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21Creating a Revenue Advantage through Sales andMarketing ExcellenceJohn Warner, Jo�l Claret, Ralph Marquardt, and Eric Roegner

In an industry as capital-intensive as chemicals, the focus on operational excel-lence of the last two decades is understandable. However, a significant additionalsource of value creation potential exists which is largely untapped: creating a revenueadvantage. Excellence in sales and marketing can lead to a tangible incrementalimprovement in ROS. In addition, a one percent improvement in price leads tosignificantly more value than a similar reduction in variable costs (Fig. 21.1).

Fig. 21.1 Pricing is a significant improvement lever.

Achieving these benefits requires a paradigm shift and a laser focus on salesand marketing excellence comparable to the operations and capital transformationthat took place in the 1980s and 1990s. New tools, processes, and performancemanagement systems are required to successfully implement and institutionalizea revenue advantage – the industry needs to turbocharge the development of thelatent revenue gene within its business system.

Value Creation: Strategies for theChemical Industry. 2nd Edition. F. Budde, U.-H. Felcht, H. Frankem�lle (Eds.)Copyright � 2006 WILEY-VCH Verlag GmbH & Co. KGaA, WeinheimISBN: 3-527-31266-8

21.1Defining World Class

Creating a revenue advantage requires the development of a set of interdependentcapabilities around six key elements – (1) Go-to-market strategy, (2) Value chaininsights/segmentation, (3) Target customer identification/value propositiondesign, (4) Customer interface model, (5) Pricing, and (6) Performance manage-ment (Fig. 21.2).

Fig. 21.2 Go-to-market value delivery system.

While it is important to build capabilities in each of these six elements, achiev-ing revenue distinctiveness requires the integration of these capabilities into a dif-ferentiated commercial operating system. Experience suggests that 50 percent ofthe value comes from individual elements, with the remaining 50 percent beingachieved through integration across the elements.

21.1.1Developing a Winning Go-to-market Strategy

The first key challenge is defining a winning go-to-market strategy that will enablea significant and sustainable competitive advantage. A winning model should ide-ally meet the following criteria:. It should create significant value for customers and the custo-mers’ customers.

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. It should create a sustainable position within the value chain thatenables the company to capture its fair share of the value.

. It should provide a distinctive competitive advantage from thecustomer’s point of view.

. It should target specific segments and customer needs to enableseamless execution.

In today’s economy, companies have to choose between the two fundamentalmodels: a value-added strategy – high benefits at a price premium – or a no-frillsstrategy – basic benefits at an average industry price. In industry after industry,the squeeze is alive and well for the middle market offering. For example, in retailall of the profitable growth is taking place either at the high end – e.g., Nordstrom– or within the no-frills segment – WalMart, Target. Similarly, in the airline indus-try, Emirates and Singapore Airlines are prospering at the high end and South-west Airlines and Ryanair at the low.. Value-added provider: In this model, the goal is to deliver a valueproposition that customers and their customers will consider cre-ates higher benefits than competitors’ offerings and that they willbe willing to pay for.

. No-frills offering: In this model, the goal is to seamlessly executeagainst the customer’s basic service and quality requirements at aprice that differentiates the offering from that of competitors inthe eyes of the customer. As Dell and Southwest have demonstrat-ed in other industries, this does not necessarily mean the lowestprice.

The two thematic go-to-market business models can be pursued either on a corpo-rate level or business unit by business unit.Developing the optimal go-to-market model requires deep customer and value

chain insights that are tailored to the unique market intrinsics of different prod-uct/market segments. For instance, commodity businesses are likely to havemuch less sophisticated business models with fewer degrees of freedom for differ-entiation. The game is likely to revolve around out-executing the competition. Onthe other hand, more differentiated products are likely to have far greater degreesof freedom and may entail much higher levels of go-to-market sophistication tomaximize value capture.

21.1.2Value Chain Insights/Customer Segmentation

At the heart of creating a revenue advantage is the need for chemical companiesto complement their asset-forward view (i.e., maximizing asset utilization) with amarket-back view (i.e., maximizing margins based on what customers are willingto pay) of customers’ current, latent, and unmet needs. This requires the develop-ment of much more sophistication and understanding of the marketplace and

27121.1 Defining World Class

21 Creating a Revenue Advantage through Sales and Marketing Excellence

customer needs. Revenue-advantaged companies have a much greater under-standing of the market, customer needs, and value chain discontinuities thantheir competitors.. Where is 100 percent of the global demand for our product bycustomer and application?

. What is the global market price band and what drives the pricebands across regions, segments, and applications?

. What is the value added of the product through the value chain?

. What profit differentials exist across markets and customer seg-ments based on the unique characteristics of the marketplace?

Developing and operationalizing a segmentation approach that changes sales andmarketing behavior and leads to bottom-line impact is a significant undertaking.A segmentation approach must be relevant and actionable, leading to changes inbehaviors (e.g., different value propositions, alternative sales and service models,different price/benefit positioning of offerings, differential margin expectations).Different levels of segmentation are required depending on the go-to-market

model and the organization’s current capabilities. In our experience, the most val-uable segmentation approach is based upon profit potential and needs. On theprofit potential side, the key issue is whether or not a customer’s profit potentialwarrants a customized, tailored (with a menu of options), or standard offering.On the customer needs side, we see four different behaviors in purchasing: custo-mers will buy on price, service, product attributes, or “win-win” performance part-nerships.

21.1.3Target Customer Identification and Value Proposition Design

Once a differentiated understanding of the marketplace has been obtained, it isimportant to decide which segments and specific customers the organizationaspires to serve and, equally importantly, which ones it will not target. In mostchemical companies today, this is a significant mindset shift. In general, mostchemical companies are volume-focused, and have never met an unattractive cus-tomer.The dilemma for most chemical companies today is that a 20/90 rule applies to

customer performance – 20 percent of customers typically account for 90 percentof profit margin (Fig. 21.3). The challenge is what do with the long tail of custo-mers that add little incremental margin to the overall bottom line. In mostinstances, companies have decided that the best thing to do is to enhance the prof-itability of the tail through aggressive pricing actions. In other situations, theyhave decided to redefine the value proposition and overall offering to enhance theprofitability of this customer group or move these customers to distributors.The challenge is further complicated by the fact that most companies today do

not have a good understanding of where to find the untapped business in the mar-ketplace, and what price or margin potential exists for this “white space”.

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21.1 Defining World Class

Fig. 21.3 Customer revenue and margin concentration.

In today’s environment of sophisticated purchasing techniques and wider-rang-ing product sources due to entrants from emerging markets, it is critical forchemical companies to create distinctive value propositions for a focused set oftarget customers by answering three fundamental questions:

1. Where, within the overall market price band, do they wish to compete? Inwhich geographies? Which market segments? Which needs-based seg-ments?

2. Where, within the overallmarket price band, do theywishNOTto compete?3. What value proposition will enable enterprises to capture their fair share of

the profit pool, and create a differentiated offering versus competitors?

21.1.4Defining the Customer Interface Model

In light of the targeted customer base and value proposition design, chemicalcompanies must align their delivery models to what their target customers arewilling to pay for. In general, the chemical industry has typically given away forfree many of its value-added sales and technical services within the current valuepropositions, for instance high frequency of interactions, high frequency of trans-actions, visits to multiple plants, and others. These sales and technical serviceshave become an industry norm rather than a way to differentiate offerings.The majority of chemical companies offer a wide range of channel alternatives –

e-channels, direct sales, customer service, third party distribution, technical ser-vice. This multi-channel approach has greatly increased customer flexibility andthe choice of alternative relationship models, but has done little to reduce theinvestment in direct customer interface capabilities or to differentiate players’ ser-vice offerings. Primarily, it has added complexity and costs to the delivery system.

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To counteract this phenomenon, chemical companies should consider the fol-lowing options:. Differentiating channel offerings to customers based on whatthey are willing to pay for ( e.g., direct, inside sales, e-sales, thirdparty distribution)

. Explicitly charging higher prices or incremental fees for differen-tiated capabilities that create substantial value for the customers(e.g., rush orders/rapid delivery dates, less than truck load ship-ments, short lead times)

. Creating a low cost customer interface model for specific seg-ments that provides only the bare necessities to complete a trans-action.

For example, Dow Corning has created a specific channel and value propositionin its Xiameter brand that provides a no-frills/low-cost channel to those customerswho simply want a basic product/service offering at a low price. Dow Corningreports that this model has been extremely successful in opening up a new cus-tomer base, driving volume growth, and generating attractive margins.

21.1.5Pricing Excellence

At the end of the day, creating a revenue advantage hinges on the ability of thesales force to achieve the right contract terms, at the right price, at the right vol-ume, at the right customers. While the concept is simple in theory, putting it intopractice has been an enormous challenge for chemical players. Challenges typical-ly advanced by the sales force include: “We have to cut our price to meet a compe-titive offering,” “We need the volume to base load our facilities,” “I know thosecontract terms are one-sided and expensive, but that is the industry norm.”While these challenges are valid and frequently encountered, a dramatic

improvement in their overall pricing capabilities would deliver substantial valueto many in the industry. Chemical companies have spent years lowering costs andcreating new innovations, involving a great deal of hard work and investment –why give the advantage away by underpricing?According to Marn, M. et al., excellent pricing requires distinctiveness on three

levels:. Transaction pricing:How do you decide the exact price to assigneach customer transaction – what base price, discounts, allowan-ces, adjustments, and other incentives?

. Product/market strategy:Within each market segment, what pricelevel gives your product the optimal price/benefit position relativeto competitors?

. Industry strategy:How do industry structure (supply and demand)and competitive dynamics affect overall price levels? What actions

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21.2 Building World Class Revenue Capability

are required to maximize margins in a highly volatile raw mate-rial environment?

Achieving pricing excellence requires a significant shift from a volume to a mar-gin mindset, enhanced frontline tools, and significant capability building.

21.1.6Performance Management

The glue that holds an enhanced revenue capability together is a margin-orientedperformance management system. Most chemical companies today have verysophisticated operations and capital allocation performance management sys-tems. On the revenue side, this is often a different story. Capital projects, oftenworth less than USD 500,000, are debated through rigorous performance dialo-gues and detailed financial analyses. On the flip side, the sales team makes multi-million dollar decisions on large customer contracts in a relatively ad hoc manner.Key elements of an enhanced revenue performance management capability

include:. Establishment of a revenue scorecard that includes metrics andtargets (both impact- and capability building-oriented)

. KPIs cascaded throughout the organization that clearly define theunique role, metrics, and targets that, when integrated, enablethe organization to achieve its margin expectations

. An explicit understanding of historical and expected customerprofitability by product and by transaction, with a forward-lookingview on raw material costs.

21.2Building World Class Revenue Capability

Developing a world class revenue capability is a complex process and requires aparadigm shift in most organizations. To achieve this change, companies need todevelop a commercial system, the set of core capabilities and organizationalenablers that work together to create significant value and sustainable competitiveadvantage. Five key components are required to create a world class commercialsystem (Fig. 21.4):. Performance expectations: Significantly change the aspirations onthe expected performance trajectory

. Program design: Focus on what matters

. Commercial toolkit: Put in place the right tools to solve the rightproblems

. Capability-building agenda: Build the right skills and providecoaching

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Fig.

21.4

Com

mercialop

eratingsystem

.

21.2 Building World Class Revenue Capability

. Mindsets and behaviors: Make sure you have the right people inthe right jobs doing the right activities.

Our experience suggests that all five of these elements are critical to success. Anyweak link in the commercial system will lead to suboptimal results.

21.2.1Performance Expectations

The basic principles of successful change management also apply to creating acommercial system – set stretch aspirations (i.e., performance expectations thatrequire the organization to think radically and NOT incrementally about becom-ing excellent in sales and marketing), make it one of the top three strategic priori-ties, ensure senior management leadership, sustain focus to ensure the journey iscompleted, and invest sufficiently in skill building. The challenge lies in living bythese guidelines. This must be viewed as a way of changing the way the companydoes things rather than as a new initiative.

21.2.2Program Design

It is important up front to spend time on developing a game plan to embed thenew commercial system into the organization. A critical aspect of this designphase is developing an explicit articulation of what the organization is trying toaccomplish through an enhanced go-to-market value delivery system. There aretwo thematic options:. Integrated front-line sales and marketing performance improvement:Step-change, immediate performance improvement throughdeliberate action and process change

. New commercial business model: Radical change/innovation in thevalue proposition and delivery system.

21.2.3Commercial Toolkit

Each element of the go-to-market value delivery system is likely to require the de-velopment of new tools and techniques that enable enhanced transparency andfaster and improved fact-based decision making. This starts with enhancing thetransparency of customer profitability, to gain an understanding that goes deeperthan annual overall profitability by customer and provides transparency by cus-tomer, by product, and by transaction. Averages quite often disguise improvementopportunities – 50 percent of transactions are below the annual customer profit-ability.

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In addition to customer profitability tools at the transaction level, additionaltools will need to be implemented and delivered to the accountable individuals inareas such as customer segmentation, target margin setting, contract terms poli-cies, raw material cost movement expectations, and customer/product mix optimi-zation.

21.2.4Capability Building Agenda

The commercial system must address the central question of how the organiza-tion is going to build new and sometimes radically different capabilities withinthe entire sales and marketing organization. In many instances, these capabilitiesneed to be instilled in individuals who have many years of experience in the oldway of thinking and are resistant to change. In addition, successful implementa-tion may require an influx of new talent.Embedding these new capabilities in the organization requires a learn-by-doing

approach, with constant reinforcement of the desired behaviors and consequencemanagement for non-compliance. Allowing people to opt out because of seniorityor good past performance is a potentially fatal sin. Elements of a successful capa-bility building program include:. Leadership by credible change agents. A learn-by-doing training approach that requires the applicationof new tools and techniques to current customer issues andopportunities

. Reinforcement through an ongoing capability building agendathat includes getting repeated practice in using the new tools andprocesses.

21.2.5Mindsets and Behaviors

Quite often, the greatest challenge companies have to overcome in creating a rev-enue advantage is the organization’s existing mental model of the right way toconduct commercial activities. This is often reinforced by the conversations pro-cess and performance dialogues that take place within the organization. It is criti-cal to develop a tailored influence model to make the required change happen andstick. This requires an explicit understanding of the fundamental changes in themindsets and behaviors of marketing and sales decision makers that will beneeded to enable the successful execution of the new commercial system.There are four key elements to reprogramming the mindsets and behaviors of

the organization (see Chapter 24, section 3.2 for more detail):. Fostering understanding and conviction: Ensure each individualclearly understands the performance requirements and believesthat they are meaningful and appropriate

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References

. Providing effective role models: Ensure respected people at all levelsof the organization behave in the new way

. Reinforcing with formal mechanisms: Align the structures, pro-cesses, and systems to reinforce the desired changes in behavior

. Developing skills and talent: Ensure each individual has the skillsand competences to perform with the new commercial system.

While these elements may seem basic and simple, it is extremely difficult toimplement them within large, complex organizations. Quite often, it will requiresignificant mindset shifts and symbolic actions to overcome institutional barrierssuch as: “No one has ever been fired for agreeing to a lower price…but many havebeen fired for losing volume”; “Our customers and competitors set the price… wejust have to be competitive”; Our customer contract terms are industry standard…they have existed for years… there is no way we can change”; “I realize that wedon’t make much money on this large customer…. but they are strategicallyimportant to us as we have been their preferred supplier for 20 years”.

21.3Summary

. Executives of chemical companies today must ask themselves thecentral question – is it time to undertake a second paradigm shiftto create a revenue advantage to complement an operational one?

. A revenue advantage is a significant opportunity with large poten-tial financial rewards. However, it is not easy to achieve.

. It requires the development of an integrated go-to-market valuedelivery system based on six elements.

. Creating a revenue advantage through sales and marketing alsorequires a multi-year transformation that turbocharges the devel-opment of the latent marketing and sales gene within the organi-zation.

References

Marn, M., Roegner, E., and Zawada, C.: The Price Advantage,John Wiley & Sons, 2004

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