned with adaptation in products, policy, systems and organization. Internal integration and co-ordination, team selling, control, evaluation and compensation as proposed by Narakesari and Cannon (2002) also fall under seller adaptations. Kempeners (1999) have proposed a decision making model for organization structure for KAM. Incentives are what the seller gives to the buyer in terms of discounts, push money, special allowances etc. and investments are those which the seller makes in terms of hard assets (plant , machinery ) keeping in mind only the key account. This would mean that these investments become useless if the customer is lost. Such investments are called transaction specific investments. KAM EFFECTIVENESS Most of the literature on Key Account Management focuses on quantitative measures for effectiveness for the selling organization. Typical measures listed are additional sales volume or maintenance of existing sales volume, increased profits per customer, share of sales at specific accounts, account conversions etc , (Colletti 1987, Nepolitano 1997). Researchers also have shown qualitative measures being deployed as well such as effective execution of account plans, ability to co-ordinate field sales, quality of the overall account management program etc. However, the most important measure would be how satisfied the buyer is with the sellers account management program. Sengupta et al (1997) term the ability of an account management program with regard to meeting of the buyers objectives, continuity and satisfaction as KAM subjective performance and they associate this positively with the switching costs being perceived by the buyer firm.

Compendium of Research Papers

Key Account Management Practices of Small Firms 71

SMALL SCALE ENTERPRISES AND KEY ACCOUNT MANAGEMENT Small business are well recognized and acknowledged worldwide as vital and significant contributors to economic development, job creation, and the general health and welfare of economics both nationally and internationally. The small business sector represents a statistically significant proportion of the world economy. In India small scale industrial units are defined as those engaged in the manufacture processing or preservation of goods and whose investment in plant and machinery (original cost) does not exceed Rs.10 million. This includes units engaged in mining or quarrying, service and repairing of machinery. Ancillary units whose investments in plant and machinery do not exceed Rs.10 million are also considered under small scale units. As per the Annual report of the Ministry of Small Scale Industries, Government of India 2001-2002, the number of small scale units in India was estimated to be close to 3.5 million, employing about 20 million people. Also during this period the value of production by the SSI units was estimated to be over Rs.6,900,000 million. The perceived benefits associated with small sector are that the small firms are less capital intensive and generate more employment for the local populace. They also meet local demand for a large variety of items. The decision making in small scale firms is much faster due to absence of hierarchical structure. As most of the units are run by the owner managers a very high degree of flexibility exists and the response is perceived to be much faster as compared to large organizations. However not everything is attractive about small firms especially in India. The Government has declared some items reserved for the small sector but post liberalization, the list of items has shrunk drastically. Out of the 811 items originally reserved for the small scale sector, only 169 items remain exclusive to small firms and rest can now be imported under Open General License (OGL). Large units are also allowed to manufacture these reserved items provided they export 50% of their produce over a period of three years. Hence technically speaking there are no products exclusive to the SSI anymore. Given the constraints they operate in, it is argued that evidence of KAM practice can be found among small firms even though they may not have formal programmes. Small firms have limited geographical coverage as compared to large firms who have national presence. They mostly cater to local demand and hence it is important for them to retain and develop existing customers. Their target market is limited in size and they have to make the best use of this limited size. New customer acquisition is a costly affair and hence especially when one is operating with limited resource, an existing customer becomes even more valuable. In India where infrastructure is poor small firms would find it difficult to effectively serve dispersed markets and hence the focus would be effectively serving few customers who are in concentrated geographical markets. However, dependence upon narrow range of customers or dependence upon a single or small number of customers is clearly a major element affection survival and nonCompendium of Research Papers

72 Abhishek S, B. Shashidhar R., B. Nagabhushan R, Prashant M.,Gururaj K

survival (Mujumdar, 2003). The choice of customers should be very judicious to get the best advantage out of the operation of a small industrial unit. Hence small firms need to have a suitable plan to serve this handful of key customers. A selection criterion is a tricky issue for SSI. It is mentioned earlier in this paper that large size buyers prefer KAM. These are the ones who are less profitable. Given the lower bargaining power of SSIs, it would be better to target medium scale buyers than large ones. Going for long term growth buyers again depends on the growth orientation of the owner-manager. Management of prestige accounts is a challenge that requires a great amount of planning and strategy. Selecting clients whose cost to serve is less is a good option for small firms but for this, the firm needs to have a good costing system in place. Management is another major problem with the small firms India. (Desai, 1999). Most of the units are run by owner managers and success depends on the earnestness with which the owner manager applies himself/herself to learn and to apply what has been handed over to him/her as well as what has been learnt through own experience. The approach is not very scientific. Owner managers perform multiple jobs that cut across several functions without possessing adequate functional skills. In small business the orientation of the owner manager is considered very important in the actions taken. A key distinguishing feature of the pro-growth small firms is a balanced alignment of the owner-managers intention, the abilities of the business and the opportunity environment (Morrison et al, 2003). RESEARCH METHODOLOGY This section reports on the research methodology underlying our investigation. Research Design and Data Collection The modestly understood problem under scrutiny called for an exploratory research design. The assumptions and haunches about certain factors of key account management are reflected in the framework given above (Fig1). Personal interviews with select number of small firms in the two districts were found to be adequate to capture a cross section of small businesses and their key account management practices mainly with regard to criteria and structures. This study does not aim to study all the KAM variables mentioned in the framework but focuses on small firms basis for account selection, the structural adaptations within the firm, the expectations from key customers and perceptions on relational benefits. Interviews were conducted with CEOs or owners of nineteen small firms. These people were considered reliable sources as in small firms they are directly involved in line function and are hence in a position to articulate better. These firms were of different of proprietary, partnership or private limited types and most of them had an annual turnover of less than Rs.3.00 crores, Out of eighteen only three firms exceeded a turnover of this figure. Even in terms of investment in plant and machinery, these firms were small . Only one firm out of the
Compendium of Research Papers

Key Account Management Practices of Small Firms 73

eighteen exceeded plant investment of more than Rs. 5 crores. Most of the firms were more than 5 years old. In fact the average age of these firms was more than eleven years (11.27 years) which indicates that most of the firms had considerable experience as small firms and they continue to be small at present. Data was collected through in-depth interviews with prior appointments. The focus in these interviews was on factors such as KAM criteria, structure and the perceptions about key account management. All interviews were transcribed in a manner suitable for further categorization and analysis. Data on KAM criteria was in terms of reasons for certain customers being considered important and the focus variable chosen for relationship. As regards to structure, data was collected on actors involved in ongoing transactions with key accounts. The variable with regard to perception about KAM was in terms of awareness and perception on relational benefits. Analysis & Interpretations All the firms studied are located in the Dakshina Kannada and Udupi districts and had significant number of longstanding customers. They all had some form of account management practices existing in their firms. The study focused on account management variables in these firms with focus on selection criteria, structure, expectations and perceptions. 1. More than 60 % of the business came from regular customers for most of the small firms. Obviously these customers have been considered important by small firms due to the fact that they depend on these customers for survival. Regular customers have been identified as frequent buyers, one who keeps coming back and who understands our policy, and these type of customers form 60% of the customer population. However not all these regular customers are considered very important. Half the firms considered 30-40% of the regular customers as not being very important. This shows that there is some mechanism or yardstick through which small firms segregate regular customers. However data on non regular customers who are considered important was not collected. 2. It was not surprising to note that almost all small firms did not know about Key Account Management. They admitted not having heard about it even though elements of account management practices could be seen in their firms. Hence account management has been an evolutionary process for these firms. It also seems to be more transaction type rather than strategic. Though firms perceive that their own growth opportunities with key accounts are high, the account management programs were more deal centric. 3. Only two firms had dedicated sales persons to handle key accounts. Otherwise when key accounts are being handled by sales, it is by sales persons who handled all other types of customers. This shows a lack of
Compendium of Research Papers

74 Abhishek S, B. Shashidhar R., B. Nagabhushan R, Prashant M.,Gururaj K

forms structures for KAM. Given the constraints of size and skill set, it would be difficult to have a formal structure for KAM. Small firms face problems of less manpower, high employee turnover, and lack of competence. Training in such firms is seldom not given priority due to cost implications and resources not being available. 4. Another reason why sales persons did not handle key accounts is that in small firms, owner managers handled such accounts directly. Regular customers who are important are too precious and need to be handled by the directly by the CEO. Another reason for this could be the fact that from the key account, the person who interacted with the small firm is the owner-manager and hence the reason for even level marketing. Though from the selling firm, the owner managers interacted with people from different departments such as purchase, design and logistics, at the buyer firm, the reciprocating did not cut across departments. From the selling firm, only the owner manager is preferred as the contact point by the key account. This shows that when it comes to account management in small firms, the seller firm seems to be more interested in cross sectional information than the buyer firm. Another possibility is that small firms are quite discrete in information sharing with their key accounts and hence only the owner manager is positioned as the contact point. 5. Most of the small firms perceived that the relationship benefits were enjoyed by both the parties. A couple of firms were of the opinion that it benefited only them and not the buyers. This comes across as an unusual observation as it is also more plausible that small firms perceive that they are being exploited by key accounts on account of size imbalance and such perceptions can compel the seller organization to adopt highly defensive strategies. This is not an ideal setting for long term relationships as there are chances that appropriate level of transparency may be absent due to any party perceiving that it is being exploited by the other. However, evidence of an open sharing of information is also not seen in the study. 6. Though customers have been identified as important by small buyers on strategic variables such as growth opportunity, credibility and competitive edge, when it comes to choosing key account, the criteria has been in favour of sales and profit potential with gaining of competitive edge taking the back seat. This seems to have been influenced by current deliverables by the sellers for their key accounts. Better prices and priority in deliveries dominate among other things such as product customization and after sales service in the list of deliverables. This means that though relationship benefits are perceived at strategic level, the deliverables, as mentioned earlier, tend to be transactions oriented

Compendium of Research Papers

Key Account Management Practices of Small Firms 75

Quite often, marketing is quoted as a major problem area for small firms (Vasant Desai 1999). Marketing in small firms is seldom at a disadvantage on account of problem related to product such as poor design, quality and finish. However problems directly related to marketing also seem to be plenty. Low brand equity of SSI brands is often quoted as a problem but how relevant it is in business markets is questionable. However a major marketing problem with small firms seems to be the low bargaining power they have with their customers. Their own small size becomes a barrier while dealing with buyers who are large and hence enjoy a better bargaining power. Some small firms are so dependent on one or very few large customers that they are compelled to meet even the most unreasonable demands by them due to the fear that these customers will be lost if their demands are not met. This is the main reason small firms frequently encounter delayed payments, infrequent orders and communication barriers from their customers. In the absence of any significant power, the strategy adopted by most of the small firms is defensive (Reeder & Reeder). DISCUSSION AND FUTURE RESEARCH The observed findings deserve some further comments. As shown by the study, Key Account Management practices exist in small firms though not in a formalized way. These firms need not necessarily adopt structures, selections criteria, performance metrics and have perceptions about account management programs in a manner similar to large firms operating in the organized sector. In fact the model and the framework for KAM could be far different for small firms with different variables coming into play and existing variables having a different impact. Buyer readiness would have to be studied in greater detail because for those firms seeking long term relationship with vendors, the size and soundness of vendor firms would be important from strategic point. Firms that would like to exploit the size advantage with small firms are not suitable for KAM from the perspective of selling firms. On the other hand small firms may not be perceived as potential partners by the firms that are looking at collaboration rather than exploitation. This is a paradox within which small firms operate. KAM programs are successful when there is information sharing by both parties. As seen in the study, this seems to be a problem area for small firms. The variables that affect trust and commitment for small firms is another area for research. Socio cultural factors have been observed to have an impact on relationship building and networking (Wai-Sum Siu, Wenchang Fang and Tingling Lin, 2004) and such factors typical to Dakshina Kannada and Udupi districts can be linked to trust variables for account management. This study has not considered switching costs faced by the seller towards the buyers. Any transaction specific investment made by small firms towards maintaining relationship with a single buyer (these investments would be of no use if the relationship is terminated) would create a situation of economic lockCompendium of Research Papers

76 Abhishek S, B. Shashidhar R., B. Nagabhushan R, Prashant M.,Gururaj K

in to the seller and in some cases moral lock-in to the buyer. The perceptions about such investments and type of investments seen in small firms would throw some light on the owner-managers attitude towards risk. Similarly studies on dissolution of relationships in account management particularly in small firms would help establishing performance metrics specific to small firms. The relationship between the satisfiers (outcomes) and dis-satisfiers and the interplay between the two would help in exploring the necessary and satisfactory conditions for account management in small firms. REFERENCES Morrison, A., Breen J., & Ali S. A Small Business Growth; Intention, Ability and Opportunity. Journal of Small Business Management, 41(4), 2003. Cespedes, V. 1989. Managing Major Accounts. Boston: Harvard Business School Publishing House. Colletti, J.A & Tubridy, S. 1987. Effective Major Account Sales Management, Journal of Personal Selling & Sales Management. Desai, V. 1999. Issues, Problems & Perspectives, Small Scale Enterprise. Vol.12. New Delhi. Himalaya Publishing House. Heide, J.B. & Weiss A.M. Vendor Consideration and Switching Behaviour for Buyers in High - Technology Markets. Journal of Marketing, 59(3), 1995. Homburg, C., Workman J. P. & Ove. J. 2002. A Configurational Perspective on Key Account Management. Journal of Marketing. Jacques-Bernard & Sauner-Leroy. 2004. Managers and Productive Investment Decisions: The Impact of Uncertainty and Risk Aversion. Journal of Small Business Management, 42(1). Kempeners, M.A., & Van der Hart Hein, W. 1999. Designing Account Management Systems, Journal of Business and Industrial Marketing, Vol 14 No.4. Kjell Gronhaug, Inge Jan Henjesand & Koveland, A. 1999. Fading relationships in business markets: an exploratory study. Journal of Strategic Marketing, 7, 175-190. Maister, D. H. 1999. Key Account Management. The CPA Journal. McDonald, M., Millman, T. & Beth, R. 1997. Key Account Management Theory, Practice and Challenges. Journal of Marketing Management, Vol 13.

Compendium of Research Papers

Key Account Management Practices of Small Firms 77

Mujumdar, S. 2003. PhD Thesis on Small Scale Industries 2003. Napolitano, L. 1997. Customer Supplier Partnering: A Strategy Whose Time Has Come, Journal of Personal Selling & Sales Management , Fall 1997, vol XVII, No.4. Narakesari, N. & Cannon, J. 2002. Relationship Marketing and Key Account Management. New Delhi: Response Books. Pardo, C. 1997. Key Account Management in the Business to Business field: The Key Accounts Point of View.Journal of Personal Selling & Sales Management, 4, Vol XVII. Reeder, R., Reeder, B. & Brierty, E. 2002. Industrial Marketing Management Analysis, Planning & Control. New Delhi: Prentice Hall India Sharma, A. 1997. Who prefers Key Account Management Programs? An Investigation of Business Buying Behaviour and Buying Firm Characteristics, Journal of Personal Selling & Sales Management, 4, Vol. XVII, Fall. Spencer, R. 1999. Key Accounts: Effectively Managing Strategic Complexity. Journal of Business and Industrial Marketing, Vol 14. No.4. Wai-Sum, S., Wenchang, F. & Tingling, L. 2004. Strategic Marketing Practices and the Performance of Chinese Small and Medium Sized Enterprises (SMEs). Taiwan: Entrepreneurship and Regional Development.

Compendium of Research Papers