© 2004, Clark Gilbert, Harvard Business School Page 1 Professor Clark Gilbert Harvard Business School Sales and Distribution Management With Case Study.

© 2004, Clark Gilbert, Harvard Business School Sales and Distribution Management Sales and Distribution Strategy Sales involves delivery and transfer of ownership of the product or service to the customer It forms the beginning of the latter part of the supply chain post manufacture Sales constitutes the direct and most intimate contact of the firm makes with its customers Sales is responsible for the fulfillment of the promise made to the customer by its predecessor function- marketing While marketing is responsible for creation of a customer, sales and after sales service are responsible for servicing and retention of the customers

© 2004, Clark Gilbert, Harvard Business School Areas of Sales Management Responsibilities Forecasting of aggregate and product wise sales, using past data and incorporating current and future trends Designing and managing the sales workforce to meet the forecast and build long term relations with associates Decide on critical aspects of sales policy including pricing, credit terms to customers and settlement of claims To closely liaise with After Sales service to present a united customer care front to associates and consumers

© 2004, Clark Gilbert, Harvard Business School Role of Sales Management The larger concept of marketing is the creation, servicing and retention of customers and markets This comprises identifying customer wants, designing and developing products/services to meet these wants Designing products, deciding initial pricing,building awareness, persuasion-role of marketing function Sales role-Actual delivery of products/services to the customer maximizing convenience and ensuring satisfaction Finally fulfilling the promise made to the customer through sincere and effective after sales service

© 2004, Clark Gilbert, Harvard Business School Role of Sales Management Marketing covers want identification and development of appropriate products/services Sales involves transfer of ownership and possession to the customer in exchange for the price she pays Retention of the customer takes place in the after sales and customer service part of the larger marketing chain

© 2004, Clark Gilbert, Harvard Business School Role of Sales Management Effective transfer of possession and ownership to the customer This has to be done in the right place, right time and the right manner Choice of channel members, deciding the terms of engagement with channel partners, Sales promotion and merchandising are key responsibilities Effective liaising with Marketing and manufacturing are essential ingredients for successful selling

© 2004, Clark Gilbert, Harvard Business School Role of Sales Management Timely and accurate information on gross sales and by product, studying current sales trends and projecting future trends are important responsibility elements Sales has to be the secondary/tertiary sales which represents consumer off take and not as is usually the case reflect primary i.e. “push sales” Sales constitutes the first point contact with primary and secondary customers Image of a company and its business prospects are critically impacted by the attitude and the performance of the sales force

© 2004, Clark Gilbert, Harvard Business School Managing the sales force Three fundamental issues: the right organization, the right sales force and the right evaluation and compensation system Key to sales force organization is the level of aggregation over product lines and choice of geographical coverage Most Indian companies have common sales force for all product categories. A few like Philips have segmented sales force viz. audio and video products have separate sales force Deciding the mix between specialized segmental skills and the cost benefit analysis to justify the decision is key to sales force organization

© 2004, Clark Gilbert, Harvard Business School Sales force strength and organization No of persons required at various levels and positions is decided based on geographical coverage and intensity of coverage of channel outlets (Break bulk, distributor and retail) Benchmarking with key competitors is useful for new sales force as well as updating existing sales force Back office and infrastructural support are key inputs in determining the sales force composition Establishing performance standards, being “best in the class” should be the objective Qualification should include aptitude as well as attitudinal requirements. Learning curve inputs also vital

© 2004, Clark Gilbert, Harvard Business School Compensation and Incentive Systems Compensation should be competitive both externally and internally. In India “in hand” is relevant An effective incentive system sets aggressive but achievable and transparent targets (most Indian companies fail here) Should reflect business priorities, be simple and easy to administer Supporting requirements are reliable forecasts and rational budgeting Most important- focus to be on secondary i.e. consumer sales and not primary i.e. Invoice numbers

© 2004, Clark Gilbert, Harvard Business School Managing the Sales Force Deploy according to desired territorial configuration: ensure adequate coverage breadth wise and depth wise Continuous interaction with all channel members to be ensured. Partnership is the focus Role of senior and top management crucial. Every senior/top person to make sales visits. Helps to be in touch with market realities Sales persons whereabouts to be continuously monitored. Regular sales visit and performance reports a must Training both class room and on the job to be a continuous and evolving initiative. Mentorship to be institutionalized Regular periodic transfers between marketing, sales and after sales service personnel helps to improve integration and versatility between the three arms of the larger marketing function

© 2004, Clark Gilbert, Harvard Business School Sales Strategy-choice among several options Relationship strategy aims at developing a holistic partnership with all those involved in the buying decision e.g. computers and industrial marketing Double win strategy ensures outcomes for both buyer and seller, requires empathizing from both, is essential part of any selling strategy Heroic sales strategy involves money back, free replacement and persistent after sales contact. Most successful in maximizing loyalty and retention Customer centric instead of product centric strategy shifts emphasis towards customer and away from short term sales person strategy which is increase numbers.

© 2004, Clark Gilbert, Harvard Business School Methods of Selling Selling through channel partners(distributors and dealers) Direct selling which bypasses channel associates works for some products(personal care,household-Avon,Amway, Eureka Forbes) Sales through large retail chains in house brands (Wal-Mart, Home Depot) Mail order sales(Sears), telemarketing of services increasingly popular-to be questioned in terms of appropriateness(standardized, low involvement products eligible)

© 2004, Clark Gilbert, Harvard Business School Channel Management and Channel strategy Distribution channels have different members each forming a link in the chain between company and customer We start with Carrying and Forwarding agents who “break bulk” Distributors, wholesalers and retailers form the rest of the chain in that order(they are all primary customers) not final customers Most channel members operate on remuneration of fixed costs plus variable margins on goods sold or moved

© 2004, Clark Gilbert, Harvard Business School Channel strategy decisions Channel selection first step: no of factors include market factors, competitors, intermediary availability and product factors Market factors include customer preference for place of purchase viz. supermarket, departmental store, neighborhood outlet Geography is important(rural customers in India prefer centralized selling locations,whereas urban prefer to shop closer to home Sometimes new entrants can choose locations overlooked by incumbents (Wal- Mart rural Arkansas while incumbents preferred big cities)

© 2004, Clark Gilbert, Harvard Business School Some Channel Definitions Distributors are bulk buyers and sellers of company products/services. Perform all functions of primary customers viz. bulk storage, retailer servicing and participation in sales promotion Wholesalers sometime synonymous with distributors but at others one step down the logistic chain handling sub territory of larger distributor area Agents/brokers are channel partners who do not take title to company’s goods but act as intermediaries between seller and customers (primary or secondary) –resorted to in initial stages of establishing post manufacturing supply chain Retailers are the last link in the supply chain, interface with the consumer/customer and are responsible for creating and maintaining the firm’s image with them.

© 2004, Clark Gilbert, Harvard Business School Channel selection criteria Most firms initially go for established channel members already partnering big players like H.L.L or Nestle Timex Watches decided to go in for enlightened, aggressive newcomers and this paid off handsomely Stage in product life cycle important. In initial stages risk with newcomers preferred. Later choice with company either veterans or more new comers High tech products like info. Hardware requires substantial company support through trained personnel. Low tech products in personal care, personal ware can do with fewer company support personnel Low value products can be sold through wholesalers and general retailers. However high value products including appliances, white goods require focused retailing and excellent after sales service infrastructure In all cases close contact with ultimate customers is a must. Companies ignore this basic wisdom at their peril.

© 2004, Clark Gilbert, Harvard Business School Roles/responsibilities of channel members Carrying &forwarding agents maintain company stock and move it to distributors/wholesalers. Invoicing to primary customers from C.F.As Wholesalers/distributors carry their own stocks and service retailers. Adequate territory coverage is their responsibility Retailers stock, display and sell to their customers. Key requirement is accurate and timely reporting of stocks based on which alone reliable records of demand can be built Retailers should also do the best in selling, and building rapport and goodwill with customers and in advising them and guiding with their best interests and the company’s as well in mind

© 2004, Clark Gilbert, Harvard Business School Company responsibility to channel members Channel members should not be loaded with excess inventory which will cause resentment and lower their commitment Every channel member should be given appropriate mix of product-fast moving, medium and slow moving. Non moving product should be removed by company at periodic intervals. Discount schemes do not solve the problem Company should provide adequate primary and secondary display to channel members and point of purchase material Good appraisal and reward system should be put in place to reward the right partner performance. Non performers should be gradually weeded out. Long term orientation should be the key to assessing all channel partners Frequent and caring interaction with channel partners and prompt addressal of grievances will help to build and sustain enduring partnerships as opposed to opportunistic alliances

© 2004, Clark Gilbert, Harvard Business School Indian Distribution Scenario Traditional role of intermediaries viz. set up minimal infrastructure and expect guaranteed returns Extremely high cost of logistics Lowest margins in the world Expectation of extremely low prices from Indian mass market customers further pressurizes already low returns

© 2004, Clark Gilbert, Harvard Business School Indian Distribution Scenario Challenge of working with low product portfolios and low inventories not acceptable to firms as well as channel partners Poorly organized and managed distribution and retail operations. Company owned and managed facilities not much better Continuous pressure on sales force to achieve unrealistic targets results in equally unrealistic pressure on channel partners Prevailing mindsets have to change for both firms and channel partners

© 2004, Clark Gilbert, Harvard Business School The Sales Organization Functions include planning, administrative and executive functions Planning features forecasting, budgetting and formulation of sales policy Administrative function comprises recruitment of sales force, training, appraisal/reward systems and control Executive functions include sales promotion and selling routine i.e. execution of customer orders\ Objective of the sales organization is to ensure achievement of the company’s sales and profit targets

© 2004, Clark Gilbert, Harvard Business School Forecasting Forecasting may be of total product/service sales or of sub product or individual products or combinations of all While forecasting is essentially a prediction of future sales, it usually is a projection of past sales incorporating credible trends Desirable to give more weightage to recent period sales. At least ten previous periods data should be taken for reliability.Most Indian firms ignore these to their cost

© 2004, Clark Gilbert, Harvard Business School Forecasting For cyclical industries, need to know the length of the cycle(might change as for Indian auto industry from 4 yrs up to 1980s to 5 years post 1980s) Amplitude as % change to be measured Cycles include macro economic cycles, industry cycles and inventory cycles(most Indian companies do not include these in their forecasts Finally consumer sales to be measured and forecasted and not sales to channel members as is unfortunately done

© 2004, Clark Gilbert, Harvard Business School Sales Budgets Sales budgets are overall sales plans enumerated in financial terms The forecast by gross units, product groups and individual variants to be converted into Re terms Expenses for promotions and schemes as well as infrastructure like hoardings and shop signage to feature Allowances for spoiled and obsolete product withdrawals to be included Targetted levels of overall receivables and acceptable age of receivables also part of budget

© 2004, Clark Gilbert, Harvard Business School Sales Budgets Budgets should be approved by senior sales executives with their marketing and financial counterparts and finally approved by top management Budgets should be reviewed definitely on a quarterly basis and preferably on monthly basis Changes should be minimal but incorporated into revised budgets after approval by top management

© 2004, Clark Gilbert, Harvard Business School Sales Policy Firstly the direct/indirect issue. Do we go for direct selling? Do we use distributors? If so how many in various territories and regions? How many in metros/large cities? Next to decide the terms of sale including credit terms and to whom various credit terms applicable(franchisees, direct and indirect dealers)

© 2004, Clark Gilbert, Harvard Business School Sales Policy Deciding minimum infrastructure for channel partners Intensity and frequency of coverage by sales personnel I.e. weekly/monthly visits to specific retail outlets and distributors and CFAs Warranty policy and ASS infrastructure to be decided.Training and supervision of Channel staff for various functions including logistics, motivation of retailers and handling quality issues are part of sales policy Need to involve Marketing and QC personnel in formulation of relevant aspects of sales policy where their contribution is critical

© 2004, Clark Gilbert, Harvard Business School Administrative Functions First step is the selection of sales personnel. Various sources including media, placement agencies and educational/vocational training campuses have to be tapped Employee contacts are useful for experienced personnel. Poaching seems attractive but is a short term approach

© 2004, Clark Gilbert, Harvard Business School Short term performance initiatives These are short term inducements to customers to buy more of the firm’s products These include discount, coupon sales, lucky draws and contests These require involvement of Marketing and finance groups to ensure best synergy of market enhancing and profit achievement objectives Problem is that most of these only result in altering the timing of purchase and do not contribute to increased sales during the year Further these contribute to brand dilution and ambiguity about real pricing points for the brand offering

© 2004, Clark Gilbert, Harvard Business School Some Suggestions It is better to build brand credibility, offer real value propositions to customers through relevant communication and strategic pricing Associates should be supported through adequate infrastructure including signage and merchandising support Finally associate remuneration should be competitive and permissive of realistic long term earning prospects Information systems and good evaluation/incentive schemes with a view to build enduring partnerships should form the keystone of associate formation and development

© 2004, Clark Gilbert, Harvard Business School Sales Organization Types Several types based on competitive specialization of selling orgn. Geographical orgn. most common where all firm’s products sold in each region -assumes demand patterns and associate capability uniformly spread Product type sales organization e.g. pharma cos have medicines, equipment and supplies organized in separate groups

© 2004, Clark Gilbert, Harvard Business School Sales Organization Types Orgns. based on customer types viz. Industrial, Institutional and Consumer categorization. IBM, Xerox, Publishing cos Activity function based including telemarketing, direct selling, and field sales- telecom firms follow this approach Hybrid sales orgns. Large cos evolve into this form of orgn. over time

© 2004, Clark Gilbert, Harvard Business School Recruitment,training and compensation of sales force Recruitment is process of locating, selecting and employing suitable persons for the sales force Matching to positions on the orgn chart and to job specs is essential Objective criteria and sound methods of testing/evaluating ensure good recruitment Over reliance on criteria such as quantum of prior experience a pitfall

© 2004, Clark Gilbert, Harvard Business School Recruitment contd. Reference check on previous employment experience and performance necessary Clear statement of expectations from new employees on conduct and performance a must Offer of emoluments and future prospects to be unambiguous(avoid vague “sky is the limit” promises-nobody believes them anyway)

© 2004, Clark Gilbert, Harvard Business School Training of Sales force Training needs flowing from job specs is the starting point. Understanding customer markets is critical Detailed product knowledge mandatory for all types of offerings. For low tangibility differentiated offerings(e.g.personal care), knowledge of emotional satisfiers helps Knowledge of the market place, competitors, channel associates and selling practices are focus areas Inventory management, good logistics practices and receivables management should be vital inputs

© 2004, Clark Gilbert, Harvard Business School Training of Sales Force Frequency, timing and manner of sales visits to various channel associates is fundamental training input Communication skills a priority with emphasis on receiving and rapport building(listening and empathising) Training methods include formal class room formats, field training, seminars and interaction with senior/top mgmt On the job training by superiors combining concept with practice should co-exist with general functional and behavioural training

© 2004, Clark Gilbert, Harvard Business School Compensation and Motivation of Sales Force Sales compensation through salary,bonuses and perquisites Significant part of compensation to be performance based. Care to be taken to set realistic, real world targets.

© 2004, Clark Gilbert, Harvard Business School Motivation of Sales Force Motivation is the driving force based on positive feelings that produces goal directed action It is necessary to reward goal directed action to ensure repetitive behaviour towards the goal/goals The first step obviously is to establish the right goals

© 2004, Clark Gilbert, Harvard Business School Right Sales Goals-the right approach Customer to be the focus always. Creation of new customers and retention of existing customers Primary and Secondary/final customers should merit equal focus. In fact primary customers are stakeholders too with their unique set of rightful expectations If we short change the primary customer, we are unlikely to fully meet the expectations of the end customer

© 2004, Clark Gilbert, Harvard Business School The Sales Goals The final goal has to be maximizing long term profits through optimizing the volume/margin relationship Channel inventory planning and control is critical Optimizing accounts receivables is another critical responsibility and therefore major performance variable Critical variable is retail sales which reflect consumer sales and therefore demand for company’s product/services

© 2004, Clark Gilbert, Harvard Business School Sales goals Unit of sales needs to be defined properly. For services like telecom, a unit of standard value (Rs. x representing a standard offering like monthly revenue) For merchandising, and signage joint goals for sales and marketing should be set Min. no of inventory turns for each channel partner should also be a sales goal. Recommended min 12 for every industry Min revenue/profit per sq.ft of space should be a retail target Regular and reliable reports should be a fundamental performance requirement

© 2004, Clark Gilbert, Harvard Business School Rewarding Performance as well as Potential Rewarding current performance in financial and non financial measures is intrinsic to motivation Need to spot & assess and develop potential through training and award of challenging assignments is the greater part of motivation Involve sales personnel in critical customer service areas like new product selection, pre manufacturing logistics. Establish contributions from sales personnel(feedback they carry from customers primary and secondary is input) Role of mentors is very important. Attaining the position of a mentor could be the ultimate goal of outstanding performers. Nurturing mentorship throughout the sales organization is key to superior competitiveness

© 2004, Clark Gilbert, Harvard Business School Channel Partner Management Need to select the right channel partners- new to the industry,new to business is the best Clear set of expectations to be communicated at selection(storage, inventory management, retailer servicing and support, timely and reliable information are key Competitive remuneration with accompanying rigorous performance standards Information about the sales responsibility domain, competitors and relevant socio,political, cultural impacters

© 2004, Clark Gilbert, Harvard Business School Channel Partner Management Providing initial and ongoing training on product, technologies, logistics practices and Info systems critical Periodic visits to company facilities and interaction with company personnel over all relevant functions viz. marketing, manufacturing, Q.C. and Finance/accounts Rewards and recognition through channel partner conferences an important motivating and enabling device Most importantly fostering the partner identity in all channel partners

© 2004, Clark Gilbert, Harvard Business School Company responsibility to channel members Channel members should not be loaded with excess inventory which will cause resentment and lower their commitment Every channel member should be given appropriate mix of product-fast moving, medium and slow moving. Non moving product should be removed by company at periodic intervals. Discount schemed do not solve the problem Company should provide adequate primary and secondary display to channel members and point of purchase material Good appraisal and reward system should be put in place to reward the right partner performance. Non performers should be gradually weeded out. Long term orientation should be the key to assessing all channel partners Frequent and caring interaction with channel partners and prompt addressal of grievances will help to build and sustain enduring partnerships as opposed to opportunistic alliances

© 2004, Clark Gilbert, Harvard Business School Merchandising Merchandising is the process of increasing visibility and appeal of products to increase saleability It includes product packaging, placement, promotion and “special pricing” One other form of merchandising is using the brand power of one organization to sell products of another.(sports personalities and entertainment cos lending their brand names to various products)

© 2004, Clark Gilbert, Harvard Business School Merchandising Mostly merchandising focusses on presentation of products including displays and special instore storage and packaging(gift bags, racks, trays), posters, danglers, special cards/brochures It also features discount schemes along with the pricing and packaging features Outdoor signage and on shop and in shop signage could also feature as part of merchandising

© 2004, Clark Gilbert, Harvard Business School Planning and evaluation Some aspects like signage should be considered as longer term and should feature as investment Others including displays and special packaging and pricing initiatives would be shorter term and should be expensed All expenditure should be justified in terms of real sales increase(not changing the timing of purchase by customer as in most festival sales)

© 2004, Clark Gilbert, Harvard Business School Planning and Evaluation Test marketing and post purchase surveys of customers should be the basis of evaluation One tip is that all merchandising should keep the customer in mind. Need to avoid feeding the creative instincts or egos of marketing personnel in the company Merchandising should be the joint responsibility of Marketing and Sales sub functions of the larger Marketing function

© 2004, Clark Gilbert, Harvard Business School Summary Defining larger Marketing process and Sales sub process Areas of Sales responsibility, forecasting, sales organization, selection, training and retention issues, compensation, motivation of sales force Sales strategy, types of selling viz direct selling, through channel members, mail order, e selling Sales budgeting, how to develop the budget as effective planning and control tool

© 2004, Clark Gilbert, Harvard Business School Summary Essentials of space planning and inventory management Channel members types and roles, selection of channel partners Mutual expectations of firm and its chnl. Partners, training, rewards/recognition Sales goals optimizing the long term volume/margin combination

© 2004, Clark Gilbert, Harvard Business School Summary Company responsibility to channel members including promotional and information systems support Merchandising basics, role of company and channel partners

© 2004, Clark Gilbert, Harvard Business School Page 55 Sustaining versus Disruptive Innovation Product Performance Time Performance that customers can utilize or absorb New performance trajectory Disruptive Innovation Pace of Technological Progress Sustaining Innovation Breakthrough Incremental Source: The Innovator’s Dilemma

© 2004, Clark Gilbert, Harvard Business School Page 56 Disconnect with Resource Allocation Disruptive Proposal Targets Different Customers in New Ways Introduces Different Performance Criteria Under Valued by Leading Customers Lowers Performance along Traditional Trajectory Lowers Gross Margins Marketing Manager Production Budgeting Committee

© 2004, Clark Gilbert, Harvard Business School Page 57 Performance E-mail applications Home-use Applications Disruptive technology: digital film Children’s Game Toys Applications for Silver Halide Film Technology Established players force new technology into old markets Disruption in digital photography Kodak’s Response ($1B in R&D)

© 2004, Clark Gilbert, Harvard Business School Page 60 Different Types of Innovations Low-End Disruption New Market Disruption Sustaining Innovation CUSTOMERS Overserved customers in low-end of existing market New customers or new contexts of use Most profitable customers in existing markets BUSINESS MODEL New financial or operational model that earns attractive returns at low prices New business model, often lower price points, new sales model & distribution channels Similar to existing model, improves or maintains margins TECHNOLOGY “Good enough” on traditional metrics but lower prices Improved performance on new attributes (e.g., simplicity, convenience) Improvements along dimensions valued by current customers New Market Disruption New customers or new contexts of use New business model, often lower price points, new sales model & distribution channels Improved performance on new attributes (e.g., simplicity, convenience)

© 2004, Clark Gilbert, Harvard Business School Page 62 7% 4% Quality of minimill-produced steel 12% 8% 18% 22% % of Tons Steel Quality 1980 1975 1985 1990 Rebar Angle iron; bars & rods Structural steel Sheet steel 25–30% 55% % of Margin Steel Minimills: A Low-End Disruption

© 2004, Clark Gilbert, Harvard Business School Page 63 Different Types of Innovations Low-End Disruption New Market Disruption Sustaining Innovation CUSTOMERS Overserved customers in low-end of existing market New customers or new contexts of use Most profitable customers in existing markets BUSINESS MODEL New financial or operational model that earns attractive returns at low prices New business model, often lower price points, new sales model & distribution channels Similar to existing model, improves or maintains margins TECHNOLOGY “Good enough” on traditional metrics but lower prices Improved performance on new attributes (e.g., simplicity, convenience) Improvements along dimensions valued by current customers

© 2004, Clark Gilbert, Harvard Business School Page 65 Established Markets Continue to Grow even as the Disruptive Markets Take Root 0 1000 2000 3000 4000 5000 6000 7000 8000 9000 10000 11000 12000 13000 14000 15000 1965197519811983198519871989199119931995199719992001 Source: ITI, Industry Statistics Programs; U.S. Microcomputer Statistics Committee Forecast, Data Analysis Group Mainframe Computer Market Minicomputer Market First Revenue Lead Sustained Revenue Lead Minicomputers Disrupt Mainframes Dollars ($billions) Phase I Phase II Phase III

© 2004, Clark Gilbert, Harvard Business School Page 67 Disruptive Proposal Targets Different Customers in New Ways Introduces Different Performance Criteria Under Valued by Leading Customers Lowers Performance along Traditional Trajectory Lowers Gross Margins Marketing Manager Production Budgeting Committee Disconnect with Resource Allocation

© 2004, Clark Gilbert, Harvard Business School Page 70 The Irony of Disruptive Innovation Growth Starts in New, Not Established Markets Product Performance Time Performance that customers can utilize or absorb New Net Growth

© 2004, Clark Gilbert, Harvard Business School Page 71 Established Business Established Business Disruptive Business Disruptive Business Net New Growth Net New Growth Starts Outside Established Business Displacement "Overall, the newspaper industry's involvement with the Internet has been one where it had a lot to lose and it's been trying not to lose it, as opposed to starting from scratch and having a lot to win." --Steve Yelvington, President of Online Newspaper Division Finding New Market Growth

© 2004, Clark Gilbert, Harvard Business School Page 73 RPV: Strengths Become Weaknesses Hiring & Training Product development Manufacturing Planning & Budgeting Market Research Resource allocation People Technology Products Equipment Information Cash Brand Distribution Processes Resources Values Ethics Cost structure/ income statement Size of opportunity The criteria by which prioritization decisions are made Core Competence vs. Core Rigidity

© 2004, Clark Gilbert, Harvard Business School Page 74 Capabilities in One Context Become Disabilities in Another Big enough to be interesting? Processes:How? What Margins Are Attractive? Cost structure Product Quality Resource Allocation Customer Feedback Planning Cycles Market Research Values:Why? “Organizational DNA”

© 2004, Clark Gilbert, Harvard Business School Page 75 Disruption through Portable Ultrasound “I had a call with a nephrologist where I literally told the sales rep to take the product out of the bag and show it to the physician. He didn’t do it. And I’m the President of the company…...We have all of these sales leads, but some of my reps are afraid of cannibalizing sales of higher-end hand carried systems.” President, Hand-Carried Ultrasound Company “I need to look at the kidney myself and see what’s going on. Every time I want to look I have to send the radiologist a patient… That’s not good. It doesn’t help me get my job done. I want to do it myself.” Nephrologist

© 2004, Clark Gilbert, Harvard Business School Page 77 Separate Disruptive Ventures Integrated Sites Millions of Page Views / Month Separated Sites Separated sites had nearly 4 million more page views 0 2 4 6 8 10 12 Penetration 6.5 10.4

© 2004, Clark Gilbert, Harvard Business School Page 78 Implications Disruptive technologies attack an established business, but provide enormous opportunities for new net growth Focusing on your core market can lead to organizational rigidity – Trying Harder Can Be Part of the Problem! Identifying these opportunities requires different lenses: Reconsidering technologies viewed as “inferior” in your core market Targeting “overshot” where the primary alternative is non-consumption Developing these opportunities requires different tools: A different development, review, and funding process than the core business A venture process that is patient for growth, not for proof of concept A willingness to look outside of core business—venture autonomy, talent, partnerships, and acquisitions Disruption can provide competitive advantage is the search for growth

© 2004, Clark Gilbert, Harvard Business School Page 80 HBS Definition of Entrepreneurship Pursuit of Opportunity Without Regard to Resources Currently Controlled Managing Uncertainty 1.Identify Critical Risks 2.Design Experiments 3.Stage Investment

© 2004, Clark Gilbert, Harvard Business School Page 81 Technical Operating Market Distribution /Pricing Team Environmental Which is the most important risk to understand and remove? Deal Killers, Path Dependencies, Costs, Investor Needs, Greatest Uncertainty 1) Identify Key Sources of Risk Total Venture Risk

© 2004, Clark Gilbert, Harvard Business School Page 82 Driver 3 Driver 2 Business Models: Fishbone Diagrams profits costs revenues Driver 1 Driver 2 Driver 3 Driver 1 Driver 2 Driver 3 Driver 1 Driver 2 Driver 3 Using the tool 1. Draw the key drivers of revenue and costs 1. Draw the key drivers of revenue and costs 2. Identify key drivers and assumptions 2. Identify key drivers and assumptions 3. Test sensitivity to changes in key drivers 3. Test sensitivity to changes in key drivers 4. Analyze how reasonable key assumptions are 4. Analyze how reasonable key assumptions are 5. Use the tool to surface key assumptions, logical inconsistencies, critical sources of uncertainty and important questions to ask 5. Use the tool to surface key assumptions, logical inconsistencies, critical sources of uncertainty and important questions to ask

© 2004, Clark Gilbert, Harvard Business School Page 83 2) Types of Experiments Partial experiments –buy information on “deal killer” source of uncertainty good when you know you don’t know something, risk of failure is high –case examples customer research before introduce product (Parenting, Tally Up) hire as consultant before hiring full time (Tally Up) background check on job candidate Holistic experiments –test entire model on small scale good to reveal ignorance-I.e., things you didn’t know you didn’t good to tests interaction between variables –case examples introduce product in trial before full launch (Onset vs. Knight Ridder) develop prototype with development partner (Tally Up’s beta version, E Ink) projection and reflection (ONSET ask VCs evaluate whole plan)

© 2004, Clark Gilbert, Harvard Business School Page 84 2) Risks of Experiments Experiments can be expensive –(Knight Ridder, E Ink, Segway) They can take too long –What if you finally get it right, only to find out that the market has moved or someone else has beat you to the punch? They can perpetuate –“Given the pace of our expansion, I don’t think we made mistakes fast enough and we didn’t learn from them often enough. The problem wasn’t just turning them on, sometimes it’s turning them off.” »-Bob Ingle, Executive Editor, San Jose Mercury News

© 2004, Clark Gilbert, Harvard Business School Page 85 2) The Value of Experiments Value greatest when: –Significant cost of failure –Significant probability of failure –Cost of the experiment is a small percentage of the total investment –The experiment yields fairly accurate results You can increase the value when: –Minimize both costs and timing –You impose variance on key questions, but control for other variables (Onset) –Have key milestones and ways of measuring progress –Change behavior as a result  enter vs. exit, product adaptation, adaptation subsequent roll-out

© 2004, Clark Gilbert, Harvard Business School Page 87 3) Staging Investment Only spend significant sums of money after big risks have been reduced. Examples –R&R doesn’t place manufacturing order until after K-Mart order is received –Knight Ridder waits on registration until execution and sales risk are reduced

© 2004, Clark Gilbert, Harvard Business School Page 88 SUCCESS INVEST NOW FAILURE SUCCESS Payoff - Investment - Cost of Test GOOD RESULTS INVEST - Investment - Cost of Test FAILURE RUN AN EXPERIMENT ABANDON - Cost of Test BAD RESULTS ABANDON Payoff - Investment - Investment 1 1 (1-P G ) 1 PGPGPGPG PSPSPSPS (1-P S ) P S|G (1-P S|G ) 3) Staged Investments and Value of Information

© 2004, Clark Gilbert, Harvard Business School Page 89 Capital Funding to Milestones aka “Old-Fashioned Venture Capital” Risk (ß) Valuation Idea is Feasible Technology Works A Customer Buys Seed Funding R&D Capital Go-to-Market Capital Expansion Capital P(success) = 30% Req’d IRR = 100% P(success) = 40% Req’d IRR = 70% P(success) = 50% Req’d IRR = 50% P(success) = 80% Req’d IRR = 30% Source: Lou Mazzucchelli, Ridgewood Capital

© 2004, Clark Gilbert, Harvard Business School Page 90 The “Fully Funded” Folly A Customer Buys Fully Fund IPO (……….pray……………….) Capital Risk (ß) Valuation Idea is Feasible Technology Works Source: Lou Mazzucchelli, Ridgewood Capital

© 2004, Clark Gilbert, Harvard Business School Page 91 Implications Risk is inversely related to value Entrepreneurial managers don’t take risk, the manage risk New ventures will: Develop in an highly iterative and staged process Employ a series of risk reducing experiments Business models will change multiple times Reviewing of new ventures requires that board members can: Considered plans that will change considerably Demand results, but on different metrics—opportunity recognition and milestone achievement Identify risks, stage investment, and value risk reducing experiments Embrace outside perspectives Creating the right context for reviewing new ventures is key—simply having powerful ideas and opportunities is not enough

© 2004, Clark Gilbert, Harvard Business School Page 1 Professor Clark Gilbert Harvard Business School Sales and Distribution Management With Case Study.

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© 2004, Clark Gilbert, Harvard Business School Page 1 Professor Clark Gilbert Harvard Business School Sales and Distribution Management With Case Study.

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