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Excerp 5

The big picture
“When people talked about ‘Sales Strategy’ I used to laugh. As an oxymoron, even ‘Military
Intelligence’ paled in comparison. In those days, ‘Sales Strategy’ was nothing more than simple
tactics ruthlessly executed. But that was then. Today the wrong sales strategy sinks companies.”
Neil Rackham in Sales and Marketing Management, Spring 2000
Reproduced with kind permission from Professor Neil Rackham
The place of sales in business strategy
The role of marketing has been hotly debated over the years, whether it is
strategic, tactical, or not even necessary. The role of sales is rarely questioned.
Ever since Stone Age tribes traded pots for shells, selling has been
necessary. Of course, you cannot have a seller without a buyer, but more of
that later.
The evolution of business in the 20th century favored those with professional
qualifi cations such as accountants, who frequently made the switch
from money management to general management at Board level. Marketers
too, armed with MBAs and compelling concepts like branding and segmentation,
became more strategic and also jostled for a place on the Board. Not
so sales. Most Sales VPs got on with selling, consoling themselves that the
monetary rewards of selling provided a more attractive prize than power.
Nevertheless, company politics did not go away. As soon as a quarterly target
was missed, the sales force became the reason for the failure of the business
Can sales continue to sit on the strategic sidelines? In this era of customer
orientation, it is more important than ever that sales managers should be
involved in strategy-making, despite
assertions from some business gurus
that marketing is strategic and sales
is operational. Who else but salespeople
are close enough to understand
the relevant decision-makers
in the customer organization? If a
company truly wants to align its
strategy with customers’ strategies, it
is no longer appropriate for salespeople
to be the tactical, operational
doers, whose feedback is fi ltered
through layers of management and
Professor Nigel Piercy and Nikala Lane at Warwick Business School have
identifi ed ways in which the sales function contributes to strategy-making,
and call it the fi ve Is: – involvement, intelligence, integration, internal
marketing and infrastructure development. We will discuss many of these
functions in Part III, with a specifi c focus on infrastructure development in
Chapter 12. At the moment, let’s just look at the big picture.
Intelligence is the easiest to discuss. Professional salespeople should be
closely scrutinizing the customer and their business environment and applying
their skills to selective supplier–customer relationship development.
Some companies may assume that marketing does all that research, and for
some categories of relationship, an aggregation of information about customer
needs may be all that is necessary. But in business-to-business, many
customers are large and complex, and the account manager’s understanding
should be complete.
The account manager can identify opportunities for relationship development
with certain customers, but operations have to deliver it. That’s where
internal marketing is essential, but it also leads on to involvement and
integration. If sales is not involved in strategic decisions at the same level
as operations, what does that say about the status of the organization’s
knowledge of the customer? Sales can only be integrated into the rest of the
organization when it is represented at the highest decision-making level.
Where else can sales explain what customers are doing, and how the organization
can add value?
In this era of customer
orientation, it is more important
than ever that sales managers
should be involved in strategymaking,
despite assertions from
some business gurus that
marketing is strategic and sales
is operational. Who else but
salespeople are close enough to
understand the relevant decisionmakers
in the customer
T H E B I G P I C T U R E 5
Selling has always been a “boundary-spanning” role – representing the
company to the customer and representing
the customer within the
company. Companies cannot call
themselves “customer-focused” unless
they have that “voice of the customer”
in the Boardroom. Is it just
wishful thinking that sales should
have a place at the Boardroom table? Not at all.
We live in an era where a company’s top fi ve customers frequently generate
more than half of an organization’s revenue. These key customers have
a signifi cant impact on all parts of the business: they infl uence, or even
decide, R&D priorities; and they affect every element of the business chain,
from systems design to distribution. Increasingly, it makes no sense to have
a Board on which the voice of these key customers is not represented.
Marketing can represent the voice of the many anonymous customers who,
in aggregation, are called “the marketplace”, but only sales has the closeness
and depth needed to speak for these key customers who have such a profound
effect on a company’s strategy and future.
Selling with strategic focus has implications for the way sales activity is
organized. It also has implications for the knowledge that salespeople,
account managers and sales managers need. In order to operate at Board
level, you need a certain language, and a historical and cultural background
of strategy-making. This chapter gives an overview of business strategy
models that sales managers and account managers need to present their case
internally and to work with senior customer personnel on relationship
Selling has always been a
“boundary-spanning” role –
representing the company to the
customer and representing the
customer within the company.
So what are the strategic roles of the sales function?
Involvement – in strategy formulation
Intelligence – industry and customer knowledge and analysis
Integration – working across functions to develop value
Internal marketing – of the customer to colleagues
Infrastructure development
Source: Piercy and Lane (2005)
What is the “big picture” that drives
strategic thinking?
No company operates in isolation. When business strategy is converted into
sales targets without suffi cient involvement of sales in the strategy formation,
there’s often a serious disconnect.
It sometimes seems that Chief
Executive Offi cers and their strategy
formulation teams assume that the
company can drive itself anywhere,
regardless of economic cycles, the
activity of competition or customer
Real strategy is not like that. Strategic plans cover not only “where are
we now?” and “where do we want to be?” but also the methods of getting
there. Plans must be modifi ed by consideration of the global and local business
environment (see Figure 1.1).
Quite early in a strategic plan, there is usually a “PEST” analysis, of the
political, economic, social and technological trends that impact on the
company. Just keeping up to date with new laws affecting the operations of
the company is a demanding activity. Economic conditions affect all players
in the global economy, but some industries are more sensitive than others
to economic swings. Food retail is a good place to be in a recession as we
all need to eat, but the size of a knowledge services fi rm, such as systems
integration, can change signifi cantly depending on economic prosperity or
Policy and
Our industry
Figure 1.1 The business environment.
It sometimes seems that Chief
Executive Offi cers and their
strategy formulation teams assume
that the company can drive itself
anywhere, regardless of economic
cycles, the activity of competition
or customer behaviour.
T H E B I G P I C T U R E 7
Social trends are very important, even for business-to-business companies.
In retailing, it is vital to know the patterns of the catchment area of each
store, by age, income, cultural origin and family size (demographics). This
enables plans to be made to get the right stock to the right stores at the right
time. All demand in a supply chain is derived from aggregated consumer
needs and wants. If the rising generation of consumers is concerned about
the environment and social responsibility, then raw materials extraction
companies need to ensure that that is refl ected in their activities.
Other external impacts, such as the weather, local sporting success or
national tragedies, also have to be taken into account. This analysis is a means
of identifying some genuine opportunities and threats for the business.
Political/legislative factors
• Corporate governance
• Health and safety at work
• Equal opportunities/diversity
• Employment law, governing individuals’ rights at work
• Consumer protection
• Tax and duties on products/services
• Regulations governing use of land and property
• Environmental regulations
• Copyright law
• Privacy law, e.g. regulations covering spam e-mail and unsolicited telephone
• Prohibition/legalization of substances and activities.
Adapting to the external business environment
In 1989 in Argentina, infl ation reached approximately 5,000%. The
1990s saw increased stability, but also deregulation, which opened up
In a study of companies adapting to this dramatic economic change
between 1989 and 1999, researchers found that fl exible, adaptive companies
had the following characteristics in the way they gathered information
about their business environment:
An important role of VP Sales is to contribute to an understanding of how
PEST factors are affecting the company, and to take the lead on identifying
how these factors are affecting certain customers in particular industries.
Changes in external pressures can affect the way they want to buy, as we
will see in Chapter 2.
You may ask how objective a PEST analysis can be. Some businesspeople
can have their own fears or enthusiasms about any or all of the PEST factors,
which is why other sources of opinion should be reviewed. Research institutes,
industry watchers, government departments and consultants all
produce analyses of trends and predictions. Since these analyses are based
on reliable sources, businesspeople should take notice of them, at least for
developing a Plan B in case Plan A, or “business-as-usual”, does not give
the expected results.
Early in my career in the IT industry, I worked on a strategic plan that
was heavily infl uenced by a technology trend. IT analysts’ reports were
predicting that most companies would decentralize their IT installations
from mainframe computers with dumb terminals to client/server networked
technology. Client/server versions of mainframe software had to be developed
in order to meet this trend. Subsequent reviews suggested that the
mainframe software performance was still buoyant but the client/server
software was not being accepted very rapidly. Global economic recession
had arrested the customers’ desire for change.
The analysts’ predictions were not necessarily wrong. The rise of the
Internet in the 1990s ensured that networked servers with their personal
computer clients became the norm, so it was a good idea to have prepared
new products for the new world. Mainframes did not disappear, they merely
• They had formal and informal ways of gathering information about
the external business environment.
• They attempted to create an external orientation.
• They adopted new models for processing, analyzing and using external
“Every employee is aware of the importance of having an open mind and
catching all they can from the sector, competitors and customers.”
Source: Hatum and Pettigrew (2006)
T H E B I G P I C T U R E 9
changed into super-servers, so the plan could be seen in hindsight as pessimistic
compared to the reality that emerged. Nevertheless, it would have
been desperately wrong to ignore the analysts’ predictions altogether and
assume that a steady sales performance for a mainframe software product
with over 20 years’ heritage was going to continue forever.
Competitive pressure in our industry
Too many companies, not enough differentiation
Our industry
Our supply chain
Raw materials
supply Retailers
Figure 1.2 Industrial supply chain.
Merging to survive
Sometimes, there are just too many companies competing to deliver
similar value. In 2006, two Taiwanese companies merged to create a
large-size display panel supplier that could rival the Korean market
leaders. Demand for large-size TFT–LCD (Thin Film Transistor–Liquid
Crystal Display) screens was weak and prices were declining, putting
pressure on revenue and profi tability in the industry. Scale and capacity
were the keys to survival.
Decisions to deal with competitive
pressure through merger are
usually done collectively and at a
high level. VP Sales should be able
to contribute to them based on feedback
from salespeople about particular
competitors. Salespeople must
know what their direct competitors
are doing. Unfortunately, research
report after research report suggests
that salespeople have such faith in
their own products and services that
they do not pay enough attention to
learning about competitors and why
they might be more successful in
developing relationships with customers. A recent survey of 426 salespeople
found that respondents were not confi dent that they had a good understanding
of the competitive environment or industry benchmarks (The
Communication Challenge Ltd, 2006). When salespeople understand “the
big picture”, they are able to impress the customer with their knowledge,
and demonstrate a clear framework of differentiating value to address their
Besides understanding current competitors, salespeople also have to be
constantly alert to the possibility of new entrants coming into the industry.
Sometimes, the effect of an entrant can be dramatic. A distinctive European
brand entered the US vacuum cleaner market in 2002, and gained more
than 20% of market share within four years. Meanwhile, the parent company
of the former market leader decided to sell it.
Working closely with other supply chain players in strategic relationships
may help a company to cannibalize its own products or services before
someone else does. As the long-term nature of a relationship reduces risk,
innovation becomes more of an opportunity. A balanced portfolio of customer
relationships can help to reduce risk if a particular strategic relationship
is lost to a market entrant.
Meanwhile, the biggest competitor that any company should fear is “do
nothing”. In the IT industry, a high proportion of proposals are lost to the
Salespeople must know what their
direct competitors are doing.
Unfortunately, research report
after research report suggests that
salespeople have such faith in
their own products and services
that they do not pay enough
attention to learning about
competitors and why they
might be more successful in
developing relationships with
T H E B I G P I C T U R E 11
customer’s inertia and unwillingness to act, which can often be linked to
uncertainty and risk in the business environment.
Supply chain infl uences: upstream suppliers
Recession prompts OEM competition with channel
With business hard to fi nd in the bust after the dot-com boom,
the direct sales teams of some of the major players in the IT industry
appeared to be reaching deeper into the small and medium-sized business
customers that were usually served by channel partners. Where it occurred,
this confl ict risked reducing margins for both the supplier and the reseller.
It is worth noting that it was the front-line salespeople in the resellers
who were the fi rst to realize the situation.
If our immediate suppliers hold signifi cant power in the supply chain, or
if the companies extracting raw materials create bottlenecks as their ability
to supply – and their prices – vary, our opportunity for profi t is lower. Of
course, the prices we pay for goods may be affected by the suppliers’ bargaining
power, but we may be able to partner with suppliers to ensure some
long-term stability in prices. There might be different types of suppliers that
a company could work with to ensure a better balance of mutuality. The
worst we might fear from our suppliers is that they have enough power and
brand value in the industry to by-pass whatever value we create and build
relationships directly with our customers. We will look later at how value
has to be justifi ed in all aspects of the supply chain. There are also legal
constraints on supplier power. When a company has more than 25% of the
market share, they attract the interest of anti-trust legislators. This reduces
to some degree their enthusiasm for wielding their power.
Derived demand: how consumers drive supply chains
If your company is extracting tin, it is because millions of people want to
buy food in tins as that extends the food’s shelf life. So, if all demand is
“derived demand” from the consumer, why do we think that we can push
our value down the supply chain? Many strategists now talk about the
“demand chain”. In fact, the idea of a demand chain was identifi ed in the
18th century by the Scottish economist/philosopher, Adam Smith:
“Consumption is the sole end of all production; and the interest of the producer
ought to be attended to, only so far as it may be necessary for promoting that of the
Adam Smith, The Wealth of Nations, Book IV, Chapter VIII (1776)
Consumer power generally expresses itself as an insatiable hunger for
more choice at lower prices. This contributes to the fearsome reputation of
retailers in the supply chain. I once interviewed a purchasing manager in a
medium-sized retailer who admitted pushing an account manager too hard
on discount. The account manager walked away from the negotiations, and
supply ceased. The next week the buyer had the hassle of explaining to his
manager why an important brand was missing from the shelves in stores,
and backed down. In a large retailer, this would have been high risk
Many retailers have progressive supplier development programs that can
help small companies to grow and be profi table and successful. Power brings
with it public expectations of responsibility. For example, retailers can be
called upon to address power imbalances throughout the supply chain.
Customer power reaches up the supply chain
For four years, a group of agricultural workers in the USA conducted a
campaign to gain public support for their demands for better wages and
working conditions. Student groups, religious organizations and celebrities
joined a boycott of fast food chains that were dealing with the
workers’ employers. To end the boycott of their brand, one chain implemented
a “pass-through” to ensure that the workers got an increase in
their piece rate.
T H E B I G P I C T U R E 13
You may not be in an industry that deals with retailers, or even distributors.
Perhaps your business involves working directly with industry customers.
This has been my experience in the IT industry. This can be equally
challenging as large companies who represent a signifi cant proportion of
their suppliers’ revenues are bound to be tempted to use that power when
necessary. If industry conditions allow it, reinvigorating your customer base
to ensure a broad portfolio of relationships is essential to minimize the risks
associated with large and powerful customers. We will discuss this more fully
in Chapter 3.
The components of the whole business environment are shown in Figure
Opportunities and threats
All the external factors in the business environment are sources of opportunities
and threats, so when we talk about a SWOT analysis, the “O” and
“T” sections should be derived from PEST and the demand chain. That is
the big picture that company strategists have to address; and VP Sales has
to contribute to an understanding of what this picture is. The way that
Our industry
Our supply chain
Raw materials
supply Retailers
Policy and
Figure 1.3 The big picture.
strategists use this information to change the company’s position in a turbulent
business environment is by changing investment in the company’s
relative strengths and weaknesses to enable it to perform more effectively.
Strengths and weaknesses
In 1985, strategy guru Michael Porter introduced a concept called the
“Internal Value Chain” to track exactly where companies add value to
immediate customers. From the different functions identifi ed in the internal
value chain, we could make a judgment on what we do well, and what we
don’t do well. This was an extremely helpful tool at the time.
Looking back from 2006, this “chain” model seems to have been rooted
in the concept of a company having different functions that pass things on
to another department (Figure 1.4). In modern organizations that concept
can be seen as a weakness, as it is at the handover stage that things tend to
go wrong. The lack of internal integration can result in ineffi ciencies and
dissatisfi ed customers, and functions within the company should at least be
interlocking cogs in a fi nely tuned machine. We can all think of many ways
that companies differentiate their value, even in B2B organizations, that
must be inherent in all functions. Perhaps a company could be a “green”
leader, known for an excellent record on everything from controlling its
factory emissions to recycling paper and print cartridges. “Green” value
leadership can now be important in winning government business in some
parts of Europe.
Two things are certain about a company’s strengths. One is that it does
not matter a hoot what we who work for the company think are our
Supply chain
Research and
Human resource
Figure 1.4 The internal value chain.
T H E B I G P I C T U R E 15
strengths, or even what the Chief
Executive Offi cer tells industry analysts.
A strength is only a strength if
it is seen as a strength by customers,
and if they think that it makes us
different from our competitors. Let’s
look at a value differentiator that almost every purchasing decision-maker
will tell you is important: “Being easy to do business with.” What does that
mean? Customers who want it talk about simple processes – reliability,
friendly service, speedy problem resolution, and much more. It is a powerful
company-wide competence where it exists, and if customers tell you that
you are easier to do business with than competitors in a particular way, then
that is worth putting in a SWOT analysis.
On the basis of building on strengths, addressing weaknesses, exploiting
opportunities and minimizing threats, companies can make strategies for
themselves. But we have all seen many SWOT analyses that have simply
been long lists of vague ideas or wishful thinking. As such, they can hardly
inform strategy. A variation that is much more rigorous is a grid designed
by key account strategist Diana Woodburn.
Her principles include the minimizing of the SWOT lists to a few key
factors that are specifi c and relevant. These few things then need to be
forced together to generate some truly strategic thinking. Do we have a
strength that is neatly aligned with an opportunity? For example, what if a
bureaucratic company has just taken over a nimble and fl exible competitor,
and one of our strengths is “ease of doing business with us”? We should be
A strength is only a strength
if it is seen as a strength by
customers, and if they think that
it makes us different from our
Strategic wins!
Danger area
Contingency plan
Figure 1.5 A SWOT matrix. (Reproduced with kind permission from Diana Woodburn of
Marketing Best Practice,
able to leverage that all the more if our nearest rival gets restructured into
its new owner’s straitjacket or submerged in post-acquisition navel-gazing.
If we are in a highly competitive industry such as printing, but are recognized
for our expertise in using recycled paper and biodegradable inks, we should
be swinging into action whenever new “green” legislation is passed.
The alignment of weaknesses with threats is also possible, and will require
investment to avoid diffi culty. Counteracting threats with strengths and
addressing weaknesses that might cause opportunities to be lost is also
important. Looking at SWOT this way tells us more about the strategy that
is needed.
What’s all this analysis for?
“Everybody’s got a plan, until he gets hit”, according to a heavyweight
boxing world champion. But as Louis Pasteur (1822–1895), French microbiologist
and inventor of pasteurization of milk pointed out, “chance favours
only the prepared mind.”
Analysis can lead to paralysis, decision-making that takes too long, and
strategic plans that are infl exible and get ignored. An inside-out approach
to analysis and planning can make a company internally focused with the
possibility of being wrong in its view of the world. There are many variables
that affect the future of any business, and contingency planning for all of
them would be wasteful. Risks associated with any sort of investment seem
to get constantly higher and more complex.
Portfolios reduce risk
The analogy of supply convoys in World War Two was used in a McKinsey
Quarterly article to explain how companies need to operate in a complex
and rapidly changing world. The weather was one problem – that could
be diffi cult to manage despite meteorological forecasts and navigational
equipment. Even more of a problem was enemy activity; attack by
submarine, air or other ships was a constant risk, despite the best efforts
of the intelligence services. Convoys were deployed, with supply ships
T H E B I G P I C T U R E 17
Readers might also refl ect that many companies may make strategic plans,
but manage themselves to quarterly objectives. This is ironic because expectations
of future performance, not last quarter’s results, should theoretically
drive share prices. But try telling that to a CEO who has just missed a sales
forecast for the second consecutive quarter.
It is diffi cult to manage for the long term – anyone knows that from their
own personal development – but consultants like McKinsey suggest that
it is possible for companies to have a long-term value orientation yet
deliver short-term performance. For
example: some companies are known
for having a long-term focus on
innovation and managing progress
in the short-term by measuring the
proportion of sales coming from new
products (Davis, 2005).
Portfolio analysis
A portfolio is a collection of, for example, artwork, investment, property,
products, skills or customers. Having a collection of things in a business
sense is sometimes referred to as a combination or spread for the purpose of
reducing risk and maximizing opportunity. Defi nitions of portfolio management
describe a business process by which a company formulates strategy to
mixed with troop ships and destroyers, which improved the chances of
each ship and the supplies crossing the ocean safely.
These convoys were the military equivalent of “portfolios” in business.
In order to get your enterprise through the dangers of the business environment,
you have to work with a variety of initiatives, in a collection,
some of which will make it and some which will not. The key to success
is a disciplined search for the right collection and a fl exible approach to
future change.
Source: Bryan (2002)
Some companies are known for
having a long-term focus on
innovation and managing progress
in the short-term by measuring
the proportion of sales coming
from new products
achieve its overall objectives: how it decides on the mix within the collection
in order to prioritize resource allocation, accepting a risk/reward
To visualize the mix, strategists use a diagram and call it a matrix. The
meanings of matrix include “the formative parts of an animal organ” and
“mass of rock enclosing gems”, but in its most general sense, according to
the Oxford English Dictionary, it means “the place in which things are developed”.
Strategists and marketers have been working with matrices to categorize
items within portfolios for decades.
These portfolios usually involve a 2 × 2 box, with axes marked high and
low (Figure 1.6). The horizontal axis works from left to right. Once you get
used to these universally useful boxes, the world of strategy is yours for the
Product portfolio management
The Boston Consulting Group’s Growth-Share Matrix, designed in the
product-led 1960s, is still probably the most well-used approach to analyzing
a company’s product portfolio, and the earliest example of a strategic tool
for professional marketers. The vertical axis measured the market growth
rate and the product’s position on the horizontal axis shows the relative
competitive position through market share. The Profi t Impact of Marketing
Strategy (PIMS) program, which has been managed by the Strategic Planning
Institute since 1975, found that high return on investment was closely
related to high market share. PIMS is still collecting and analyzing data from
hundreds of companies (see
Some researchers have pointed out that the cost of acquiring market share
varies considerably from market to market, and that correlation does not
High Low
Figure 1.6 A 2 by 2 matrix.
T H E B I G P I C T U R E 19
prove causation, so we must treat generalizations carefully. Nevertheless, the
BCG matrix has stood the test of time and gained popular appeal with its
stereotypical product types of “Wildcats”, “stars”, “cash cows” and “dogs”.
Correlation does not prove causation
In my fi rst statistics seminar as an undergraduate, the tutor handed out
two lists of numbers by calendar month. One was the number of births
in the country; the other was the number of storks in the country. More
storks are present in the summer, when the birth rate is higher. On the
basis of his lists, we could conclude that there was a statistical correlation
between the number of storks in the country and the birth rate. His point
was, of course, that the correlation does not prove that the storks brought
the babies.
Business unit portfolio management
To accommodate more variables and shift the focus of matrix management
to markets, McKinsey, working with General Electric, developed a nine-cell
Attractiveness–Capabilities matrix. From General Electric’s point of view,
something was needed to address the problem of its business unit managers
planning too conservatively, which resulted in a weak plan at corporate
level when the unit plans were aggregated (Lorange, 1975).
The vertical axis “industry attractiveness” addressed the industry sector
in which the unit operated. A score for the business unit was derived from
factors such as market size, market growth and profi tability, weighted and
scored to create a compound overall score. To score “business strengths” on
the horizontal axis, the unit was judged on market share, growth, product
quality, technology skills, economies of scales and experience, marketing
capability and profi tability relative to competitors. The importance of the
business strength score was that it was deemed to be something that the unit
could change with the right allocation of resources over time.
With a score on each axis, each GE business unit would land in one of
the cells in the matrix. Each of the nine cells in the matrix was allocated a
label indicating strategic direction. For example, high industry attractiveness
and strong business strengths would result in investment for growth;
medium industry attractiveness and weak business strength would result
in a strategy of “manage for cash”. Given the continuing success of GE,
who can argue against the power of
the tool to focus resources where
growth could be maximized? So, the
company got a balanced plan rather
than a conservative plan, ambitious
where success was achievable, tactical
where market conditions were
This model is indeed sophisticated, but includes variables that are diffi cult
to measure objectively. There may be independent benchmarks for market
share and product quality, but how can we determine the relative strength
of a company’s marketing capability?
The model attracted interest from other large corporations, but some
wanted to adapt it. Shell wanted to incorporate more qualitative variables
and called their amendment of the BAA the Directional Policy Matrix
(DPM), a name that seems to be more widely used in strategy textbooks
than the original (Figure 1.7).
All these matrices (Growth-share, BAA, DPM) used circles to indicate
a product or business unit’s position, with the area of the circle being proportional
to sales volume. Most companies who adopted strategic portfolio
matrices found that they improved the skills of the managers involved in
working with them and the quality of information used in strategy-making.
So, the company got a balanced
plan rather than a conservative
plan, ambitious where success
was achievable, tactical where
market conditions were
Business strengths
Market attractiveness
High Low
Figure 1.7 A variation on the directional policy matrix. (Adapted from Professor Malcolm
McDonald with kind permission.)
T H E B I G P I C T U R E 21
They perceive the analysis as far more objective, and the process as far more
effi cient, than other approaches. At least all assumptions and sources of
information are logged so that participants
in the process can trace
why decisions have been made. Of
course, the matrix is only a “snapshot”
of the portfolio at a point in
time. The positioning of the circles
should provoke questions, rather
than being a defi nitive answer.
By the 1980s, the DPM was taught in business schools around the world.
It was designed for a global conglomerate, and it worked very well at that
level. It still needed more adaptation in order to work for smaller companies,
or units within large corporations. This is where the customer portfolio
became signifi cant.
The development of customer portfolio analysis
Large customers are not necessarily profi table
The Supply Chain Executive Board, a division of the Corporate Executive
Board, has analyzed 1.26 million order records from six companies in
three industries in an ongoing study of supply chain “costs to serve”.
The least profi table 20% of customers represent only 11% of volume
of orders. But these are large orders – over 20 times the revenue of the
average order – and they generate large losses. For every dollar of revenue
earned, they reduce profi t by 87 cents. A large order from a customer
seems attractive, but large orders still cost a lot to fulfi ll. The implication
is that customers who order in large quantities are not necessarily strategic
to their supplier.
This research, which is discussed more fully in Chapter 3, is referenced
with kind permission of David Evans, Managing Director, Research, The
Supply Chain Executive Board.
A division of the Corporate Executive Board.
A provider of business research and executive education based in Washington DC.
Of course, the matrix is only a
“snapshot” of the portfolio at a
point in time. The positioning of
the circles should provoke
questions, rather than being a
defi nitive answer.
Customer portfolio management was designed to address this sort of
problem – challenging the assumption that volume drove profi tability.
Volume might have been king in the 1950s, but by the 1980s the world
economy was a different place, and achieving success was more complex.
In 1982, Renato Fiocca examined the use of portfolio matrices in what
were then called “industrial markets”, but we know today as B2B (also
incorporating B2G, business-to-government). He suggested that the core
for strategic analysis should be the customer. He pointed out that in
most industrial markets there are a limited number of important buyers.
Buying processes are complex; supply chains have their own power structures
and close relationships or partnerships between buyers and sellers are
Fiocca intended that his matrix would help decision-makers in B2B
markets to improve profi tability because they could allocate resources to the
most promising business relationships and withdraw them from others.
In B2B, we are familiar with large customers being referred to as “accounts”.
Fiocca called his model the “account portfolio matrix”. The attractiveness
of the customer’s business was scored on the vertical axis. The score on the
horizontal axis was based on the strength of the relationship between the
supplier and the customer.
Customer “attractiveness factors” were about the market in which they
operated. Fiocca included market size, the customer’s market share and
the customer’s strength compared to their competitors, covering fi nancial
strength and their technical skills and intellectual property. The “relative
buyer–seller relationship” encapsulated the strength of “our” relationship as
supplier to the customer versus the customer’s relationship with competitors.
Fiocca included personal friendships and complementary culture as strengths
as well as the “share of purse” versus competition, and the number of years
that the supplier–customer relationship has been in place.
Since Fiocca created the model presented in Figure 1.8, there have been
other modifi cations and simplifi cations. In the mid-1990s, I was a researcher
in a team led by Professor Malcolm McDonald at Cranfi eld School of
Management working on key account management. We identifi ed Fiocca’s
account portfolio analysis as an important tool for distinguishing key accounts
from other accounts, but rather than use a nine-cell model we decided to
use a four-cell model into which we hybridized some elements of the directional
policy matrix.
T H E B I G P I C T U R E 23
In practice, our model moved further on from Fiocca’s in trying to focus
on the relationship between the buyer and the supplier. In my work with
small companies and with companies from developing economies in recent
years, I have tried to improve its usability even further (Figure 1.9).
Customer/supplier relationship
Strong Medium
Figure 1.8 Account portfolio analysis. (Adapted from Fiocca, 1982.)
Co-operative Tactical
High Low
Our value to the customer
to us
Figure 1.9 The B2B relationship development box.
My research into buyer–seller relationships has usually involved key personnel
from the supplier and members of the customer’s buying decisionmaking
unit. There are innumerable examples of senior managers in a
supplier thinking that they are doing
very well with a customer when in
fact the customer has a less rosy view
of their achievements and the quality
of the relationship. It is a phenomenon
that was identifi ed by Professor
Malcolm McDonald as “supplier
delusion”. So it is important that the
horizontal axis should represent the
customer’s point of view.
When account managers have asked purchasing managers about how
they compare to competitors, it is clear that because all suppliers are expected
to be able to meet core expectations of product quality and delivery accuracy
for a reasonable price, it is “soft” factors such as accessibility of key staff and
problem-solving that distinguish them. True perception of business strengths
comes from a customer viewpoint.
Although the research and calculation involved in identifying appropriate
factors, weighting and scoring systems can be diffi cult and timeconsuming,
there are two main strengths in portfolio approaches.
First, the steps involved in compiling the customer attractiveness scores
are more likely to deliver a greater degree of objectivity than models with
axes based on single, qualitative or judgmental factors. The requirement to
consult the customer about their rating of “our business strengths” (versus
competitors) can also be a contribution to objectivity, which should lead to
better decisions about resource allocation.
After all, while suppliers are looking out to their customers from the
inside, those same customer organizations have purchasing professionals
looking out to their suppliers from the inside, analyzing them and making
judgments about them. Chapter 2 examines their strategic perspective.
The labels for the quadrants of the relationship development box are
designed to describe business relationships simply:
• Strategic: To describe a relationship as strategic is instantly understandable;
it is one where both parties to it anticipate long-term gain.
• Tactical: A tactical relationship is instantly recognizable as one where both
parties are not investing, but doing mutually advantageous business on a
transaction-by-transaction basis, looking for mutual short-term gain.
There are innumerable examples
of senior managers in a supplier
thinking that they are doing
very well with a customer when
in fact the customer has a less
rosy view of their achievements
and the quality of the
T H E B I G P I C T U R E 25
Where there is a difference in either party’s perceptions, more care is
• Cooperative: If a customer recognizes a supplier’s business strengths but
potential for business development is limited, the relationship can still
be long-lived, but it will not attract signifi cant investment from either
side. The relationship is cooperative in that there is some mutual dependence,
but it may not necessarily be comfortable or even friendly.
• Prospective: If a supplier is targeting a customer or potential customer, but
the customer is not yet convinced of the supplier’s strengths, the relationship
can be described as prospective.
In describing the axes of this model in workshops and classes, I fi nd myself
repeating again and again that the vertical axis represents the strategic value
of the customer to the supplier, and the horizontal axis represents the strategic
value of the supplier to the customer. This way, we can marry the
purchasing analysis with customer analysis and form a tool that both buyer
and seller can use to describe their relationship at a point in time. It is supposed
to be a relationship portfolio analysis rather than an inside-lookingout
customer analysis.
In terms of strategy-making, investment focus is in the high/high box.
But a healthy supplier needs to spread risk, and generate development activity
in the other quadrants at low cost.