forces A forces How Top Sales Teams Drive Performance Executive Summary

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1 Executive Summary forces forces A T W O R K How Top Sales Teams Drive Performance

2 Acknowledgements GMA and McKinsey & Company would like to gratefully acknowledge the cooperation of the more than 20 GMA member companies that participated in the 2002 Customer and Channel Management Survey. In addition, a portion of this report is based on data provided by Information Resources, Inc., whose assistance is greatly appreciated. GMA is the world s largest association of food, beverage and consumer product companies. With U.S. sales of more than $500 billion, GMA members employ more than 2.5 million workers in all 50 states. The organization applies legal, scientific and political expertise from its member companies to vital food, nutrition and public policy issues affecting the industry. Led by a board of 42 Chief Executive Officers, GMA speaks for food and consumer product manufacturers and sales agencies at the state, federal and international levels on legislative and regulatory issues. The association also leads efforts to increase productivity, efficiency and growth in the food, beverage and consumer products industry. McKinsey & Company is a global management consulting firm that helps leading corporations and organizations make distinctive, lasting and substantial improvements in their performance. With approximately 6,500 consultants deployed from 83 offices in 43 countries, McKinsey advises companies on strategic, operational, organizational and technological issues. Over the past seven decades, the firm s primary objective has remained constant: to serve as an organization s most trusted external advisor on critical issues facing senior management. Forces at Work: How Top Sales Teams Drive Performance reports the key findings of the 2002 Customer and Channel Management Survey; the survey was co-sponsored by Grocery Manufacturers of America and McKinsey & Company, and Forces at Work was prepared by McKinsey & Company. Copyright McKinsey & Company. Do not reproduce, disclose or distribute the information contained herein without McKinsey & Company s express prior written consent.

3 Executive Summary forces A T W O R K How Top Sales Teams Drive Performance

4 forces AT WORK How Top Sales Teams Drive Performance Undeterred by analysts forecasts that sales will grow annually by no more than 4 percent through 2007, or by their own recent performance, U.S. consumer goods companies are setting aggressive growth targets and expecting their sales forces to rise to the challenge. Who will win big and who will fall behind depends in large part on the effectiveness of each company s sales force. To identify the specific activities that help companies achieve winning performance, McKinsey & Company conducted the Customer and Channel Management Survey in 2002, its sixth since The 2002 survey, sponsored by the Grocery Manufacturers of America (GMA) and McKinsey & Company, was married to a market performance analysis. We used outside-in data including analyst reports, annual reports, 10Ks, and data from Information Resources, Inc. to identify companies that outperformed their peers on a number of dimensions. These results helped us define winning for each business practice. Our survey captured sales practices, techniques, and trends at more than 20 leading U.S. food and nonfood companies whose combined sales totalled nearly $100 billion in more than 200 categories. The questionnaire, which covered 1997 to 2001, aimed to uncover the entire range of business practices that sales organizations influence or control. Based on the responses to the survey s 10 parts innovation, pricing and trade spend management, retail execution, supply chain, sales agent management, field sales, sales financials, organization, customer team leader/account manager, and top management we focused on how winners in each area behaved differently than other companies. This approach enabled us to identify the specific activities that distinguish winners from their competitors. Not surprisingly, given today s tough economy, every company is squeezing more sales force productivity and working harder to manage higher trade promotion costs. In the last five years, sales force expenses among surveyed companies decreased by eight percent while sales 2

5 force productivity grew 75 percent, from $4.5 million per sales person in 1997 to $7.9 million in Growth targets remain lofty, ranging from 5 to 15 percent annually over each of the next five years, even though sales grew just 4.3 percent a year, on average, between 1997 and To deliver on their own high expectations, manufacturers are asking their sales forces to contribute in new ways by giving the sales force a critical role in areas such as innovation or logistics. For example, innovation winners launched twice as many innovations as other companies and captured three times the sales for each launch, thanks, in part, to the sales force. As everyone raises the stakes, however, productivity-enhancing efforts create less of an advantage. While 1997 trade spend winners generated a 157 percent advantage in incremental volume versus their branded peers, today s winners garner only a 40 percent advantage. Despite diminishing returns, winning is still worth a lot, according to our analysis of eight sales performance levers, namely pricing, trade promotion, retail execution, headquarter selling effectiveness, supply chain, innovation, post-merger management and talent management. The top-performing companies in our survey those who excel in at least three sales force performance levers made significant strides between 1997 and 2001: their growth rate was 2.2 percentage points higher than other companies and their operating margins improved by 31 percent, while their competitors margins were unchanged. The survey quantifies the value of superior sales force practices on company performance, and demonstrates that any company can win. Our winners include large and small food and nonfood companies, some that use direct sales approaches and some that rely on sales agents. Interestingly, the winners rely on No.1 brands for about the same percent of their sales as the rest of the pack. We identified real differences in the practices winners adopt and thus believe that most companies can still unlock new sources of growth. Even the most successful companies can improve on the levers where they currently don t lead, or push new horizons in their areas of strength. This executive summary highlights findings on five of the sales force performance levers we evaluated: pricing, trade promotion, retail execution, headquarter selling effectiveness and innovation. Kari Alldredge, Tracey Griffin, and Lauri Kien Kotcher 3

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7 pricing Using IRI s point-of-sale data for more than 180 of our survey participants top brands, we identified winners that consistently managed to raise their prices by a larger proportion than their competitors and to gain share. Being a pricing winner can be significant because, for the average company, a 1 percent price increase drives a 2 to 6 percent increase in operating margin. Increase price and share simultaneously; 1% price increase drives a 2 to 6% increase in operating margin Three behaviors separated our pricing winners from their peers: the use of menu pricing, a consistent focus on price as the No.1 priority, and the degree to which they involve the sales force in pricing decisions. Using menu pricing: All pricing winners use menu pricing while only 25 percent of their competitors do so. They set a price for standard service, then charge more when customers request services that add costs ( menu plus options) and provide discounts when customers exhibit more efficient behaviors. This approach helps align the value pricing winners capture with the cost to serve each account. Pricing winners are twice as likely to use menu plus options and typically use menu pricing with more than 80 percent of their accounts, which represents nearly all of their sales volume. Focusing on price as a No.1 priority: For winners, everyday pricing is a priority topic, one that is reportedly discussed in every conversation with top accounts. Top-performing manufacturers use market data to show retailers with EDLP strategies how they can be more profitable by matching the lower prices of only certain competitors, or only certain brands, for a limited time without damaging their EDLP position in the market place. Not surprisingly, this approach is more profitable for the manufacturers, too, as EDLP accounts now represent more than 25 percent of industry sales. Involving the sales force in pricing decisions: Finally, pricing winners make sure that the field shares responsibility with headquarters on a broad range of pricing decisions. They also are more than twice as likely than their less-successful counterparts to share information about consumer price elasticity with their field sales personnel. This helps the sales force, now armed with more information about consumer behavior, persuade its retail customers to accept suggested price changes and to make them stick. 5

8 trade promotion Secure 40% more incremental volume with equivalent levels of trade spend Consumer goods companies appear to be making some inroads in their efforts to increase trade effectiveness. According to our survey, nearly 70 percent of companies are pursuing measures to increase trade effectiveness, and these initiatives are having greater impact. The latest figures show that trade spending is growing 1.5 times as much as incremental sales volume, a marked improvement from the period, when trade spending grew four times more than incremental sales volume and eroded profits considerably. Importantly, trade promotion winners do not spend more: their median trade spend is about 14 percent of net sales, which matches the median level at all other companies surveyed. Top performers those who achieve the most incremental volume compared to their branded competitors get more out of each dollar spent because they execute an integrated, disciplined approach to trade spend management and put the right talent in key positions. Executing an integrated, disciplined approach: For trade winners, an integrated disciplined approach to trade spend management includes more rigorous pre- and post-event analysis and broad sharing of results with the organization. We found that companies are analyzing 1.5 times more events now than in 1997 and that 87 percent use return on investment to measure trade spend effectiveness. Winners analyze 60 percent of their trade dollars, while less successful companies analyze only 40 percent. The strongest performers ensure that senior sales management, account managers, customer team leaders, brand managers, and financial analysts can access eventeffectiveness analysis for spend allocation, account planning, and forecasting. When making decisions about performance management, these companies consider promotion results as they align the incentives of customer team leaders and account managers to account profitability. 6 Putting the right talent in key positions: Winners get more out of each dollar spent in part because they are more likely to use a centralized team of dedicated analysts to ensure effective execution of trade spend initiatives. Winners rely on dedicated resources for more than 40 percent of the analysis, versus about 25 percent for other companies. That helps winning organizations optimize spend across all categories and use this center of excellence to share best practices in trade spend effectiveness and train the organization.

9 retail execution Retail execution winners differentiate retail coverage and target retail merchandising support to drive competitive advantage. They also tie compensation to execution. Some tighten the performance curve by improving underperforming stores, while others shift the curve by applying what works in their best stores to their average stores. Achieve more consistent store-level share, lower out-ofstocks and higher display levels; worldclass performance worth 5 to 15% of sales In our survey, companies that achieved better store-level performance lowest dollarshare variation across a set of stores also had lower out-of-stocks and higher display levels than competitors. Tailoring the coverage strategy: While many companies vary their retail resource allocations across accounts by sales volume potential, unit volume potential, and seasonality, 67 percent of the top performers in retail execution allocate resources based on market share. Among the other companies surveyed, only 11 percent use this critical metric. Retail winners focus on creating the right level and mix of resources to improve store-level performance. Shifting focus to critical areas: We found that winners retail merchandisers and sales representatives spend 19 percent more time than their competitors on activities that matter to the consumer stocking and fixing shelves, cutting in new items, building displays and much less of their in-store time on administrative activities. Rigorous performance management: Our retail execution winners tie the compensation of their sales representatives and merchandisers to several retail execution metrics. All winners use incentives related to volume growth, and nearly threequarters link compensation to authorized items in distribution and reset execution; at the other companies surveyed, only 60 percent use a volume growth metric and other metrics are used less often. 7

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11 headquarter selling effectiveness A few retail accounts often represent a substantial portion of sales, so it s critical that consumer goods companies effectively manage their headquarter selling approach to these key accounts. We found that both direct sales organizations and those using sales agents can be winners in this area achieving top-quartile base business growth while maintaining or improving margin. The best companies demonstrate consistent strength in three areas: account segmentation, integrated account planning, and strategic coverage of accounts. Account segmentation: While many companies use sales volume, growth, and/or similar metrics as the basis for account segmentation, the most successful companies adopt a more sophisticated approach: top-quartile companies are twice as likely as others to use account profitability as a key criteria for segmentation. As a result, these companies can manage their key accounts more rigorously and involve them more completely in the account planning processes. Winning companies also differentiate service levels; for example, providing more attentive service, customized displays, and shipping priority for their most profitable accounts. While there is a great deal of flexibility in this area, each company should be mindful of the law requiring that segmentation be based on objective factors, and should consult their legal counsel on the issue. Integrated account planning: Top companies share account plans with their key customers and involve them in all elements of account planning. For example, 83 percent of winners get key customer input when developing plans in current logistics performance and strategy, but only 55 percent of other companies do so. Strategic coverage of accounts: Whether they rely on a direct sales force or sales agents, winners use a broader set of metrics than their competitors to define their account coverage strategy. For example, 71 percent of the winners but none of the others use profitability and growth rate to define their coverage strategy. Two-thirds of the successful companies (but only 19 percent of the other companies surveyed) re-evaluate their coverage strategy annually. 9

12 Winners in headquarter selling stay close to the customer, empower their sales force, and align their organization to meet the needs of top accounts, though direct sales organizations and those using sales agents handle things differently: Deliver 4 percentage points more in base business growth Direct sales force organizations: Many companies create dedicated, multifunctional teams as a way to stay close to top customers, focusing their resources on these customers. Critical accounts also receive greater attention from top management, who hold summits with key accounts to discuss pricing, merchandising, product pipeline, and other topics, and tailor services accordingly. Winners also report that senior management interacts with their customer teams at least monthly, while only 64 percent of other companies make the same claim. Winners share more information with their sales organizations, believing it leads to better decision making, and involve them in critical decisions including some that have little to do with the traditional sales role. Finally, the best companies leverage a broad set of talent and skills against their top customers, creating diverse teams led by multifunctional business managers. As direct selling organizations capitalize on these tactics, the war for talent persists, especially for key positions (e.g., customer team leader, national account manager). We found that a top headquarter selling performer with a direct sales force pays 30 percent more for key positions than other companies. These winners also spend almost twice as much on training, and review their team leaders more often. Sales agent coverage: Winners who use sales agents have on average one and one-half fewer layers between the head of sales and retail buyers than other companies, who have six layers on average. These winners also are more likely to integrate agent management into their sales organization than other companies, preferring long-term partnerships with dedicated agents who support only their brands. To this end, they often provide on-the-job training on category management, customer service, and selling skills, among other areas, and regularly give their agents critical supply chain information (e.g., shipments to accounts, out of stocks, inventory levels), which helps them serve accounts more effectively. 10

13 innovation Secure 5 to 6 times more sales from new products In terms of significant innovation new products that generate at least $35 million in first-year sales the consumer packaged goods industry has had a consistently weak record. Historically, a few winners have had a significant advantage: while less than 7 percent of consumer product introductions passed the $35 million mark in the past decade, they generated almost half of the new product sales. Today s innovation winners, the top-quartile companies that grew their sales from new product innovation (excluding line extensions) and improved or maintained their margin, introduce twice as many products as their peers and capture nearly three times the sales from each new product. They succeed by involving the sales force and their retailers in the entire innovation process and by tracking new product performance more vigorously. Involving the sales force and retailers: At winning companies, the sales force knows what products are in the pipeline, reviews the consumer market research, and provides input on channel strategies and trade promotions. In addition, winners involve customers in new product development and launch, capturing key retailers input on new concepts and considering the needs of high-growth channels (key accounts of the future). For example, 80 percent of innovation winners lower internal margin requirements to drive non-core channel volume, but only 29 percent of other companies do the same. Tracking performance vigorously: To the standard metrics most companies track for new products (i.e., percent ACV distribution, dollar sales, display weeks, and market share), top performers add planogram compliance, the timing of cut-ins, customer satisfaction and rollout speed. Less than half of their peers track these results. 11

14 conclusion Companies with decidedly different approaches can work their way into the top quartile by pulling a combination of performance levers. While winners rarely follow the same path, they always share three behaviors: they create strategies that center around top customers, they break the silos that can cause organizations to work at cross-purposes, and they invest time, resources, and capital for profitable results. Centering the strategy around the customer: Winners find ways to center their strategies around the customer: headquarter selling winners who segment their customers by profitability manage their key accounts more rigorously and involve them more thoroughly in the account planning process, and pricing winners differentiate service levels for top customers and align pricing to the cost to serve. Breaking the silos in the organization: In today s tough retail environment, sales growth requires senior-level direction, organizational alignment, and a broad-based commitment. Growing profit at a key account requires a team leader to understand promotion impact on the supply chain, the pipeline of new products and consumer price elasticities. Winners not only give their sales organizations greater access to this information, but they also ensure that all functions work together. Investing for profitable results: At the average consumer goods company, trade spend, sales-related supply chain expenses, and sales expenses account for 27 percent of net sales. Winners understand this investment but they track the right metrics, do rigorous analysis, and hold key sales people accountable. We suspect that today s best practices will be the baseline five years from now and that tomorrow s sales force will need to do even more to drive further growth. For CEOs developing a growth agenda, this suggests a number of next steps. The first involves conducting an honest assessment of how your company compares to best in class competitors and developing an understanding of what winning is worth to you. You must then focus on how well your organization s initiatives reflect the three themes at which winners excel. We believe these steps can help shape game-winning growth strategies that will withstand the uncertain economic times we face. 12

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