Sales and Distribution
Management
With Case Study
Professor Clark Gilbert
Harvard Business School
© 2004, Clark Gilbert, Harvard Business School
Page 1
Sales and Distribution
Management
• Sales and Distribution Strategy
• Sales involves delivery and transfer of ownership of
the product or service to the customer
• It forms the beginning of the latter part of the supply
chain post manufacture
• Sales constitutes the direct and most intimate contact
of the firm makes with its customers
• Sales is responsible for the fulfillment of the promise
made to the customer by its predecessor functionmarketing
• While marketing is responsible for creation of a
customer, sales and after sales service are
responsible for servicing and retention of the
customers
© 2004, Clark Gilbert, Harvard Business School
Areas of Sales Management
Responsibilities
• Forecasting of aggregate and product wise
sales, using past data and incorporating
current and future trends
• Designing and managing the sales workforce
to meet the forecast and build long term
relations with associates
• Decide on critical aspects of sales policy
including pricing, credit terms to customers
and settlement of claims
• To closely liaise with After Sales service to
present a united customer care front to
associates and consumers
© 2004, Clark Gilbert, Harvard Business School
Role of Sales Management
• The larger concept of marketing is the creation,
servicing and retention of customers and markets
• This comprises identifying customer wants, designing
and developing products/services to meet these
wants
• Designing products, deciding initial pricing,building
awareness, persuasion-role of marketing function
• Sales role-Actual delivery of products/services to the
customer maximizing convenience and ensuring
satisfaction
• Finally fulfilling the promise made to the customer
through sincere and effective after sales service
© 2004, Clark Gilbert, Harvard Business School
Role of Sales Management
• Marketing covers want identification and
development of appropriate
products/services
• Sales involves transfer of ownership
and possession to the customer in
exchange for the price she pays
• Retention of the customer takes place in
the after sales and customer service
part of the larger marketing chain
© 2004, Clark Gilbert, Harvard Business School
Role of Sales Management
• Effective transfer of possession and
ownership to the customer
• This has to be done in the right place, right
time and the right manner
• Choice of channel members, deciding the
terms of engagement with channel partners,
Sales promotion and merchandising are key
responsibilities
• Effective liaising with Marketing and
manufacturing are essential ingredients for
successful selling
© 2004, Clark Gilbert, Harvard Business School
Role of Sales Management
• Timely and accurate information on gross sales and
by product, studying current sales trends and
projecting future trends are important responsibility
elements
• Sales has to be the secondary/tertiary sales which
represents consumer off take and not as is usually
the case reflect primary i.e. “push sales”
• Sales constitutes the first point contact with primary
and secondary customers
• Image of a company and its business prospects are
critically impacted by the attitude and the
performance of the sales force
© 2004, Clark Gilbert, Harvard Business School
Managing the sales force
• Three fundamental issues: the right organization, the
right sales force and the right evaluation and
compensation system
• Key to sales force organization is the level of
aggregation over product lines and choice of
geographical coverage
• Most Indian companies have common sales force for
all product categories. A few like Philips have
segmented sales force viz. audio and video products
have separate sales force
• Deciding the mix between specialized segmental
skills and the cost benefit analysis to justify the
decision is key to sales force organization
© 2004, Clark Gilbert, Harvard Business School
Sales force strength and
organization
• No of persons required at various levels and
positions is decided based on geographical coverage
and intensity of coverage of channel outlets (Break
bulk, distributor and retail)
• Benchmarking with key competitors is useful for new
sales force as well as updating existing sales force
• Back office and infrastructural support are key inputs
in determining the sales force composition
• Establishing performance standards, being “best in
the class” should be the objective
• Qualification should include aptitude as well as
attitudinal requirements. Learning curve inputs also
vital
© 2004, Clark Gilbert, Harvard Business School
Compensation and Incentive
Systems
• Compensation should be competitive both externally
and internally. In India “in hand” is relevant
• An effective incentive system sets aggressive but
achievable and transparent targets (most Indian
companies fail here)
• Should reflect business priorities, be simple and easy
to administer
• Supporting requirements are reliable forecasts and
rational budgeting
• Most important- focus to be on secondary i.e.
consumer sales and not primary i.e. Invoice
numbers
© 2004, Clark Gilbert, Harvard Business School
Managing the Sales Force
• Deploy according to desired territorial configuration: ensure
adequate coverage breadth wise and depth wise
• Continuous interaction with all channel members to be ensured.
Partnership is the focus
• Role of senior and top management crucial. Every senior/top
person to make sales visits. Helps to be in touch with market
realities
• Sales persons whereabouts to be continuously monitored.
Regular sales visit and performance reports a must
• Training both class room and on the job to be a continuous and
evolving initiative. Mentorship to be institutionalized
• Regular periodic transfers between marketing, sales and after
sales service personnel helps to improve integration and
versatility between the three arms of the larger marketing
function
© 2004, Clark Gilbert, Harvard Business School
Sales Strategy-choice among several options
• Relationship strategy aims at developing a
holistic partnership with all those involved in
the buying decision e.g. computers and
industrial marketing
• Double win strategy ensures outcomes for
both buyer and seller, requires empathizing
from both, is essential part of any selling
strategy
• Heroic sales strategy involves money back,
free replacement and persistent after sales
contact. Most successful in maximizing loyalty
and retention
© 2004, Clark Gilbert, Harvard Business School
Methods of Selling
• Selling through channel partners(distributors
and dealers)
• Direct selling which bypasses channel
associates works for some products(personal
care,household-Avon,Amway, Eureka
Forbes)
• Sales through large retail chains in house
brands (Wal-Mart, Home Depot)
• Mail order sales(Sears), telemarketing of
services increasingly popular-to be
questioned in terms of
appropriateness(standardized, low
involvement products eligible)
© 2004, Clark Gilbert, Harvard Business School
Channel Management and Channel strategy
• Distribution channels have different members
each forming a link in the chain between
company and customer
• We start with Carrying and Forwarding
agents who “break bulk”
• Distributors, wholesalers and retailers form
the rest of the chain in that order(they are all
primary customers) not final customers
• Most channel members operate on
remuneration of fixed costs plus variable
margins on goods sold or moved
© 2004, Clark Gilbert, Harvard Business School
Channel strategy decisions
• Channel selection first step: no of factors
include market factors, competitors,
intermediary availability and product factors
• Market factors include customer preference
for place of purchase viz. supermarket,
departmental store, neighborhood outlet
• Geography is important(rural customers in
India prefer centralized selling
locations,whereas urban prefer to shop closer
to home
• Sometimes new entrants can choose
locations overlooked by incumbents (WalMart rural Arkansas while incumbents
preferred big cities)
© 2004, Clark Gilbert, Harvard Business School
Some Channel Definitions
• Distributors are bulk buyers and sellers of company
products/services. Perform all functions of primary customers
viz. bulk storage, retailer servicing and participation in sales
promotion
• Wholesalers sometime synonymous with distributors but at
others one step down the logistic chain handling sub territory of
larger distributor area
• Agents/brokers are channel partners who do not take title to
company’s goods but act as intermediaries between seller and
customers (primary or secondary) –resorted to in initial stages of
establishing post manufacturing supply chain
• Retailers are the last link in the supply chain, interface with the
consumer/customer and are responsible for creating and
maintaining the firm’s image with them.
© 2004, Clark Gilbert, Harvard Business School
Channel selection criteria
• Most firms initially go for established channel members already
partnering big players like H.L.L or Nestle
• Timex Watches decided to go in for enlightened, aggressive
newcomers and this paid off handsomely
• Stage in product life cycle important. In initial stages risk with
newcomers preferred. Later choice with company either
veterans or more new comers
• High tech products like info. Hardware requires substantial
company support through trained personnel. Low tech products
in personal care, personal ware can do with fewer company
support personnel
• Low value products can be sold through wholesalers and
general retailers. However high value products including
appliances, white goods require focused retailing and excellent
after sales service infrastructure
• In all cases close contact with ultimate customers is a must.
Companies ignore this basic wisdom at their peril.
© 2004, Clark Gilbert, Harvard Business School
Roles/responsibilities of
channel members
• Carrying &forwarding agents maintain company stock
and move it to distributors/wholesalers. Invoicing to
primary customers from C.F.As
• Wholesalers/distributors carry their own stocks and
service retailers. Adequate territory coverage is their
responsibility
• Retailers stock, display and sell to their customers.
Key requirement is accurate and timely reporting of
stocks based on which alone reliable records of
demand can be built
• Retailers should also do the best in selling, and
building rapport and goodwill with customers and in
advising them and guiding with their best interests
and the company’s as well in mind
© 2004, Clark Gilbert, Harvard Business School
Company responsibility to
channel members
• Channel members should not be loaded with excess inventory
which will cause resentment and lower their commitment
• Every channel member should be given appropriate mix of
product-fast moving, medium and slow moving.
• Non moving product should be removed by company at periodic
intervals. Discount schemes do not solve the problem
• Company should provide adequate primary and secondary
display to channel members and point of purchase material
• Good appraisal and reward system should be put in place to
reward the right partner performance. Non performers should
be gradually weeded out. Long term orientation should be the
key to assessing all channel partners
• Frequent and caring interaction with channel partners and
prompt addressal of grievances will help to build and sustain
enduring partnerships as opposed to opportunistic alliances
© 2004, Clark Gilbert, Harvard Business School
Indian Distribution Scenario
• Traditional role of intermediaries viz. set
up minimal infrastructure and expect
guaranteed returns
• Extremely high cost of logistics
• Lowest margins in the world
• Expectation of extremely low prices
from Indian mass market customers
further pressurizes already low returns
© 2004, Clark Gilbert, Harvard Business School
Indian Distribution Scenario
• Challenge of working with low product
portfolios and low inventories not acceptable
to firms as well as channel partners
• Poorly organized and managed distribution
and retail operations. Company owned and
managed facilities not much better
• Continuous pressure on sales force to
achieve unrealistic targets results in equally
unrealistic pressure on channel partners
• Prevailing mindsets have to change for both
firms and channel partners
© 2004, Clark Gilbert, Harvard Business School
The Sales Organization
• Functions include planning, administrative
and executive functions
• Planning features forecasting, budgetting and
formulation of sales policy
• Administrative function comprises recruitment
of sales force, training, appraisal/reward
systems and control
• Executive functions include sales promotion
and selling routine i.e. execution of customer
orders\
• Objective of the sales organization is to
ensure achievement of the company’s sales
and profit targets
© 2004, Clark Gilbert, Harvard Business School
Forecasting
• Forecasting may be of total product/service
sales or of sub product or individual products
or combinations of all
• While forecasting is essentially a prediction of
future sales, it usually is a projection of past
sales incorporating credible trends
• Desirable to give more weightage to recent
period sales. At least ten previous periods
data should be taken for reliability.Most
Indian firms ignore these to their cost
© 2004, Clark Gilbert, Harvard Business School
Forecasting
• For cyclical industries, need to know the
length of the cycle(might change as for Indian
auto industry from 4 yrs up to 1980s to 5
years post 1980s) Amplitude as % change to
be measured
• Cycles include macro economic cycles,
industry cycles and inventory cycles(most
Indian companies do not include these in
their forecasts
• Finally consumer sales to be measured and
forecasted and not sales to channel members
as is unfortunately done
© 2004, Clark Gilbert, Harvard Business School
Sales Budgets
• Sales budgets are overall sales plans
enumerated in financial terms
• The forecast by gross units, product groups
and individual variants to be converted into
Re terms
• Expenses for promotions and schemes as
well as infrastructure like hoardings and shop
signage to feature
• Allowances for spoiled and obsolete product
withdrawals to be included
• Targetted levels of overall receivables and
acceptable age of receivables also part of
budget
© 2004, Clark Gilbert, Harvard Business School
Sales Budgets
• Budgets should be approved by senior sales
executives with their marketing and financial
counterparts and finally approved by top
management
• Budgets should be reviewed definitely on a
quarterly basis and preferably on monthly
basis
• Changes should be minimal but incorporated
into revised budgets after approval by top
management
© 2004, Clark Gilbert, Harvard Business School
Sales Policy
• Firstly the direct/indirect issue. Do we
go for direct selling? Do we use
distributors? If so how many in various
territories and regions? How many in
metros/large cities?
• Next to decide the terms of sale
including credit terms and to whom
various credit terms
applicable(franchisees, direct and
indirect dealers)
© 2004, Clark Gilbert, Harvard Business School
Sales Policy
• Deciding minimum infrastructure for channel
partners
• Intensity and frequency of coverage by sales
personnel I.e. weekly/monthly visits to
specific retail outlets and distributors and
CFAs
• Warranty policy and ASS infrastructure to be
decided.Training and supervision of Channel
staff for various functions including logistics,
motivation of retailers and handling quality
issues are part of sales policy
• Need to involve Marketing and QC personnel
in formulation of relevant aspects of sales
policy where their contribution is critical
© 2004, Clark Gilbert, Harvard Business School
Administrative Functions
• First step is the selection of sales
personnel. Various sources including
media, placement agencies and
educational/vocational training
campuses have to be tapped
• Employee contacts are useful for
experienced personnel. Poaching
seems attractive but is a short term
approach
© 2004, Clark Gilbert, Harvard Business School
Short term performance
initiatives
• These are short term inducements to customers to
buy more of the firm’s products
• These include discount, coupon sales, lucky draws
and contests
• These require involvement of Marketing and finance
groups to ensure best synergy of market enhancing
and profit achievement objectives
• Problem is that most of these only result in altering
the timing of purchase and do not contribute to
increased sales during the year
• Further these contribute to brand dilution and
ambiguity about real pricing points for the brand
offering
© 2004, Clark Gilbert, Harvard Business School
Some Suggestions
• It is better to build brand credibility, offer real value
propositions to customers through relevant
communication and strategic pricing
• Associates should be supported through adequate
infrastructure including signage and merchandising
support
• Finally associate remuneration should be competitive
and permissive of realistic long term earning
prospects
• Information systems and good evaluation/incentive
schemes with a view to build enduring partnerships
should form the keystone of associate formation and
development
© 2004, Clark Gilbert, Harvard Business School
Sales Organization Types
• Several types based on competitive
specialization of selling orgn.
• Geographical orgn. most common
where all firm’s products sold in each
region -assumes demand patterns and
associate capability uniformly spread
• Product type sales organization e.g.
pharma cos have medicines, equipment
and supplies organized in separate
groups
© 2004, Clark Gilbert, Harvard Business School
Sales Organization Types
• Orgns. based on customer types viz.
Industrial, Institutional and Consumer
categorization. IBM, Xerox, Publishing
cos
• Activity function based including
telemarketing, direct selling, and field
sales- telecom firms follow this
approach
• Hybrid sales orgns. Large cos evolve
into this form of orgn. over time
© 2004, Clark Gilbert, Harvard Business School
Recruitment,training and compensation of
sales force
• Recruitment is process of locating,
selecting and employing suitable
persons for the sales force
• Matching to positions on the orgn chart
and to job specs is essential
• Objective criteria and sound methods of
testing/evaluating ensure good
recruitment
• Over reliance on criteria such as
quantum of prior experience a pitfall
© 2004, Clark Gilbert, Harvard Business School
Recruitment contd.
• Reference check on previous
employment experience and
performance necessary
• Clear statement of expectations from
new employees on conduct and
performance a must
• Offer of emoluments and future
prospects to be unambiguous(avoid
vague “sky is the limit” promises-nobody
believes them anyway)
© 2004, Clark Gilbert, Harvard Business School
Training of Sales force
• Training needs flowing from job specs is the
starting point. Understanding customer
markets is critical
• Detailed product knowledge mandatory for all
types of offerings. For low tangibility
differentiated offerings(e.g.personal care),
knowledge of emotional satisfiers helps
• Knowledge of the market place, competitors,
channel associates and selling practices are
focus areas
• Inventory management, good logistics
practices and receivables management
should be vital inputs
© 2004, Clark Gilbert, Harvard Business School
Training of Sales Force
• Frequency, timing and manner of sales visits
to various channel associates is fundamental
training input
• Communication skills a priority with emphasis
on receiving and rapport building(listening
and empathising)
• Training methods include formal class room
formats, field training, seminars and
interaction with senior/top mgmt
• On the job training by superiors combining
concept with practice should co-exist with
general functional and behavioural training
© 2004, Clark Gilbert, Harvard Business School
Compensation and Motivation of Sales Force
• Sales compensation through
salary,bonuses and perquisites
• Significant part of compensation to be
performance based. Care to be taken to
set realistic, real world targets.
© 2004, Clark Gilbert, Harvard Business School
Motivation of Sales Force
• Motivation is the driving force based on
positive feelings that produces goal
directed action
• It is necessary to reward goal directed
action to ensure repetitive behaviour
towards the goal/goals
• The first step obviously is to establish
the right goals
© 2004, Clark Gilbert, Harvard Business School
Right Sales Goals-the right approach
• Customer to be the focus always. Creation of
new customers and retention of existing
customers
• Primary and Secondary/final customers
should merit equal focus. In fact primary
customers are stakeholders too with their
unique set of rightful expectations
• If we short change the primary customer, we
are unlikely to fully meet the expectations of
the end customer
© 2004, Clark Gilbert, Harvard Business School
The Sales Goals
• The final goal has to be maximizing long term
profits through optimizing the volume/margin
relationship
• Channel inventory planning and control is
critical
• Optimizing accounts receivables is another
critical responsibility and therefore major
performance variable
• Critical variable is retail sales which reflect
consumer sales and therefore demand for
company’s product/services
© 2004, Clark Gilbert, Harvard Business School
Sales goals
• Unit of sales needs to be defined properly.
For services like telecom, a unit of standard
value (Rs. x representing a standard offering
like monthly revenue)
• For merchandising, and signage joint goals
for sales and marketing should be set
• Min. no of inventory turns for each channel
partner should also be a sales goal.
Recommended min 12 for every industry
• Min revenue/profit per sq.ft of space should
be a retail target
• Regular and reliable reports should be a
fundamental performance requirement
© 2004, Clark Gilbert, Harvard Business School
Rewarding Performance as well
as Potential
• Rewarding current performance in financial and non
financial measures is intrinsic to motivation
• Need to spot & assess and develop potential through
training and award of challenging assignments is the
greater part of motivation
• Involve sales personnel in critical customer service
areas like new product selection, pre manufacturing
logistics. Establish contributions from sales
personnel(feedback they carry from customers
primary and secondary is input)
• Role of mentors is very important. Attaining the
position of a mentor could be the ultimate goal of
outstanding performers. Nurturing mentorship
throughout the sales organization is key to superior
competitiveness
© 2004, Clark Gilbert, Harvard Business School
Channel Partner Management
• Need to select the right channel partnersnew to the industry,new to business is the
best
• Clear set of expectations to be communicated
at selection(storage, inventory management,
retailer servicing and support, timely and
reliable information are key
• Competitive remuneration with accompanying
rigorous performance standards
• Information about the sales responsibility
domain, competitors and relevant
socio,political, cultural impacters
© 2004, Clark Gilbert, Harvard Business School
Channel Partner Management
• Providing initial and ongoing training on
product, technologies, logistics practices and
Info systems critical
• Periodic visits to company facilities and
interaction with company personnel over all
relevant functions viz. marketing,
manufacturing, Q.C. and Finance/accounts
• Rewards and recognition through channel
partner conferences an important motivating
and enabling device
• Most importantly fostering the partner identity
in all channel partners
© 2004, Clark Gilbert, Harvard Business School
Company responsibility to
channel members
• Channel members should not be loaded with excess inventory
which will cause resentment and lower their commitment
• Every channel member should be given appropriate mix of
product-fast moving, medium and slow moving.
• Non moving product should be removed by company at periodic
intervals. Discount schemed do not solve the problem
• Company should provide adequate primary and secondary
display to channel members and point of purchase material
• Good appraisal and reward system should be put in place to
reward the right partner performance. Non performers should
be gradually weeded out. Long term orientation should be the
key to assessing all channel partners
• Frequent and caring interaction with channel partners and
prompt addressal of grievances will help to build and sustain
enduring partnerships as opposed to opportunistic alliances
© 2004, Clark Gilbert, Harvard Business School
Merchandising
• Merchandising is the process of increasing
visibility and appeal of products to increase
saleability
• It includes product packaging, placement,
promotion and “special pricing”
• One other form of merchandising is using the
brand power of one organization to sell
products of another.(sports personalities and
entertainment cos lending their brand names
to various products)
© 2004, Clark Gilbert, Harvard Business School
Merchandising
• Mostly merchandising focusses on
presentation of products including displays
and special instore storage and
packaging(gift bags, racks, trays), posters,
danglers, special cards/brochures
• It also features discount schemes along with
the pricing and packaging features
• Outdoor signage and on shop and in shop
signage could also feature as part of
merchandising
© 2004, Clark Gilbert, Harvard Business School
Planning and evaluation
• Some aspects like signage should be
considered as longer term and should feature
as investment
• Others including displays and special
packaging and pricing initiatives would be
shorter term and should be expensed
• All expenditure should be justified in terms of
real sales increase(not changing the timing of
purchase by customer as in most festival
sales)
© 2004, Clark Gilbert, Harvard Business School
Planning and Evaluation
• Test marketing and post purchase surveys of
customers should be the basis of evaluation
• One tip is that all merchandising should keep
the customer in mind. Need to avoid feeding
the creative instincts or egos of marketing
personnel in the company
• Merchandising should be the joint
responsibility of Marketing and Sales sub
functions of the larger Marketing function
© 2004, Clark Gilbert, Harvard Business School
Summary
• Defining larger Marketing process and Sales
sub process
• Areas of Sales responsibility, forecasting,
sales organization, selection, training and
retention issues, compensation, motivation of
sales force
• Sales strategy, types of selling viz direct
selling, through channel members, mail order,
e selling
• Sales budgeting, how to develop the budget
as effective planning and control tool
© 2004, Clark Gilbert, Harvard Business School
Summary
• Essentials of space planning and
inventory management
• Channel members types and roles,
selection of channel partners
• Mutual expectations of firm and its chnl.
Partners, training, rewards/recognition
• Sales goals optimizing the long term
volume/margin combination
© 2004, Clark Gilbert, Harvard Business School
Summary
• Company responsibility to channel
members including promotional and
information systems support
• Merchandising basics, role of company
and channel partners
© 2004, Clark Gilbert, Harvard Business School
A New Path to Growth
Using Disruption to Drive
New Growth at McNeil
Professor Clark Gilbert
Harvard Business School
© 2004, Clark Gilbert, Harvard Business School
Page 54
Product Performance
Sustaining versus Disruptive Innovation
Disruptive Innovation
Source: The Innovator’s Dilemma
© 2004, Clark Gilbert, Harvard Business School
Time
Page 55
Disconnect with Resource Allocation
•Targets Different
Customers in New Ways
•Introduces Different
Performance Criteria
•Under Valued by Leading Customers
•Lowers Performance along Traditional
Trajectory
•Lowers Gross Margins
Disruptive
Proposal
Budgeting Committee
Production
Marketing Manager
© 2004, Clark Gilbert, Harvard Business School
Page 56
Performance
Established players force new technology
into old markets
Applications for
Silver Halide Film
Technology
Disruption
Kodak’sin
digital
Response
photography
($1B in R&D)
Home-use Applications
E-mail applications
Children’s Game Toys
Disruptive technology: digital film
© 2004, Clark Gilbert, Harvard Business School
Page 57
Definition of a Fanatic:
Someone who doubles his speed
when he has lost his direction
--George Santayana
© 2004, Clark Gilbert, Harvard Business School
Page 58
The Benefit of Staged Learning
Replication of
Old Market and
Business Model
© 2004, Clark Gilbert, Harvard Business School
Discovery of
New Market and
Business Model
Page 59
Different Types of Innovations
Sustaining
Innovation
Low-End
Disruption
New Market
Disruption
CUSTOMERS
•Most profitable
customers in existing
markets
•Overserved customers
in low-end of existing
market
•New customers or new
contexts of use
TECHNOLOGY
•Improvements along
dimensions valued by
current customers
BUSINESS
MODEL
•Similar to existing
model, improves or
maintains margins
© 2004, Clark Gilbert, Harvard Business School
•“Good enough” on
traditional metrics but
lower prices
•New financial or
operational model that
earns attractive returns
at low prices
•Improved performance
on new attributes (e.g.,
simplicity, convenience)
•New business model,
often lower price points,
new sales model &
distribution channels
Page 60
Steel Minimills: A Low-End Disruption
© 2004, Clark Gilbert, Harvard Business School
Page 61
Steel Minimills: A Low-End Disruption
% of Margin
% of Tons
25–30%
Steel Quality
55%
22%
18%
8%
12%
4%
7%
1975
© 2004, Clark Gilbert, Harvard Business School
1980
1985
1990
Page 62
Different Types of Innovations
Sustaining
Innovation
Low-End
Disruption
New Market
Disruption
CUSTOMERS
•Most profitable
customers in existing
markets
•Overserved customers
in low-end of existing
market
•New customers or new
contexts of use
TECHNOLOGY
•Improvements along
dimensions valued by
current customers
•“Good enough” on
traditional metrics but
lower prices
BUSINESS
MODEL
•Similar to existing
model, improves or
maintains margins
© 2004, Clark Gilbert, Harvard Business School
•New financial or
operational model that
earns attractive returns
at low prices
•Improved performance
on new attributes (e.g.,
simplicity, convenience)
•New business model,
often lower price points,
new sales model &
distribution channels
Page 63
Minicomputers: A New Market Disruption
The DEC Programmable Data Processor 8: 1965
© 2004, Clark Gilbert, Harvard Business School
Page 64
Established Markets Continue to Grow even
as the Disruptive Markets Take Root
Minicomputers Disrupt Mainframes
15000
Sustained
Revenue Lead
First
Revenue
Lead
14000
13000
Minicomputer
Market
12000
11000
10000
9000
Dollars 8000
($billions)7000
Mainframe Computer
Market
6000
5000
4000
3000
2000
Phase I
Phase III
Phase II
1000
0
1965
1975
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
Source: ITI, Industry Statistics Programs; U.S. Microcomputer
Statistics Committee Forecast, Data Analysis Group
© 2004, Clark Gilbert, Harvard Business School
Page 65
Disruption in Print Media
“All the News that Fit to Pixel”
© 2004, Clark Gilbert, Harvard Business School
Page 66
Disconnect with Resource Allocation
•Targets Different
Customers in New Ways
•Introduces Different
Performance Criteria
•Under Valued by Leading Customers
•Lowers Performance along Traditional
Trajectory
•Lowers Gross Margins
Disruptive
Proposal
Budgeting Committee
Production
Marketing Manager
© 2004, Clark Gilbert, Harvard Business School
Page 67
Old Business Models Make It
Very Difficult to Realize
Missing Revenue: Online Advertising Market
120
100
80
45%
60
45%
Missing!
15%
E-mail
20%
10%
Demographic
Usage Targeting
Sectionals
40
ROS
20
0
Online Newspaper
© 2004, Clark Gilbert, Harvard Business School
Typical Online Entrant
Page 68
Online Revenue Per Unique User
$19.00
$17.00
$17.12
$15.00
$13.00
$11.00
$9.00
$7.00
$7.93
$5.00
$3.00
$1.00
Newspapers
© 2004, Clark Gilbert, Harvard Business School
Pure-Plays
Page 69
Product Performance
The Irony of Disruptive Innovation
Growth Starts in New, Not Established
Markets
New Net Growth
Time
© 2004, Clark Gilbert, Harvard Business School
Page 70
"Overall, the newspaper industry's involvement with the Internet has been
one where it had
a lot to lose
and it'sMarket
been trying not
to lose it, as opposed
Finding
New
Growth
to starting from scratch and having a lot to win."
--Steve Yelvington, President of Online Newspaper Division
Displacement
Established
Business
Net New
Growth
Disruptive
Business
Starts Outside
Established
Business
© 2004, Clark Gilbert, Harvard Business School
Page 71
Why is this so difficult
for otherwise
successful firms?
© 2004, Clark Gilbert, Harvard Business School
Page 72
RPV: Strengths Become Weaknesses
Core Competence vs. Core Rigidity
Resources
•
People
• Technology
• Products
• Equipment
• Information
• Cash
• Brand
• Distribution
© 2004, Clark Gilbert, Harvard Business School
Processes
Values
• Hiring & Training
The criteria by which
prioritization decisions
are made
• Product
development
• Manufacturing
• Ethics
• Planning &
Budgeting
• Cost structure/
income statement
• Market Research
• Size of opportunity
• Resource
allocation
Page 73
Capabilities in One Context
Become Disabilities in Another
Big
enough to be
interesting?
Market
Research
Planning
Cycles
Processes:
How?
Customer
Feedback
Values:
Why?
What
Margins Are
Attractive?
Cost structure
Resource
Allocation
© 2004, Clark Gilbert, Harvard Business School
“Organizational
DNA”
Product
Quality
Page 74
Disruption through Portable Ultrasound
“ I need to look at the kidney
myself and see what’s
going on. Every time I want
to look I have to send the
radiologist a patient…
That’s not good. It doesn’t
help me get my job done. I
want to do it myself.”
Nephrologist
“ I had a call with a nephrologist where I
literally told the sales rep to take the product
out of the bag and show it to the physician.
He didn’t do it. And I’m the President of the
company…
...We have all of these sales leads, but some
of my reps are afraid of cannibalizing sales
of higher-end hand carried systems.”
© 2004, Clark Gilbert, Harvard Business School
President, Hand-Carried Ultrasound
Company
Page 75
Performance
Develop Separate Business Development
Processes
Time
© 2004, Clark Gilbert, Harvard Business School
Page 76
Separate Disruptive Ventures
Separated sites had nearly 4 million more page views
12
Penetration
10
Millions
of Page
Views /
Month
10.4
8
6
4
6.5
2
0
Integrated
Sites
© 2004, Clark Gilbert, Harvard Business School
Separated
Sites
Page 77
Implications
 Disruptive technologies attack an established business, but provide
enormous opportunities for new net growth
Focusing on your core market can lead to organizational rigidity –
Trying Harder Can Be Part of the Problem!
Identifying these opportunities requires different lenses:
•Reconsidering technologies viewed as “inferior” in your core market
•Targeting “overshot” where the primary alternative is non-consumption
Developing these opportunities requires different tools:
•A different development, review, and funding process than the core business
•A venture process that is patient for growth, not for proof of concept
•A willingness to look outside of core business—venture autonomy, talent,
partnerships, and acquisitions
Disruption can provide competitive advantage is the search for growth
© 2004, Clark Gilbert, Harvard Business School
Page 78
Managing Uncertainty
in New Venture Creation
Clark Gilbert
Harvard Business School
© 2004, Clark Gilbert, Harvard Business School
Page 79
HBS Definition of Entrepreneurship
Pursuit of Opportunity
Without Regard to Resources
Currently Controlled
Managing Uncertainty
1. Identify Critical Risks
2. Design Experiments
3. Stage Investment
© 2004, Clark Gilbert, Harvard Business School
Page 80
1) Identify Key Sources of Risk
• Technical
• Operating
• Total
MarketVenture
• Distribution
Risk /Pricing
• Team
• Environmental
© 2004, Clark Gilbert, Harvard Business School
Which is the most
important risk to
understand and remove?
Deal Killers, Path
Dependencies, Costs,
Investor Needs, Greatest
Uncertainty
Page 81
Business Models: Fishbone Diagrams
Driver 1
Driver 1
revenues
Driver 2
Driver 2
Driver 3
Driver 3
profits
Driver 1
costs
Driver 2
Driver 3
© 2004, Clark Gilbert, Harvard Business School
Using the tool
1. Draw the key drivers of revenue and costs
2. Identify key drivers and assumptions
3. Test sensitivity to changes in key drivers
4. Analyze how reasonable key assumptions are
5. Use the tool to surface key assumptions,
logical inconsistencies, critical sources of
uncertainty and important questions to ask
Page 82
2) Types of Experiments
•
•
Partial experiments
– buy information on “deal killer” source of uncertainty
• good when you know you don’t know something, risk of failure is high
– case examples
• customer research before introduce product (Parenting, Tally Up)
• hire as consultant before hiring full time (Tally Up)
• background check on job candidate
Holistic experiments
– test entire model on small scale
• good to reveal ignorance-I.e., things you didn’t know you didn’t
• good to tests interaction between variables
– case examples
• introduce product in trial before full launch (Onset vs. Knight Ridder)
• develop prototype with development partner (Tally Up’s beta version, E
Ink)
• projection and reflection (ONSET ask VCs evaluate whole plan)
© 2004, Clark Gilbert, Harvard Business School
Page 83
2) Risks of Experiments
• Experiments can be expensive
– (Knight Ridder, E Ink, Segway)
• They can take too long
– What if you finally get it right, only to find out that the
market has moved or someone else has beat you to
the punch?
• They can perpetuate
– “Given the pace of our expansion, I don’t think we
made mistakes fast enough and we didn’t learn from
them often enough. The problem wasn’t just turning
them on, sometimes it’s turning them off.”
» -Bob Ingle, Executive Editor, San Jose Mercury News
© 2004, Clark Gilbert, Harvard Business School
Page 84
2) The Value of Experiments
Value greatest when:
– Significant cost of failure
– Significant probability of failure
– Cost of the experiment is a small percentage of the total
investment
– The experiment yields fairly accurate results
• You can increase the value when:
– Minimize both costs and timing
– You impose variance on key questions, but control for other
variables (Onset)
– Have key milestones and ways of measuring progress
– Change behavior as a resultenter vs. exit, product adaptation,
adaptation subsequent roll-out
© 2004, Clark Gilbert, Harvard Business School
Page 85
3) Staging Investment
Lock-in on
Early
Assumptions
© 2004, Clark Gilbert, Harvard Business School
Discovery of New
Market and
Business Model
Page 86
3) Staging Investment
• Only spend significant sums of money after
big risks have been reduced.
• Examples
– R&R doesn’t place manufacturing order
until after K-Mart order is received
– Knight Ridder waits on registration until
execution and sales risk are reduced
© 2004, Clark Gilbert, Harvard Business School
Page 87
3) Staged Investments and Value of
Information
SUCCESS
INVEST NOW
Payoff - Investment
PS
(1-PS)
- Investment
FAILURE
SUCCESS
GOOD RESULTS
1
INVEST
PG
1
PS|G
(1-PS|G)
Payoff - Investment - Cost of Test
- Investment - Cost of Test
FAILURE
RUN AN EXPERIMENT
(1-PG)
1
ABANDON
- Cost of Test
BAD RESULTS
ABANDON
© 2004, Clark Gilbert, Harvard Business School
Page 88
Funding to Milestones
aka “Old-Fashioned Venture Capital”
Idea is
Feasible
Technology
Works
A Customer
Buys
P(success) = 80%
Req’d IRR = 30%
Valuation
P(success) = 50%
Req’d IRR = 50%
P(success) = 30%
Req’d IRR = 100%
P(success) = 40%
Req’d IRR = 70%
Risk (ß)
Capital
Seed
Funding
R&D
Capital
Go-to-Market
Capital
Expansion
Capital
Source: Lou Mazzucchelli, Ridgewood Capital
© 2004, Clark Gilbert, Harvard Business School
Page 89
The “Fully Funded” Folly
Technology
Works
Idea is
Feasible
A Customer
Buys
Valuation
Risk (ß)
Capital
Fully
Fund
(……….pray……………….)
IPO
Source: Lou Mazzucchelli, Ridgewood Capital
© 2004, Clark Gilbert, Harvard Business School
Page 90
Implications
 Risk is inversely related to value
Entrepreneurial managers don’t take risk, the manage risk
New ventures will:
•Develop in an highly iterative and staged process
•Employ a series of risk reducing experiments
•Business models will change multiple times
Reviewing of new ventures requires that board members can:
•Considered plans that will change considerably
•Demand results, but on different metrics—opportunity recognition and
milestone achievement
•Identify risks, stage investment, and value risk reducing experiments
•Embrace outside perspectives
Creating the right context for reviewing new ventures is key—simply
having powerful ideas and opportunities is not enough
© 2004, Clark Gilbert, Harvard Business School
Page 91