It's Not Luck (27 page)

“And in the others?”

“In all the others, the buyers insisted we continue right then and there.”

“Even better.”

“Here is a nice twist,” Don continues to surprise me. “Knowing that closing a deal is a sensitive step, we decided not to take any risks. Pete composed a list of obstacles that usually stand in the way of the buyer before he can sign the order. We simply present this list to the buyer.”

“Wait a minute,” I can’t believe my ears. “You are giving the buyer excuses why he shouldn’t buy? Are you trying to convince the buyer that he cannot sign the deal?”

“So it seems,” he laughs. “But Alex, don’t forget. At this stage the buyer knows that our offer is his dream. There is no fear that he will walk away.”

“I see,” I get it. “A role reversal. If you take the position of raising the obstacles, he must now take the position that they can be overcome. That’s gutsy.”

“Not really. What happened in reality is that the buyers played down some obstacles and discussed with our salespeople how to overcome the others. And you know the results. Whenever it was a small deal it was signed on the spot. In other cases, when we discussed business with buyers of large accounts, they asked us to prepare a quote for more business than we expected. It’s looking good. Pete’s problem now is how to slow down. The shop needs time to digest this tidal wave.”

“Super job, Don. Really super job. You have done much more than I expected. We will need this blueprint for Bob and Stacey, once they figure out their own breakthrough marketing solutions.”

Don leans back in his chair, rightfully proud of what he has accomplished.

“Don, as a reward, go home now and pack.”

He stands up and stretches. “Unpack, you mean.”

“No, pack. We are flying to Bob’s.”

“Alex, I was away for two weeks. I have plans for tonight.”

“No problem. You can stay here, and take tomorrow off. I’m going to Bob’s to examine the solution they’ve come up with. I just thought you would want to be part of it.”

“Wouldn’t miss it for the world.” He heads for the door muttering, “With this schedule, no wonder I’m a bachelor.”

23

I had asked Bob to hold the number of participants to a minimum, to invite only the people who actively participated in building the marketing solution. I expected about a dozen. He brought Susan Lomark, his VP of sales, and Jeff Dillman, his VP of operations. I know Jeff quite well, he was instrumental in building our approach to distribution. A very capable person. Susan, I know much less. I never worked closely with her, but Bob thinks the world of her, so she must be good.

“What about the others?” I ask Bob as we help ourselves to coffee and donuts.

“There are no others.” Responding to my raised eyebrow, he adds, “Alex, since it got out that we are up for sale, this place is swarming with rumors. And rumors don’t make it easy to operate. Before we know that we have a solid marketing plan, approved by you, I’m not going to leak it out. I don’t need any more disturbances.”

“I understand. Shall we start?”

Bob signals Susan to present. “We followed your tree,” she says, and goes to the flip-chart.

“Did you believe that it would work?” I ask out of curiosity.

“I can’t say that we believed in it. It made sense, but frankly, who would believe that it’s possible to systematically develop a marketing breakthrough?”

“But it worked?”

“We think so,” Bob answers for her. “Otherwise we wouldn’t have called you here.”

“We’ll know that it works when sales start to roll in,” Susan says. “Until then it’s only a neat idea.”

“I like this approach. Carry on.”

She flips the first page. “Here we listed some of the market UDEs that we used as a starting point.”

“We elected to choose the shops as our market, not the end consumers,” Bob interjects.

“Why?” I ask.

“We followed your guidelines,” he answers. “You want fast results, so we concentrated on the link that we have direct contact with.”

“Besides,” Susan adds, “to bring whatever new message to the consumers would necessitate increasing our advertising budget.”

“Which we assumed you would have a hard time approving,” Bob completes her argument.

“Good choice,” I concur.

I read the UDEs of the shops. No surprises. Even I, who never worked in the cosmetics field, know all of them. Things like: “Shops have to give considerable discounts on relatively obsolete products”; “Many times shops are out of an item a customer wants”; or “Many shops have difficulty meeting payments to the vendors.”

“Then we built the Current Reality Tree of the shops,” Susan flips one more page.

“Was it difficult to construct this tree?”

They, look at each other and grin, “Embarrassingly easy,” Bob admits.

I let Susan continue.

“According to your guidelines we should rewrite the tree so that the core problem is expressed as a policy of the vendor. In our case we didn’t have to do any rewrite. It came out naturally like this,” and she starts to read the tree from bottom up. “ ‘Cosmetic companies give discounts in proportion to the size of the shop’s order,’ and ‘Discounts for large orders are substantial.’ Take this policy of ours and consider the fact that ‘Shops are usually in fierce competition with each other’ and you see the unavoidable result, ‘Shops are forced to order in large quantities.’ ”

“Yes, I see, but let me digress for a second. An equivalent conclusion is that shops cannot afford to order in small quantities. Bob, didn’t you tell us that shops are not taking advantage of your new distribution system, of your offer to replenish to them on a daily basis? This might be the answer.”

“Yes,” he laughs. “And I accused them of resisting change, of being locked into purchasing habits. Nothing of the sort. At the same time that my distribution managers were begging them to order on a daily basis, our sales policies were discouraging them from doing it. Smart, isn’t it!”

I prefer not to comment and signal Susan to continue.

“Let me first go into the financial branch. A direct result of buying in large quantities is that ‘Shops have to carry a lot of inventory.’ As you know, ‘Most shops don’t have much cash.’ Remember we are not selling to the big chains, most of our outlets are small shops, like drugstores. So the need to carry a lot of inventory means that ‘Most shops must borrow heavily.’

“And you see the result, ‘Shops’ financial expenses are heavy,’ which translates into ‘Shops’ profitability suffers.’ ”

“The situation is quite bad,” Bob elaborates. “I constantly hear complaints from small shop owners that they are really working for the bank. To that extent the burden of the loans is heavy.”

I nod my head. I’ve heard about it. And not just in cosmetics.

Susan continues. “If, ‘Most shops must borrow heavily,’ and ‘Shops’ credit is limited,’ then ‘Some shops have difficulty meeting payments.’ ‘We, the vendors, want to be paid . . .’ ”

“How nasty of us,” Bob must interject.

“And as a result ‘Some shops have trouble getting merchandise,’ which, of course, has a major impact on their profitability.”

“How bad is it?” Don asks.

“Quite bad,” she answers. “Every year many shops declare bankruptcy. We, and our competitors, are well aware of the cash pressure, so we all give quite good payment terms. The standard in the industry is ninety days.”

“And reality is,” Bob adds, “that our receivables are running at about one hundred and twenty days. It’s a real problem.”

“Shall I continue?” Susan asks.

“There is more,” Bob promises, “a lot more.” He smiles at Susan.

“Here is another entry: ‘Shop forecast of future sales is quite inaccurate.’ Couple it with ‘Shops are forced to order in large quantities,’ and you get the next nasty result: ‘There is considerable mismatch between the shop inventory and actual customers’ demand.’ This leads directly to ‘In spite of the large inventories, shops suffer from shortages.’ ”

“What do you mean by shortages?” I ask, just to make sure.

“Shortage means a customer entered the shop, asked for a particular item, this item is not in the shop and the customer refused to buy an alternative item.”

“So according to this definition, a shortage translates directly into a lost sale?”

“Yes. That is the derivative,” she points to the tree. “And you see what makes it even worse. Here is your conclusion, ‘Shops cannot afford to buy in small quantities,’ which makes shortages a chronic condition. The shop will live with the shortage until it can afford another big purchase.”

“And this,” I follow the arrows, “leads to a substantial reduction in shops’ profitability.”

“Very substantial,” Susan agrees.

“Alex, you’ve got to see the last branch,” Bob is clearly proud of their tree. “You won’t believe how crazy this industry is. Susan show him.”

Susan is not overflowing with enthusiasm. In a dry tone she continues, “As you know ‘Brands are constantly releasing and advertising new product lines.’ ”

“Now more than ever,” I say.

“Yes, definitely,” she confirms. “Combine it with ‘There is considerable mismatch between the shop inventory and actual customers’ demand,’ and the result is obvious: ‘Shops are holding a goodly amount of relatively obsolete products.’ They know that they cannot hold these ‘old’ products for long, and therefore, ‘Shops offer considerable discounts on relatively obsolete products.’ This doesn’t help their profitability.”

“You see, Alex,” Bob explains the obvious, “exactly when we invest a fortune to persuade the consumers to buy the new line, the shops are going out of their way to persuade them to buy the old line. Talk about a mismatch.”

“Let me understand,” I say. “From your tree the core problem is clear. It’s our policy that drives the shops to buy in large quantities. How large is large? I mean, in terms of the shop’s weeks of sales?”

Susan volunteers an answer. “It depends on the size of the shop, but in any event I think that it’s more appropriate to talk in terms of months than weeks. If I judge by the frequency shops are ordering from us, I would say that a big shop orders from us in batches of one to two months. For a small shop . . . about six. The average is somewhere around four months, I guess.”

“I see. That’s good.”

“Why do you say that?” Don is surprised.

“We are a major part of the problem,” I answer. “This means that we can be a major part of the solution. Okay Bob, let’s see your proposed solution.”

Bob turns to Jeff, who until now hasn’t said one word. “Your turn,” he gestures to the flip-chart. Susan can barely hide her sigh of relief. Why are they afraid of me?

Jeff clears his voice. “The solution is quite obvious.” He flips a page. “Basically the Future Reality Tree is a mirror image of the Current Reality Tree. We started with two injections, ‘Discounts are not based on the size of the order, but on the dollar amount the shop orders per year,’ and, ‘The shop is replenished on a daily basis.’ From these two injections, and following the logic outlined in the Current Reality Tree, everything fell in place.” And he sits down.

I scan the Future Reality Tree. No surprises. These two injections lead nicely to the opposites of all the UDEs. Jeff is right, there’s no need to read this tree aloud.

“If you notice,” Bob says, “one of the injections is based on our new distribution system. This will guarantee that our competitors will not be able to offer the same. At least not for a while. Knowing them and the way they operate, it will take them at least two years to copy us.”

“Great work,” Don is beaming. “Our road map does work. You have done a great job.”

“Your road map was excellent,” Bob agrees. “It was a no-brainer.”

There is a problem, I think to myself. There must be a big problem, otherwise why hasn’t Bob revealed this solution to his people? He must suspect that I will not approve it. Why? It looks perfect. I can ask him, but it will be better if I find it myself. Think.

I stand up to refill my cup. This is my standard way to gain time. It doesn’t help. I still don’t have a clue. Before I give up and ask Bob for the pitfall, I turn to Susan, “How much, do you think, will this offer increase our sales?”

“In the long run, a lot. Maybe even thirty percent. Maybe more.”

“And in the short run?”

“It’s hard to tell,” she fudges.

“What’s your guess?” I press.

“Probably sales will drop. But not by much.”

“Sales will drop? Why?” Don is astonished.

Now it’s clear. It is a big problem.

“Because this offer gives the shops an incentive to drop inventories,” I explain. “Susan, how much inventory are the shops holding now, and how much do they need to hold for proper visual display plus reasonable stock? Don’t exaggerate in the amount of backup stock, remember, according to your suggestion we are going to replenish them on a daily basis.”

“This does not mean that they will immediately realize that we can do it, but a fair estimate is that they’ll be able to reduce their inventory by half. Maybe a little more.”