HARVARD CASES

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.

1* 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.

2 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?

The various comments supporting proactive and reactive positions are as follows:

Proactive vs. Reactive NA Strategies Pursue a Proactive Approach to the NA Program Take a Reactive Stance in the NA Program

In addition to the issues listed above, students will also focus on numbers to justify their arguments for either a proactive approach or a reactive one.

Haley's aggressive growth plans for WESCO depend upon substantially increased revenue from the NA program. Key NA customers can ramp up revenues very quickly.

Key NA customers allow us the best margins when including costs to serve in the calculation (Exhibit 5).

The NA program has a lot to offer customers in heavy process industries (Exhibit 13).

Larger and more predictable orders are more economical for suppliers and allow WESCO to obtain better prices.

Consolidation in the EES industry has made competition fiercer. We need to get as many customers as we can to sign on.

Being proactive gives us more control over the profile of the customers we choose to work with.

Actively pursuing customers improves our chances of becoming a first-tier supplier to our customers, which should, in turn, improve our margins.

Taking a reactive stance could cause us to lose out on the business of potential key customers being pursued by our competition.

The NA program is only highly profitable when fully implemented. In the middle stages, the costs to serve are very high.

The NA program is pitched to headquarters. Local branches uninterested in the corporate bottom line can sink implementation.

Pushing the NA program could alienate contractor customers by ignoring them or even competing against them.

If the prospecting and selling phases of the NA process could be cut substantially, NAMs would have more time to work on implementation and maintenance. The selling process could be directed at consultants in order to increase demand for the program.

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.

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.

Roy Haley states his revenue and profitability goals for the company. By the year 2000, he wants revenues to have grown by $725 million and profitability by at least 60%.

Extrapolating from the figures given in Exhibit 2, and assuming no seasonal differences in purchasing patterns, we find existing rates of growth of approximately 19% for key customers, 15% for focus, and a decline of 1 % for other NA customers as follows:

Key : 89*12/5 = 213.6 (213.6 -180)180 = 18.7% Focus : 25 * 12/5 = 60 (60 - 52)52 = 15.4% Other : 14*12/5 = 33.6 (33.6 - 34)34 = -1.2 %

Under this scenario, assuming the average level of growth from the other segments (as shown in case Exhibit 5) amounting to $192 million, this leaves a need for $266.5 million through business acquisitions and $266.5 million in NA growth. This means that WESCO needs to double its current NA revenues in the next three years in order for Haley to meet his targets.

Based on the current levels of growth, the NA program would reach the $476 million level by the year 2000, falling short of the goal by over $50 million. More importantly, if each type of customer continues to generate the current average revenues for their category, then this scenario means expanding the number of NA customers to 525 from 300. Using the current NAM customer loads, this means that WESCO must add 12 new NAMs to its team. Given the difficulty of finding suitable NAMS, this may be difficult. Further, the NAMs are already quite heavily committed, so the estimate must be considered conservative.

The instructor might want to capture these numbers as they come. However, there is little value gained by getting into further discussions of the numbers at this time. It is better to come back to them at a later point in the discussion.

Once some or all these points have been addressed in the discussion, 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. Why don't we take some time to understand the role that WESCO plays in this supply chain. 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. In general, as a distributor, WESCO allows EES suppliers to sell to customers too small to purchase directly from them. By offering customers products from numerous EES suppliers, WESCO increases the probability of a good product-customer fit by helping the customer to find the product that most exactly fits their requirements. In its specific initiatives, WESCO adds value to its suppliers by generating demand for their products. In the course of monitoring its

relationships with its customers, 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. (Case Exhibit 7 provides a schema for this process.3)

As with its suppliers, WESCO adds value to its customers both in general and in the particular features of the services it provides. As a distributor, 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, in volumes appropriate to their size. Under the NA program, WESCO offers specific value added services aimed at trimming procurement costs. Without intervention, costs-to- acquire MRO products can exceed the costs of the products themselves. Inventory costs (summarized in case Exhibit 9) add to acquisition costs and bloat the total procurement cost for MRO products. In the interest of cutting these types of costs, WESCO offers inventory management and reduction initiatives that range from JIT systems to storeroom management to inventory consignment (see case Exhibits 10-11). WESCO also monitors inventory to ferret out mechanical problems and inefficient energy usage, as well as providing detailed records indicating where and how initiatives for cost reduction can help customers. Finally, by offering standardized, year-long pricing regardless of volume at a particular site, WESCO offers customers the ability to make better estimates of their MRO costs during a particular year.

At this point, 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.

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. Large industrial customers are demanding it, and they are important to WESCO.

Industrial customers currently account for nearly one half of WESCO's revenues and have ongoing and relatively predictable MRO needs. During the late 1980s, many large industrial customers demanded higher quality levels, which necessitated major investments on the part of distributors like WESCO.

2. It offers national distributors, like WESCO, an opportunity to create a unique and sustainable competitive advantage with its customers and suppliers.

Customers: The NA program builds customer value and enhances cooperation. This can potentially lower the customer's price sensitivity and temptation to switch. By constructing the intricate networks between WESCO's sales and customers' purchasing staffs required for the NA implementation and maintenance processes, WESCO can build a high level of trust and cooperation with its customers. Because the NA program can document the value it adds to 3 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. 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.

customers, particularly in its transaction cost reduction initiatives, customers are disincented from price sensitivity because haggling undermines their efficiency. Finally, the NA program builds in some switching costs. Particularly in the design of systems for inventory management, the NA program creates technical links that are far easier to continue to use than to dismantle and rebuild with a competing distributor.

Suppliers: WESCO can also use the NA program to demonstrate the unique value they add to their suppliers' offerings. The NA program creates demand for its suppliers' products in the course of NA value creation activities for WESCO's customers. In the process of conducting energy audits and the like, 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.) By engaging in these types of demand creation activities, WESCO can secure a position as a desirable distributor with which to work, overcoming some of the natural antagonism and conflict that can arise across the two levels in the channel.

3. Roy Haley sees it as an opportunity to increase the scope of WESCO's business with each of its major customers.

NA customers can each generate up to $10 million or more apiece in yearly revenues. Their demand is relatively predictable and maintenance reasonable straightforward once the implementation phase of the national account management process is complete. Haley knows that certain types of inefficiencies pervade heavy process industries such as pulp and paper and petrochemicals, so once WESCO has its foot in the door, its value proposition should be compelling. If WESCO can push NA customers through toward tiered integrated supply agreements, the program holds even more potential.

4. WESCO needs it to meet Haley's ambitious growth plans.

Haley wants to increase revenues by 30% and profitability by over twice as much by the year 2000. The only customer segment that can generate the necessary revenues at the required levels of profitability are key NA customers.

Having established the importance of the NA program to WESCO's overall growth strategy, the instructor can transition the class with the following question: "Well, the NA program is important. Also, going back to the beginning of this discussion, most of us feel that this program hasn't been very successful. 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. Specifically,

1. WESCO needs to be more selective in choosing NA prospects. Currently, WESCO does not have a process for segmenting its customer base. It has tried to use a shotgun approach to select customers as partners in its NA program.

2. After having chosen the right customer, WESCO needs to ensure proper implementation. 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. Nevertheless, the process needs to be streamlined and responsibility reapportioned.

Using the results of the study done by Piraino, we can develop a list of factors that can ensure a high degree of success. These factors are as follows:

1. Being in the customer's procurement sweet spot. Customers are interested in value as opposed to price when the purchase is of sufficient magnitude. As Piraino points out, for most of WESCO's customers, over 70 percent of the annual procurement budget is accounted for by the top five to ten suppliers. It is with these suppliers/distributors that customers are usually interested in developing a relationship based on value more than price. 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. For instance, in case Exhibit 14, imagine that the customer currently spends $12 to $15 million per year on EES needs and $100,000 on office supplies. Pursuing value over price in EES purchases could save the company upwards of $2.5 million per year, but spending time and energy on office supplies procurement will save only $20,000, an amount that is too small to attract the customer's attention, especially given the effort to achieve these savings.

2. Senior management buy-in. This issue is especially important in a bottom-up sell. An individual customer plant may be extremely enthusiastic about the services WESCO is offering, but if senior management doesn't see the benefit to the company as a whole, then implementation over the usual two dozen or so customer sites will be an uphill fight. As Piraino points out, once there is a mandate from the top, pockets of resistance in the rest of the organization are relatively easy to overcome. 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. The problem, of course, is that for a supplier of electrical components, it might be very difficult to get the CEO's attention. This is where the role of the consultant comes in.

3. Role of consultants. One way that senior management tends to become interested in MRO procurement costs is through the work of consultants. Through the nineties, 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, manufacturing, and service. 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. They may

also help the customer's organization become more conducive to change, aiding the implementation process.

4. Relationship with the local customer. Purely top-down initiatives have the reverse problem of bottom-up initiatives. 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.

5. Uniformity of needs across customer plants. NA implementation is ultimately dependent upon each distributor's branch being able to meet the needs of each customer's plant. As Piraino points out, in several less successful NA relationships, unanticipated differences in procedures and purchases across customer sites have made implementation difficult. For example, when a local plant's bill of materials turns out to be very different from the list covered by the NA agreement, the local WESCO branch has to resolve all matters locally, often with no cooperation from the local customer. The customer's corporate staff accuses WESCO of not working hard enough. 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. WESCO gets caught in the middle and its implementation team quickly loses interest in the face of implementation headaches and small potential sales volumes. Even the NAM shift focus to other accounts that might be easier to manage.

6. The customer has initiated NA programs with suppliers/distributors of other product categories. This point addresses both plant- and corporate level resistance. If the company has implemented previous NA programs, then management is usually interested in and prepared to work under such a structure, and individual plants are used to conform to top-down initiatives of this sort. The negative aspect of this factor is that the first movers might lock WESCO out of the customer site for good.

Having identified these factors, 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?"

Factors Controlled by WESCO? Can WESCO use it to Segment Customers?

Being in customer's No Yesprocurement sweet spot

Senior management buy-in Partly Yes Yes

Role of consultants Partly Yes Yes

Relationship with local Yes Yescustomer

Uniformity of needs across No Nocustomer plants

Customer has NA programs No Yesfor other products

1. WESCO cannot control a customer's purchase profile. However, this information can be used by WESCO to segment customers. WESCO should selectively pursue customers whose profile looks like that of the customer in case Exhibit 16.

2. WESCO can work with the customer's senior management and convince them about the benefits of the NA program. The reality, however, is that CEOs might not be interested or have the time to get into looking at cost savings from light bulbs and switches.

3. WESCO can develop good relationships with consultants and gain access to their customers. The issue here is that consultants, especially those that focus on re-engineering and supply chain management initiatives, might view WESCO as a competitor rather than as a collaborator.

4. Relationships with local customers are a very critical piece of the NA puzzle. This point entails a chicken-and-egg problem, however, insofar as WESCO needs the local relationships to make the NA program work, while needing the NA program to give an incentive to develop local relationships. As the case suggests, WESCO's successful NA programs have been those in which WESCO branch personnel had already established good working relationships with local customers. On the other hand, given limited resources, it remains a question whether WESCO has the time to pursue grass roots customer development. Before an NA agreement is signed, the branch personnel will tend to want to work with the customers who will make the largest purchases with the least effort. These customers are either potential NA customers or not. If not, it is unappealing

to give them up to pursue a corporate goal. As the case suggests, this is an issue even after the NA agreement has been signed.

5. Although uniformity of needs is very important, WESCO cannot control it. Further, the only way that WESCO can get access to this type of information is during the implementation stage, at which point it is too late. Otherwise, WESCO gets the information haphazardly, 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.

6. The presence of existing NA agreements is not controllable by WESCO and is an effective mechanism for segmenting customers. However, there is a downside here. If WESCO waits for the customer to initiate NA programs with other distributors, it runs the risk of the customer also asking the other distributors to manage WESCO as a second tier distributor.

Even after the discussion to this point, students may say that WESCO should get its customers to commit up-front. 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, “Are you suggesting that WESCO ask customers to invest in these relationships, and if they don't, do you recommend that WESCO drop these customers? Clearly, there need to be a lot of factors in place for customers to participate willingly in the program, make the investments, and work collaboratively with WESCO to achieve mutual gains.”

The reality is that customers get into these relationships in a gradual manner. At each stage, they are likely to look at the return on their current investments before they make any further investments in the relationship. 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. 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. 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.

It is evident to the students by now that not only does WESCO need to be selective, they also need to have a very clear implementation plan after they have been selected. However, there is still an incomplete understanding of the patterns of relationship development. The instructor can therefore direct the students' attention to the case Exhibit 5.

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.

Having drawn the three curves on the board, I have the students interpret these curves. It also helps to ask students whether the three NA segments are, in fact, three stages in the process of relationship development. There is usually a lot of support for this line of reasoning. Students will relate to this issue by pointing out that if an implementation program is not executed properly, then WESCO ends up in a situation where it has made significant investments while the customer has probably not made any investments at all. In this situation, if the volume of sales are not realized, then WESCO is going to lose a lot of money.

Another attribute of this analysis is that it proceeds through time based on current and past experience, 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.

The Evolution of NA Relationships:

Other NA customers and focus NA customers

Prior to initiating the NA program, all customers have "other industrial customer" status. From the data, 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

WESCO makes in these relationships that it does not incur in its relationships with other industrial customers.

From the point of view of the "other NA" and the "key NA" customer, the value of the NA contract lies almost entirely in the discount. Although standardizing prices across all plants would have the potential to cut costs involved in obtaining quotes and improving the accuracy of budget forecasts, local plants have probably not seen the situation this way. Purchasing agents are probably viewing the NA agreement as amounting to a discount of one telephone call. They usually get quotes from other distributors, using WESCO's price list as a benchmark from which to negotiate with WESCO’s competitors.

A worse scenario: because purchasing agents tend to be evaluated on the basis of the discounts they can derive from distributors, standardized pricing might mean that they will be disincented from purchasing from WESCO, since their talents in negotiation will be irrelevant to such purchases.

In summary, these customers do not see a significant increase in value, and whatever marginal increase they do see is because of lower prices that they are now getting. Many of them have possibly gotten into these agreements just to cherry-pick the best prices. These customers are not interested in going any farther. Unfortunately for WESCO, 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.4

Key NA customers

In the case of 'key NA" customers, the story is very different. WESCO's costs-to-serve these customers go down dramatically. This is probably because the joint activities and detailed implementation plans developed and executed with the customer are leading to better ordering patterns, reduced administration costs, etc.

4 Some students are likely to conduct the following analysis, which the instructor needs to manage carefully. They will calculate the dollar value of price discount for the “other NA” customers as follows. Case Exhibit 2 lists the mean annual purchases per “other NA” customer as $227,000. Case Exhibit 13 gives the breakdown of savings for a fully implemented "key NA" customer. From the case, we know that this customer purchases $1 million per month from WESCO. Case Exhibit 5 suggests that WESCO gives its best discounts to its largest NA customers, so it seems reasonable to assume that the customer profiled is receiving as good or better a discount than the average $3.6 million-per-year "key NA" customer. With this in mind, we know that the customer's annual savings exceeds 20% of $12 million for a savings of over $2.4 million annually. Of that, we know from case Exhibit 13 that five percent of the savings (~$120,000) derives from price improvement. Thus, the price discount works out to approximately one percent.

From case Exhibit 5, we see in the price index that ten index points separate "key" prices from "other industrial" customer prices. Since "key" prices have a discount of around one percent and "other industrial" customer prices have no discount, we can estimate discounts for “focus NA” customers at 0.7% and for "other NA" customers at 0.5%. Thus, the discount offered by WESCO to "other NA" customers works out to about one half of one percent. The instructor should clarify that these are volume discounts of the list price as stated in the agreement. In all likelihood, these list prices would be negotiated by the two sides and would be significantly lower than list prices available to other non-NA customers.

At the same time, the customer is beginning to see much greater value in this relationship. Prices have gone down slightly further. The main point here is that key NA customers not only benefit from the relationship, they are also collaborating with WESCO to continuously improve processes and systems.

It is important for the instructor to bring the students' attention to case Exhibit 13. As this exhibit points out, 95% of the value derived in the NA program lies in areas other than price. However, 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. Further, concrete savings through inventory reduction, SKU deletions, and product substitution, which together account for nearly 40% of value added through the NA program, require that the customer and WESCO undertake an inventory audit and jointly improve the process.

Overall, WESCO is probably able to delight the "key NA" customers and do it in a way that is very profitable to WESCO. Both sides have a lot to gain from maintaining this relationship and stand to lose a lot if the relationship were to terminate. Since the value received by the customer has been achieved through the joint collaborative activities of the customer and WESCO, the competition is shut out. Unless the customer has the time or inclination to sit down with another supplier and recreate this process, they know that it will be difficult to get the same level of benefits from any other supplier.

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. In fact, the instructor should take a few minutes to summarize these issues in the following manner.

1. Price Line: See TN Exhibit 1 - Under the NA program, WESCO offers year-long, national pricing regardless of volume at any one customer site. For "focus NA" and "other NA" customers, WESCO pays for the lower prices by giving up margins. Once the customer reaches the "key NA" stage and the relationship is fully implemented, WESCO is able to get better prices through better planning, so prices for the customer can go down without hurting WESCO's margins, and WESCO maintains profitability.

2. Cost Line: See TN Exhibit 2 - The early stages of the NA program involve substantial investments on WESCO's part in order to acquire the customer. In these stages, there is little or no involvement from the customer. However, once implementation has been successfully completed and the customer moves to the "key NA" stage, WESCO's costs plummet because the customer is now investing in the relationship. In addition, they are adapting their processes to match WESCO's capabilities and vice versa, reaping efficiency gains through relationship management.

3. Customer Value Line: See TN Exhibit 3 - The instructor can point out that in the "focus NA" and "other NA" stages, the relationship is adversarial, insofar as the customer is extracting value at WESCO's expense. However, in the "key NA"

customer stage, there is an explosion in customer value and this is achieved in a collaborative mode.

At this point, it is vital to discuss the importance of the implementation program. As is highlighted in the case, the building of a successful NA program is not just about getting the right customer. It is also about developing an implementation plan that ensures buy-in from both sides at all levels. This is critical to the success of the relationship. The instructor can highlight this issue by drawing the hockey stick that captures the impact of acquiring and retaining customers.

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. If this is not done right, then WESCO can wind up in the shaded region and continue to lose money indefinitely in the relationship. The instructor should be very deliberate in this part of the discussion to avoid losing the students’ attention to this point. 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.

At this point, the instructor may choose to segue into the issue of the organizational limitations of WESCO’s NA program. 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, that is, make into “key NA “ customers?

Is NAM capacity an issue here?

WESCO currently has 18 NAMs managing an NA program that involves 50 key customers, 100 focus customers, and 150 other NA customers. This works out to an average of slightly under three key customers, 6 focus, and 8 other NA customers per NAM.

NAM’s responsibilities in the evolution of NA agreements work out as follows:

Stage Prospecting Active Selling Implementation Maintenance

NAM Flexible 30-40% up to 50% 15%+commitment

Timeframe Varies 6-9 months 2-3 months Indefinite

Looking at the time the NAMs spend on the second through fourth stages, if a NAM is in stage two or three and is maintaining three key accounts, then there remains little or no time at all for prospecting. In addition, with the time and customer allocations, the NAMs will end up over-committed once their fifth key customers move into the implementation stage. This means that barring change, the maximum number of additional key customers is 32.

Possible solutions to these problems are somewhat complicated. Hiring more NAMs is difficult because the process of professional development takes time and needs to be planned out far in advance. A second option involves minimizing NAM’s responsibility by expanding the support service staff to take over much of the maintenance role. 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.

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?

The sustainability of the NA program is going to be affected by changes in supplier management approaches and competitive threats.

WESCO developed the NA program in response to EES customers consolidating their supplier bases, implementing quality certification programs, and demanding low prices. Having reduced the procurement costs in relationships with the top 5 to 10 suppliers, these customers now find that procurement costs for other categories of MRO supplies equal or even exceed the costs of the supplies themselves, and have expanded to over 80% of total procurement costs. In order to reduce these procurement costs, these customers are already shifting to new procurement model modes: suppliers tiering or forming supplier alliances.

In the case of supplier tiering, several important issues arise. The most important one is the issue of what business is WESCO in. Should WESCO take on supplying janitorial supplies to one customer, industrial gases to another, and so on? Can this affect WESCO in the long-run? Does WESCO have the competency to manage non-traditional lines of business?

Those in support of this move will use the same logic as that used by Haley. According to Haley, 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. 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. They will suggest that the approach can lead to a lot of chaos, confusion, and losses if the local branches are allowed to customize offerings to local customers. There is usually a lot of energy in this part of the discussion. 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. As well, there is sometimes very little learning from one relationship that can be transferred to other relationships. Overall, there is consensus that this can be good for WESCO if done right.

Students are less enthusiastic about the alliance option. 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.

Overall, in either case, there is a larger peril as well. 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. If, however, 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, then the economics of the program may be further skewed against WESCO’s goals. This problem can be compounded if customers want first to purchase through an NA agreement, then to have WESCO serve as a first-tier distributor in a supply tier, then to purchase from an alliance of distributors who will team up to provide a one-stop solution. Further, WESCO’s competitors are pursuing similar customer management strategies to its own, so the threat posed by potential competitor NA programs is real.

Students may point out that profits will not be sustained for several reasons. First, customers are migrating all the time. As described above, as soon as WESCO gets through one stage, customers begin to demand even more service and support from WESCO.

Second, competitors will follow and develop their own NA programs. This is not as much of an issue. Especially if the customer and WESCO have collaborated and shared the huge gains in the relationship, 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, goals and objectives setting, and continuous monitoring.

The instructor can use the diagram shown below to capture this line of thought:

At this time, 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. Further, WESCO has twice as many focus and three times as many other NA customers as it does key customers. 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. The case has details on customer, organization, and other issues that highlight the impact of the NA program on other customer types. For example, there is John Whitney's quote, where he says that NA customers demand a lot of service that is not commensurate with their sales volume-either current or potential. 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. Another example can be found in Larry Worthington's quote, 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, i.e., the contractors, any more.

There is also information in the case on the sales approach required to serve the different types of customers. As Piraino points out, in order to manage NA accounts sales reps need to have a farmer mentality, and to manage contractors they need to be like hunters.

The instructor needs to ensure that students are keeping this issue in mind as they make decisions on the NA program. 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. For example, in order to do this successfully, WESCO needs to think through very carefully whether it should adopt a generalist approach where a salesperson sells to all types of customers, or a specialist approach where a salesperson sells to only a specific type of customers. This issue also exists at the level of the branch.

Given the richness of issues with the NA program design, I have found that this is an area that gets passed over by the students in this case. Consequently, I take a few minutes in class to bring this to their attention. 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.

What should WESCO do with the NA program? What are your recommendations?

There are several areas that need to be covered here.

The issue of NAM capacity means that, given the current number of NAMs and the difficulty of adding more than a very small number to that staff in the short term, it will be very difficult to add many customers to the NA program. 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, the NAMs would be freed up to do more prospecting, which, given a better customer segmentation process, has the potential to yield better results for WESCO.

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. Thus, changing the growth profile of the NA program becomes a key factor in achieving success.

In the most optimistic of scenarios, 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). 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, then the sales goal could be met without increasing the ranks of the NAMs.

Another approach would be to find a group of as many such customers from among the current focus NA and other NA customers. This would also help by reducing the number of other NA and focus NA customers, while also being slightly more realistic, as 28 new and perfect customers might be difficult to find (where were they, after all, when WESCO signed the first 300 customers?). Nevertheless, by sticking to customers with whom WESCO already has some acquaintance, 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. Although it might make it possible to reach revenue and profit goals in the short-term

(even this is doubtful, as there is precious little space for mistakes), it may not be a good long-term strategy.

I have found that at the end of this discussion, 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.

Teaching Strategy

In order to facilitate a proper analysis of the wealth of issues discussed in this case, the instructor might want to break the discussion into several themes.

Theme 1: The best place to start this case is with an action plan. The central question here is whether WESCO should be proactive or reactive in managing its NA program. 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 would make sure that it was not squashed prematurely. Rather, I would try to get this student(s) to identify the sources for filling the gap left by the NA program.

This part of the discussion should take around 15 minutes.

Theme 2: The next part of the discussion focuses on the role of WESCO as a distributor, how WESCO adds value to its customers and suppliers, and how the NA program was initiated.

This part of the discussion should take about 15 minutes as well.

Theme 3: Here the discussion centers on the reasons why the NA program has not delivered on its promises to-date.

This is a very important part of the case discussion and the instructor should allocate at least 30 minutes to it.

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. 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.

This part of the discussion takes about 15 minutes, leaving the instructor with about 5 minutes to summarize the learning points in the case.

Postscript

WESCO refocused its efforts in managing the NA program. As far as Haley was concerned, the NA program was critical to his growth strategy. WESCO hired managers to take over the maintenance functions, thereby relieving the NAMs to focus on the development of new

NA customers. In addition, after an extensive recruitment effort, WESCO was able to add several NAMs to its current teams.

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. Piraino and his team then developed a comprehensive plan that focused on re-implementing the NA program with these customers. Current results suggest that this effort was very successful as well.

WESCO continues to take on non-traditional lines of business requested by its large and important customers. However, the decisions are still made in Pittsburg on a case by case basis. There is no current plan to pass this responsibility on to the branch offices. Overall, based on numbers in the second half of 1997, the NA program appeared to be back on track.

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.

5* 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. 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.

3. 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.

Recommended Readings

Major Sales: Who Really Does the Buying? – HBR-82305

Automation to Boost Sales & Marketing – HBR 89105

Teaching Questions

1. What is your plan? Do you plan to continue with PROCEED or will you introduce the TH product? Provide support for your plan.

2. 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?

3. What is SaleSoft’s current approach to selling PROCEED?

4. Quantity the benefits of CSAS to a customer using the information given in Exhibit 7.

5. What value does TH provide a customer? How is this different form the customer value delivered by PROCEED?

6. What is a Trojan Horse? How does it facilitate customer acquisition and retention?

7. How will you price TH?

8. 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, or will you introduce the TH product?

The various comments supporting going ahead with TH or PROCEED are as follows:

PROCEED vs. THContinue with PROCEED Sell Trojan Horse

We have spent too much time on PROCEED to walk away from it now.

PROCEED has only generated interest--

Tanner – We will lose our first mover advantage in the CSAS market if we divert our attention to TH.

Selling TH is very much like selling CMS and there are so many success stories in the CMS market. Customers don’t need to be educated on the benefits of TH. Most Sales VPs will grab it at any price.

TH will prevent SaleSoft from partnering with consultants who are very important to the firm.

The cost involved and the time required to develop the TH product are not very high. We can afford to do it.

SaleSoft has committed to current customers that remaining modules of PROCEED will be read by June 1998.

Tanner – We don’t need consultants to sell TH.

Twenty Prospects for PROCEED want to see completed product before making any purchase commitments.

Tanner – It’s a much bigger and broader market than the PROCEED market.

Miller knows what he is doing. He has shown that he can make it work – he was successful in bringing order to chaos in the MRP area.

TH is an easy way to get into customer accounts, gain quick sales, generate much needed revenues (pg. 1).

The competition is going to heat up very quickly in the TH market – Microsoft and Lotus are planning to enter. All the CSAS competitors are small and like SaleSoft – this is an easier battle for SaleSoft.

Industry experts think it is unlikely that one vendor will be able to do it all (pg. 2)

We don't have the skills to mass market products – we don't know how to sell TH.

Customers are very skeptical about CSAS and the ability of CSAS vendors to survive in the long-run (pg. 2).

Creating awareness for TH is very expensive – half a million dollars over the next six to eight months.

It is easier to quantify the benefits of TH, and it needs no customization (pg. 9).

We just need to convert 6 of the 20 prospects to hit $5.7 million in sales**. Given that there are just five players in CSAS and we are better than the others, (using Exhibit 3) this is not difficult.

TH is easy to sell – only the sales VP needs to get on-board. There are too many players involved in the purchase of PROCEED (pg. 9).

(** - $2,400/seat * average of 400 seats per prospect* 6 = 5.76 million)

TH needs only 1/3rd the time taken for selling PROCEED (pg. 9)

Tanner – We will not relinquish the PROCEED market if we go after TH (pg. 10)

Once some of these issues for and against have been brought up, 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. Those who are against PROCEED seem to be disturbed by the lack of sales in the last eighteen months. They also believe that TH will not have the same problems as PROCEED. 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. In either case, 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. Let’s understand the CSAS buying cycle as given on case page 4.”

What is the buying cycle for PROCEED?

The buying cycle begins when the senior management realize that a CSAS might solve existing sales, marketing, and service problems. The case doesn’t provide any details about how long this stage takes. It is useful to ask the students what the catalyst is for this stage to happen. 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, marketing, and service processes. Once top management have seen that they are able to bring order to the manufacturing, inventory, and materials handling functions, like Miller (pg. 7) they think that automation might provide answers to managing sales, marketing, and service issues. Some students might counter these comments by pointing out that automating sales and marketing functions is very different from MRP systems (see pg. 2 on the general belief that there was no standardized approach to sales order cycle).

Next, the subsequent stages of the CSAS buying cycle can be captured in the following manner. In addition to text on pg. 4, there is a lot of information in Exhibits 4 and 5 on the issues raised by different members of the DMU, their concerns, and the benefits they seek from CSAS solutions.

Using these three sources of information, 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.). I have found that there is wide variance in the student analysis on who is involved in each stage and what are their motivations. Rather than trying to clarify these issues, I take them as they come. There is a lot of energy at this point and it doesn’t help to challenge students on their views. Invariably, this job is well done by other students who will object to comments with which they disagree.

It is important that the instructor captures the following points:

1. Consultants get involved very quickly in the cycle and get more powerful over time.

2. Senior management plays a bigger role in the beginning and in the end. However, in the middle stages they have a limited role to play.

3. Line managers are involved more in the intermediate stages that involve systems design.

4. Users might only be involved towards the end. This is not clearly spelled out in the case and students will debate this issue. Some will insist that users will be involved throughout. Others will quote the case and suggest that it is only with the pilot test that users get involved in the process.6

Below, is an example of a table that came out of a class discussion in my Business Marketing Class.

SaleSoft Buying Cycle Stage Involvement Activity Timeframe

(months)Need Identification CEO, CFO, VP Sales, Realization by senior 21-30

VP Marketing, VP management that CSAS mightService solve existing problems

Need Clarification VP Sales, VP Mktg., VP Evaluation of potential to 3-4Service, VP MIS, SA automate existing processes andConsultants specification of the order in

which functions are to beautomated

Need Definition and VP MIS, IS Managers, Evaluation of how different 2-3Specification Sales, Managers, functions to be automated are

Marketing Managers, related and how data is to beSA Consultants collected, stored, and analyzed

Evaluation of CEO, CFO, VP MIS, SA Decision on which system (h/w & 6-8Software/hardware Consultants s/w) to purchase, short-listing ofAnd vendor vendorsAlternativesPilot Testing and Sales Reps, Sales Customization of CSAS and pilot 3-4Customization Managers, MIS dept., testing

SA consultant, CSAS vendorRollout 4-6

6* 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, 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, 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. 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. They felt that this would given them a higher chance of success. The customer’s senior management wanted to pilot test using skeptics in a low profile market. I usually take a minute to bring this issue to the attention of the students. Given the time constraint, I usually don’t get into a long distance on this issue.

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.

On a side board, the instructor can also separately capture the orientation of each DMU member towards CSAS.

DMUMember

Orientationto CSAS

Under-standing ofCSAS

Interest inImplementingCSAS

Reasons

CEO +/- Low +/- +Would like more control and higher sales & marketing efficiency

- Has other things to think about

CFO + Low +/- same as aboveVP Marketing

+/- Low +/- +Wants more control

-Fears that other will have access to data. Erodes power

VP Sales +/- Low +/- same as above

VP Service +/- Low +/- same as above

Sales Reps -/+ Low -/+ -Worried about sharing customer information—if everyone knows everything about my customer, what is my role?

+This will make me more efficientConsultant +This is my livelihood

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, and that too only if it happens to be selected as a CSAS vendor.

One way to run this part of the discussion is to draw a ladder on the board, with one vertical line for the customer’s buying cycle for PROCEED and the other for SaleSoft’s selling cycle, and build the rungs as links between the two vertical lines. In this case, the process highlights the fact that SaleSoft does not have an approach that maps onto the customer’s selling cycle. This is a very big learning point for students and is worth the drama. 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?

To the above figure, the instructor can then add the following information that highlights the role of consultants.

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.

An example that the instructor can use here is the important of getting the product specified in a customer’s RFQ (request for quotation). In many high-tech business this is considered to be more than half the battle won.7 In cases where a competitor’s product was specified, vendors should realize that there is a good chance that they have already lost the sale.8

At the point, the instructor can say something like, “Well, clearly the selling approach is not right. 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. Case Exhibit 7 provides more numbers that students can use to calculate these benefits. There are three sources of benefits detailed out in Exhibit 7: sales cycle reduction, startup time reduction for new employees, and employee turnover reduction.

For Company A (a financial services firm), this translates into $7.5 million in additional sales.

Selling time reduction x ($ sales/ year)Additional Sales due to Sales cycle reduction= Avg. selling time

= 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 = $1.1 million / year 60 120 300

7* 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.8 ? In my own personal experience, I have found that vendors that do a win / loss analysis of orders, 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

Additional sales due to reduction in sales rep turnover

= (% reduction) x (current turnover) x ($ sales / rep) x Days to startup

Workdays / year

= 0.1 x 24 x ($1m) x 60 = $480,000 / yearThe total additional sales for Company A from using CSAS are = $7.6 million

w/o PROCEED with PROCEED

Sales Costs (at 30$ of sales) $127.6 million $127.6 million

Selling Costs (at 30$ of sales) $38.28 million $36 million * + commissions on

$7.6 million = 36 + .1 x 7.6 =$36.76 million

Difference 38.28 – 36.76 = $1.52 million*-$120 million x .30 = $36 million. Using PROCEED, cost of sales remains the same as it would be if sales volume were $120 million w / o PROCEED.

We can also get to this number by working directly from the savings. 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. Thus, the firm gets $7.6 x .20 = $1.52 million in the first year after implementing PROCEED.

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

= $1.5 m + $600k + $200k + $180k + $150k

= $2.63 million

Thus, the pay back time for the CSAS investment is around 1 ¾ years. For Company B, the results are even more dramatic and the pay back period is less than a year.

For company B that is in computer h/w, the analysis is as follows:

Selling time reduction x ($ sales / year)Additional Sales due to Sales cycle reduction = Avg. selling time

= 15 x $350m = $29.16 million / year 180

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 = $8.2 million / year 90 250 300Additional sales due to reduction in sales rep turnover

= (% reduction) x (current turnover) x ($ sales / rep) x Days to startup Workdays / year

= 0.15 x 88 x ($1.4m) x 90 300

The total additional sales for Company B from using CSAS are = $42.9 million

w/o PROCEED with PROCEED

Sales $392.9 million $392.9 million

Selling Costs (at 35% of sales) $137.5 million $122.5 million + commissionson $42.9 million = 122.5 + .04 x42.9 = $124.2 million

Difference 137.5 – 124.2 = $13.3 million

We also get this by working directly from the savings: if we assume that selling costs don’t change, then the company saves 35 percent (row 3 of Exhibit 7) of the additional sales in costs less commissions of 4 percent. Thus, the firm gets $13.3 million in the first year after implementing PROCEED.

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

= $3.6 m + $1.44m + $450K + $430k + $350k

= $6.27 million

Thus, the pay back time for the CSAS investment is less than half a year (.47 years).

Using the above information, the instructor can draw a stacked column of the benefits and call it the “value column” or the “value line.” Executives are very likely to get in at this point with their own versions of bars, pies, stars, and other ways in which their firms represent customer value

At this point, the instructor can push the class by saying something like, "I think that SaleSoft has a good selling story. Not only is the firm going to get additional sales, it will have reduced sales rep turnover and higher sales rep morale. In addition, the investment pays for itself in less than 6 months for Company B. The economics and other benefits that we spoke about should make this an easy sell, 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. 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, this student will bring up several issues highlighting the following:

1. The value of PROCEED needs to be sold at every level of the organization. Not every person in the DMU cares about the sources of benefits as defined by the value line.

2. 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. Further, there will be arguments that the three sources of benefits are very hard to measure and unrealistic.

3. The VP MIS needs to be convinced that the operation of the system will be as promised.

4. The Sales managers and VP Sales need to be assured that their salespeople will use the system well.

5. The Sales Reps need to be reassured that the system will benefit them.

This sets the stage for the instructor to say something like, "So creating these value lines is not the end. 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."

At this point, the instructor can mention to the students that this is a potental area where things can break-down between marketing and sales. Marketing develops value propositions with all these benefits quantified. However, when they then toss it over to Sales to take it to their customers, Sales find it very difficult to manage. The next thing you know, there is a breakdown in the initiative. I reiterate the fact that it is here the most large companies are facing problems in implementing their new strategic marketing initiatives. 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.

Next, the instructor can move the discussion along by shifting the focus from PROCEED to TH.

How does TH compare to PROCEED?

Selling TH is different from PROCEED in several ways. First, unlike PROCEED, TH is focused only on sales. 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, marketing, and services departments of customer firms. TH delivers enormous value to Sales VPs of firms that are involved in selling big-ticket items with long, and complex selling cycles. These Sales VPs find it difficult to provide their firms with accurate forecasts, which in turn affects the firm’s ability to plan operations and resources. Thus, TH might be an easier sell than PROCEED.

Looking at the value line created for PROCEED, students will point out that all the benefits listed for PROCEED are also applicable to TH.

Compared to PROCEED, TH needs minimal customization (customizing the program requires only small alterations such as changing the number and names of segments in the opportunity pipeline).

Some students will point out that TH might not really by a TH for PROCEED, since it appears to be addressed to a market segment that is not the same as the PROCEED product. Not all PROCEED prospects would necessarily want to start their automation efforts with TH. Also, not all TH users might be interested in the complete PROCEED product. This is the point where the instructor needs to run a discussion on what is the role of TH, how does one design a TH product, and what is the link between TH and the customer acquisition and retention process.

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. In these cases, customers might not be willing to make the investments in the vendor. As is the case with PROCEED, vendors are able to generate interest in the product but are not able to convert this interest into actual sales.

In these situations, if there is an opportunity to unbundle the complete product into distinct products that can be sold and used independently, and it is also possible for the customer to add modules over time without risking any loss in past investments, then TH can be a very effective tool for the vendor. TH provides with an opportunity to penetrate a customer account faster and more economically. A good TH product will also facilitate and ensure future sales of other products to the customer. For the customer, TH offers an opportunity to reduce the risk and the investments involved. The customer is able to use the TH product and experience the benefits fro that product before making any further investments. It also gives the customer a chance to assess the capabilities of the vendor to support and serve them over time. TH also provides the vendor with an opportunity to make some money relatively quickly. Vendors can use TH to create a barrier to entry for competitors by increasing the switching costs to the customer.

Designing the TH product involves the integration of product bundling/unbundling issues with pricing issues. In designing a TH product, 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. 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.

Based on what we have discussed, how will you price TH?

Based on customer value, one could potentially make the case that TH should be priced at the same level as PROCEED, i.e., $2,400 per user. This is base on the fact that the value line for TH is the same as that of PROCEED. Some students will point out that this price is difficult to justify given that SaleSoft is having trouble selling PROCEED at $2,400. Other students will suggest that if SaleSoft were to go after prospects that had never seen PROCEED or used a CMS product, then it is possible for SaleSoft to price TH at $2,400 or even higher.

Using competition as a basis, given that TH is closer to a CMS product, students are likely to suggest a price anywhere from $200 to $400. Finally, in the case, Miller has suggested a price of $1,000, and Tanner has suggested a price of $400 per user. Students that suggest a low price will point to the fact that SaleSoft has to minimize customer resistance and reduce marketing and sales costs. At a price of $400 per user to below, they will suggest that TH will sell like hot cakes. They will quote Tanner who says, “at this price, our salesforce will have to just go out and pick up these orders.”

Those that suggest a price closer to $1,000 per user will argue that at a lower price, SaleSoft is leaving money on the table. Given the enormous benefits TH provides customers, these students, like Miller, will want to charge a higher price to extract a reasonable value for themselves.

It is also possible to do the following break even calculations to determine the price of TH.

TH Cost = Development cost + Init. Marketing cost + ongoing marketing costs

= $200,000 + $500,000 + $200 / user

At $1,000 (as per Miller), SaleSoft would need

= 700,000 = 875 users to break even 1000 - 200

And at $400 (as per Tanner), SaleSoft would need

= 700,000 = 3500 users to break even 400 - 200

Using the results of this analysis and information from Exhibit 7 that suggests that SaleSoft can expect to get 200 users per prospect, one can conclude that SaleSoft needs 875 / 200 = 5 customers at $1000/seat and 3,700 / 200 = 18 customers at $400 per user to break even. 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. This is also the ideal spot for the instructor to draw the attention of students to Exhibit 8. “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, with the next largest number of individuals working in support services. Both the sales and the marketing departments are small, with only five and four members, respectively. 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.

Students will look at all this information and suggest that this firm is still organized to develop products—not to sell them. They will suggest that Miller completely re-organize the firm and build up selling capability very quickly. The instructor can push students on this point

by asking the following question, “If you are an entrepreneur in a high tech industry and have been developing products for a while, when will you change the organization? How will you change it? It is very easy to say that Miller should do it. However, students have to understand that this is a non-trivial issue. 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. In these businesses, the need to innovate continuously and develop new product only complicates issues further.

What Happened?

As the case points out, Miller and Tanner were looking for an additional $2 million of venture capital. Late in 1995, they decided to use the TH proposal as their trump card to get more investments from the venture capitalist (VCs.). As a condition to giving more money, the VCs demanded that SaleSoft put the PROCEED project on the back burner and push ahead with the TH product. SaleSoft made a big announcement that it had now positioned itself as an “Opportunity and Pipeline Management” company. The VCs did not allow the organizational structure to be changed in any manner since they saw this as major and unnecessary expense. As a result, when asked to sell the TH product, 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.

Two things happened as a consequences. First, competitors that were trying to sell CSAS to these prospects immediately seized upon this chance. They started telling the prospects that if they wanted a sales forecasting and opportunity pipeline manager, then possibly TH was a good bet. However, if they were looking for a complete CSAS solution (which these prospects were) then TH wouldn’t cut it. Further, with SaleSoft calling itself the pipeline manager, it was more or less clear that SaleSoft had pulled out of the CSAS marketplace. 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. Add to this the competitive reaction and there is little doubt about what happened. 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.

Teaching Process

One way to manage the wealth of information in the case is to break up the discussion into several times.

Theme 1: As the case revolves around a binary decision, the best way to begin the discussion is with a comparison of PROCEED and TH. There is usually an even split in class with support for both products. 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, and those who support PROCEED appear to suggest that SaleSoft is on the verge of getting a major break in PROCEED sales. Clearly, it is the interpretation of the current PROCEED sales that is at the heart of their analysis of both sides.

Theme 2: Here, the instructor needs to walk the class through details of the different stages in the CSAS purchase process (or buying cycle). It is important that the instructor needs to push the discussion on who is involved in each stage, their needs, and what they are looking for in that stage of the buying cycle. Having done that, the instructor then can ask the class to map SaleSoft’s selling cycle onto the customer’s buying cycle. It becomes evident that SaleSoft enters the picture very late in the game and is at the mercy of consults. Once this issue has been identified, the instructor can transition the class to the next theme by asking the following question, “Okay, we have found that SaleSoft is very late in getting into the game. That is clearly not good, but let’s live with that for the moment. At least, 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. The instructor can build a column, (or, a line) of benefits to a customer. With the customer value line developed, the instructor can get details on costs to a customer of buying PROCEED. 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. But that’s not what is happening. What’s wrong with our analysis?” This leads to the idea that it is not enough to come up with these value lines, it is also important for the firm to figure out how it is going to sell these benefits to the customer. Will a customer see this value? Are there other factors that were not considered?

Theme 4: Next, the instructor can move the discussion to the other side and ask how students see TH solving all these problems. The associated decision that needs to be addressed is about how to price the TH product. The instructor should then ask the students if they think that the TH product should be sold to PROCEED prospects. 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. The instructor should capture this issue on the board since it will be very useful to go back to in the summary. 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. This leads to the next theme in the case discussion.

Theme 5: The instructor can then bring the attention of the class to the organization chart in case Exhibit 8. 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, or reactively in developing markets. 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, not atypical for a start-up firm, might make it difficult for the firm to be successful in a mass marketing strategy.

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. It is important to get the customer and competitor’s veiwpoint here. Finally, the instructor can do a short 5-10 minute lecture that summarizes the learning from this case discussion.

Some Additional Thoughts

For the last three years, I have visited the Sales and Marketing Automation Conference that is held in Boston every year. It is amazing to see the turnover of firms in this business. More than half the firms seem to be new ones. Interestingly, the people in the booths seem familiar. They just have changed jobs and work for new firm every time I see them. During one visit with Professor Ben Sharpiro, we asked several vendors to tell us more about their product, and who were their main competitors. The most common answers were (a) we are the only ones who have truly integrated sales and marketing automation software in the business, and (b) we really don’t think we have any competitoin.

In the last twenty minutes of the class, I tell students that SaleSoft decided to launch TH and that it did not change its organization very much. I then ask them to tell me what they thought would happen. Students very quickly get to the point that SaleSoft must have gone back to its PROCEED prospects with this new product. Next, I ask them how this customer would react. Most say that there will be a signficant customer resistance to this move by SaleSoft. However, there are some who think that these prospects have not bought because they have doubts about CSAS. 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, and also that SaleSoft would be unlikely to deliver a CSAS product to the customer in the long-run.

After this discussion, 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, complex, and require major changes on the customer’s part, and customers are risk averse. 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. 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. 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.

Issues to Manage

There are a few issues that the instructor will need to watch out for.

First, 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. That it is difficult to understand how SaleSoft did not anticipate this when developing the system. This is an issue that cannot be

answered satisfactorily using information in the case. The instructor can manage this issue by directing the students to the information on the page where Miller clearly explains why this happened. Second, 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. The instructor can address this by saying, “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, marketing, and service. 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. I also ask students whether this is the time to sell the firm. Given the current situation, would Miller be able to get a good price for the firm, or would he be better off getting some more sales before trying to sell the company.

Exihibit 1 The Role of Trojan Horse in Managing Customers and Managing the Firm

Case 16 Arrow Electronics, Inc.9

Synopsis

In the spring of 1997, Jan Salsgiver, president of the Arrow/Schweber group, a subsidiary of Arrow Electronics is reviewing a proposal from Express Parts Internet Distribution Services with her colleagues Skip Streber, senior vice president for sales at A/S, and Steve Kaufman, CEO of Arrow.

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.

Salsgiver needed to give her recommendations on how to adapt their business model to the new equation put forth by Express. In other words, by being on an Internet-based trading system, 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. 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.

Use

The Internet is seen as the new way to conduct business. The majority of the transactions on the net are being conducted between the business to business category. E-commerce is still in its infancy and is still a topic of speculation. This case can be used to explore the obstacles in developing and implementing new ways of doing business on the web. This new medium gives the power of information in the hands of the customer. Another issue is developing and implementing new ways of managing customer relationship especially when you do not see your customer.

In principle, using the Internet is a great way of reaching out to new customers whom you could have never reached before. But, the issue still remains of how to lock the customers into a long-term agreement with volume commitments. 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. Further, the services and solutions provided should be innovative.

This case analysis helps students develop a better understanding of how to develop, and effectively manage customers in the dynamic environment of Internet. The case is also rich in understanding what information is required to develop a web-site where one can conduct transactions. Finally the case has a lot of information on trends in customer-distributor-supplier relations through the '90s.

9 This case solution was prepared by Stephen Samuel.

Given the complexity of the situation and the information provided, the case is best taught in a second year MBA electives such as Internet Marketing, Service Management or Business Marketing. 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.

Objective

The teaching of the 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 customer and supplier relationships in business markets on the Internet.

3. Defining the notion of customer value and mapping its changing nature over time in a long-term relationship.

4. Understanding the role of Express Parts Internet Distribution Service and Arrow's use of its homepage in acquiring and retaining customers.

5. Developing a process model for initiating and implementing an Internet service program.

6. Exploring the difficulties involved in managing a portfolio of customers over the Internet.

7. Understanding trends in business transactions over the Internet.

Teaching Questions

1. 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, or would you prefer that Arrow adopt a passive approach?

2. By being on an Internet-based trading system, 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. How can Arrow use the Internet to its advantage?

4. What strategies should Arrow adapt to develop and maintain competitive advantage in doing business on the Internet?

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, 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. By building the home page, Arrow will ensure that they will maintain this relationship by having a customized page for each customer.

The competition over the web is going to be more intense. We need to get as many customers to sign on.

Actively pursuing customers improves our chances of becoming a first-tier supplier to the customer.

Being proactive gives more control over the profile of the customers we choose to work with.

Ordering on the site will help in getting larger and more predictable orders and the customers can be offered better prices.

The new medium of managing customers will help to get more information on the customer, reduce inventory and predict the customer requirements better.

Take a Reactive Stance

Arrow will be able to add on new customers only when they are selected.

Arrow will lose out on its current customers who will switch to buying parts from Express.

Arrow will now be a supplier to Express.

As the customer does not see the distributor's name, Arrow will not be able to capitalize on its brand name or the relation it has made with its customers.

It will help in reaching out to new customers in new regions.

By being on an Internet-based trading system, 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, Arrow can add value to its suppliers by generating demand for their product in new regions to new customers. In the course of monitoring its relationships with its customers, Arrow obtains information about customer needs and translates that knowledge into explicit demand.

As with the suppliers, Arrow adds value to its customers both in general and in the particular features of the services it provides. It can customize pages for its loyal customers wherein they can order online. Customers can use Arrow's web site to track their orders. Arrow can post the pages of service information for their customers, including the guides that Arrow's Field Application Engineers use to diagnose problems.

With the help of the web site, Arrow can offer customers a one-stop solution to their need for electronic parts in a similar manner that Express Parts is doing currently. It can get smaller distributors to supply and deliver parts to customers on its behalf.

Business customers can get their own password-controlled area inside Arrow's site, where they can display the different semiconductors and passive components, review recent purchases and electronically page Arrow's sales representatives. These specific value added services will aim at trimming the procurement costs, with the customers ordering online.

Arrow can also extend its Web site to its own suppliers, so that the manufacturers can better schedule production and further reduce inventories.

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.

1. With distributors like Express Parts using the web as another source of distribution, it will soon be the order of the day to order online for electronic parts. Thus, it becomes imperative on Arrow's part to use the Internet to its own advantage.

2. It offers an opportunity to create a sustainable competitive advantage with its customers and suppliers.

By getting the customer to order online through their customized page, Arrow builds customer value and enhances cooperation. This can potentially lower the customer's price sensitivity and temptation to switch. Online reps can be a part of every sales pitch to major customers. And the sales reps will run the customer-specific areas for that customer. A group of these customers can be allocated to Field Application Engineers. They will act as

technical support for the sales force when customers want detailed design assistance or problem solving on specific product design issues.

3. Arrow can also learn a lot about its customers by watching how they use the Web site, particularly the customized web pages. Arrow sales reps can monitor their customers' browsing for potential problems or prospects.

4. Arrow can try to use the web to exchange more and more timely information with its suppliers. With its direct model giving it a clearer view of actual sales, Arrow can manage a low inventory. And better forecasts can help its suppliers shrink their inventories as well, with the end consumer reaping some of the savings. The goal is a "virtual" corporation, where suppliers can "see" their products being purchased.

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 - 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. It is also very critical to help customers design the supplier's new proprietary devices into their product.

Arrow generated demand by helping customers engineer end products and making Arrow's suppliers' chip integral to these designs.

Arrow's web site can be used to its advantage. Arrow can predict the demand and market the new proprietary devices to the customers. 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. Once they have information on the customer of a requirement - be it in case of searching for information on a product/design or a purchase, the customer can be sent information regarding the same. This can be followed by a visit by the Field Application Engineer along with a Field Sales Representative. By being proactive, Arrow will be able to generate more demand for its supplier in terms of new products, new markets and getting to help customers design the suppliers' new proprietary devices into their products.

Customers: The mid and small-sized Original Equipment Manufacturers accounted for 56% of Arrow's sale. With the help of the Internet, Arrow can now look at the large OEM's as well. The Internet solution for ordering online through customized pages will attract the large OEM's. Online purchase will help in reducing the inventory costs, which will help pass on the cost benefit to the customer. Therefore Arrow will be at a competitive advantage against its competitors. It will be able to quote a better price because of its better inventory management system. That will help customers to reduce on their procurement cost.

Once the customer starts ordering through their customized pages, they will start designing new proprietary devices that are offered on-line. There is a switching cost associated with this process.

The online customized pages help Arrow to understand the customer's needs better and therefore serve them better. It can build an additional service to encourage the customers to exchange information about the products and designs they use. This will help to build an online-community.

This can be extended to building a two-way relationship over the web with both the customers and the suppliers. You can also have a forum that brings users together to talk about their views of the electronic industry. Finally, there could be a closer collaboration with the suppliers. This site could be made accessible only to the suppliers. This site will provide them exact information about Arrow's requirements and allows them to see their quality results in real time.

The key benefits that can come from a system like this are tuning one's business to exactly meet customers' needs, precisely in the way they want-an element of customization which provides a much better use of assets.

By linking the suppliers and the end users together; the finished goods inventory is dramatically reduced; and they now have much better information about what their customers want to buy. 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, the instructor might want to break the discussion into several themes.

Theme 1: The best place to start this case is with an action plan. The central question is whether Arrow should join Express Parts Internet Distribution Service or to start transactions on their homepage.

Theme 2: The next part of the discussion focuses on the role of Arrow as a distributor, how Arrow adds value to its customers and suppliers.

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.

Case 17 Aladdin Knowledge Systems

Synopsis

In May 1996, Aladdin Knowledge Systems, an anti-piracy hardware and software security firm, had just purchased its German competitor FAST Software Security AG and the major FAST distributor in the US, Glenco. As a result of the merger, Aladdin's Hardware Against Software Piracy (HASP) now overlaps with FAST's Hardlock product offering.

HASP and Hardlock each have loyal customers and distributors in ten countries. Aladdin's founder, president, and CEO, Yanki Margalit, must decide whether or not and how to integrate the worldwide marketing, sales, and distribution of HASP and Hardlock. 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. What is it that a firm buys when it buys a competitor? Is it the technology, customer base, distribution channels, or a combination of all three? The case also highlights the complexities involved in merging product lines when the market shares, relative positioning, and the go-to-market strategies for products vary across countries.

At HBS the case is taught in the "Global Nature of Business Marketing" module of the second-year elective in Business Marketing. The case is also suitable for a Marketing Strategy or International Marketing Management course.

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, HBS case No. 598-018. 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.

Objectives

1. Understanding the motivations and complexities involved in acquiring a globalcompetitor.

2. Developing a global marketing strategy to integrate an acquisition by

Analyzing the performance and prospects of products in the context of their individual markets.

Assessing the needs of newly acquired customers.

Evaluating synergies and incompatibilities between product lines.

Evaluating the role of distributors in the selling process.

Teaching Suggestions

The heart of this discussion is the acquisition of a competitor and the integration of the two competing product lines. One way to manage the information in the case is to break the discussion into a set of themes.

Theme 1: As the case has a strong strategic focus, the discussion can begin with a point-by-point argument for one of the options posed in the discussion at the end of the case. There is usually support for each of the strategies. 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. 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.

Theme 2: This part of the discussion should focus on what it is that Aladdin bought when they acquired HASP. 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. There will be a need to understand the product, buyer behavior, and perceptions of the channel members.

It is also useful here for the instructor to distinguish between the general reasons for deciding to acquire a competitor, and the selection of a specific target. Pushing the latter discussion, the instructor can make the transition to the third theme by asking a question such as, "There are various views on what it is that Aladdin bought when they acquired HASP. Rather than trying to resolve that issue, 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. This discussion revolves around the data in case Exhibits 8 and 9. Key points to tease out here include the dominant brand (if there is one), market share for each brand, revenues generated from each brand, and the nature of the distribution process in each market. Students may group

like countries together and analyze that way, which can also work so long as the relevant distinctions are kept clear. From here, the instructor can push the discussion to the more detailed development of Aladdin's marketing strategy for the future.

Theme 4: At this point, the instructor needs to go back to the action plan and take a closer look at what Aladdin needs to do going ahead.

Theme 5: The instructor may choose here to speak about the short-term and more long-term effectsof the acquisition that are not covered in the case. The main issue here is the balance between the pressure to respond to the short-term demands of the stock market, and the importance of forming a viable long-term strategy.

Assignment Questions

1. Why did Aladdin buy FAST?

2. 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. Who will be affected by the acquisition?

4. What synergies do you see in this acquisition?

5. How do HASP and Hardlock measure up on a country-by-country analysis?

6. What is your plan? How should Aladdin go about merging its business with FAST? Should it phase out Hardlock?

Analysis

1. Why did Aladdin buy FAST?

There are several ways in which this issue can be answered.

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. Before the acquisition, Aladdin was a somewhat distant second to Rainbow Technologies, an American software company that generated $50.8 million in software sales in 1995 compared to Aladdin’s $11.3 million before merger income. Rainbow is rumored to be in merger discussions with the number four competitor, Software Security, Inc. Such a purchase could put Aladdin even farther behind in overall market share and

the US market in particular. The decision to purchase a smaller competitor is thus presented here as a reactive stance, attempting to preserve market share against the threat of the market leader.

The choice of FAST over other competitors: The second phase of the decision involves choosing the particular competitor to acquire. This process is detailed in the comments of Margalit and others toward the end of the case. Three types of arguments are used here. The first is an argument based on the market share analysis presented above. Instead of picking the number-three competitor in US market share, Aladdin elects to go with the firm with a broader base. In addition to shoring up Aladdin’s number two stake in the US market, the acquisition of FAST makes Aladdin the share leader in Europe. If Rainbow chooses to purchase Software Security, Inc., Aladdin’s overall competitive position will not be altered tremendously – it will remain second in the US market and first in Europe. There is also the organizational angle. In the case, Margalit points to the cultural fit between Aladdin and FAST, insofar as each firm has an entrepreneurial culture and young management teams. Software Security’s management team is not as well aligned with that of Aladdin.

The second argument is product based. In comparing FAST’s Hardlock with Software Security’s UniKey and Activator lines, Margalit considers the latter product offerings to be weaker. (Case Table B gives the National Software Testing Laboratories test results for HASP, Hardlock, and Activator. In most measures and overall ratings, Hardlock exceeds Activator’s performance, coming closest overall to HASP’s ratings.)

The third argument is one of manufacturing and development efficiencies. This is not detailed in the case but some students are likely to bring it up. They will suggest that although the products are different, there might be an opportunity to benefit from scale economies once the two lines are merged.

The fourth argument is customer/market based. FAST has a significant customer base that Aladdin has access to through the acquisition. Students will argue that customers are unlikely to switch vendors and hence provide a captive market for future sales. FAST also provides Aladdin access to the German market and enhances Aladdin’s position in the US market.

The case also presents several reasons against the decision to acquire FAST. First, there are some that see the software security market maturing, as evidenced by the slowdown in growth during the past year. Second, they believe the smartcard technology and license management would have been better areas for investment. Finally, some students will wonder about the fact that it is an Israeli company buying a German firm (In the video, Margalit points out that this was not an easy sell.)

2. 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

and that are interested in protecting their revenue streams. The software security customer base is composed of approximately 70% software publishers and developers, 15% vertical market software developers, and 15% multinationals. In small firms, presidents and sales managers make the decision to purchase software security, while in large firms, technical specialists evaluate alternatives. Purchasers generally choose between two product lines and rarely mix technologies because of compatibility problems. Price was a very important factor since it was not passed on to the end customer.

The security product delays the rate at which software is going to be pirated – it does not eliminate piracy completely. Sooner or later someone is going to break the code and render the security system useless. This is where the upgrades become important. 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. Thus, upgrades extend the useful life of the product. The instructor could use a diagram, like the one below, to capture this issue.

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. 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, the program could check whether the correctly coded HASP key was connected. As mentioned in the case, customers rarely mixed security technologies from several vendors since, once installed, dongles could not easily be retrofitted to fit alternative programs.

If the customer chooses to switch products when introducing an upgrade, 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

absorb. Thus, it in unlikely that a customer is going to switch vendors once the initial decision has been made.

From this analysis, it becomes clear that customers that have invested time in evaluating different software security products and chosen to use a specific product, they are unlikely to switch. There are several reasons that need to be understood here. There is a chance that customers might consider switching products when introducing new products.

3. Who will be affected by the acquisition?

The issue is more serious for FAST employees, distributors and customers.

For example, one issue to focus on here is the somewhat precarious position Hardlock customers are finding themselves in at the moment. Having invested in a software security system, they may now be hearing from Aladdin’s competitors that Hardlock may disappear. If Aladdin wishes to keep these customers, they must convince Hardlock customers that their interests will be protected and that the firm will be there for the long haul.

The same line of argument holds true for distributors. In countries where there are distributors for both products, unless the firm takes quick actions, FAST distributors are likely to think that they will lose the franchise. Having developed customers for the Hardlock product, these distributors will be staring at the prospect of losing their customers to their competitors. It is possible that they lose interest and stop supporting the product. It is also possible that they approach other competitors of Aladdin and try to sell competing product lines.

Finally, 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.

In summary, unless Aladdin develops a clear cut product market plan and communicates this quickly to customers and distributors, it stands to lose a significant portion of the investment it made in acquiring FAST.

4. What synergies do you see in this acquisition?

Both HASP and Hardlock are at the high end of software security, earning the highest marks in independent product tests. Both products are considered to be of excellent quality, 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. The two products could theoretically address the needs of similar customers.

Where the products differ is in their positioning in the various markets. Hardlock has a reputation as more of a premium product, with prices running about 20% higher than those for HASP. HASP, is usually positioned as the value product. Nevertheless, with HASP prices ranging from $20 to $100 per unit, price is clearly flexible, and given anticipated reductions in manufacturing costs for Hardlock, it should be possible to cut the real difference further.

Another important point that is likely to come up here is the relationship between the nature of the product, the nature of the acquisition, and customer management. If software security products were completely interchangeable, 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. On the other hand, if the entire value to the customer were in the value added by the manufacturer and distributor, 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.

5. 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.

Countries dominated by Hardlock:

Germany

Hardlock commands a 75% market share of the German market, and Hardlock sales alone comprise nearly 20% of the combined firm’s total revenues. In the German market, Hardlock’s reputation is primarily one of quality, whereas HASP’s is primarily one of value. Although the list price for both is similar, HASP is often sold at a heavily discounted price through a franchised distributor. The market share for HASP can be measured at between 8% in revenues and 16% in units sold.

Italy

Hardlock outsells HASP in Italy two to one and has a strong, forward-looking distributor. HASP distribution is weak. Aladdin’s primary investment in the Italian market is in maintaining the presence of local manufacturing assembly of HASP products.

Countries dominated by HASP:

Israel

As Aladdin’s home country, the Israeli market is heavily dominated by HASP which is distributed directly through Aladdin. Hardlock’s market share is 6%. Software piracy is high enough to have led to the founding of Aladdin, and the concentration of high-tech firms suggests that the market will remain stable if not increase.

Japan

HASP dominates the Asia-Pacific market, boasting greater compiler and operating system compatibility and outselling Hardlock four-to-one. Sales in this market account for 10% of Aladdin’s revenues. The wrinkle in this market is that newly acquired Glenco is responsible for Hardlock distribution in Asia, and dismantling this distribution structure could require some restructuring.

UK

The UK market is characterized by price sensitivity, making HASP an easier sell. HASP currently generates about twice as much revenue as Hardlock and is distributed through a wholly owned subsidiary. With its purchase of FAST, Aladdin inherited a 50% stake in a UK Hardlock distributor. Nevertheless, this distributor is more interested in FAST’s multimedia products than software security.

Russia

Sales in Russia account for slightly over 1% of Aladdin revenues, though the high rate of software piracy in this area makes it an attractive target. Using a specialized distributor, HASP dominates the Russian market with a 50%-60% market share. Hardlock’s market share is about 16%.

Countries without a clear leader:

US

The US market has the highest software sales of all the markets in question. Combined US sales for HASP and Hardlock account for 43% of Aladdin’s revenues, with HASP providing 60% of US sales dollars. Both are sold through subsidiaries. Glenco, purchased by Aladdin in the wake of the FAST acquisition, specializes in selling Hardlock’s products in the US as well as the Asia-Pacific and Latin American markets. The US market is characterized by price sensitivity and stiff competition from number-one software security company Rainbow Technologies. HASP is currently positioned as the value product, with prices running 5% to 10% below those of Rainbow, whereas Hardlock commands a price premium, positioned as a high-end product.

France

Sales of HASP and Hardlock are nearly even in France. Distribution for the two product lines is separate, and both distributors are focused primarily upon other products. Nevertheless, the high rate of software piracy in France compared to the rest of western Europe makes it a potentially lucrative market.

Spain

HASP and Hardlock are approximately equal in unit sales. Although Hardlock revenues are higher, distributors are somewhat disgruntled, so either product could take off.

Benelux

Although Hardlock has twice HASP’s annual revenues, HASP sales are growing 60% annually, six times as fast as Hardlock sales.

6. 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, 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, product, and distribution issues.

The argument for phasing out Hardlock is made on the basis of crowding in the software security market. 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. This strategy is supported in varying degrees as a form of the strategy of picking a winner, discussed below.

The argument for picking a winner in each country also depends upon considerations of efficiency. Since each brand already has its own marketing apparatus, choosing a single brand allows for continuity while eliminating duplications of effort. Students supporting this strategy will also focus on streamlining operates and development in addition to eliminating inefficient distributors. Some students will also favor HASP when the two brands are close to even in a particular country.

The argument for marketing both products as before is based more on a customer- and distributor- retention strategy than the latter two options. The rationale behind this strategy is that one of the major aspects of the FAST acquisition is the acquisition of Hardlock market share. Further, students will point out that customers are unlikely to switch products and will expect continued support from the vendor. Finally, since customers generally consider two options when deciding upon a software security solution, students will recommend that Aladdin could hold onto the Hardlock business, or even grow it by keeping the brands separate and continuing to develop and market each.

Postscript

Aladdin decided to do several things. In the US and UK market, they have scaled back on promoting the Hardlock product. Existing Hardlock customers continue to be supported. However, most of the promotion is for the HASP product. Yet, if a customer calls in asking for the Hardlock product, the firm does not try to move them towards the HASP product. The firm has made sure that employees in both organizations have felt no change after the acquisition.

Hardlock employees have been assured that there will be no change in the support and commitment. In Germany and Italy, Hardlock continues to be aggressively supported and its market share has not gone down at all.

There has been some trouble with distributors. In several small country markets where Hardlock was weaker, the Hardlock distributor either dropped the line altogether or cut back on sales effort. This affected sales in the short-run. In some countries, the Hardlock distributor sold the business to the HASP distributor. 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.

The firm did combine development and manufacturing operations and was able to achieve significant savings internally. In the two quarters following the acquisition, earnings dropped and Aladdin stock prices fell. However, a year after the acquisition, most of the issues had been ironed out and the firm began to record significant increases in profitability.

Exhibit TN-1 Country by Country Analysis

The following chart summarizes information given in and derived from case Exhibits 8 and 9.

Market Total Market (units) (000)

% Total Aladdin

Revenues

Dominant Brand

HASP Revenues

($000)

HASP Market Share (units) (000)

Hardlock Revenues

($000)

Hardlock Market Share (units) (000)

Germany 500 23% Hardlock 2,400 16% 11,200 66-75%

US 2,717 43 HASP 14,625 22 10,350 12

Israel 117 3.7 HASP 2,000 85 150 6

France 400 5.4 HASP/Hardlock

1,575 11 1,575 9

Japan 480 10 HASP 5,000 20 1,100 5

Russia 50 1.2 HASP 500 50-60 175 10

UK 460 5.5 HASP 2,125 18 1,050 7

Italy 367 3.4 Hardlock 600 5 1,400 10

Spain 80 2.4 HASP/Hardlock

500 25 900 25

Benelux 87 1.5 Hardlock 300 12 600 18