Management of a Sales Force, 12th Edition 403Management of a Sal.docx

Management of a Sales Force, 12th Edition 403
BBA3221
CHAPTER 12 Forecasting Sales and Developing Budgets
383
of the reps' forecasts to come up with our own. One advantage
of this procedure is that we can develop forecasts in more
detail, by product lines."
"Then you're recommending that we abandon our mathematical
approach to forecasting and go to a survey method. Is that
right?" the president asked.
"Not necessarily. I am trying to give you an idea of the different
approaches we can use and let you make the decision," Newman
replied.
"Whoa! I have trouble with that. You're supposed to be the
expert in market analysis, not us. We hired you to tell us what
you think we should do. I want a recommendation from you

without any equivocation." Pat Michaels firmly told Cori
Newman what was expected of her.
Newman was inwardly shaken by Michaels's aggressive position
but tried to maintain her composure. She replied, "Very well,
youll have my recommendation in writing Monday morning."
After exchanging the usual parting words, she returned to her
office to begin what would be a hectic weekend.
She mulled over the other forecasting alternative that she had
not been allowed to present at the meeting. She had been about
to tell her bosses that she could develop another mathematical
model based on data other than employment. She would have to
do a lot of statistical work to locate and validate such a series
of information, but, after all, that was her job.
Cori Newman wondered if she should recommend continued use
of a forecasting method with which management was familiar or
if she should recommend switching to the survey of customers'
buying intentions system.
Question:
1. What forecasting method should Cori Newman recommend
that Precision Tools adopt?
(ASS12-3
AEROSPACE SYSTEMS, INC. (A)
Budget Reduction Policy

As Ted Sowinski, the chief executive officer of Aerospace
Systems, Inc., stood befoTe the fax machine, his face noticeably
hardened as he read the message from NASA being emitted
from the contraption's innards. Everyone in the room was aware
of the subject of the incoming message, and all fell silent. They
knew from Sowinski's face that the news was bad. Their
contract for building a new space probe vehicle had been
canceled, a victim of the budget cutbacks by the federal
government.
This serious setback to the company's future was not
unexpected. The board of directors had discussed the matter
thoroughly at its last meeting and had directed management to
institute immediate budget reductions throughout the company
that would offset the revenues that would be lost because of the
potential contract cancellation. Management was ordered to
submit to the board its plan for those budget reductions at the
next board meeting, which was to be held the first Wednesday
of the following month, 22 days away.
As Sowinski took the message from the machine, he directed his
assistant to assemble all of the company's divisional vice
presidents for £ meeting the next morning. The sole agenda1 to
be the execution of the budget reductions.
Bill Rooney, vice president of the Compaq- i electronics
division, returned to his office aftm the budget meeting with the
president the other vice presidents. Despite his high.y emotional
protest, he had been firmly direct* - -reduce the budgets for his
division by approximately 20 percent. He had contended that it i
totally irrational to cut the budgets of the company's one
division that was still profitable aas whose revenues were
growing. The other executives had been in no mood to hear his
case. Son -had even told him that he could cut costs withers
hurting revenues. It struck Rooney that everyone in the room
seemed to think they knew more about his division than he did.
Nevertheless, he
384 PART 4 Sales Planning

was stuck with the order and knew that any appeal to higher
echelons would be not only ineffective but also career suicide.
Rooney directed his assistant to call a meeting of all the
division's department heads. The agenda: cutting their budgets.
Michiko Takanaga, manager of sales operations for small
consumer electronics, returned from the meeting furious. She
had been ordered to reduce costs for her department by $12
million. The method by which she was to do it was left largely
to her.
Most of the meeting had been devoted to how best to
accomplish the reductions while doing as little damage as
possible to ongoing profitable operations. Some of the
department heads thought that they would concentrate on
getting rid of marginal workers. Everyone agreed that the key to
meeting the budget mandates was cutting payroll costs and the
resultant lowering of the costs of the benefit package, payroll
taxes, and workers' compensation insurance. The total benefit
package offered by the company to all employees amounted to
32 percent of payroll. FICA taxes plus workers' compensation
cost 17 percent of payroll. The department generated revenue of
$85 million in 2000, with a total budget of $76 million. Total
payroll was $18 million. The department had 331 employees, 91
of whom were sales reps. The sales reps' average compensation
was $76,000 a year. Field-selling expenses for 2000 were $2.9
million, of which travel, lodging, and meals accounted for about
$2 million, with the rest going for entertaining customers.
Takanaga decided to confer with her assistants about how the
budget reductions should be done. She could just slice
everything 20 percent across the board, but that seemed
irresponsible to her. She believed that it was her job as manager
to make some difficult decisions, and this one was certainly
going to fall into that classification.
Since being ordered to do it, she had thought of little else but
how she could make the budget reduction. She realized that just
about all of the reductions would have to come out of payroll

and the resulting savings in the benefit and tax package.
Previous budget squeezes had reduced administrative overhead
items to bare bones.
One alternative Takanaga was contemplating was terminating
enough sales reps so that the entire $12 million reduction would
be from payroll costs and benefit packages. Naturally, she
thought of trying to keep the best producers and letting the
marginal ones go, but she suspected that she would be cutting
into some reps who were good, solid performers even though
their records placed them in the lowest quartile of profit
producers.
Another alternative was to try to get the sales reps to accept a
pay cut sufficient to allow everyone to keep his or her job. She
knew that would be a difficult selling job. How could she get a
rep who was making $100,000 a year to accept $80,000 just so
she wouldn't have to fire anyone? But then she realized that
strange things do happen. One offshoot of this thought was to
offer to keep the reps who would otherwise be fired if they
would accept, say, a 40 percent pay cut. A rep who was making
only $60,000 a year might work for $40,000 if it meant keeping
his job and benefits package.
The problem weighed so heavily on Takanaga's mind that she
talked of little else that evening as she dined with a friend who
was a sales manager for a large business machines manufacturer
in Japan. He was of the opinion that she would have to redesign
the entire sales force so that the sales job could be
accomplished with fewer reps. "You'll have to redesign the
territories, replan your call patterns, stop calling on some
people, use the telephone a lot more, hire some cheaper help for
inside selling, get rid of your expensive sales reps, and hire new
ones for a lot less money. You're going to have to work like the
devil to find a cheaper way to cover your customers."
Takanaga was not sure that her friend's plan could be done. A
flat across-the-board reduction of all budgets appealed to ker.

After all, any damage done could easily be blamed on top
management's mandate to cut the budgets.
Question:
1. What advice would you give Michiko Takanaga on how she
should reduce her departmental budgets?
386 PART 4 Sales Planning
Nature and Benefits of Territories
A sales territory comprises a number of present and potential
customers, located within a given geographical area and
assigned to a salesperson, branch, or intermediary (retailer or
wholesaling intermediary).
In this definition, the keyword is customers rather than
geographical. To understand the concept of a sales territory, we
must recognize that a market is made up of people, not places—
people with money to spend and the willingness to spend it. A
market is measured by people times their purchasing power
rather than in square miles.
A company, especially a medium- or large-sized one, can derive
several benefits from a carefully designed territorial structure
(see the accompanying box "Benefits of Good Territory
Design"). Unfortunately, poorly designed territories are all too
common because sales executives fail to monitor and react to
changes in the market. Over time, some territories gain potential
customers at a faster rate than other territories. Some territories
might even lose customers. Eventually, territories that once
were fair and equal become unbalanced in terms of their sales
potential. This is why sales executives must consider revising
the territorial structure on a regular basis. More detail on
revising territories is provided later in this chapter.
In select circumstances that typically involve small-sized
companies, sales territories are not necessary. For example,
formal territories may not

Management of a Sates Force, 12th Edition
1. Enhances customer coverage.
When a sales territory is too large, potentially important
customers are overlooked. The rep simply does not have enough
time to call on all customers. Creating territories is a way for
management to control sales reps' activities such that all
customers are served in a more efficient manner. >'.. Reduces
travel time and selling costs. With no geographic territories,
reps inevitably crisscross each other as they travel to and from
their accounts. The result? Reps spend more time traveling and
less time selling; and the firm spends too much money in
automobile/fuel expenses.
3. Provides more equitable rewards. Imagine two sales reps who
are equal in both ability and motivation. Yet one rep would earn
much more commission than the other if assigned to a territory
with significantly higher potential. Hardly fair! Sales
organizations should reward the salesperson and not just the
territory.
4. Aids evaluation of sales force.
With well-designed territories that are equal with respect to
both sales potential and
Benefits of Good Territory Design
workload, sales managers can more easily and fairly evaluate
their sales reps' performance. Each rep's actual performance is
typically compared to a territorial potential or quota.
5. Increases sales for the sales organization.
Many firms have some territories that are too big and others that
are too small. These firms should redesign their territories to be
equal. Sales will go down for reps with previously big
territories. These lost sales, however, will be more than offset
by the sales increases of the other reps.
6. Increases morale. In general, good territory design results in

productive salespeople who efficiently serve satisfied customers
and who are being evaluated and rewarded in a fair manner.
This in turn leads to increased morale, which benefits the sales
organization in many ways—not the least of which is through
reduced turnover.
Source: Andris Z. Zoltners and Sally E. Larimer, "Sales
Territory Alignment: An Overlooked Productivity Tool,"
Journal of Personal Selling & Sales Management, Summer 2000,
pp. 139-50.
388
CHAPTER 13 Sales Territories
387
388
FIGURE 13—1 Procedure for designing sales territories
388
Select a control unit
Determine location and potential of customers
Determine
basic territories
Assign tlespeop to territories
Set up territorial coverage plans

Evaluate effectiveness of design
388
be needed for a small company with a few people selling only in
a local market. In this case, management can plan and control
sales operations without the aid of territories and still enjoy
many benefits of a formal structure. In addition, lack of
territories may be justified when personal friendships play a
large part in the market transaction. This is one reason
automobile dealers and commodity and security brokers usually
do not district their sales forces. Highly specialized sales
engineers also may serve in troubleshooting assignments or be
called in anywhere to help close an important sale.
Designing Territories
The ideal goal in territorial design is to have all districts equal
in both sales potential and the sales reps' workload. When sales
potentials are equal, it is easier to evaluate and compare sales
reps' performances. Equal opportunities also reduce disputes
between management and the sales force and generally tend to
improve workers' morale. To achieve both objectives is an ideal,
but usually unattainable, goal. However, this should not deter
an executive from constantly striving to reach it.
Changing market conditions put continuing pressure on
companies to adjust their territories. Different procedures may
be used to design the districts. However, a company's territorial
structure is influenced by the potential business in the firm's
market and by the workload required or sales expected of its
sales force. One plan for establishing or redesigning territories
includes the following six steps, as seen in Figure 13-1:
1. Select a control unit for territorial boundaries.

2. Determine location and potential of customers.
3. Determine basic territories.
4. Assign salespeople to territories.
5. Set up territorial coverage plans for the sales force.
6. Evaluate the effectiveness of the design on a continuing
basis. (We discuss this step in Chapters 14 and 15.)
Determine Basic Control Unit for Territorial Boundaries
When designing territories, Hie first step is to select a
geographical control unit as a territorial base. Commonly used
units are states, counties, cities, zip-code areas, and
metropolitan areas (see Figure 13-2). A typical territory may
comprise several individual units. One person's district may
consist of four
388
(
PART
4 Sales Planning
) (
FIGURE
I3-2
)
State
Zip-code area
388
Territorial control units

388
County
Sales territory control unit
388
388
City
Metropolitan statistical area
metropolitan areas; another's may be three states. The unit
should be small for at least two reasons. First, a small unit helps
management realize one of the basic values of territories—the
geographic pinpointing of potential. Second, the use of small
control units makes it easier for management to adjust the
territories. If an organization wants to add to one person's
district and reduce another's, a county unit facilitates the
adjustment better than a state unit.
States
Territorial systems built around states are simple, inexpensive,
and convenient. Territories may be built around states if a firm
has a small sales force covering a national market and uses a
selective distribution policy. A luggage manufacturer on the
West Coast that sells directly to a limited number of selected
retail accounts, for example, uses the state unit with apparent

success.
However, for most companies, states do not serve well as bases
for territories because customers often ignore state lines. An
Oregon-Washington boundary ignores the fact that many
consumers and retailers in southern Washington buy in
Portland, Oregon. Trade from Alton and East St. Louis, Illinois,
gravitates to St. Louis, Missouri, rather than to any Illinois city.
Counties
For companies that prefer to use a political subdivision as a
territorial base, the county may be the answer. In the United
States, there are almost 3,100 counties but only 50 states.
Smaller control units help management to design territories that
are equal in potential and to pinpoint problem areas. Many
kinds of statistical market data (population, retail and wholesale
sales, income, employment, and manufacturing information) are
available on a county basis.
The only serious drawback to the county unit is that it is still
too large for some companies. A manufacturer or a wholesaler
may want to assign several reps to cover one county because the
potential is far too much for one person to handle. This
situation may prevail in such counties as Los Angeles, Cook
(Chicago), Wayne (Detroit), or Cuyahoga (Cleveland). It then
becomes necessary to divide the county into a series of
territories, and some smaller control unit is needed.
Cities and Zip-Code Areas
In the past, such firms as wholesalers of food, drugs, and
tobacco often used a city as a control unit, because most of the
market lay within urban limits.
388
CHAPTER 13 Sales Territories
389

388
In fact, in many instances, even the city was too large, and
firms used several sales reps within a single city. Then some
subcity unit was needed, and precincts, wards, or census tracts
were used.
Postal zip-code areas are one particular subcity unit widely used
when an entire city is too large to use as a basic control unit. By
using zip-code areas, a company works with geographical areas
that ordinarily have a high degree of economic, social, and
cultural homogeneity. However, it is difficult to get much
statistical market data for geographical units smaller than a
county or city.
Metropolitan Statistical Areas
Many companies have found that a significant share of their
market has shifted to suburban and satellite cities outside the
major central city. These firms have been aided tremendously
by the delineation of metropolitan statistical areas (MSAs). The
federal government has identified and established the
boundaries for about 360 of these areas.3 An MSA is an
economically and socially integrated unit with an urbanized
area of at least 50,000 people. The MSA boundary lines are
defined by one or more counties. For example, the MSA
containing Santa Rosa, California, which is in Sonoma County,
is defined by the area of that one county. Alternatively, the
MSA containing Cincinnati, Ohio, includes the area of 15
surrounding counties, including counties in nearby Kentucky
and Indiana. So, an MSA may cross state lines.
Because an MSA is defined in terms of counties, a vast amount
of market data is available.4 MSAs are small in land area—
about two-thirds of U.S. counties are not in any MSA. However,
over 80 percent of the nation's population live within one of the
360 MSAs. Consequently, MSAs constitute lush, concentrated

markets for many consumer and industrial products. Because of
this market potential, some firms assign territories that consist
of a number of metropolitan areas. They encourage their
salespeople to work in those areas only and to skip the regions
outside or between them.
Determine Location and Potential of Customers
Management should determine the location and potential of both
present and prospective customers within each selected control
unit. Sales records should indicate the location of present
customers in each control unit. Prospective customers can be
identified with the aid of company sales reps plus outside
sources such as (1) trade directories (e.g., Thomas's Register);
(2) publishers of mailing lists (e.g., R. H. Donnelley
Corporation); (3) subscription Lists from trade journals; (4)
trade association offices; (5) classified telephone directories; or
(6) credit rating firms (e.g., Dun & Bradstreet, Inc.).
Once the customers are identified, management should assess
the potential business it expects from each account.
Management then can classify these accounts into several
categories based on their potential profitability to the seller.
This step furnishes some of the necessary background for
determining the basic territories.
388
396
PART 4 Sales Planning
Global Positioning System Devices

To help salespeople navigate their territories, some sales
organizations are equipping reps with global positioning system
(GPS) devices. These are products that communicate with
satellites to pinpoint and give directions to specific geographic
locations.
GPS provides numerous benefits for salespeople who travel,
especially those with large, unfamiliar territories. Most
obviously, the technology essentially prevents reps from ever
again being lost. By simply entering the address of a
prospective customer, a sales rep is provided with step-by-step
directions on how to get there—including which highway lane
to drive in. Some GPS devices can even identify the fastest
route around unexpected road construction.
In addition, company managers can use GPS devices to track
their salespeople. That is, information on the specific
geographic location can be automatically communicated to the
central office in real time. This can be analyzed to determine
whether or not salespeople are covering their territories in the
most efficient manner.
Prices and features vary significantly. Handheld devices start
for as low as $100, while complete navigation systems with
automated computer voice can cost several thousand dollars.
Questions: For what kinds of salespeople are GPS devices likely
to be most beneficial? What are the drawbacks?
Source: "Gadget of the Month," Financial Management,
September 2001, p. 53.

Assigning Salespeople to Territories
Once the sales territories have been established, management
can assign individual salespeople to each district. Up to this
point, we have implicitly assumed that the salespeople have
equal selling abilities, and that each person would perform
equally well in any territory. Obviously, this is not a realistic
assumption.
In any given sales force, the reps may differ in selling
effectiveness. They also vary in experience, age, physical
condition, initiative, and creativity, as well as in selling skills.
A sales rep may succeed in one territory and fail in another,
even though the sales potential and workload are the same in
both districts. For example, in a territory where a large number
of the customers are engineers, a salesperson with a technical
background may be highly effective. Sales performance also
may be influenced by differences in local customs, religion, and
ethnic background.
Many companies intentionally design some sales territories so
that they are unequal in size, as measured by the rep's workload
or the territorial sales potential. Note that this contradicts the
previously stated "ideal goal* of designing territories that are
equal with respect to workload and potential. However, these
unequally sized territories accomplish two purposes. One is to
accommodate some of the above-noted differences among
salespeople. The other is to give executives some flexibility in
managing their sales forces. For example, many firms
intentionally design a small territory for beginners or sales
trainees. Then, as a rep progresses in skill and performance, he
or she is moved (or promoted) to progressively larger and more
lucrative territories. Similarly, some companies may initially
assign reps to territories out in the hinterland. Later, these reps
can be promoted to better territories closer to their homes or
offices.

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