June 11, 2003 - Distribution Channel Commentary (DCC) # 28

Greetings:

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THIS WEEK’S TOPICS:

  1. TWO ARTICLES ON WHY AND HOW TO GROW PROFITS
  2. RAISING PRICES AND TERMS; CASE STUDIES
  3. HIGH PERFORMANCE PERSONNEL SYSTEMS (ANNON. SLIDE SHOW)
  4. "I.T. DOESN’T MATTER" EXCEPT FOR THE TOP 3%+ OF ALL DISTRIBUTORS
  5. TRADE SOME GUILT FOR EXCESS STOCK AND FREE ADVERTISING?
  1. TWO ARTICLES ON WHY AND HOW TO GROW PROFITS

It is amazing to me how complacent many private company executives seem to be about their poor profitability. None of them like it; many wish that factors outside of their company and control would improve so that they could make more. Very few see "profits" as an integral, long-term, cost of both capital and financing the future for all stakeholders’ needs that must be covered. Are a lot of us unwittingly (?) liquidating our businesses and its eventual, on-going valuation a lot more than we think? What should we do about it? Perhaps some quick refresher articles on the real purposes of profits and why all employees have to become more responsible for creating profits or it won’t happen?

Here are two quick, hopefully inspirational reads:

"The delusion of ‘profits’": a June 2nd , op-ed article in the Wall Street Journal by Peter Drucker (originally written in the mid-‘70s; obviously timeless wisdom worth recycling) at this URL: http://www.opinionjournal.com/extra/?id=110003570

If you can’t access the link, because the online journal is a subscription service, the gist is that profits are not anything "extra or surplus", but rather a cost of both capital and the future well being of all stakeholders, especially employees. (These days most employees are probably not taking their jobs and pay for granted and might like to be more of the solution in helping to insure their job security, growth and retirement.)

These subjects are covered thoroughly and simply in our video, "High Performance Distribution Ideas for All" (Section 2). You might also skim through articles on our site numbered 5.14 (5_14.asp) and 2.16 (2_16.asp) for more thinking on how to reframe "profits" as "necessary costs" and get more help from all employees.

"When Profits Fall" by Deborah House at this URL: http://www.usbusiness-review.com/0302/01.html (While at US Business Review check out some of the other articles; this online source tends to have more substantive articles aimed at small businesses.)

Some key themes in Ms. House’s article are:

  1. Maximizing profitability requires everyone’s effort.
  2. CEOs who generate great sustainable profitability do not let all employees reverse delegate all of the responsibility for profits, raises, growth, etc. up to the top managers; they make them all (optimally and sufficiently) responsible.
  3. "True intra-preneurs rise to the top as more risk (with corresponding higher rewards) shifts to the individual."
  4. "The other benefit to a real pay-for-performance system is that employees (and potential employees) tend to self-select out and find a job with companies that have lower expectations."

For those company managers who are trying to figure out the best way to: downsize, upgrade, refocus and revive both morale and results, now is the time to:

  1. Go open book (article 5.14) (5_14.asp)
  2. Re-think metrics that will speak to and guide all employees (article 2.16) (2_16.asp)
  3. Re-think and upgrade informal personnel systems and their underlying unspoken assumptions (see topic #3 below)
  4. Read on, because the theme of topics 1-4 is how to get all employees to be more of the service value creation and selling process that in turns grows profits.
    2.   RAISING PRICES AND TERMS; CASE STUDIES

If we could raise prices and charge more fees for unbundled services, we could improve profits. Lots of previous commentary column inches have been dedicated to this. Perhaps the best one discussion is in DCC # ed 13.1 entitled, "What’s wrong with margin enhancement programs?" (13commentary.asp). For video users, you will also want to immediately go to, watch and have some discussions over module #4.10, "Selling and Getting Paid for Better Service"

A client has a new story to add to the pile. This particular chain concluded a few things about their inside sales force:

  1. If their inside sales people were not measured, let alone compensated on extra charges for extra services, most of them tended to waive most of the standard book price fees most of the time to please customers. Far fewer seemed to charge the fees a greater percent of the time.
  2. After diplomatically, disguised personality testing of 10 of their most aggressive and 10 of their most appeasing, passive inside sales people, they concluded that as many as 70% of their insides sales people would have real problems dealing with discretionary pricing and terms issues. These folks just didn’t have the mental and emotional make up to be flexible and sufficiently aggressive for an array of fee-charging opportunities.

What to do? How about "Push the Wheel of Learning" and "Make Good Mistakes" failing and falling forward (see annotated slides 10 and 11 in this slide show: Knowing_Doing_Gap_slides.pdf)

Here’s the theory behind a one-branch, test-cheaply experiment. Rather than overhauling the entire inside sales force, it seemed wiser to segment customers based on historic profitability and future potential in order to serve, price and term them differently with no exceptions allowed by the inside sales desk. If, however, a customer enjoyed a high-enough, strata ranking and insisted on an exception, then there would be one special-skilled, designated person per office to hear and decide on the plea. This would immediately take pressure off of all of the inside sales people. The system wouldn’t allow any exceptions for customers that were typically small and/or break-even at best. And, it would be interesting to monitor different sub-segments of customers’ reactions. How many (profitable, unprofitable, potentially big, forever small and chiseling, etc.) customers requesting a break would:

  1. Refuse the appeal process and go elsewhere to presumably place the order.
  2. Go ahead and place the order and pass on the appeal process.
  3. Pursue the appeal process, be denied and still place the order.
  4. Do "b" and go elsewhere (for how long?) to presumably place the order (and all future business?) If we have the best total service value, will they go on strike, but then come back on our terms?

When confronting customers over any type of concession demand, it would help enormously to know two things and have that intelligence built into the company’s information capability:

  1. Is the customer historically profitable or not? And, do we have some rough estimate going forward on their lifetime potential profit contribution (not just GM$) that might raise or lower their historical rating?
  2. Does the distribution location have superior service metrics and therefore total procurement cost value for the customer type that is asking for the concession, so that we are dealing from strength when a customer makes a concession request?

(For much more prescriptive information on the why’s and how’s of: segmenting customers and serving them differently; measuring, achieving, selling and getting paid for service excellence value; and lots more - we recommend our 23 page "strategy paper" available free via email to karen@merrifield.com)

What hidden issues does this case also raise? How about personnel issues like:

  1. What type of person does this company want to hire into their inside sales positions going forward considering the dramatic difference in aptitude capabilities between the top 10 and the bottom 10?
  2. How much and how fast can employees be taught, cross-trained and encouraged to pursue a path of mastery towards "black-belt, jedi-master competence in how many different skills?
  3. Hiring best people and training them is nice, but doesn’t this have to be preceded by thinking through the teachers (managers), the location’s strategic people needs, the personnel systems that improve the success rate of the hiring process, etc. When doing any new effort consider using the "kinetic chain" (article 2.1 - 2_1.asp) and video module 5.10) to design a holistic and internally consistent implementation solution. If one link in the chain is weak or mis-aligned, the rest of the partial solutions will fizzle.

If you read between the lines in the article referenced in #1 entitled "When Profits Fall", you will also see the same personnel systems raised. Perhaps FedEx’s motto – people, service, profits – says it most succinctly of all. If we don’t rethink all 7 of the natural, chronological personnel systems that we are currently doing, more or less, we won’t ever be able to grow profits to the sustainable cost level that they need to be.

    3.   HIGH PERFORMANCE PERSONNEL SYSTEMS OVERVIEW (SLIDE SHOW)

If you go to our web site, click on "slide shows" and click on the slide show with the same title as above, you will find 19 slides with 4700 words of notes. Don’t panic! You can just look at the pictures and skim the commentary as you like. (This should be posted within the next 24 hours)

    4.   "I.T. DOESN’T MATTER" EXCEPT FOR THE TOP 3%+ OF ALL DISTRIBUTORS

In DCC 26.4 26commentary.asp, we first touched on the fall-out over the latest Harvard Business Review article entitled "I.T. Doesn’t Matter". Well, in the last two weeks the hub-bub has continued to grow, and at some point in the aftermath of a purposely controversial article, a good summary article comes along. Here’s the URL to a short one-page that does just that from the latest Fortune magazine. http://www.fortune.com/fortune/fastforward/0,15704,454727,00.html

Some of the passages from the column that I liked were:

  1. "The source of competitive advantage is what you do with the information that technology gives you access to. (So, everyone can have the same basic software capability, but there are big differences on not only how people use the tool’s potential, but what informational choices they make for capturing, massaging, interpreting, sharing and acting on information.)
  2. "Look at the business powers, (Wal-Mart, FedEx) they are all waging information warfare.
  3. "A holistic view of the customer…is still shockingly rare…my company is drowning in data but starved for information. (You don’t have to have a perfect, total view of the customer; it just has to be strategically more helpful by a magnitude over your competitors. Start with simple profitability ranking reports of customers.)

If you skim through our "strategy paper", we have now highlighted passages that describe what strategic analysis information distributors should seek and how/why they need to share "strategic performance information (SPI) with all employees to achieve high performance economic results. It is especially easy to do when 90%+ of the competitive distributors continue to look at and react to too much financial data. If you are looking for more ways to make your IT investment matter, request our "strategy paper" from karen@merrifield.com.

  1. TRADE SOME GUILT FOR EXCESS STOCK AND FREE ADVERTISING?

I’m hoping that some of you in reader land might fit the following stream of consciousness:

"Gee, I really appreciate Bruce’s commentaries. I’ve gotten enough value out of them that I should really encourage him to keep doing them. I know, he consumes a lot of t-shirts playing tennis during the summer, maybe he would like some of our extra, dust-collecting (preferably white, size XL) company t-shirts or polo shirts that aren’t too obnoxiously plastered over with our commercials and logos. Bruce’s tennis ability probably will not detract from our brand value, and he will at least know that his advice is still worth a great t-shirt. That should keep him cranking out stuff for his web site!

Any contributions would be appreciated!

Bruce Merrifield

Bruce@merrifield.com

919-933-7474