Case Study: The Case Of Centralised Sales

CASE STUDY
The Case Of Centralised Sales

By R Chandrasekhar

The Case Of Centralised Sales Synopsis: The going had been good. But it was time to change. Vinod Saraf, the CEO of the machine tools-manufacturer, Pluto, was convinced that only a revolutionary new organisational structure could spur his organisation to achieve its growth objectives. He didn't have too many choices: he could either create business units around customer-segments, or he could create divisions around product-categories. Saraf decided to do a bit of both. And create a Central Sales Organisation to boot. His managers agreed that it seemed to be the right thing to do. But Eureka Forbes' S. Goklaney, the Hinduja Group's J. Shetty, Voltas' K.S. Oberoi, and Bombay Dyeing's P. Malik don't entirely agree. A BT Case Study.

Less than half-way through his presentation, Ashish Mullick knew that the man in the fourth row desperately wanted to speak to him. Not that there was anything in the demeanour of the elegantly-balding manager in a well-cut grey suit that suggested it, but the long years on the circuit had seen Mullick develop a sixth sense about people. That man seemed to him like a CEO waiting to unburden himself to the nearest management consultant.

He was right. The subject of his ruminations was, in fact, a CEO. His name was Vinod Saraf, and he was attending the Hyderabad Management Association's day-long workshop on strategic marketing with the specific aim of seeking the advice of Mullick, a professor of marketing at the J.L. Kellogg School of Business, and a consultant to several Fortune-500 companies.

But Saraf didn't get to meet Mullick till lunch; the marketing guru was whisked away for the customary sound-bytes by a waiting television crew soon after his presentation ended. His ulcers exacerbated by his organisational angst, Saraf was moodily pottering around the salad bar, when he heard a voice behind him. ''I saw you trying to speak to me before I had to leave. I'm Ashish Mullick, but I guess you already know that...''

In a quiet corner, away from the bustle of the pushy B-school types busy fattening their Rolodexes, Saraf unburdened himself to Mullick.

''I head Pluto Engineering...''

''I've heard the name. You make machine-tools, don't you?'' interrupted Mullick.

''That's right. We've been in the light engineering business for the last 53 years. We are a widely-held company, run by professional managers. Like most companies of our generation, we have a functional organisational structure. Each of the 4 functions-Manufacturing, Marketing and Sales, Finance, and Human Resources Development-is headed by a general manager. We have regional sales managers looking after the 4 zones, reporting to Raj Chatterjee, my General Manager (Sales & Marketing), who is based in Mumbai. Over the years, Raj and his team of 200 salespeople have built a nation-wide network of 1,600 dealers. None of them is exclusive to Pluto, but that is characteristic of the machine-tools market...''

''And this arrangement works for you?,'' questioned Mullick.

''It does,'' answered Saraf. ''In the 1990s, when the machine-tools industry was sputtering along at 8 per cent per annum, we managed to grow by 11 per cent. Each of our 35 offerings has a marketshare of 12-15 per cent in its category in a fragmented market, which is dominated by the unorganised sector.''

Mullick knew a happy ending when he heard one. The CEO of any company that had managed to outgrow the market in an industry whose fortunes were linked to the economy should, he reckoned, be giving tips to consultants-not seeking their advice.

''I don't see how I can help you, Mr Saraf,'' he said. ''You seem to be going great guns.''

''I know that, but we want to do better. Our industry is set to grow by 10 per cent per annum over the next 5 years, but we should grow faster. Last month, we decided to restructure our company into 3 independent profit-centres: Power Tools, Industrial Belts, and Hydraulic Hoses. As each of them reaches a threshold level of sales, it will be spun off as a Strategic Business Unit (SBU). Each profit-centre will have a CEO: Raj Chatterjee will head Belts; Ashwin Kumar, Vice-President (Manufacturing), will head Tools; and we have hired a new hand for the hydraulics business. The CEOs have total control over manufacturing and marketing; only staff functions, like Finance and hr, will be looked after by the corporate centre.''

''We've also decided to centralise sales. We don't know how, but one option could be the creation of a Central Sales Organisation (CSO)-a single entity that acts as the interface between the profit-centres and our customers. The more we think of it, the more the CSO seems to be the solution to our problems. But is it? That is where I want your assistance.''

''Fascinating,'' murmured Mullick, as he idly traced a pattern on his plate with a fork. ''What would you like me to do?''

''I've called a meeting of Pluto's senior managers to discuss the advantages and the disadvantages of a CSO. I've also invited one of our biggest dealers. I'd like you to attend the meeting.''

Mullick, impressed with the mild-mannered CEO who was prepared to change even when the going was good, agreed. Mission accomplished, Saraf left, promising to pick him up the next morning at 9 sharp.

The meeting was held in Pluto's modest boardroom in an unpretentious grey block in Secunderabad, which hosted both its corporate headquarters as well as its largest manufacturing-facility. Everyone else had assembled by the time Mullick and Saraf walked in. Mullick recognised some of them from his earlier chat: Chatterjee was a portly man touching 50, and Kumar was a lean whippet-like individual of indeterminate age. Then there were Anil Marwah, Head (Finance), and Prabhakar Das, Head (HR), both assembly-line B-school offerings in their late 30s: clean-shaven, manicured, in white shirts and khakis. The quorum was completed by Sunil Agrawal, a 35-something second-generation entrepreneur, who was the managing partner of Agrawal Enterprises, Pluto's largest dealer in West India.

Once everyone in the room had been acquainted with Mullick, Saraf started off by listing the changes he wished to make in Pluto's organisational structure-essentially, a repeat of the previous afternoon's discussion with Mullick.

''What do you think, Dr Mullick?,'' he concluded.

''Profit-centres that will, eventually, become SBUs are a good idea. In fact, you may even want to embed staff functions, like Finance and hr, in each SBU. But I think a lot depends on how you manage your marketing-and-sales function during the transition.''

Sunil Agrawal burst out: ''Will I have to deal with 3 salesmen now? After all, I stock Pluto's entire range...''

Chatterjee had anticipated this question, and was ready with an answer. ''The decision that we have arrived at is to create a separate entity, responsible only for sales. We're tentatively calling this the Central Sales Organisation. Our entire sales-team will be transferred to the CSO, which will sell products produced by all the 3 profit-centres. Marketing activities-like product-development, advertising and promotion, brand-building, and resource-allocation-will continue to be the responsibility of the CEOs of the profit-centres. But the CSO will be headed by a CEO, who will be at par with them.''

Agrawal wasn't convinced. ''But why create a separate organisation for this purpose? While some of your products are end-user specific, none of them are dealer-specific. I do not understand why you have to create an elaborate organisation just to interact with us, your primary customers...''

''That's true,'' conceded Marwah, ''but only to an extent. Dealer-sales account for 60 per cent of Pluto's turnover; the remaining 40 per cent is our sales to large accounts-companies whose purchase-volumes are high, and who prefer to deal directly with us. These accounts are handled directly by our salespeople. While our margins on dealer-sales are 8 per cent, the corresponding figure for sales to large accounts is 11 per cent...''

''And I think,'' continued Mullick, ''that Pluto feels it has not exploited the large accounts segment, and is hoping that the CSO will change that. Isn't that right, Mr Saraf?''

''Absolutely,'' agreed Saraf. ''We only have to look as far as our nearest rival, Bharat Engineering, to realise that. Seventy per cent of its turnover accrues from sales to large accounts. And, while this segment is growing at the rate of 25 per cent, our sales to dealers have grown at just 10 per cent per annum.''

''Fair enough. Have you identified the CEO for the CSO? That choice will have some bearing on the eventual success of your change-initiative,'' pointed out Mullick.

Saraf pointed to Prabhakar Das. ''I have managed to convince Prabhakar that he is the man for the job. He raised 2 objections: the first revolved around his background as a hr professional, with no experience in either sales or marketing. The other was based on his understanding that the CSO would become redundant once the SBUs became operational. Those are the very reasons that drove my choice.''

''As a hr specialist, Prabhakar can easily identify the skill-gaps in our salespeople, and quickly develop suitable training-interventions to bridge them. As far as I am concerned, the primary objective of setting up a CSO is to develop selling competencies. Once that is done, it is only natural that the CSO will become redundant...''

''And that,'' concluded Marwah, ''is a clear sign of success, not failure. In any case, selling skills are generic while marketing is product-specific.''

Prabhakar was clearly the man in the hot seat. Having overcome his reluctance, he seemed to be looking forward to his new assignment. ''We should ensure that our salespeople understand the business processes related to selling. We evaluate salespeople on the basis of their annual billings, but we should start considering process-oriented factors, like the time spent on calling on new customers, or the proportion of enquiries that lead to a sale, too...''

''That is just why we should move out of our functional structure,'' said Ashwin Kumar. ''By ensuring the right focus, a CSO contributes to the process of building critical mass and developing competencies...''

''But this is exactly where you will run into a trade-off between costs and volumes,'' objected Agrawal. ''I have seen this happen with one of your competitors, Indian Machine Tools, which used to be the market-leader in the power tools segment. Soon after it adopted the SBU structure in 1993, its costs spiralled out of control...''

Mullick chuckled. ''No, I am not laughing at you,'' he told Agrawal. ''Just before I came to India, I was approached by an American medical supplies-manufacturer, which wanted to create the same structure as you are planning. And one of their managers raised the same objection that you have just raised. Companies are the same everywhere.''

''Anyways,'' he continued, ''companies that willingly adopt change have to learn to look beyond the short-term implications. It is imperative that you understand which sales-related factors deliver shareholder value, and which do not. This sounds easy, but isn't. The typical salesperson is excited by volumes; profits are incidental. Everyone in Pluto, from the CEO to the sales rep, needs to understand what drives profits.''

''I am quite clear in my mind that we need to change,'' reiterated Saraf. ''I believe there are 4 things that any CEO should consider in a situation like this. Does the new structure facilitate the development of competencies? Does it enhance our managerial abilities? Does it provide for the transfer of knowledge across business units? And does it leverage a company's resources optimally? I think our profit-centre-CSO structure stands these tests.''

''I am in favour of a CSO.'' intoned Mullick, '' I know of a few Indian companies, like BPL, that have managed to centralise sales successfully. BPL calls its entity the Central Marketing Organisation, and its activities aren't restricted to sales, but extend to marketing and brand-management too. There are also companies that have created centres of excellence by building divisions that manage all their activities. gm's Saturn division is, probably, the best-known example of this. There have been instances of multi-divisional or multi-product companies creating a CSO, only to realise that it doesn't work for them. Cadbury India is a case in point. The company had a short-fling with the CSO structure. But the reasons that dictate the effectiveness of the CSO seem to go beyond product- or industry-characteristics. Nestle, which operates in the same markets as Cadbury, operates through a CSO. I think the real issue is implementation. And managing change effectively. Not that the CSO structure is perfect; there are several disadvantages associated with it. Personality clashes between the head of the CSO and the heads of the other profit-centres is one. I'm also not sure how your salespeople will react to this sudden change...''

Saraf stepped in quickly. ''I don't believe there will be any such problems here. We have all worked together for more than a decade, and understand each other pretty well. I think our salespeople will welcome this move...''

Does Pluto really need to reconfigure its organisational structure if it wants to realise its long-term strategy? Can't these goals be achieved without doing so? Are there any roll-out problems that Saraf should be prepared for? Is Saraf's view of the CSO as a transient entity justified? Should it actually be disbanded once the SBU structure matures? Will it create any reporting problems in the short run? Has the company done the right thing in identifying a hr professional to head its CSO? Can the CSO become a profit-centre by focusing on trading operations? Are there alternative organisational structures that Saraf could consider?