Case Study: The Case Of Centralised Sales, Pg 2

CASE STUDY
The Case Of Centralised Sales
Continued..

THE DISCUSSION

"Pluto should reorganise its businesses on the basis of customer-segments instead of creating independent profit-centres." SURESH GOKLANEY
Managing Director, Eureka Forbes

Vinod Saraf is right in questioning if the existing organisational structure at Pluto can meet its future requirements. The functional structure may have served the company well in the past, but that does not necessarily mean that it will stand the test of time. A company should look at the emerging business compulsions, and audit the ability of its structure to continue to deliver the results it desires.

However, Pluto's structure should be driven by its strategy for the future. There is little to suggest that the company has factored market realities into its thinking. Unless Pluto does this, and gets its strategy right, no structure will work for it. Saraf and his team have decided to split the business category-wise into Strategic Business Units (SBUs). Nothing wrong with that, but why? Why can't the businesses be split according to customer-segments? And why should the company focus on economies of scale in selling as opposed to manufacturing?

Let us look at Pluto's product portfolio. It makes light industrial products like belts, hoses, and power-tools. These are not hi-tech products, nor do they sell on the basis of proprietary designs. Consequently, this is not an industry with high entry-barriers. This is reflected by the fact that the market is dominated by the unorganised sector. With its rivals, both in the organised and the unorganised sectors, enjoying a marketshare of 85 per cent, and the market growing at the rate of 11 per cent, the 20 per cent growth-projections made by Pluto imply that the company will have to snatch customers away from the competition. Will its poaching focus on the unorganised sector? Saraf needs to address this issue first if he wishes to arrive at a relevant sales structure.

The market in which Pluto operates seems fairly commoditised. Price, I guess, is the main basis for competition. Any company operating in this context needs to focus on 2 issues: how the cost of manufacturing can be driven down, thereby enabling the company to compete on price. And how the company can offer customised products and services to large customers. The answers to these key questions are also pre-requisites to getting the structure right.

Only from the perspective of better business focus does a Central Sales Organisation (CSO) make sense. Pluto certainly needs to move away from a sales-only orientation to a sales-and-process orientation. This will involve changing the attitudes of the company's salespeople, and I think Saraf has done well to identify Prabhakar Das as the man for this job. I believe he will succeed, but the transition from a functional structure to a CSO-driven one will not be without its share of problems.

An integral part of changing employee attitudes is modifying the organisation's performance-measurement and rewards systems. Traditional accounting methods measure result-oriented performance parameters, but are a total loss when used to measure process-oriented parameters. Can the quality of relationships developed by a salesperson be measured as objectively as physical sales? Will a company feel all right about rewarding a salesman who did not meet his monthly target, but developed excellent relationships with 3 customers?

I do not see the logic in splitting the business on the basis of purely internal criteria. Agreed, the machinery for manufacturing hoses, power-tools, and belts may be different, but that doesn't mean that the profit-centres have to be organised along those lines. To my mind, a better way to reorganise Pluto would be to do so on the basis of customer-segments. Dealer-sales, for instance, could be one SBU or profit-centre. This will include standard products sold in large numbers through a wide distribution network.

In this low-price, high-volumes business model, the profits will come from reduced manufacturing-costs. While the marketing function of this SBU will focus its efforts on brand-building, which will facilitate higher retail sales, the logistics function will try to ensure a seamless flow of information and products from the company to the dealer, thereby reducing its working-capital requirements. This profit-centre will be dedicated to developing these competencies.

And the second profit-centre could cater to large accounts by working closely with them to develop not just new products, but also new delivery- and inventory-processes customised to the specific requirements of the end-user. The salespeople in this profit-centre should function as account executives. The R&D Department will function as an extension of the customer's engineering department. And the logistics function will focus on JIT delivery. So, this profit-centre will focus on developing customer-oriented flexibility as its competence.

"Saraf needs to begin by focusing on his strategy. The right organisational structure is always a function of strategy." JAYARAM SHETTY
Group V-P (HR), Hinduja Group (India)

There are several compelling reasons for a company to periodically review its organisational structure. It could feel the need to re-orient itself in terms of vision, mission, culture, short- and long-term goals, and business strategy. It is also important to restructure when the organisation needs to be galvanised into action. While moving from the domestic to the global market, for instance. Or, while seeking to increase marketshare in a competitive market.

It may also be necessary to change an organisation's structure in order to derive the benefits of synergies at different levels of the organisation. Irrespective of the strategic compulsions, a restructuring should always add value to the customer, and increase the organisation's level of operational effectiveness. If it doesn't meet these objectives, the exercise will prove to be futile-or even counter-productive.

The need for an organisational restructuring has arisen at Pluto because of the company's desire to outgrow the market. This is a laudable objective, but Saraf needs to begin by focusing on his strategy. The right structure will flow from this; an organisation's structure is always a function of its strategy. Tinkering around with the structure is only one of the ways in which a company can realise its objectives. Getting the strategy right first, though, is of primary importance.

Saraf and his team should begin by formulating a Vision 2005 for Pluto. Visioning is an elaborate process that addresses several basic questions. What is the raison d'être of Pluto? What is its purpose? What is its business? Who are its customers? What are the means it should use to realise its objectives? What is the kind of organisational culture that can best facilitate them? Answers to these questions will indicate not just the strategy Pluto should adopt to achieve these objectives, but also the structure best-suited to doing so.

I am not sure if Pluto has done its homework in this context. It is possibly because Saraf is looking at the structure in isolation of strategy that there is no clarity on why Pluto needs to move from a functional structure to a profit-centre structure. The CSO-the vehicle that Pluto hopes will get it started on the road to an SBU-based structure 5 years down the line-will only reinforce the functional character of Pluto's existing structure. It retains the emphasis on individual functions. And, in fact, enhances the emphasis on the sales function. I believe this change is purely cosmetic, adding no value either to the company or its customers.

Since securing critical mass seems to be an over-riding concern in this entire exercise, I have 2 suggestions. One, Pluto should set up the CSO as an independent profit-centre in its own right. This means that the CSO should, increasingly, focus on trading operations. This, in fact, is an excellent business opportunity since the unorganised sector has a 60 per cent share of the market. Pluto should enter into strategic alliances with units in the small-scale sector, and sell their products under its own brandname. This will contribute substantially to turnover and profits in the short run.

Two, the company should set up dedicated project teams in each business. This team should include specialists-who handle functions like new product development, marketing, regional sales co-ordination, finance, and HRD-and generalists, who handle the sales function. Pluto should use such teams as the building-blocks for the future. This approach will serve all the objectives Saraf seeks to meet-increased sales, an emphasis on large accounts, and higher customer satisfaction-without causing any sudden changes in Pluto's corporate structure.

"Pluto should establish a dedicated distributor network, which can supplement its non-exclusive dealer network." K.S. OBEROI
Vice-President (Operations), Voltas

There is no single structure applicable across organisation-types and industry-contexts. This is especially true of a sales structure, which may have to vary, even within the same organisation, on the basis of the business environment and the competitive situation.

Pluto will have to find a way of addressing both segments-dealers and large accounts-at the same time. However, there is one factor that Saraf seems to have ignored: customer loyalty. Only a loyal customer-base can help the company achieve the 20 per cent growth it seeks. I believe Pluto should begin by establishing a dedicated distributor network, which can supplement its non-exclusive dealer network.

Pluto's decision to move towards a SBU structure should be seen in the context of the low success-rates, in general, of SBUs. It is important to ensure that SBUs are staffed by high-quality manpower. Else, the organisation will find itself losing control over its business-all in the name of autonomy. The concept of a CSO, even as an intermediary structure, has much in its favour. It ensures that all products benefit from expert selling even while giving individual businesses the means to furnish critical manufacturing and marketing inputs. Das should focus on building an informed, enthusiastic, and committed organisation through people-related initiatives.

Saraf and his managers repeatedly mention the need to achieve critical mass in terms of turnover. What is more important for an organisation in the throes of change is a critical mass of people with the right kinds of skills and attitudes. In tomorrow's flat and competency-driven organisations, teams will play an important role at every stage of the business. In most organisations, however, this is easier said than done. Functional specialists who have worked in traditional hierarchical organisations will find it difficult to change their orthodox mind-sets. Saraf, Marwah, Kumar, Das, and Chatterjee sound excited and enthusiastic about the new structure. I do not know if this enthusiasm will be shared by managers and employees down the line. I think Saraf will have to spend a considerable part of his time resolving inter-functional conflicts.

Saraf can use a quality assessment framework, like the Malcolm Baldridge Model, to build the competencies Pluto will need in the future. If effectively used, it will provide him with a powerful vehicle to transform the company's employees into competent entrepreneurs. What's more, this approach will also ensure that employees across the organisation-including those in the sales function-understand the factors that drive profitability, and work in alignment with Pluto's business goals.

"Pluto must retain the existing functional structure, and develop dedicated sales teams for individual products" PREM MALIK
Executive Director, Bombay Dyeing

There are 3 conceptual flaws in the way Pluto's Management Committee is restructuring the organisation:

There is an inadequate understanding of the real definition of a profit-centre. The concept works only when the individual heading it has control over all the activities that make up a traditional value chain. This control should be absolute and all-encompassing, covering everything: operations, purchase, sales and marketing, finance, HRD, and services. Only then can the head of a profit-centre work effectively, and become accountable in the true sense of the word.

Take away even a single resource, and the entire concept comes crashing down. People will be held responsible for events and activities beyond their control, and the invariable tendency to pass the buck will surface. Caught up in saying not-me, employees will spend most of their time fighting fires-not working towards organisational goals. It is imperative that Saraf bear this in mind while tinkering around with Pluto's organisation structure.

The bifurcation of sales and marketing functions is potentially hazardous. I am surprised that no one has even thought about this. There are several instances of companies which have experimented with a bifurcated model to their peril. At the operational level, sales and marketing can, and should function independently. But the two must be managed at the top by one person.

This is important as it will facilitate co-ordination between two functions that, necessarily, have to work hand-in-hand. If this is not the case, sales and marketing will pull the organisation in different directions, wrangling regularly over who has the ultimate authority on issues like pricing, stocking, handling customer complaints, offering volume discounts, holding inventory, and collecting receivables from customers.

The profit-centres the company wishes to create are, basically, cost-centres. While the respective CEOs are responsible for manufacturing and marketing, they have no responsibility for income and profits, both of which are outside their control. This is a basic contradiction, which is not in sync with the requirements of either reaching a critical mass, or improving business performance.

These are risks that Saraf cannot afford. The team that he has nurtured over the years could disintegrate if the proposed structure is put in place. Instead of giving autonomy to senior managers, the so-called profit-centres-truncated and fragmented as they are-will introduce an element of strain in inter-personal relations. And that would be dangerous to Pluto's long-term interests.

Having said that, what should Saraf do? I suggest the following alternatives.

Pluto must retain the existing functional structure. There are 2 reasons why this will work. First, the functional structure has done well so far-indicative in the fact that Pluto has grown faster than the industry average. Second, it will also serve the requirements of the future.

If gaining critical mass, building sales competencies, and a better focus on the business are the 3 reasons why Pluto is thinking in terms of setting up a CSO, nothing prevents the company from achieving those goals with the existing structure. All it needs to do is to develop dedicated sales teams focused on individual products. Their skill-gaps can still be identified and bridged through training. This, surely, does not call for this kind of a fundamental change in the organisational structure.

Go the whole hog, and create 3 profit-centres: Power Tools, Industrial Belts, and Hydraulic Hoses. But make sure you understand the concept right. These profit-centres should be fully-integrated; a truncated profit-centre will not work. But setting up an integrated profit-centre requires large investments. While this approach will increase costs in the short term, it should be looked at as an investment for the future. In the long run, it will ensure gains in sales and profits. However, Pluto should carry out a cost-benefit analysis before deciding in favour of the profit-centre approach.

Set up a separate sales and marketing outfit-call it the Sales & Marketing Organisation (SMO)-but with a clear understanding that it is the only profit-centre at Pluto. All the other management units are cost-centres, and should focus on manufacturing-related operations alone. They should sell their products at a pre-determined transfer-price to the SMO, which will handle both marketing and sales. The SMO will be accountable for turnover, margins, profitability, new product-launches, and customer-management. This will ensure that accountability is focused-not diffused. It will also help the company achieve volumes and cut costs. Five years down the line, Pluto could review this structure.