Applying the Methodology: A Case Study in Consumer Products
About four months into my tenure with Booz Allen, the firm was asked to help a large conglomerate solve a problem beleaguering one of its companies. That company had two separate divisions (companies), each selling major appliances. One sold washers and dryers and the other major kitchen appliances, such as stoves, ranges, ovens, microwave ovens, and so on. The company that sold washers and dryers was of a reasonably decent size and had good brand name recognition, particularly in the commercial marketplace, such as laundromats, hotels, and laundry service companies. The kitchen appliances company was relatively very small, with less than $70 million in annual sales. (Just to put it in perspective, General Electric, Sears/Kenmore, and Whirlpool brands had combined sales in the billions of dollars annually.)
Both companies were experiencing the same problems. Eight years earlier, the companies had begun a trend of high growth and commensurate profits. However, for the previous two years, growth and revenues had precipitously declined, especially for the kitchen appliances company. Performance deteriorated from a peak of $70 million in annual sales to only $30 million, resulting in serious losses. The CEO of the conglomerate was ready to shut down the operations of the kitchen appliances division; it was too small and losing too much money. However, the CEO wanted to find out if the washers and dryers division could be turned around.
The Booz Allen team was assembled with one analyst (myself), a newly promoted job manager, a junior partner, and a senior partner. The junior partner, with the day-to-day, hands-on responsibility for the job, decided to have two parallel efforts at the same time—one dedicated to the washer and dryer company, and the other to the kitchen appliances company. I was assigned to work on the kitchen appliances company. I was supposed to work independently, so as to allow the remainder of the team to focus without distractions on the washers and dryers company.
I told the partner that I didn’t feel qualified to work independently without ongoing supervision and guidance. His response was, “You don’t need to worry about it. There is no hope there, and all you need to do is to collect all the relevant data so that we can rationalize the closing of that division.”
I pleaded, “What if there is an opportunity for turning it around? I may completely miss it.”
He laughed and said, “Don’t worry; there is no opportunity for a turnaround there.”
I contested, “How do we know that, without analyzing the situation first?”
His answer was appropriate for an experienced consultant with many scars to show for it. He said, “When it looks like a duck, walks like a duck, and quacks like a duck, then it is a duck. So, when it looks like a turkey, walks like a turkey, and gobbles like a turkey, then it is a turkey. It is obvious the division is a turkey—nothing to save there.”
When I arrived at the company’s headquarters, the president and I spent the full first day together in his conference room. I got an overview on the product lines, customers, distribution channels, and differentiation in the marketplace. I asked the president about the segmentation of its market. He gave me two: (i) developers and builders of homes and (ii) department stores. (In those days there were no specialized stores that sold appliances. All appliances, big and small, were purchased at department stores. The largest department store chain was Sears, Roebuck and Co.; the next was J. C. Penney; and there were hundreds of other regional and local stores around the country.) I asked him to list what he perceived to be his company’s strengths and weaknesses. He listed the strengths:
•Its high-end products had a reputation for quality.
•Products were known for their great features.
•Products were known for their attractive and appealing design.
He listed the weaknesses:
•Products were too highly priced.
•There were no low-end models.
•Some expensive features were not needed, making the products unnecessarily higher in price.
I then had the president give me his perspective on what had led to the steep decline in business. We finished by discussing whether he thought the performance of the division could be turned around. I needed him to agree with the view that it couldn’t be turned around. If he agreed, then my report would be easy to put together. But if he didn’t, then I’d have to prove him wrong with facts, data, and analyses, which would mean much more work for me. His response was that it would be unlikely to be able to turn performance around unless the company introduced a new low-end line. He then told me that his boss, the CEO of the conglomerate, was unwilling to undergo the substantial costs that would be required to change the features in the current lines and develop a whole new lower-end line. If the company could not do these things, he saw no hope of staying competitive in the marketplace. Following are some of the specific details I learned from him regarding the market and competitive dynamics.
The company manufactured a wide variety of high-end major kitchen appliances, both freestanding and built-in, with features and quality commensurate with high-end products. Prices were relatively high, reflecting the high quality of design and features. The company had one smaller competitor at the high-end level. The rest of the players in the industry, including the larger companies, were focused primarily on serving the mass market.
Developers and home builders accounted for about 70 percent of his company’s sales, and department stores about 30 percent. The president attributed the precipitous decline in performance to the fact that the company didn’t have a low-end line, and so their prices were no longer competitive, particularly for larger contracts with the larger home developers/builders. He emphasized that the larger developers, which built many homes at the same time, preferred to buy the various kitchen appliances from a single manufacturer. They would always solicit bids from the various competitors and would select the lowest-priced bid. He told me that his inability to offer lower prices alone was killing them and their ability to win the larger contracts. I asked him where he got the data to support his suppositions. He told me that it came from their salespeople and that he himself heard the same comment directly from many of their larger customers.
Over dinner I was thinking about what I heard and began planning my next steps. It appeared quite simple: I needed to focus on two issues. First, I needed to confirm what the president had told me. I needed to personally interview a handful of the company’s larger customers to verify and document what the president had said. I decided to also interview two or three smaller home builders for balance purposes. Second, I needed to accurately calculate and estimate the research and development costs that would be involved in pursuit of the development of a lower-cost line, which was what the president had recommended, to affirm that it was unreasonable, as the CEO of the conglomerate believed. With those two analyses in hand, my job would essentially be done.
However, while I was planning and rationalizing everything in my head, a couple of nagging questions kept popping up. A nuanced inconsistency. Seemingly trivial, unimportant, and completely out-of-context questions, which I couldn’t answer in my own mind. By now you also know how I react to nuances. I decided to resolve the nagging questions first.
The questions were so simple and innocent. The first was, How could they do so well with builders for five years or more prior to the decline? What suddenly happened? What had changed? The customers were still the same and doing the same things they had been doing for years. The product lines were exactly the same. The prices hadn’t changed all that much. So, what had created a sudden upheaval in the market for this appliance company? The second question was this: If indeed the president was right and the company was losing business because it didn’t have low-end models, then how come it didn’t lose most or all of its builders and customers? How come many of them were still customers, but were buying fewer products than in previous years? I decided to get answers to these questions. I also decided, just to make sure that I had covered all the bases, to check to see whether the company’s competitor was experiencing the same decline in performance.
I met with the president the following morning and asked him to set up in-person interviews with six larger builders and three smaller ones. I then asked him to give me the data and analyses that he used to estimate the cost and time to build and introduce a new low-end line, per his recommendation. The following three days, I was busy flying around the country conducting interviews. I also ordered, from a for-a-fee financial database service company, the estimated revenues and profits of the other high-end competitor for the previous seven years.
The initial findings led me to a different assessment of the market and competitive dynamics from that of the president. I asked him to provide the company’s annual sales for the last seven years, broken down by each individual customer and summarized at three levels: (i) the smaller builders (those who built fewer than fifty homes a year), (ii) all other builders, and (iii) department stores. I meanwhile researched and got the previous seven-year trends of home construction in the U.S., broken down by the more expensive custom homes and the typical middle-market, mass-built tract homes. First, let’s summarize my findings from the interviews. Below is a summary of the relevant things I was told:
•I found two distinct kinds of builders who were customers of my client: the larger home builders, who built hundreds and thousands of homes annually, and smaller builders, who tended to be custom home builders that built fewer than fifty homes a year.
•The two groups had completely different demands and requirements. They were clearly two separate strategic business segments, and not a single one, as the company viewed them. What I discovered in my interviews was an entirely different set of purchasing behaviors and decision making by the two groups. They each had completely different key success factors and “cost to serve” economics.
For the larger builders, the lowest price was very important and played a key role in their final purchasing decision. But there was an even larger factor involved that substantially overshadowed the price consideration. The lowest price was a secondary consideration. The primary fatal flaw criteria were completely different. I asked whether the quality and the features of the appliances were important to them. The answer was consistent. They all said that it would be nice to have a higher quality appliance, but they wouldn’t be willing to pay that much more for it. In their own words, “Nobody buys a new home because of the appliances we install. We can install anything; it wouldn’t make that much of a difference. Of course, if we can get a higher quality appliance for about the same price, we would buy it instead of the run-of-the-mill appliances, like G.E., Whirlpool, or Kenmore.” That made a lot of sense to me, but the other finding, the one related to the fatal flaw, was a completely new discovery for me.
All the large builders had a single criterion that had to be met, with no exception. It was just-in-time delivery of the appliances. The builders explained that because they built tens and hundreds of tract homes at a time, projects followed a rigid schedule. Appliances for all the homes had to be delivered and installed in the same period. The builders signed contracts with subcontractors to install those appliances, way in advance of installation time. These subcontractors would show up on the day appliances were to be delivered and installed. If the appliances had not arrived, the builder was still obligated to pay the subcontractor’s workers full wages for the day. Each day that went by without appliances to install was very costly. Therefore, no delay was tolerated. My client had issues with delivering on time. They were okay for smaller quantities, up to ten or so at a time, but seemed to have problems delivering larger quantities punctually. That is why builders would order only small quantities of appliances at a time. When I asked them what had changed, since they had been buying larger quantities from the company for five years previously and only stopped in the last two, the answer was almost laughable.
•The builders said that in the previous five years the industry had experienced a boom, and the market was growing at a high rate, and none of the appliance manufacturers, large or small, were able to keep up with the growing demands. The builders bought products from whoever was able to supply them. During that period, all the manufacturers had a problem with just-in-time delivery. The builders said, “We had to live with it. But times were good then, and we all made a lot of money and could afford the delivery problems. We couldn’t correct them anyways, so we just had to ignore them for the time being.”
However, the industry had begun to slow down as the economy slipped into a recession and new home sales dropped substantially. Profits for the developers declined, and they became much less tolerant of delivery issues. The larger appliance companies were able to adhere to the contracted timing. My client could not make the necessary adjustments. I knew that there was no way my client could consistently and reliably deliver on large quantities. It was too small and had no ability to build large inventories for this purpose. There was no way it could compete with the large players on this specific requirement. In other words, they had fatal flaw disadvantages in this business segment and therefore would not likely enjoy success.
•The smaller custom home builders had completely different requirements. They were building custom homes to the exact specifications of the owners. Those homes were bigger, more expensive, and used only high-end products and finishes, including appliances. These builders purchased high-end, fully featured merchandise with a good brand reputation. They viewed both my client and the other high-end competitor as perfectly befitting their requirements.
I asked the builders how they selected which of the two to buy from. They said that they didn’t. They would bring the two high-end choices to the home buyer and let them make the final choice. I asked them if they knew how the owners made such a choice. They said that it varied greatly and they hadn’t noticed a pattern. I asked whether the builders would benefit from an introduction of lower-end models. They said no. Worse, if the company introduced a low-end line, they would stop recommending them to the buyers, since it would ruin their own reputation for being builders of high-end homes and high-end interiors. I asked what they thought of the expensive features and whether it would make a difference if they were eliminated. They said that those features make the appliance a high-end product. Eliminate the features and builders would stop recommending my client’s products. I asked them whether their business had been hit by the recession. They said no. Their business had been thriving for seven years and did not appear to be vulnerable to the recession.
I looked at the industry trend for homes built in the U.S., and they were consistent with what I heard. A boom had started seven years earlier and lasted for five years. The recession had begun two years prior, affecting the building of tract homes. Custom home builders experienced no slowdown, but rather showed healthy growth.
I realized that the president had an inadequate grasp of the market. His segmentation was wrong, as well as what he thought were the success factors. Therefore, his recommendations for product changes were very wrong as well. The large tract builders wouldn’t have cared whatsoever about those changes, and the custom home builders would have stopped buying from them.
With those findings, I asked the president for his specific sales numbers broken down by the two categories of builders to see if the numbers agreed with what I heard from the customers. I also asked him to give me the sales to the department stores as well, to see if something would jump out at me. I received all the numbers the next day and started looking at what they revealed.
Let’s pause for a second and focus on a couple of things that I said in this section regarding the pedestrian application of the segmentation and analyses of the key success factors. This example is not atypical. It supports my observations and experience over the years with many companies.
You would have noticed how unreliable the salesforce feedback was. The large tract builders needed more competitive pricing, and that’s all the salespeople heard. They either were not told or ignored the issue over delivery schedules. Management was not made aware of it either. The salesforce also completely missed on the requirements of the smaller custom home builders. Apparently, this segment was too small to pay much attention to.
So, the following morning, I studied the numbers and several revealing patterns emerged:
•There had been a definitive and severe decline in orders from the larger tract builders dating back three years. The average bid price per unit declined substantially during these three years, and therefore the margins for my client as well.
•The smaller custom home builders didn’t show the same pattern. It was in fact the opposite. Over the same period, these builders increased their orders. The average price per unit for this group hadn’t declined. The margins increased a bit.
•Department store sales stayed stable for the most part.
I wanted to know whether the president was the only one in the dark, or if the marketing and sales organization was just as clueless. I asked to interview the vice president of marketing and sales. He was as pedestrian a thinker as one can imagine. His focus was exclusively on the larger builders and how he could win their business back. According to him, he needed more salespeople to have better coverage and allow them to interact more frequently and closely with their more important customers, the larger builders. This way they could anticipate their needs better and be on hand to deal with problems when they occurred. He pointed out that his larger competitors had many more salespeople working that segment. It didn’t even cross his mind that his company may not be able to afford more salespeople, as the larger companies may. He was the one who had pushed to eliminate some features as a way to reduce prices and become more competitive. He also pushed to introduce a lower-end product line. I asked him what the effect would be on the smaller builders should that happen. He dismissed the question out of hand. They were too small to worry about. I knew that if the division survived, he would have to be replaced—he didn’t demonstrate the kind of thinking, understanding, and awareness commensurate with his position.
I began to form some hypotheses and needed more data to confirm them. The first hypothesis was that the larger builders were the main reason for my client’s losses over the last three years. Clearly it was not because of declining sales and profitability with the custom home builders. In fact, this aspect of the business had actually experienced improved margins. The second hypothesis was that a major factor in the increasing losses was due to hiring additional salespeople over the last three years. The VP told me that he had hired additional salespeople because he believed it to be the only way to reverse the trend. Yet sales continued to decline, and so the additional salespeople just exacerbated and magnified the company’s losses. The third hypothesis was that the just-in-time delivery demand from the larger builders would introduce additional costs, because there was no way, in my mind, that such a small company had the infrastructure capacity to handle just-in-time delivery. For example, the company didn’t have its own delivery trucks. If a customer called a week before the scheduled delivery and asked to delay delivery, my client would have to pay a penalty to the trucking company. My client would also have to pay extra costs for warehousing the shipment until the actual delivery date. The larger competitors had no such issues, because they owned their trucks and warehouses. The fourth hypothesis was that if we reduced the focus on the large tract builders, and eliminated most of the direct salesforce, we might bring the company quickly back to profitability, thereby reducing the pressure to close the division down. The fifth hypothesis was that the custom home builder segment was a growing one and might support continued growth for my client. I needed to pay close attention to this segment, as well as the department store segment. (Just as a side note to further demonstrate the concept of the true “cost to serve” I discussed earlier in this chapter: It is clear that the two segments [large builders and the smaller custom home builders] had substantially different cost-to-serve economics. When allocating the true-cost-to-serve for the two different segments, the majority of the extra salespeople hired specifically to serve mostly the large builders should be allocated to that segment. Also, the extra costs associated with building and storing the larger inventories in advance of delivery, necessary to assure just-in-time delivery, would also need to be allocated mostly to that segment. It was also true for any extraordinary storage and transportation costs resulting from serving the just-in-time requirements of the large builders’ segment.)
I asked the president to free up at least a half day for me. We met and I laid out all my findings and the observations from the numbers he provided me. I also gave him my conclusions and hypotheses. He was completely bewildered. The only words he uttered were, “I’ll be damned!” He also immediately gave me another data point regarding my hypothesis about the losses attributable to the larger tract builders. He said that at times they had to work three shifts to meet larger orders with short delivery times. They had to pay substantial extra pay for overtime, which was not reflected in the pricing for the products. (These costs, too, needed to be mostly allocated to the large builders’ segment when calculating the true-cost-to-serve.)
He immediately understood the implications of my findings and told me that he would take immediate steps to lessen the focus on large builders, eliminate salespeople and overtime shifts, and terminate the VP of marketing and sales. We worked very closely together from that point on. I asked him to have his people do an actual cost-to-serve analysis for all his customers. I explained the concept and we built the methodology on how to do it properly. We also agreed on how to allocate the various overhead and functional department costs to reflect true-costs-to-serve. He asked the accounting department to work on it. I also asked him to set up interviews with additional custom home builders and larger customers in the department stores. I spent the following week focusing on these tasks. Here is what I discovered:
•The additional custom home builders I spoke with confirmed what I had been told in previous interviews. This segment was growing at a healthy rate.
•During one of the interviews, the interviewee mentioned to me that he worked closely with kitchen remodelers who worked on remodeling existing homes. He mentioned that they also bought high-end products, and was a segment growing at a fast rate.
•I learned that the department stores sold many product lines, from low end to high end, and how the process worked internally for them. The majority of buyers were women. The management at the stores appeared to have little insight as to the way their salespeople interacted with the buyers.
I decided that I needed to study the customer interactions on the floor with the department store salespeople. I spent the next three days interviewing salespeople at various department stores, as well as women who happened to have been shopping for new appliances. I also interviewed kitchen remodelers. I asked the president to have his marketing staff collect whatever market data they could on this segment. At the end of the three days, I made the following observations:
•The kitchen remodelers were indeed a growing segment. Their needs, requirements, and purchasing decisions were almost identical to those of custom home builders. Both segments seemed to me to comprise a single segment from a strategic point of view.
•When asked how they decided between the two high-end competitors, all responded the same way. They work with their customers and let them make the final choice. I found out that these women almost always go to the department stores to inspect the products before making a final decision. (I thought that this was an especially important finding and decided to follow up more on this later.)
•The salespeople at the department stores were extremely important in influencing the final purchasing decision for these women.
•The women who came to the department stores could be categorized, from my perspective, into one of three groups: (i) those who came specifically to buy only a high-end product, (ii) those who didn’t exactly know what they were looking for, and (iii) those who were very cost- and budget-sensitive. All three categories had little knowledge of appliances and didn’t really know how to go about selecting the best. Most heavily relied on what the salesperson on the floor told them.
Also, many came to the store with a preconceived idea of which brand might make the most sense for them. The preconceived ideas came from multiple sources, such as their own experience with appliances they had owned in the past, what their relatives and friends may have told them, and what a serviceperson may have told them in the past when their appliance needed servicing.
The latter seemed to leave an unusually strong impression on their preference. These women viewed the serviceperson as a knowledgeable and credible expert. So, if the serviceperson told them that the brand that they came to fix was known for breaking down, the customer would not be very likely to buy that same brand again. Conversely, if the serviceperson mentioned a brand that they claimed had a great reputation for quality, they would be predisposed to that brand.
Everything began to fall into place and my hypotheses appeared to have been confirmed. I understood that I found two important contributors in the final purchasing decision of these women: the salesperson at the department store and the appliance servicepeople who made house calls. I understood that I found two levels of success factors in the two segments under consideration: custom home builders/kitchen remodelers and the department stores. The first success factor was the recommendation either from the custom home builder/kitchen remodeler to their clients. Without such recommendations, my client wouldn’t even be in the game. Thus, the requirements of the home builders/kitchen remodelers fell under the fatal flaw category. I prioritized these fatal flaw criteria as: (i) reputation as the best high-end products, (ii) top-of-the-line features, (iii) reputation for top-quality products (meaning they don’t break down or need service very often), and (iv) actual experience to prove that it is a high-quality product (demonstrating the longevity of the product. If products were to break down, the reputation of my client’s products would be damaged, and home builders would not trust the brand any longer, which would have a ripple effect).
Success also depended on finding out how store salespeople decided to recommend a specific brand to the customers, and whether they could be influenced to recommend my client’s appliances. I spent the following week interviewing salespeople at the department stores, women who came to purchase appliances, and some independent servicepeople. My questions were more specific, more probing, more leading. They were exclusively focused on trying to understand why they recommended certain brands to these women.
I found what I was looking for. I found out exactly why the salespeople and servicepeople made their recommendations. It solved another layer of the puzzle. Here are my findings.
Servicepeople
These were small, independent, and local entrepreneurs who specialized in fixing appliances. The large companies, like G.E., had their own servicepeople based around the country. The independents mostly serviced the other brands and less populous areas where the larger manufacturers didn’t serve with their own employees. They appeared to be straightforward, honest people. When customers asked for a recommendation, it came from their own experience and that of their colleagues. I tried to probe for the kinds of things that might influence their perception and I found something interesting.
I asked whether when they formed their opinion about the “quality” of a brand, they differentiated between whether they have encountered minor versus major service problems for that brand. They did! They tended to assign less importance to minor problems that were easy to fix. I then asked them to give me specific examples of brands with minor problems and those brands that had relatively more major problems. As the servicepeople walked me through the examples, I noticed a small nuance. For some brands, they discussed the technical reasons as to why the appliance didn’t work properly. For other brands, they didn’t. I also noticed a correlation between how technically familiar they were with the brands and the severity they assigned to a brand’s poor performance. The more familiar, the less severity and the more “forgiveness.” The less familiarity with the brand, the greater the severity they assigned to it. I logged this correlation in my mind to rethink later about how it could be used to advantage.
Department Store Salespeople
Here I found a more complex situation. I began by making three key observations regarding how they made their recommendations to these women. The first was not that surprising. They earned different commissions for different products they sold. Not surprisingly, they tended to recommend the products where they would earn the highest commissions. I followed up with their managers to see how those commissions were determined. The response was quite simple. It mostly depended on the margins the department stores made on the different product lines. The higher the profits for them, the more they tried to incentivize the salespeople with higher commissions to sell those brands. Another reason was to try to incentivize selling specific products that were sitting for too long in inventory.
The second observation regarding the recommendations of the salespeople on the floor was somewhat surprising to me. Many of the salespeople wouldn’t allow the size of their commission to affect their recommendations. They didn’t want to feel like they would sell their soul for money. They would give their honest opinion to the customer. I found out that these salespeople had a higher technical understanding of some brands and less of others. Not surprisingly, just as with the servicepeople, the more knowledgeable they were of the technology behind the features of a particular brand, the more they would recommend that brand, convinced that it offered more unique value. I continued to test this hypothesis with all the salespeople, and it proved to be correct. I also found out that salespeople, even within the same department store, recommended different brands but for the exact same reasons. Whatever brand they understood best, they recommended.
I asked all interviewees how they acquired their specific technical understanding about the different brands. I got two consistent responses. The first and most important source was technical classes given by the manufacturers about their products. The other was the general marketing literature and product brochures that the manufacturers provided as point-of-sale material.
I also accidentally found out that the turnover of salespeople was very high in department stores. The average tenure of a salesperson was about three months. First, those are not the highest-paying jobs and so the general tenure was short, until they found another, more lucrative job. Second, if they were not generating enough sales, they would be moved to another department. Training classes for salespeople by the appliance companies were conducted infrequently, about once every couple of years, if not longer. Thus, most salespeople at any given time were without the added knowledge that such training classes tended to provide. That clearly suggested that more frequent training classes could be used by my client to impart technical knowledge and thereby likely influence salespeople’s recommendations.
I was convinced I had all the information I needed to form my key success factors. As you saw from the above, I discovered three levels instead of two.
Key Success Factors
Fatal Flaw (required to pass the screening of the high-end builders/remodelers):
•Top-of-the-line features
•Reputation for top-quality products (meaning they don’t break down or need service often)
•Real experience to prove that a product is of the highest quality (if the product would break down, brand loyalty would be lost)
Secondary Differentiation (related to who influences the majority of buyers)
•Positive recommendations from salespeople
•Positive recommendations from servicepeople
Final Purchasing Decision (related to how salespeople and servicepeople make recommendations)
•Highest payout of commissions/bonuses
•Deeper understanding of features and technology for product/features differentiation
•Frequent training of all salespeople to ensure they have the necessary product knowledge
Note, unlike what common sense might have suggested, none of the key success factors reflect on specific preferences that women may have had regarding specific physical attributes of the appliances, like features, color, size, and so on. It is not because in some cases these attributes didn’t help influence a final decision; rather, it was because of two specific factors. First, the specific physical preferences were really secondary considerations and completely subjugated to the above-mentioned key success factors. Second, all the competitors had a large selection in inventory, and nobody really had anything from a features or appearance standpoint that others didn’t have as well (other than the high-end models). Thus, the physical attributes and features would be determined more by the marketing department to make sure that the product lines offered what women wanted and preferred, rather than be elevated to become part of the overall corporate competitive strategies.
I now needed to complete the data collection and analyses to make sure that I could build a solidly substantiated case for my recommendations. When I had all the data and facts, I met with the president and showed him the results. He agreed with my findings, conclusions, and recommendations, which were:
•Reduce marketing focus on large tract builders.
•Increase marketing focus on custom home builders and kitchen remodelers. They should be the highest-priority market segment.
•Increase marketing focus on department stores, but as a secondary focus.
•Reduce the direct salesforce significantly to reflect the new strategy.
•Eliminate third shifts at the manufacturing plant, and try to reduce the need for second shift as well. (This was possible because the need for just-in-time delivery of the larger builders was no longer as relevant, and the custom home builders were not as sensitive about delivery schedules.)
•Create a new department within the marketing organization with the following responsibilities:
○Establish training programs and generate informative brochures for salespeople in the department stores and for the independent servicepeople. Make sure to provide “technical” facts explaining the reasons for the uniqueness of their products.
○Training for salespeople in department stores should be held at least once a quarter.
○Formalize a process to follow up with independent servicepeople on a regular basis. They should call the various service firms no less than at least once every six months. Actual training classes for servicepeople on location should be considered as dictated by conditions on the ground.
○Actively manage the commissions/bonuses rewards for salespeople in department stores. Try to ensure that commissions/bonuses are relatively high, and at least higher than the other direct high-end competitor. If need be, sacrifice margin to achieve the above goal. Consider topping up the stores’ commissions as added incentive.
I called the junior partner at Booz Allen and asked to meet him. I presented my findings with all the exhibits and rationale, as if he were the client. I had all the accompanying numbers to show the immediate impact on the revenues and losses/profits. The analyses showed an almost immediate return to a positive cash flow, with a growing business over time and great margins. When I was done, the junior partner looked at me pensively and asked one question: “Is the president in agreement with you?” My answer was, “Every inch of it, every number in it, every finding and conclusion, every single recommendation. In fact, we worked on everything together as a team.” He then said, “I’ll be a son of a gun!”
A while later, we met with the CEO and the executive level management of the conglomerate. Present in the meeting were the two presidents of the divisions we worked on. I started the presentation with the situation regarding the appliance division. I spoke for almost thirty minutes and didn’t have a single question, which is extremely unusual. When I was finished, the CEO said nothing at first and then turned to the president I had been working with and asked him if he agreed with my analyses and recommendations. The president responded, “One hundred percent.”
To complete the story, what we predicted happened, just as if we had scripted it. Sales in the custom home and kitchen remodeler segment continued to grow, and sales in department stores increased dramatically. Profitability was achieved almost immediately. The company grew from $30 million back to the peak of $70 million within three years. I did not keep up with what happened subsequently.
Perhaps another example will serve to demonstrate how mediocrity can exist even within an organization of smart people, and how easy it is to arrive at the wrong strategic conclusions.