Tuesday 16 June 2009

Routes To Market

Currently, I am involved in two projects to help Hi Tech companies accelerate their business by building channels to market for them in Europe. Specifically, I am profiling the markets, researching players, evaluating the potential partners and then selecting them.

What the projects have shown is that while you may have a 'cookie cutter' methodology for onboarding and managing a channel network, each territory may require a very different type of channel partner due to the maturity of the market or the accessible opportunity. To some, this assessment of the opportunity is common sense but analysing the opportunity with some science is referred to in the consultant community as the 'Value Chain Analysis'.

As a dyed-in-the-wool sales animal at heart, I generally baulk at 'consultant-speak' but sometimes 'gut feeling' and 'common sense' need a) verification and b) some logic and evidence to support intuition. In this case, I am on the side of the consultants as we all know that salespeople are optimistic animals at heart, but I would go one step further, most are 'wishful thinkers'.

A Sale Is A Sale

The old maxim salespeople use is that a 'sale is a sale'. To most salespeople, there is no such thing as bad business just weak management for not taking an order. No salesman has ever been undersold and only vicious price cutting has ever beaten a salesman. To salespeople, 'revenue is king' and 'big is beautiful' so any order is worth something no matter what the margin.

This is a nasty slur on salespeople and I generalise - but management does not help. Many firms put out mixed messages to their sales teams. One minute they want 'growth' and the top line becomes vital, the next minute 'The board is bleating about margin' and suddenly, previously revered orders are being turned away as the margin is too low. At the end of month or quarter, all logic goes out of the window and anything goes.

It is little wonder that in this blur of confused notions and messages, that common sense and gut feeling can be very poor indicators.

Value Chain Analysis

A task I have recently been involved with is taking a Hi Tech company into Scandinavia and they have a Sales Manager responsible for the territory. Already, in the eyes of most Scandinavians you have made your first mistake.

Sweden alone is a country whose area is the same size as that of California. The four countries that make up the classic definition of Scandinavia have 4 different currencies, 4 different languages and 4 very different economies and demographics. Norway is very famous for its oil revenues and has a very high standard of living and low unemployment because of it. Sweden churns out some of the best graduates and entrepreneurs in the world yet has very poorly developed interactive learning facilities at primary and secondary school level despite having more internet connections per household than any country in Europe. Denmark is famous for beer and bacon but also has a large science park dominated by Microsoft and spawns some of the most innovative companies in Europe. Finland is a vast territory with a language more associated with Hungarian than other Scandic languages and is dominated by vast tundras that make its lumber industry one of the biggest in Europe but it is also home to an former boot company that somehow transformed itself into becoming the biggest name in mobile phones.

Take any one of these countries and the population of people and businesses does not warrant sophisticated sales engines to sell to them as, unless you are in an oil related business for example, Norway has its population spread out over a vast area but over 60% of it lives around the major conurbations of just 6 large cities. Yet, in all four countries, the potential markets are saturated with intelligent, entrepreneurial people who run some of the biggest and best businesses that Europe, and even the world, has to offer.

Sweden is the home of one of the largest furniture vendors in the world in Ikea, one of the most prominent retail brands in H&M, two of the safest car brands in the world in Volvo and Saab and was the birthplace of the best free internet phone service in Skype. For a vast country with such a small population, it punches way above its weight at just about anything it does from sport to business to the arts.

So the problem is that when thinking about trying to sell to these countries, you have a dilemma. There is more than enough potential but each market requires a fairly substantial investment in sales effort to get it.

The salesperson in us all would see the lovely potential users and think of selling to Nokia, Volvo, Norsk Hydro Statoil, Sappi, Carlsberg, Stena, Mearsk, Ericsson etc but beyond those household names you quickly descend into what we would classically term as small to medium sized businesses by size. And we all know that such companies are traditionally very conservative buyers.

So the 'Wishful Thinking' salespeople would use my argument to think that by combining the potential buying power of all 4 countries, you have a region rich with opportunities. Such a salesperson would easily justify several sales trips up north and come back empty handed with tales of massive opportunities, slow buying cycles, blond, good looking people, expensive beer and very friendly people who speak exceptional English.

Then the manager gets the travel expense claims and the world does not look so good.

Analysing The Market

Scandinavia poses a classic problem for companies. Most managers tackling the issue will think of centralised operations and logistics and in-country salespeople. On paper this looks fine. Several major IT distributors have operated in the total region and tried this and now only one remains.

Don't get me wrong - that remaining distributor has revenues from Scandinavia of over $1bn - it has a huge logistics hub in Sweden and sales offices in all 4 countries. But here's the rub - it has gross margins of around 7% while it has to ship to all parts of every country mainly by road -and you do not need to be a genius to work out the total area of the 4 countries is over a quarter of the size of all Europe and that the Arctic Circle means that terrain gets pretty difficult in parts even if you get some of the most spectacular views in the world.

Another issue is that this distributor's stock is bought in Euros, but it has to bill to each country in local currency. We all know how currencies have churned in the last year and the Scandic countries have had a ride not dissimilar to sterling - the fluctuations are large and of course there are multiple currencies to think of.

So when you look at the Value Chain Analysis, you quickly see that the only way a distributor could justify selling a specific line in Scandinavia is for that line to have enough sales to generate enough gross margin in each of the countries to pay for the selling costs, then have more than enough profit to cover the logistics while having enough left to cover the currency fluctuations. That distributor reckons that any line entering the market must get the mindshare of all 4 country's sales teams while having enough revenue and margin to get over the 'economy of scale' to make it viable and that is set at around $4-5m in revenue as minimum hurdle.

So for an emerging technology, with no market share in any of the countries to talk of, with a product that has to be seen to be sold, this is not good news. 'Wishful thinking' and 'gut feeling' are not helpful in solving the problem.

With the economics of the Value Chain Analysis focuses the mind - you have to find a different way.

Tackling New Markets

So if you arrive with an innovative new product which is selling well in English-speaking territories, is well suited against its competitors and is valued by small to medium businesses and above, then Scandinavia is logically a good hunting ground. Companies and people up there love technology - heck, they make some of the best of it - they are sophisticated, well off and they are all always seeking competitive advantage.

What I have also learned in my past is that they are willing to pay - and above the going rate - for good products. When at Genesys, our sales from the Scandic region came at more than twice the average selling price for the rest of Europe. We did a good job, to be sure with a sizable office in Stockholm and satellites in Copenhagen and Helsinki, but we never conquered Norway as we never put an office there. Sales were not bad but the average selling price was the diamond and the fact was that we solved a big problem which was communication over distance. Not only is Scandinavia large but it communicates globally as many of its businesses are world class companies.

So lesson one - play your cards right and you can make more money per sale in Scandinavia. Tell that to your Value Chain people and product marketers. Enter the market with that thought and it will help enormously but it also means you have to pitch your Value Proposition very sensitively so know what problem you solve and how well you solve it beforehand.

Broad Brush vs Focus

The second thing to learn is that 'Big is Beautiful' for the broad brush approach. If you are going to view the region as one territory you had better be expecting some pretty sizable sales to justify the resources you are going to consume. Classic mistakes are trying to pick off large sales in big companies only or shotgunning your efforts. The fact of the matter is, if you are a relatively unknown quantity in the Nordic region, going broad brush will lead to failure.

For broad brush read broadline in distribution terms. Your name needs to trip off the tongue to get enough sales across the regions to make it viable up there. So if you are going to take on, say, a Symantec with the next best thing, think long and hard about how you do it.

Focus is how I would do it. It does mean you have to look at each country in isolation but this sharpens the mind. Getting Norwegians to buy a product is not the same as getting Swedish people to buy - the pricing may be different as well as the characters involved. My approach is to look for Channel partners who will represent you in the country. The mistake is to think that if such a player has an HQ in Stockholm and sales office in Oslo then you have two countries pegged. But Scandinavia does not work like that - your Partner is no better off than you - the Oslo outpost is merely an opportunist sales centre.

What you need are local 'evangelists'. Companies who share the dream of your product, understand your vision, will professionally mirror your values and techniques, be able to show your product in the same light as you, be able to support as you would, be as dedicated to you as you would, sell as voraciously as you and want to be you in that country.

You may have to sacrifice a little margin, you may think they are demanding, you may think they make a little too much margin for themselves, you may think their demands on language are tough but what you get is a company that you can trust and will share in your success.

Such companies are not always easy to find. You can find plenty on the internet but until you meet people and see see how they have been successful then you will never get the right one.

Here's an example - the major broadline distributor in the Nordics ships around 18,000 projectors in Scandinavia a year of all brands which sounds a lot. Epson's partner in Sweden is a 9 man company based in Stockholm who last year shipped 10,000 units in Sweden alone. On paper, this just could not happen - projectors are mainly commodity products. But when you meet the people behind the companies you instantly understand why. This small company has grown up selling projectors as a passion, with knowledge and differentiation (they sell only one other brand and that's the second market leader in Sweden). They don't have massive logistics or warehousing, they operate on 'Just in Time' stock and they don't have a massive call centre with multi-product salespeople. They have dedicated salespeople who have the products in their cars, who visit customers and show them how Epson is the best.

The also have invested heavily in Microsoft Dynamics and by September they will have an online shop for web purchases so that resellers of the main broadliner can have all the web buying capabilities of the big players.

And finally - that small distributor makes approximately 50% more gross margin on average selling the same products as the broadliner.

Horses For Courses

The message here, using Scandinavia as my example today, is that you have to assess each territory you want to sell in and understand the Value Chain of supply to know whether the business will be profitable or how it could be. If the market is ripe, mature or very easily accessible then broadline may be the answer but as in the Scandinavian example it doesn't answer all the issues.

The classic error in the past of US companies entering Europe is to view the continent as having the combined gross domestic product as large as the US - that has to be opportunity. But the reality is that even though we have the innovation of the Euro, we are still some 50 countries with many different languages and cultures and each country may be less of an opportunity than another. One size does not fit all, as the Americans would say.

So consider your approach carefully. Many marketing dollars can be consumed learning the hard way or paying for the obvious. There are may of us who bear the old scars of the wrong approaches and now understand the realities of Europe.

Europe is a massive, open market full of well-to-do, knowledgeable buyers, you just have to know how to get to them.

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