Company X
Sales Performance
Nienke Mellink
Company X Sales performance
Nienke Mellink
Public exemplar
Groningen, June 2005
Master thesis on behalf of the Rijksuniversiteit Groningen; Faculty Management and Organization
The author is responsible for the contents of this thesis; the copyright of this thesis belongs to the author.
Company X:
Mr. Drs. P. Pluim
Supervisors Faculty Management and Organization:
Mrs. Dr. J.M. Horgan Mr. Drs. M.M. Bergervoet Mr. Dr. K. Van Veen
Preface
This thesis is written on behalf of the Finance and Planning department of Company X. They have invited me to come to European Headquarters (EHQ) of Company X in Paris. Besides the fact that the research objective was very challenging for me personally, it was a major opportunity to experience a very dynamic international business environment; to understand how a global company operates and to learn from the large diversity of national cultures. Besides this very fascinating business circumstances, the location of the European Headquarters of Company X was just as astonishing; living in Paris is fantastic.
These seven months in Paris in a very professional environment were very educative. It is beyond words what I have learnt about how to deal with people, assignments, deadlines and of course the 80-20 rule. I have really appreciated this unforgettable experience in Company X and I am very grateful for all support I have had during my stay in Paris. I would like to thank Mr. Peter Pluim on the first place, for his humoristic, though very professional way of working and coaching and also Mr. Thomas Wagner and Mr. Paul Rothwell as my direct managers and Mr.
Andreas Eichler for providing me additional information regarding incentive plans.
I would like to make a remark regarding this thesis. The research done in this thesis is very much financially focused instead of the non-financially. The reason is that this assignment is done on behalf of the Finance and Planning department of Company X; the department that monitors and control financial processes. Of course, financial performance is of vital importance for the financial health of Company X. Notwithstanding this fact, an important message of this thesis is that the importance of non-financial aspects should not be forgotten, neither in the Finance and Planning department. Besides, I also have experienced that Company X, as a company, values resources (e.g. non-financial aspects) very much. Company X is very much aware of the fact that human beings are vital for performance on the first place.
Creating this critical and pluristic view on aspects like financial focus versus non-financial focus and the effect on sales performance is fed by my encouraging supervisors on the Faculty of management and Organization. First of all, I would like to thank Mrs. Justine Horgan, who was with her inexhaustible enthusiasm and useful feedback a great support in developing my research project. I am grateful that Mr. Marcel Bergervoet has facilitated the realization of this thesis due to pleasant meetings with fresh insights from new perspectives. Another word of great thanks goes to Mr. Kees van Veen for helping out in the reasoning process.
In specific I would like to thank my parents for all their heartwarming unconditional support.
Nienke Mellink
Management Summary
The department Finance and Planning does not have deep insight in the effectiveness of the “Extrinsic Reward System” and how this varies across regions and countries. Moreover, Finance and Planning is questioning whether the current set up of the “Extrinsic Reward System” works optimally in every region and country and consequently the question is asked how the effectiveness can be improved? Therefore, the assignment was to develop a financial indicator, which could be used to summarize the effectiveness of the “Extrinsic Reward System” across the regions and countries in Europe in one figure. Three preliminary questions came up;
1. Is it possible to measure effectiveness?
2. Is it possible to use only one solitary pure financial indicator?
3. Is it possible to do a cross- region/ country comparison?
The answer on the first question was ‘no’; it is not possible to measure effectiveness because no comparison group is available. For that reason sales performance of sales units on the “Extrinsic Reward System” is measured.
Considering the second question, it is strongly advised to use multiple measures (financial - non-financial, internal - external, long-term - short term). Therefore an incomplete picture of sales performance would be derived if only one solitary financial indicator was used to measure sales performance. Concerning the third question, a cross-country comparison is very complex as there are major differences regarding laws and regulations between countries.
Therefore, there will be many limitations, what should be realized in advance.
For these reasons the research objective is: “Increasing insight in the sales performance of sales units on the
“Extrinsic Reward System” in the different regions and countries in Europe and explaining variations in sales performance across countries”. The central research question, which is derived from the research objective is: “How does sales performance of sales units on the “Extrinsic Reward System” vary within Europe and how can sales performance across countries be explained?” To answer this central question a single financial indicator to measure sales performance has been derived of sales units on the “Extrinsic Reward System” across Europe. Moreover, five additional performance indicators are identified to get a more complete picture of sales performance. The reason why sales performance varies is studied on country level. The assumption has been made that the macro factors (economy, ICT conditions and culture) determine to a large extent the sales performance. It is hypothesized that the more conducive the macro environment within a country, (economy, ICT conditions and national culture), the higher sales performance will be within a country.
By calculating per plan element the financial indicator and the additional performance indicators it became clear that the countries in Region IV (except Country L) performed very well. Especially countries from Region I performed overall poorer than expected. This was not in line with the hypotheses and expectations. In addition, there appeared to be large differences between the scores from the additional performance indicators and the scores on the financial indicator; it was expected that these would vary in line with each other. Additional research has been done to verify the strength of this analysis. The strength of this analysis is studied by researching the
validity of the financial indicator and secondly the relationships between the external factors (economy, ICT and culture) and the six performance indicators separately. However, no convincing conclusion regarding the validity of the financial indicator can be derived. Secondly, no strong correlations have been found between GDP, NRI or culture scores and the six performance indicators. A third extra research is conducted on country level; again no regular relationship is found. An explanation why no relationship is demonstrated between sales performance and the macro factors might be the measurement method used. The six performance indicators are all based on financial aspects, namely signings, revenue and gross profit, which is specified performance as sales reps are also rewarded on these aspects. Non-specified performance and/or strategic aspects are not regarded. Therefore, sales performance is incompletely measured, which might be the reason why no relationship is found between macro factors and sales performance. By deriving sales performance indicators from strategy e.g. Critical Success Factors or the Balanced Scorecard of Kaplan and Norton (1992), relationships between sales performance and macro factors were perhaps demonstrated. Another explanation might be that meso factors are more important for sales performance than macro factors and thus meso factors had to be studied instead of macro factors.
Based on these conclusions it is strongly recommended to derive performance indicators from strategy and to use multiple measures to measure sales performance. Specified and non-specified performance measures should be incorporated. A good method to select multiple measures is the Critical Success Factors and the Balanced Scorecard might also lend a hand. Secondly, for sales units it is advised to emphasize processes as well besides stressing results. A more behavior-oriented approach is recommended, which implies; using multiple (non-financial) measures, high management involvement, more communication, more direction, more long term goals etceteras.
The design of the “Extrinsic Reward System” should also be adjusted to a more behavior based control system instead of outcome based control system. In turn motivation, and thus sales performance, will be more stimulated.
Table of contents
1.0. COMPANY X AN INTRODUCTION ...9
1.1.COMPANY X ...10
1.1.1.STRUCTURE COMPANY X ...10
1.1.2.ITINDUSTRY...11
1.1.3.STRATEGY COMPANY X ...11
1.1.4.STIMULATING SALES...11
1.2.THE “EXTRINSIC REWARD SYSTEM”...12
1.2.1.WHAT IS THE PURPOSE OF THE “EXTRINSIC REWARD SYSTEM”? ...12
1.2.2.WHICH PLAN ELEMENTS CAN BE DISTINGUISHED ON THE “EXTRINSIC REWARD SYSTEM”?...13
1.2.3.FOR WHO IS THE “EXTRINSIC REWARD SYSTEM” DESIGNED? ...14
1.2.4.WHO IS RESPONSIBLE FOR THE “EXTRINSIC REWARD SYSTEM”? ...14
2.0. RESEARCH METHODOLOGY ...15
2.1.RESEARCH DESIGN...16
2.1.1.BACKGROUND OF INITIAL ASSIGNMENT...16
2.1.2.RESEARCH OBJECTIVE...18
2.1.3.CENTRAL RESEARCH QUESTION...18
2.1.4.CONCEPTUAL MODEL...19
2.1.5.RESEARCH QUESTIONS...20
2.1.6.THEORETICAL RATIONALIZATION...22
2.1.7.CONDITIONS AND SCOPE...23
2.2.METHODOLOGICAL RATIONALIZATION...24
2.2.1.RESEARCH TYPE...24
2.2.2.DOCUMENTATION...24
2.2.3.RESEARCH METHODS...25
2.2.4.ANALYZE METHODS...26
3.0. THEORETICAL FRAMEWORK ...27
3.1.MEASURING PERFORMANCE...28
3.1.1.DEFINITIONS...28
3.1.2.RESPONSIBILITY CENTER APPROACH...29
3.1.3.NON-SPECIFIED PERFORMANCE...30
3.1.4.CRITICAL SUCCESS FACTOR APPROACH...32
3.2.FACTORS AFFECTING SALES PERFORMANCE...33
3.2.1.DEFINITIONS...33
3.2.2.FACTORS AFFECTING SALES PERFORMANCE...34
3.2.3.ECONOMY...36
3.2.4.TECHNOLOGY...36
3.2.5.CULTURE...37
3.3.SUMMARY...39
4.0. PRACTICAL FRAMEWORK ...40
4.1.MEASURING PERFORMANCE...41
4.1.1.FINANCIAL INDICATOR...41
4.1.2.ADDITIONAL PERFORMANCE INDICATORS...44
4.1.3.RELATIONSHIPS PERFORMANCE INDICATORS...45
4.1.4.CRITICAL SUCCESS FACTORS...48
4.2.MACRO FACTORS...50
4.2.1.REGION I; EXAMPLE OF COUNTRY ANALYSIS...50
4.2.2.ASSUMPTIONS COUNTRY ANALYSES...50
4.3.SUMMARY...52
5.0. ANALYSIS ...53
5.1.SALES PERFORMANCE...54
5.1.1.REGION I; EXAMPLE OF SALES PERFORMANCE ANALYSIS...54
5.1.2.SUMMARY OF ALL REGIONS/ COUNTRIES STUDIED...57
5.2.VALIDITY OF THE FINANCIAL INDICATOR...60
5.2.1.SUMMARY (SIGNINGS, REVENUE AND GROSS PROFIT) ...60
5.3.RELATIONSHIPS MACRO FACTORS & PERFORMANCE INDICATORS...63
5.3.1.ECONOMY; AS AN EXAMPLE...63
5.3.2.SUMMARY (ECONOMY,ICT CONDITIONS AND CULTURE) ...65
5.4.IN-DEPTH RELATIONSHIPS...67
5.4.1.ECONOMY; AS AN EXAMPLE...67
5.4.2.SUMMARY (ECONOMY,ICT CONDITIONS AND CULTURE) ...69
5.5.SUMMARY...70
6.0. CONCLUSION...71
6.1.CONCLUSION AND RECOMMENDATIONS...72
6.1.1.CONCLUSION...72
6.1.2.PRACTICAL RELEVANCE...73
6.1.3.RECOMMENDATIONS...73
6.2.RESEARCH EVALUATION...75
6.2.1.THEORIES USED...75
6.2.2.RESEARCH METHOD...75
6.2.3.SCIENTIFIC RELEVANCE...76
6.2.4.FURTHER RESEARCH...77
Tables and figures
1.0. Company X an introduction
1.1.1. The geographical division of Company X 10
1.1.1. Principal agent dilemma 12
2.0. Research methodology
2.1.1. Pre tax income 16
2.1.2. Conceptual model 19
2.2.1. Summary of research process 25
3.0. Theoretical framework
3.1.1. Sales performance based on specified – and non-specified performance 28
3.1.2. Examples of non-financial measures 31
3.2.1. Factors affecting sales performance 33
4.0. Practical framework
4.1.1. Method to measure sales performance 41
4.1.2. Criteria for the financial indicator 42
4.1.3. Relationships between performance indicators 46
4.1.4. Assumed relationships among performance indicators 48
4.1.5. CSFs of Company X sales units 49
4.2.1. Explaining sales performance based on macro factors 50
1.0. Company X an introduction
Sales performance of sales units on the “Extrinsic Reward System” across regions and countries in Europe is studied. The “Extrinsic Reward System” is one of the sales plans (“Extrinsic Reward System”) of Company X. To provide more insight, a short description of Company X and the “Extrinsic Reward System” is given. In section 1.1 the structure of Company X, the IT industry and the strategy of Company X is described. In section 1.2 the
“Extrinsic Reward System” is in-depth reflected on.
1.1. Company X
Company X is one of the world's largest information technology companies. Company X strives to lead in the creation, development and manufacture of the industry's most advanced information technologies. Core businesses are computer systems, software, networking systems, storage devices and microelectronics.
1.1.1. Structure Company X
Within Company X Worldwide, Company X distinguishes three main geographical entities; The Americas, Asia- Pacific and Europe (including the Middle East and Africa). The focus in this research is on Europe. Company X has more than 100.000 employees in Europe diversified over five regions. These five regions, which Company X identifies, are:
• Region I: Country A and Country B
• Region II: Country C, Country D, Country E and Country F
• Region III: Country G, Country H and Country I
• Region IV: Country J, Country K, Country L and Country M
• Region V: Country N and Country O (see figure 1.1.1.) Figure 1.1.1. The geographical division of Company X
Company X is divided in three main divisions: Hardware, Software and Services. This research will focus on Services. Services is the largest division within Company X. Services helps companies of all sizes capitalize on information by advising them installing-, and maintaining their IT infrastructure needs. Sales units within Company X are designed to stimulate sales, which is the amount of services offered to help other companies with their IT infrastructure.
The Americas
Asia-Pacific Europe:
- Region I
- Region II
- Region III
- Region IV - Region V
1.1.2. IT Industry
Company X belongs to the Information Technology (IT) industry. The IT industry has expanded and changed a lot over the years. Value in the industry is found in three large categories. The first category is business value, which is services and financing; secondly infrastructure value, which is hardware, software and services. The third category is component value, which is technology. Company X operates in many countries in Europe; in many different industries and offers many different companies solutions. Every sales team has its sales territories for which it is responsible within a country. Sales territories differ in their sales potential and the conditions for its realization. In general, the IT Industry faces slow growth, growing customer demand and increasing competitive pressures; more specifically:
• Financial pressures.
• Business demands; customers, competitors and stockholders are putting new demands on businesses, forcing them to become more productive
• Technology advances; integrating processes
• Security concerns; protecting the privacy of customers and employees (integrity)
• Legacy investments (www.Company X.com)
1.1.3. Strategy Company X
In the mid-1990s; the dot-com era and the “new economy”, new business models arose because of a major shift in business design and management thinking. In addition, because of many competitors in the industry, producing high quality technology and services is not enough. Innovation and inventions are critical values in order to attain and retain competitive advantage in this industry.
The answer of Company X was to give businesses the flexibility and power they need to succeed. Company X uses all of their assets to provide integrated, end-to-end solutions for their customers. These customer made solutions are in terms of Porter (1985) a differentiation strategy; according to the generic strategies. A differentiation strategy is an integrated set of actions designed to produce products that customers perceive as being different in ways that are important to them. The differentiation strategy applies to firms to sell non-standardized products to customers with unique needs (Hitt, 1999).
1.1.4. Stimulating sales
Company X uses incentive plans to encourage the processes of selling e-business solutions, which should lead to improved business results. Incentive plans drive incremental performance and differentiate earnings based on individual contribution to the team’s results. A sales plan, like the ”Extrinsic Reward System” infers guaranteed payment against performance targets. The payments are made on a regular basis with a direct correlation between performance and the commission payment. The level of commission payout is typically based solely upon the individual’s attainment of objectives and is not dependent on the business unit’s performance.
1.2. The “Extrinsic Reward System”
The objective of the “Extrinsic Reward System” is to drive profitable revenue and/or market share. The “Extrinsic Reward System” targets sales specialists. Only 50 % or 60% of their salary is fixed. Depending on performance employees on the “Extrinsic Reward System” can earn the variable part, which accounts for 50% or 40% of reference salary. Reference salary is the salary amount if a sales employee was not on an incentive plan. The pay out on the “Extrinsic Reward System” is influenced by quota attainment only. There is no managerial influence; the pay out does not depend on management assessment, mentoring, client satisfaction or other subjective methods.
The description of the “Extrinsic Reward System” is based on four questions:
1. What is the purpose of the “Extrinsic Reward System”?
2. Which plan elements can be distinguished regarding the “Extrinsic Reward System”?
3. For who is the “Extrinsic Reward System” designed?
4. Who is responsible for the “Extrinsic Reward System”?
1.2.1. What is the purpose of the “Extrinsic Reward System”?
In general sales plans are designed to motivate and reward those employees whose primary roles and responsibilities are to sell products and services directly to a specific set of customers, channels and/or territories.
To explain this, motivation expectancies and the principal-agent dilemma are regarded. Firstly, intrinsic motivation is motivation one has due to the job itself because it is interesting and challenging. Extrinsic motivation is motivation from outside i.e. rewards you get from others. Intrinsic motivation is often low for salespeople, because it is common to fail several times before malting one successful sale. These failures are combined with a low prestige in society (Blois e.a. 2000). Therefore it is necessary to create extrinsic motivation through rewards. Extrinsic rewards are expected to motivate sales reps to put more effort into their job, which should result into higher outcomes.
Secondly, the risks for the principal (Company X) are minimized, as risks are partly distributed to the agent (sales reps); now the sales rep’s salary is at stake which assures Company X that greater effort is put into the job, which impacts business results in turn (figure 1.2.1.).
Figure 1.2.1. Principal agent dilemma; Source: Kaplan and Atkinson, 1982 p. 674
The individual’s view
Skills & Knowledge
The organization’s view
Organization Objectives Results Outcomes
Rewards
According to the expectancy approach to motivation, sales reps are assumed to act in ways that create the rewards they desire (Kaplan & Atkinson, 1982). Sales incentives focus on individual contribution and operate on the fundamental principle of risk and reward: greater contributions result in higher compensation, this way Services drives profitable revenue and or market share.
1.2.2. Which plan elements can be distinguished on the “Extrinsic Reward System”?
Monetary incentives can be provided in four different forms; fixed salary, commissions’ rates, bonuses and or prizes for winning sales contests. The survey by Kraft (1955) shows that companies rarely choose just one of the four components. Most of them prefer to combine at least a salary with commissions or bonuses and very often make use of all components (Blois e.a., 2000). The “Extrinsic Reward System” is based on commission rates though awards and other cash earnings can be earned as well. To get more insight in the “Extrinsic Reward System” a small explanation is given about the different plan elements.
Plan elements are weighted components of the Target Incentive. There are three main plan elements. These plan elements are respectively: Signings, Revenue and Profit. Because these three plan elements are the key metrics, which are used to judge performance, they will now be explained in detail. Other elements like Individual Challenges and teaming will not be discussed, as these elements are qualitative and subjective determined.
Signings are the primary plan element. Signings are contracts with customers in order to fulfill services. The value of the signings is called the Total Contract Value. The Total Contract Value is the opportunity for new business, although it is no more than a paper until the services are fulfilled and the customer has paid for these services. The content of the contract is the business solution Company X offers; the provider, scope, time horizon and volume are agreed on. Most of the time, these contracts are service or maintenance contracts. Eventually, all signings generated by one sales unit, will be summed to total signings attainment of a sales unit in a year. This will be compared to the quota level. Based on the level of individual quota attainment, commission will be paid out to the sales reps. Signings are the main indication of how Company X performs at this moment. Therefore, the main responsibility of all sales reps on the “Extrinsic Reward System” is gathering as many new contracts as possible.
Revenue is the second plan element. Revenue can be subtracted from the contracts (TCV). Revenue will be created when the customers’ expectations with regard to the services are met and/ or services are delivered. After that the service is delivered the customer will pay the TCV; which creates revenue. Revenue is thus an indicator of past success. In case the customer agreed to pay after a service is delivered, it can take years to get the total revenue from a contract. In fact, most contracts regard services over many years. Eventually, these periodical payments will be summed to total revenue created by a sales unit in a year. This will be compared to the quota and based on individual attainment level commission will be paid out to the sales reps. Revenue is an important plan element because it stimulates to focus on offering solutions, which are profitable. By including a revenue element the sales reps are forced to design contracts, which are truthfully profitable for Company X.
Gross Profit is the third plan element. Revenue minus costs is gross profit. Revenue is direct revenue, which is generated from the contracts by meeting the expectations of the customers. Costs are all direct costs for execution and delivery of the service; also the administrative-, pricing- and resources costs etcetera are calculated. But in the contrary to signings and revenue the Gross Profit cannot be determined per individual. Costs, like administration costs cannot be split per contract or per deal and is calculated per region or per country. Total revenue in a country minus total costs in a country is total gross profit in a country. Gross profit is an important plan element because sales reps are forced to take costs in regard; sales reps are forced to offer services against the lowest costs.
1.2.3. For who is the “Extrinsic Reward System” designed?
The “Extrinsic Reward System” accounts for sales representatives (sales reps) and their direct managers; the managers who are direct responsible for the sales reps and their performance.
1.2.4. Who is responsible for the “Extrinsic Reward System”?
The “Extrinsic Reward System” is a quota based sales plan; this means that sales reps on the “Extrinsic Reward System” have set targets to attain. Setting quotas has two functions. First of all, humans may be motivated better by giving them explicit targets such as sales quotas according to the goal setting theory (Locke & Latham, 1990).
Secondly, quotas also offer the opportunity to reflect different conditions in the territories. Taking specific conditions into account, quotas provide the opportunity to set standards, targets that represent the sales that can be expected from an average sales rep under the specific conditions in the various territories (Blois e.a., 2000).
However, these targets (quotas) are determined initially at the worldwide level to enhance consistency across all populations. These targets are then cascaded to regional level and further downwards; basically, sales units has a responsibility for a certain amount of Profit and Loss (P&L) and on the same time the region has also a responsibility in terms of P&L. Direct managers who are in the direct reporting line above the individual should set individual targets and assess individual performance.
2.0. Research methodology
In this chapter the research methodology is outlined to provide insight into the body of this thesis and the methods, used to accomplish this research. Therefore, two main sections are distinguished. The first section (section 2.1.) regards the research design of the thesis; e.g. the background, research goal and -questions and conceptual model. The second section (section 2.2.) takes the methodological justification into account; this is e.g. research methods and analyzing methods.
2.1. Research design
In the research design it will be described for what reason this research is executed and how. Therefore, the background of the thesis is taken into account, the research goal, the central research question, conceptual model, research questions, theoretical rationalization and conditions and scope.
2.1.1. Background of initial assignment
Finance and Planning has placed this assignment as they have little in depth insight in the effectiveness of the sales units on the “Extrinsic Reward System” within Europe. Moreover, Finance and Planning is questioning whether the current set up of the “Extrinsic Reward System” works optimally in every region and country.
Consequently, having no deep insight in the effectiveness of the “Extrinsic Reward System” might cause spending too much money on sales reps while the sales are less than the potential sales volume of the market. Therefore they would like to know whether regions/ counties spent resources in an effective manner. For this reason, Finance and Planning has asked to do a cross-region/ country comparison to study the effectiveness of sales units on the
“Extrinsic Reward System” and the reason why there might be differences across regions and countries. Finance and Planning would like to have one single indicator to measure the effectiveness of sales units on the “Extrinsic Reward System” in one sight to get a direct, easy and fast insight, thus without having various measures which point out to opposite directions.
To explain the importance of attaining large amounts of signings, revenue and gross profit, Pre Tax Income (PTI) is taken into account (figure 2.1.1.). PTI is revenue minus costs minus expenses. PTI is one of Company X ‘s most relevant measures as it is supposed to meet the expectation of the stockholders with regard to dividends.
Figure 2.1.1. Pre Tax Income:
Revenue
Costs of sales and delivery _
Gross Profit
Brand and controllable expenses _
Profit (PTI)
Income tax _
Net Profit
Therefore, Finance and Planning is continuously budgeting, forecasting, controlling and managing the factors (revenue, costs and expenses) that influence the PTI. Low revenue should be compensated by low costs to make the PTI expected by the stakeholders. However, reducing costs is difficult because most costs within Services are
caused by total headcount and attrition within the European Labor Law confirms is complicated. If a high amount of sales (in terms of signings, revenue or gross profit) is attained, costs don’t have to be reduced to attain the PTI. For this reason, it is preferred to attain large amounts of signings, revenue and gross profit.
To lift the amount of signings, revenues and gross profit, Services designed sales plans (i.e. the “Extrinsic Reward System”) to motivate sales reps. In addition, it is important to know whether the “Extrinsic Reward System” works optimal in the five regions and countries. For example, when costs spent on the “Extrinsic Reward System” are higher than the increase in revenue generated from the “Extrinsic Reward System”, PTI will not improve. Therefore, it is very relevant for Finance and Planning to know how sales performance (in sense of signings, revenue and gross profit) is driven and which factors influence sales performance of sales units on the “Extrinsic Reward System”; moreover, does the “Extrinsic Reward System” impact sales performance? By finding an explanation why one region/ country performs better than another, this can be taken into account by evaluating, and perhaps even improving, sales performance in other countries.
Questions regarding initial assignment
In sum, Finance and Planning has asked to do a cross-region/ country comparison to study the effectiveness of sales units on the “Extrinsic Reward System” and the reason why there might be differences across countries and regions. Furthermore, they would like to have one single financial indicator to measure the effectiveness of sales units on the “Extrinsic Reward System” in one sight. Three major questions have to be answered regarding this initial assignment.
1. First of all, how should effectiveness be measured? On first sight, it is only possible to measure effectiveness if there is a comparison group available; that is a sales unit that is not rewarded based on the
“Extrinsic Reward System” or any other plan (this can also be historically). However, as such a group was not available within Company X it appeared that it was not possible to measure effectiveness and thus the impact of the “Extrinsic Reward System” on sales performance. For that reason, the focus is moved to
‘sales performance’ of sales units on the “Extrinsic Reward System” instead of the effectiveness of the
“Extrinsic Reward System”. Additionally, it is studied how sales performance is driven.
2. Secondly, is it possible to summarize ‘sales performance’ based on a single financial indicator? Taking only financial aspects in account seems very limited as more aspects are important determiners of sales performance; i.e. non-financial aspects. By neglecting these aspects it is not possible to get a complete and valid picture of sales performance. In addition, multiple performance indicators instead of one single indicator are supposed to be used to get a complete picture of sales performance. Financial ratios individually tell only little about the whole and therefore can be misleading. For this reason, other performance indicators will accompany the financial indicator. Additional performance indicators are added
financial indicator. However, the additional performance indicators are also financially focused because there has been asked for just financial measurements. Considering just the financial component of sales performance is a large limitation of this thesis.
3. Thirdly, is it achievable to do a cross-region/ country study at all? Doing a cross- region/ country study is very difficult to complete properly. Regions consist of countries, which vary largely from each other, e.g.
Region III includes the Country I as well as Country H. On country level, this comparison is also very complex because there are large differences regarding the circumstances and way of working within countries. For example countries operate under different law systems, which in turn e.g. affect the way financial ratios are calculated, i.e. revenue and gross profit. Furthermore, tax systems, labor unions, working conditions, salary differences etceteras differ largely. In general, accomplishing an accurate and truthful comparison seems very complex. In particular, concerning the explanation of sales performance, it seems not possible to explain sales performance on region level as no general indicators are available due to the huge variety of countries. Regarding explanations on country level, one should realize the complexity of such a study in advance.
2.1.2. Research objective
The goal of this study is twofold; first off all, the purpose is to generate insight in the sales performance of sales units on the “Extrinsic Reward System” in Europe; on region- and country level. Additionally, a cross- region/
country comparison is done to shed light on which regions/ regions perform better or poorer compared to the other regions/ countries within Europe. The second purpose of this study is to provide an explanation of the variations in sales performance across countries (as no general indicators are available on region level).
Research objective:
‘’ Increasing insight in the sales performance of sales units on the “Extrinsic Reward System”
in the different regions and countries in Europe and explaining variations in sales performance across countries”.
2.1.3. Central research question
In accordance with the research objective the Central research question is defined. To accomplish the first part of the research goal, a method should be derived to measure sales performance. More specific a financial indicator is developed which provides insight in sales performance of sales units on the “Extrinsic Reward System” in one sight. Additional performance indicators will be defined as well. Hence, sales performance is calculated according to this method. The second part of the research goal is accomplished by asking how sales performance can be explained; which factors influence sales performance and on what manner are they related to sales performance?
Central research question:
“How does the sales performance of sales units on the “Extrinsic Reward System” vary within the different regions and countries in Europe and how can sales performance across countries be explained?”
2.1.4. Conceptual model
The conceptual model (model 2.1.2.) distinguishes also between the two main concepts; measuring- and explaining sales performance. The red dotted box indicates what is researched; boxes outside the red dotted box are not researched.
Model 2.1.2. Conceptual model
To start with measuring sales performance; to derive a complete representation of sales performance of sales units on the “Extrinsic Reward System” (blue box model 2.1.2.) a main distinction is made between specified performance (yellow box model 2.1.2.) and non-specified performance (orange box, model 2.1.2.). Specified performance means that only factors on which sales reps are rewarded are considered; signings, revenue and gross profit. However, non-specified performance regards also important aspects of sales performance; customer satisfaction, product innovation, services etceteras. Because of the strong focus on signings- revenue- and gross
Sales performance of sales units on the Extrinsic Reward System
Macro factors
• Economy
• ICT conditions
• Culture
Sales performance specified in:
• Signings
• Revenue
• Gross profit
Non-specified sales performance
• Customer satisfaction
• Product innovation
• Quality
• Services Micro factors
• Competencies
• Capabilities
• Resources
Meso factors - Suppliers
- Competition
- Substitutes
Financial indicator
Additional performance indicators
Validity financial indicator
2.1.2.) and additional performance indicators (green box model 2.1.2.) are developed based on specified performance (yellow box model 2.1.2.). The validity of the financial indicator is measured according to the gray box (model 2.1.2.). Hence, non-specified performance is not taken into account.
To continue with explaining sales performance; factors on micro- meso- and macro level affect sales performance.
This includes internal factors and external factors; internal factors are factors from inside the firm (micro-level); and external factors are factors from outside the firm; either meso- (industry) or macro level (country). Micro factors, which affect sales performance, are e.g. core competences and resources (turquoise box; model 2.1.2.). Meso factors are e.g. competition and substitutes (pink box in model 2.1.2.). Macro factors are e.g. economy, ICT conditions and culture (purple box model 2.1.2.). However, only macro factors are researched in relationship with sales performance, as these factors seem most important; does sales performance depends on the country it is located in? Micro- and meso factors are not taken into account.
2.1.5. Research questions
To answer the central question, five research questions are generated based on two main questions derived from the research goal. Per research question an explanation will be given ‘why’ a research question is formulated and
‘how’ the question will be researched.
• How to measure sales performance of sales units on the “Extrinsic Reward System” across regions/ countries?
1. What is sales performance (of sales units on the “Extrinsic Reward System”)?
2. How is specified- and non-specified performance related to sales performance?
3. What would be a valid financial indicator based on specified performance?
4. What would be suitable additional performance indicators based on specified performance?
5. How does sales performance of sales units on the “Extrinsic Reward System” actually vary across regions/
countries in Europe?
6. Is the financial indicator applicable?
• How to explain sales performance of sales units on the “Extrinsic Reward System” across countries in Europe?
7. How do micro-, meso- and macro factors influence sales performance?
8. Does sales performance depends on the country it is located in?
1) “What is sales performance (of sales units on the “Extrinsic Reward System”)?”
Why: To (derive a method to) measure sales performance, first it must be defined what sales performance is.
Without a proper definition, the item of what should be measured and the actual measurement might differ.
How: Several definitions from the literature are combined with the objectives of this study and the interests of Company X.
2) “How is specified- and non-specified performance related to sales performance?”
Why: A distinction is made between specified- and non-specified performance because the financial indicator developed in this thesis is founded on specified performance. For that reason, the importance of both, specified- and non-specified performance, on sales performance is taken into account.
How: Several approaches from the literature are regarded; so the answer is based purely on literature findings.
3) “What would be a valid financial indicator based on specified performance”?
Why: It has been asked to develop a measure which summarizes sales performance of a sales unit in one figure;
therefore a single financial indicator is developed which is founded on specified performance.
How: Several approaches and studies are regarded to get insight about how sales performance is measured in general. Furthermore a set of criteria, to consider in measuring sales performance, is identified.
4) “What would be suitable additional performance indicators based on specified performance?”
Why: A more complete picture of sales performance would be derived if additional performance indicators were used as well. Furthermore, the additional performance indicators can be used to explain sales performance and test the financial indicator.
How: Additional performance indicators are selected based on several approaches found in the literature to measure sales performance.
5) “How does sales performance of sales units on the “Extrinsic Reward System” actually vary across regions/
countries in Europe?”
Why: Insight is gathered in the sales performance of sales units on the “Extrinsic Reward System”. Regions and countries, which perform better/ poorer, compared to the other regions and countries are identified.
How: Per region and per country the financial indicator and additional performance measures of the sales units on the “Extrinsic Reward System” are calculated. Automatically variations are identified.
6) “Is the financial indicator applicable?”
Why: The financial indicator should be evaluated to determine whether it is a valid measure to use besides the additional performance indicators. Without doing this, wrong conclusion might be derived from the calculations.
How: Correlations of the financial indicators with the additional performance indicators are identified and the correlations among the performance indicators.
7) “How do micro-, meso- and macro factors suppose to influence sales performance?”
Why: Factors from all kind of levels influence sales performance. Additionally by indicating factors, on all different levels, possible limitation of only reviewing macro factors might be identified.
How: Based on the literature, factors on all levels are considered as extensive as relevant.
8) “Does sales performance depend on the country it is located in?”
Why: To explain sales performance, it is chosen to study how macro factors relate to sales performance. Therefore it is researched whether sales performance depends on the country it is located in.
How: Several methods are used to test this relationship; cross-country calculations, correlation matrices and even plots are used to test how macro factors relate with sales performance.
2.1.6. Theoretical rationalization
Two lines of thinking are explored in this sub section. The first line regards the method to measure sales performance and the second line of thinking is founded on the relationships between sales performance and the context.
Measuring sales performance
Company X adopts a differentiation strategy (Porter, 1985); “Services” offers customer made services. Sales units are responsible for contact with customers and evidently sales realization within a sales unit. Sales units can be seen as a responsibility center. A responsibility center uses inputs, and produces outputs (Anthony et al. 2001, Kaplan &
Atkinson 1982). It can be held that sales units are in fact profit centers. A profit center is a unit in which the managers have almost complete operational decision-making responsibility on sources of supply and markets and are evaluated by a profit measure (Kaplan & Atkinson, 1982). In a profit center, a distinction is made between ‘management performance’ and ‘economic performance’. Management performance focus on how well the manager is doing and is measured on financial and non-financial performance measures. Economic performance focus on how well the profit center is doing as an economic entity, where performance is also affected by market conditions. Economic performance is measured on purely financial figures (Anthony et al. 2001, Kaplan & Atkinson 1982).
Sales reps are individually evaluated on signings, revenue and gross profit attainment; this is specified (financial) performance (Van Dyne et al., 1995). Non-specified performance is not taken into account in evaluations of sales reps;
consequently, neither in measuring sales performance of sales units on the “Extrinsic Reward System”. Though, financial measures are historical in nature and report on outcomes and the consequences of past actions (Bourne et al 2000). Qualitative measures should be considered as well; measuring sales performance should incorporate financial- and non financial-, internal- and external- and long-term- and short-term factors (Kaplan & Norton, 1992). In fact, performance indicators should be derived from the strategy.
Explain sales performance
A large range of factors influence sales performance and might be therefore important determinants of sales performance. Macro factors impact all firms within a country. The macro environment within a country is explored by examining a demographical segment, economical segment, political/ legal segment, socio-cultural segment, technological segment and global segment (Hitt e.a. 1999). Meso factors impact firms in a particular industry. The industry and strength of competitors is often analyzed with the help of the five forces of competition (Porter, 1985).
The five forces are suppliers, substitutes, buyers, rival firms and new entrants. Micro factors impact sales performance on firm level. The micro environment regards the core competencies, capabilities and resources of an organization. This can be identified and evaluated with the help of a value chain (Porter, 1985).
Macro factors that are explored more in depth are economy, ICT conditions and culture. The economy influences the investment climate and the level of demand and supply in general (Heyne, 2000). ICT conditions within a country determine the level of using high tech solutions to improve results. National culture influences the impact of a reward system on employees (Hofstede, 1980) and in turn sales performance.
2.1.7. Conditions and scope
This study is an assignment from Company X, Finance and planning. The geographic boundary is Europe and the regions and countries, which Company X counts as Europe. The study focuses only on Services, the divisions Hardware and Software are not taken into account. This thesis is strictly confidential. According to the American Law it is forbidden for American stock noted companies to publish information about essential topics, which could influence stock value or other factors. Nothing can be copied from this original research. It is forbidden to publish it.
Five original copies will be printed, one for Company X, one for Mrs. Horgan (my supervisor) one for Mr. Bergervoet (my second supervisor), one for the Board of examiners of the Faculty Management and Organization of the University in Groningen and one for myself. Another research exemplar is made for the University of Groningen to publish. This exemplar will include different numbers with regard to confidential figures like revenue and PTI. The timeframe of the research is six months.
2.2. Methodological rationalization
In the methodological justification the methods of executing this research are described in more detail. To do so, first the type of research is identified. Subsequently, documentation used, research methods and analyze methods are considered.
2.2.1. Research type
This thesis is a practical research because it will generate data (from regions and countries within Europe) and new insights, which are useful for Company X. Insight is generated in sales performance of sales units on the “Extrinsic Reward System” and how differences in sales performance can be explained. Moreover, this practical study is called a comparison study because a comparison is made of the sales units on the “Extrinsic Reward System” in different regions and countries across Europe.
2.2.2. Documentation
In this paragraph the source of information to collect data are identified. De Leeuw (1996) identifies six main sources to collect data. These are:
1. Documents (library, archives, and secondary sources).
2. Media (papers, magazines, radio, television).
3. Databases.
4. Reality (the field).
5. Boosted reality.
6. Experiences of researchers.
In general three main sources of information are used in this thesis, documents, databases and media.
• Documents refer to useful theoretical articles, books and reports. Regarding documents, only secondary sources of information have been used, sources that already have been analyzed and documented:
1. Internal reports of Company X about the “Extrinsic Reward System” and about Company X; collected from the management of Company X and the management who are involved in the incentive plans.
2. Theoretical articles and literature, which provide relevant theories and concepts; this is gathered from the Rijksbibliotheek Groningen.
• The electronic databases of Company X are used to learn more about the organization of Company X, the
“Extrinsic Reward System”, the regions, the countries and the job roles. Financial numbers, actuals, quotas, PTI’s revenue etcetera in a given period are stored in different databases of Company X. Electronic databases, are used in this thesis. In case of no access into a database, the management of Company X helped as good as possible.
• Media is another main source of information, more specific the Internet. With the help of the World Wide Web definitions, theories and background information was found. Furthermore the intranet of Company X is used as well.
2.2.3. Research methods
The measure methods are outlined to get more insight in the process of doing research. The research is a desk research, as all data collection and -structuring and measurements are done behind a desk. First data is collected, secondly data is structured and finally data is measured. Per main question (measuring- or explaining sales performance) the process of doing research is described (figure 2.2.1.).
Data collection
• Determining which data is needed and where one can get it. Asking region managers who are responsible for the sales units on the “Extrinsic Reward System” to help generating this data. Therefore, specific tables are made to send to the region managers, which assure clarity about the data needed.
• Data of the macro factors that influence sales performance is collected.
Data structuring
• The specific tables send out provided a structured data storing. Per region and/or country single documents were prepared with all the information in it for one region (thus, in total five documents).
• Data is structured per factor in a SPSS database; per country the scores are written down per specific factor.
Measurements
• For Europe and all countries, calculations are done to measure sales performance according to the formula of the financial indicator and the additional performance indicators to derive, which regions/ countries perform better and which perform poorer. The validity of the financial indicator is tested based on SPSS correlation matrices.
• SPSS correlation matrices and SPSS plots should give an indication about the relationship between the macro factors and sales performance.
Table 2.2.1. Summary of research process
Measure object Type of study Type of data Source of information Data via who Data structuring Measurement Sales
performance
Desk research Quantitative data
Regional- and/ or IPT databases
Company X (region) management
Regional files Calculations in regional files and SPSS Correlation matrices
Factors affecting sales
performance
Desk research Quantitative data
Rijksbibliotheek Groningen
Internet and Intranet
Company X management
SPSS database SPSS correlation matrices and SPSS Plots
