B2B Segmentation and Channel Strategy Chemical Industry

Northwestern University Kellogg School of Management November 9, 2009

ZS Associates | 312.233.4800 | www.zsassociates.com

Agenda

Introduction to ZS Channel Strategy Framework Specialty Chemicals Case Q&A

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Introduction to ZS

Who is ZS?

A global management consulting firm specializing in Sales and Marketing: Strategy Capability building Outsourcing Founded in 1983 by professors from Kellogg School of Management Andy Zoltners Prabha Sinha Significant penetration in healthcare with growing presence in: Transportation Financial services High tech Consumer products ZS is a firm with a mission: help clients get products to market and sell successfully
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Introduction to ZS

Our firm has a record of accelerated growth

Doubled our revenue and people

EVERY 5 YEARS

1983

1988

1993

1998

2003

2008

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Introduction to ZS

ZS has a global presence and supports clients in more than 70 countries, ranging from Fortune 500 organizations to start-ups

Boston Chicago Evanston Los Angeles New York City Philadelphia Princeton San Francisco Toronto

Barcelona Frankfurt London Milan Paris Zurich

New Delhi Pune Shanghai Tokyo

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Our projects drive top-line growth for clients in three key areas

GO-TO-MARKET STRATEGY
Sales process development Sales force design Territory design Incentive design & goal setting Sales performance measurement

UNDERSTANDING CUSTOMERS
Customer insights Segmentation Value proposition Marketing planning Marketing performance measurement Integrated product launch planning & measurement

FLAWLESS EXECUTION
Data management, performance reporting & analytics Incentive compensation & goals administration Territory & account planning

SALES DECISIONS

SALES AND MARKETING MARKETING DECISIONS OPERATIONS

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Agenda

Introduction to ZS Channel Strategy Framework Specialty Chemicals Case Q&A

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B2B Channel Strategy Case Study - Chemicals v1.0

Channel Strategy Framework

What is a channel?

A channel is anything that moves product, services, information and money

back and forth between a company and its end-users

Market and competitive dynamics often require indirect channels to meet

growth objectives and financial requirements
Credibility with endcustomers Market reach or coverage Cost of sales Competencies or expertise

Preferred source Complete market

basket Local / responsive

Rural geographies Small accounts Vertical markets International

Off balance sheet

assets Fixed to variable costs Leverage multiple suppliers

Market specific
knowledge Expertise through specialization Efficiency through repetition
B2B Channel Strategy Case Study - Chemicals v1.0

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Channel Strategy Framework

ZS Associates guiding principles for channel strategy

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Results

Winning requires flawless integration of channel operations, information, and enterprise capabilities Channel strategies cannot remain static, they must evolve and adapt

Channel advantage requires a deep knowledge of market insights, dynamics and trends

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Channel Strategy Framework

Our approach to scenario analysis addresses channel strategy guiding principles, iterative analysis and fact-based decisions

Scenario analysis Industry mapping

Market dynamics identify forces that shape channel strategies

Current and future states

Industry channel and customer structure and concentration Manufacturer support requirements and costs Channel capabilities, offer and business model Value chain margin allocation Customer segments, buying process and decision criteria Key trends and market dynamics

Channel strategies and financials

Distribution policy Authorizations and controls Partnership programs Channel compensation Inter- & intra-channel conflict Direct business model fit and tradeoffs Alternative channels Strategic alignment with partners Cross-business synergies Channel power and influence drivers Financial impact costs, profits & drivers

Assessment scorecards and decision support

Business objectives Criteria
Growth Profits Competitive advantage Channel power Other

Recommendations
Full, selective, combined, or gated strategy adoption
Scenarios S2 S4 S5

Trends and opportunities

S4 S5

Scenarios S1 S2 S3

Criteria
Difficult economic conditions Brand decline / private label Pay-for-performance / fee-for-service Emerging customers or channels Web effectiveness or efficiencies Other

Implementation plan
Activities, accountabilities, CSFs, signposts and milestones

Capability building
Organization knowledge, skills, process and tools for execution

Initial screen =>

Final assessment =>

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Agenda

Introduction to ZS Channel Strategy Framework Specialty Chemicals Case Q&A

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Specialty Chemicals Case

A recent acquisition and sales force merger required a new channel strategy for a printing chemicals company
A Fortune 500 chemical company with existing products for the flexible
packaging market acquired a manufacturer with products sold to the custom print market

Each market was served by an existing sales force and marketing team, and
significant overlap existed between the two markets

The sales teams ability to target the smallest and largest customers was
limited Small customers could not be profitably served by field sales Large customers required expertise not available in field sales

The organization had very limited experience with

indirect sales channels
Note: Case is based on work performed by ZS Associates, Inc. Portions of the client situation, actions, and results described on this and the following pages been modified for simplicity, illustrative purposes, or to preserve confidentiality.
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Specialty Chemicals Case

Post acquisition, what are the sales and marketing issue areas that we need to consider?
Customer Focus & Growth Strategy Go-to-Market Strategy Marketing & Sales Operations

Customer Customer Insight Insight

Competency Competency Model Model Sales Sales Process Process

Hiring, Training Hiring, Training & Coaching & Coaching

Needs Buying processes & preferences Attitudes, perceptions & satisfaction Potential & longterm value

Success Measures Success Measures

Segmentation Segmentation & Targeting & Targeting

Value Value Proposition Proposition

Sizing & Sizing & Deployment Deployment

Compensation & Compensation & Motivation Programs Motivation Programs

Sales Sales Channels Channels

Performance Performance Management Management

Competitor Competitor Insight Insight

Sales force design Advertising & promotion

Marketing Marketing Mix Mix

Information Information & Tools & Tools

Coordination Coordination Systems Systems

Marketing & Sales Marketing & Sales Analytics Analytics

STRATEGY

EXECUTION

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Specialty Chemicals Case

We worked collaboratively with our client, leveraging collective experiences and emphasizing fact-based analysis and decisions
Overview of phases
Phase 1 Phase 2 Phase 3 Phase 4

Assessment and information gathering

Segmentation and targeting

Scenario analysis and implications

Implementation planning

Market
assessment and identified information gaps Integrated database of all current and potential customers Key outcomes

Account segment
definitions Estimated sales potential for each account Target segment recommendation and coverage hypotheses

Viable channel
alternatives for each segment Cost-to-serve model for each alternative Recommendation based on qual & quant factors

Implementation
roadmap and success factors Prioritized gaps and barriers

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Specialty Chemicals Case

Our immersion involved internal and external stakeholder interviews and data-driven analytics to map industry conditions
ZS Approach to Channel Strategy
WhatWhat is channel is channel strategy? strategy?
Channel Strategy is:

When isis a (new) channel When a (new) channel strategy required? strategy required?
Common situations:

HowHow channel strategy is a is a channel developed?developed? strategy

Rigorous, fact-based approach:

Addressing customer
needs and sourcing preferences

New channels emerge New product launch Enter new markets Global expansion Customers migrate to new
channels

Map current industry

conditions and trends

Identify and explore all viable

future states

Giving fair consideration

to all direct & indirect channels options,

Design the channel for the

optimal mix & number of channels and partners

Enabling profits for

channel partners, and

Channel consolidation Declining channel

performance

Manage channels to drive

change and achieve ongoing success

Achieving the suppliers

business objectives

Diminished control of
channel activities

Proliferation of channel
formats or business models
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Specialty Chemicals Case

Accounts were segmented based on print application segment and potential estimated through regression-based modeling
1. Integrate customers of acquirer and target companies and match against the market universe

2.

Identify account profiling variables from the market dataset that influence sales

3.

Determine relationship between each relevant profiling variable and sales potential

4.

Calculate potential for current customers & prospective accounts

5.

Benchmark against other sources and adjust potential based on factors not captured within dataset
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Specialty Chemicals Case

Two dimensional segmentations incorporated customer line of business & potential

Potential per Account
What do they do?
Application Segment

How valuable are they to us?

Potential Segments (Secondary Data Analysis)

Commercial Printing

Paper boxes, cartons

Printed flexible packaging, bags

Label, wrapper printing

All Others

Tier 1 Tier 2 Tier 3 Tier 4

$ 31,320 $ 11,845 $ 5,916 $ 2,380

$ 1,130,797 $ 673,069 $ 396,826 $ 31,975

$ 4,966,906 $ 1,570,480 $ 1,182,873 $ 36,416

$ 138,949 $ 55,214 $ 31,409 $ 9,343

$ 232,092 $ 121,960 $ 72,110 $ 7,645

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Specialty Chemicals Case

Viable channel alternatives were then assessed qualitatively

Scenario analysis: Indirect channel options
Channel Characteristic Distinguishing Functions Indirect Channels Rep / Agent Reseller Distributor VAR / SI OEM

Customer
relationships Lead generation Sales

Manufacturer of
complementary products (e.g. inks) Industry movement toward consolidation Regionally focused

Range from highly

specialized to moderate to general Inventory, Credit & Logistics Marketing & Sales

Application
expertise Industry focus Customized solutions Assembled products

Manufacturer of
equipment (e.g. presses) Marketing and support functions Can be customer or channel Complex buying process Supplier programs Alliance partnerships

Compensation

Commissions 5% to 15%

Commissions 10% to 15% Other incentives

Resale margins 18% to 25% Other incentives

Resale margins 25% to 35%+ Other incentives

Verdict

Already exists

Already exists

Range of possible
partners

Too few for

distribution

Pull through is weak

Current Ability to Execute

In place, but
hard to scale

Some experience,
not managed as a channel YES

Minimal
experience, not managed as a channel YES

No experience

Some experience

Potential fit?

YES

NO

NO

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Specialty Chemicals Case

Scenario analysis was then used to estimate the cost-to-serve each segment across each viable channel alternative
Cost to Serve Illustration

Marketing Strategy and Research

Tier 2 Label Printers contain 100 accounts: 100 accounts * 90% addressable = 90 accounts

Leads, Qualified Prospects

1.
ce van Ad a t e 1 R
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Opportunity Identification

1 call/account * 90 accounts * $500/call = $4.5K Advancement Rate of 80% to Step 2

4 calls/account * 72 accounts * $500/call = $144K

2. Opportunity Management
ce van Ad a t e 2 R

Advancement Rate of 40% to Step 3

Wi nR ate

2 calls/account * 29 accounts * $500/call = $29K

3. Fulfillment

Total cost-to-serve Tier 2 Label Printers = $218K Overall win rate: 80% * 40% = 32% Cost per won account via field sales = $7,569
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Specialty Chemicals Case

Sales channels that provided the highest expected contribution against each customer segment were chosen
Channel strategy: Customer alignment and coverage
Top Commercial Printing Other Commercial Printing Paper boxes, cartons Printed flexible packaging Label, wrapper printing All Others (excluding quick printers)

Tier 1 Tier 2 Tier 3 Tier 4 Field sales Distributors or resellers

Field sales TBD

Based on success of new channels

Inside sales

Distributors or resellers

Industry mapping and scenario analysis lead to the following channel strategy recommendations:

Focus field sales on high value segments with a direct from supplier value offering Build inside sales capability to penetrate low purchase volume customers in targeted segments Pick the best indirect sales partners through a disciplined recruiting and selection process Inside sales with a direct from supplier value offering may be more effective than indirect
channel partners and should be trialed

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Specialty Chemicals Case

The implementation plan specified high-level (and detailed) steps for moving to recommended state while delivering quick wins
Channel strategy analysis Phase I: Communicate strategy and integrate market database

Organizational understanding of channel strategy vision

Phase II: Improve field targeting

Greater penetration within high value accounts, improved market knowledge, and organizational readiness for inside sales

Phase III: Launch inside sales

Multi-channel direct sales organization

Phase IV (a): Lay groundwork for indirect sales channel Phase IV (b): Conduct product rationalization

Organizational understanding of segment specific value propositions and indirect channel infrastructure Improved clarity around product capabilities and alignment of these against market segments

Phase V: Ramp-up indirect sales channel

Phase VI: Optimize channel management

Integrated direct and indirect channel selling model

Time
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Questions?

Josh Rosen ZS Associates Two Prudential Plaza 180 North Stetson Avenue, 42nd Floor Chicago, Illinois 60601 USA Tel : 312.233.4815 Fax: 312.233.4801 E-mail: josh.rosen@zsassociates.com

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