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What You Don’t Know About Sales Can Hurt Your Strategy.

What You Don’t Know About Sales Can Hurt Your Strategy

by Frank V. Cespedes  |   12:00 PM September 8, 2014
http://blogs.hbr.org/2014/09/what-you-dont-know-about-sales-can-hurt-your-strategy/

 

The goal of strategy is profitable growth, meaning economic value above the firm’s cost of capital. There are basically four ways to create that value: (1) invest in projects that earn more than their cost of capital; (2) increase profits from existing capital investments; (3) reduce the assets devoted to activities that earn less than their cost of capital; and (4) reduce the cost of capital itself.

In my experience, most CEOs, CFOs, and other C-suite executives involved in strategy formulation know these finance basics. (Or, they learn fast after a few investor meetings.) But far fewer understand and operationalize the core sales factors that materially affect each value creation lever.

Most projects and investment initiatives in firms are driven by revenue-seeking activities with customers. Hence, the customer-selection criteria of sales managers, and call patterns of sales reps, directly impact the first value-creation lever: which projects the firm invests in. But most sales compensation plans focus purely on volume incentives. In effect, the C-suite is saying to salespeople: “go forth and multiply!” That’s precisely what they do, selling to any customers and, in the process, generating a motley mix of investment initiatives in the selling firm. Soon, it really doesn’t matter what your strategic planning documents say. Your real “strategy” is the collection of investments made via this ad hoc process.

To increase profits from existing investments, the interactions between sales and other functions is crucial because those interactions accrete costs, time, and on-going asset utilization patterns in organizations. Consider the order cycle in most businesses. For the seller, an order typically touches multiple functions as it moves from a customer’s request for specifications or quote to a purchase and through any post-sale service activities such as delivery and installation. The process starts with a sale—as the old saying goes, “nothing happens until you make a sale”–and sales is involved in most of these activities, if only because it’s the sales rep who usually fields the customer’s questions or complaints and who then interacts with other functions to respond.

Smartly reducing assets devoted to activities that earn less than their cost of capital requires good links with evolving market realities. (My previous article emphasized how and why these links are broken in many companies.) But creating value also requires senior executives to get more serious and knowledgeable about performance-management issues in sales. Without that understanding of how sales hiring, incentives, organization, and training affect field behavior in your company, asset redeployment becomes an academic exercise that does not affect the actions of those using unproductive assets. Or, worse, C-suite initiatives become an unwitting impediment to the use of assets that in fact remain essential to profitable selling.

It may seem that sales has little impact on the fourth value-creation lever, the firm’s cost of capital. Isn’t that a function of risk parameters and the debt-to-equity ratio? (Call the investment bankers for advice, since they’ve shown how smart they are in managing their risks and leverage.) But consider the basics. Financing needs are in large part driven by the cash on hand and the working capital required to conduct and grow the business. Most often, the single biggest driver of cash-out and cash-in is the selling cycle. Accounts payables accumulate during selling, and accounts receivables are largely determined by what’s sold, how fast, and at what price. That’s why increasing close rates and accelerating selling cycles is a strategic issue and not only a sales task.

Interactions with customers affect all core elements of enterprise value and, in many firms the sales force is the sum of those interactions. If the C-suite can’t make these connections between sales and strategy, then attempts to increase stock price or valuations are at best limited and, at worst, going down the wrong path. For example, as a leader, you can worry prudently and diligently all you want about disruptive innovations in your industry, but you need a sales channel aligned with strategy to do something about it. Or as a character in a John le Carre novel says, “A desk is a dangerous place from which to view the world.”

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