Vertical Solutions Marketing is an appealing option for growth, especially in an era in which organization have already been pared to the bone. But managing the evolving tension between the company’s old and new business structures and sharing and transferring resources among the solutions units must be done carefully if the move to VSR is to succeed. These authors suggest 11 best practices.
During the early 1990s, corporate managers focused on improved profitability through operational optimization. They re-engineered and focused on capabilities that would improve speed, quality, and efficiency, and pruned business activities that no longer fit the corporate strategy. More recently, with few activities or personnel left to prune, many managers have turned to revenue growth as the other major alternative for improved profits. One revenue-growth model that is receiving considerable attention is “vertical solutions marketing” (VSM). While the potential rewards look exciting, such an approach will require a significant and wrenching change in the traditional marketing structures and processes, and achieving success will not be without some pain. The purpose of this article is to summarize what we’ve so far discovered about designing and completing a successful transition from traditional structures to VSM in a large corporate environment.
What is Vertical Solutions Marketing?
Vertical Solutions Marketing is a marriage of two distinct concepts, vertical marketing systems and solutions selling.
A Vertical Marketing System is a distribution channel structure in which producers, intermediaries and retailers agree to act as one to serve their agreed-upon target segment(s). There are two varieties of Vertical Marketing Systems: the corporate VMS, which organizes all the businesses or divisions of a multi-business company under a unified system, and the contractual VMS, which reaches beyond the scope of the company to include other non-owned entities.
Solutions Selling is about moving from the engagement level between seller and buyer to a marriage commitment level, i.e., the seller develops such a deep understanding of the customer that the customer sees the seller’s solution as the only viable option for their needs, and is willing to pay a premium. The overall benefit delivered by the seller’s solution is positioned at a business and strategy level, so solutions selling rarely focuses on a single product feature or advantage over a competitor.
Thus, Vertical Solutions Marketing (VSM) is the process of selecting target customer segments, intimately understanding the target segments’ needs, and delivering a total solution to each target segment through a vertical marketing system. In a more traditional approach, products and services may be mixed and matched to serve a wide array of customer segments, without any of the offerings being a total solution for the customer. With a VSM approach, however, the products and services are combined to create total solutions for a subset of the original array of customer segments.
Why Vertical Solutions Marketing?
There are substantial incentives for both the customer and the seller to implement VSM.
From the customer’s perspective, especially in the telecom networks environment, there is clear value in having a single source of expertise that can provide an end-to-end, fully reliable, fully integrated solution, that is also forward, backward and horizontally compatible with its current and emerging technology standards. Indeed, the customer is willing to pay a premium instead of trying to integrate all the parts itself. (It is a great risk, of course, on the part of the customer to make such a commitment to a single source supplier, so the selection of the solutions provider will be done with extreme care.)
From the seller’s perspective, as target customers are better satisfied and are willing to pay a premium, a VSM approach has the potential to increase market share within the target segments, and total revenues, profit margins and customer loyalty, compared to the more traditional approach. Furthermore, the seller’s solution might become a de facto industry standard because of its more universal acceptance. Recognizing the potential upside inherent in a VSM approach, in the last few years several major organizations have experimented with VSM, and achieved remarkable results. Companies such as GE, HP, Wausau, ABB, SV Chemical and EDS/Kearney all qualify as VSM leaders.
A spectrum of VSM end states
The transition to an ideal vertical solutions marketing organization cannot be accomplished in one step. For example, some companies may choose to transform themselves into vertical or solutions companies first, as a progressive end state on a transformational journey. There are in fact several possible end states, all of which represent valid ways of doing business. This array is illustrated in Figure 1 as a “stair-step” model; each end state, or step, is briefly described below. Note that as an organization climbs the steps towards a full VSM model, there are significantly larger implications for organizational change and investment.
1 The selling alliance or channel model: The strategic use of selling alliances can be effective in expanding the number and quality of potential business opportunities. Selling alliances are formed to develop and maintain customer relationships and can be used to create competitive advantage (Smith, B. and Barclay, D. 1997, “The Effects of Organizational Differences and Trust on the Effectiveness of Selling Partner Relationships, Journal of Marketing, January, 1997, 3-21). To be successful, these alliances require sales representatives from allied organizations or divisions to work effectively as selling partners. A strong, trust-based relationship is required for this type of channel relationship to work. Each party in the alliance must have demonstrated a measure of success and recognition in the selected industry vertical, and must benefit the other alliance party, typically in the form of access to new customers.
2 The packaging or bundling model: The strategic use of bundles or packages is another example (Eppen, G. and Hanson, W. and Martin, K, “Bundling – New Product, New Markets, Low Risk”, MITSloan Management Review, Summer, 1991, 32-4, 7-13). Some bundles include some items that might not be available separately while other bundles are offered at a price less than the sum of the individual items. Still other bundles endow the buyer with entitlements. The difficulty is in devising bundles that appeal to the buyer and give the seller cost advantages or demand advantages.
3 The services-products integration model: The integration of product and service strategies is an important concept for vertical and solutions companies driven by profit growth. In many situations, product differentiation and competition on products is giving way to service differentiation and the integration of product-service packages (More, R., “Creating Profit from Product/Service Integrated Strategies”, Ivey Business Journal, January, 1991, 1-34). Ideally, the product and service work together in such a way to produce higher net cash flow than either could produce separately or if both were managed separately. Thus, synergies must be clearly identifiable and improve net cash flow for the firms.
4 The solutions delivery model: In many situations there is a need to continuously demonstrate greater industry expertise, deep business knowledge, and in-depth thought leadership to guide clients into the future. Here, a combination of capabilities from across a firm will bring a range of skills and leading edge solutions to clients. For clients that require management advice such as re-engineering and transformations, process and functional issues could be addressed concurrently with the enabling technology and implementations. To achieve this, many firms choose acquisitions or external partnerships.
5 The solutions outsourcing model: The solutions concept is extended to the proactive total solution to become a one-stop-shopping source for industrial clients. This typically implies a high degree of customization and proactive sensing of client specifications. The customer relies on the provider in this extreme case to unburden it of all problems, risks, processes, capital investment, and management attention. This level of solutions provision should clearly command a premium and generate superior value for its owners.
The choice of the desired five models or end states will depend on a wide variety of factors including: 1) how well the seller understands the target customer segment; 2) to what extent the target customer segment is looking for, and can pay for, a total solution; 3) how well the seller can meet the total needs of the target customer segment; 4) the extent of the seller’s relative advantage; 5) the extent of the competitive opening in that segment; and 6) how lucrative a much greater share of that target customer segment would be versus other opportunities. As stated earlier, all end states are valid business models, though in some circumstances, the full VSM model will be the most lucrative.
Eleven best practices for managing the transition to VSM
Regardless of the chosen end state, any transformation faces serious barriers and resistance to change. Some of the more significant barriers arise from: 1) managers and employees who generally prefer the status quo, or who tend to be skeptical about the real value of what seems to the latest business fad; 2) managers who want to protect proprietary information and resources to maintain their power base; and 3) sales reps, who might be asked to relinquish prime responsibility for certain customers, or to stop servicing them altogether.
Thus, the two key challenges associated with implementing vertical solutions marketing are: 1) managing the evolving tension between the company’s old business structures and the new business structures; and 2) managing the sharing and transferring of resources among the solutions units (Burgelman, R. and. Doz, Y., “The Power of Strategic Integration”, MITSloan Management Review, Spring 2001, 42-3, 28-38). Achieving such strategic re-alignment will require a comprehensive review of the organizational structures, processes, managerial control systems and management incentives. The following quotation captures the harmony that must be achieved within a multi-business firm that chooses the transition to vertical solutions marketing:
“An orchestra demands at least three things to render a fine performance: a comprehensive complement of talented musicians, an ability to play as a perfectly aligned unit, and an emphasis on the right musicians for the right compositions. In the corporate context, strategic integration – and the outstanding performance that accompanies it – demands all of these same qualities of comprehensiveness, alignment, and thematic emphasis.” [Fuchs, P. And Mifflin, K. and Miller, D. And Whitney, J., “Strategic Integration: Competing in the Age of Capabilities”, California Management Review, Spring 2000, 118-147].
But such an alignment is not easy to achieve. Many companies that we have researched have excelled in one or more aspects of VSM, while failing to recognize the importance of many other key success factors. They may have had successful starts, but the complete transition to VSM comes through a series of well thought-out steps and careful implementation. Here, then, gathered from our literature review and research of various companies that have implemented VSM, is a brief synthesis of best practices:
1. Establish and communicate a meaningful strategic principle aligned with a VSM philosophy.
The importance of a strategic principle cannot be underestimated, in particular when the vertical solutions division is experiencing rapid growth. Management cannot be involved in every decision, so employees of the firm must be empowered to make choices and decisions based on a strategic principle known by all. The strategic principle most relevant to our topic of vertical solutions marketing, modeled after GE’s, could be “Know the target customer, learn the total solution, and be number 1 or number 2 or get out.”
2. Establish strategic, structural, and systems mechanisms for customer orientation.
Organizations that wish to improve their customer orientation, essential to VSM, may need to implement strategic, structural, or systems changes. In particular, creating a separate, stand-alone organization may prove helpful to facilitate improvements in each of these three areas. The mandate and key functions of such an organization would be focused on the selected vertical market, and on systems that support the vertical market. The key challenge for the firm is that the centralization and formalization of the old structure must not get recreated in a new form, and the ownership of the target VSM customers must be clearly transferred.
3. Match managers to the mission.
Strategic missions provide a specific template for measuring the manager against the job. Certain people tend to be superior managers in rapidly growing and dynamic businesses, but they would be lost in mature or declining businesses. You always have to match the players to the game if you want to get the job done.
4. Top managers should become more involved in business strategy and marketing decisions.
Research has shown that the more diversified the firm, the more time top managers spend on corporate level planning rather than business level planning. After adopting VSM, a firm’s portfolio will probably hold fewer businesses; thus, the demands placed on top management time for portfolio planning is lessened, and more time is available for hands-on involvement in the business. For example, Tyco has $12B in annual revenues across 6 divisions with only 50 people at corporate office; conversely, Sharp has $14B in annual revenues across 5 divisions with a corporate staff of 1500 people. Tyco’s managers’ time is much more focused within each business unit, rather than on the superstructure.
5. Provide compensation systems and evaluation systems that support the transition.
The compensation system must reward the transformation process at the most senior levels, rewarding revenue contribution and profitability from the strategic vertical market. This begins to shape the market orientation and performance of the entire organization and within each existing business unit. Managerial control systems are another mechanism to facilitate integration. The best practice model would recognize the need to report on vertical market performance and contribution within each of the existing businesses and in aggregate across the entire firm.
6. Develop an integrated product/service solution scenario based on your understanding of the target vertical market.
General Electric Medical Systems division initially sold only GE products, but then it began offer GE services, and finally, integrated packages that might even include the competitors’ products. However, understanding the profit dynamics has been a major challenge for GE.
7. Develop the strategic paths for your company’s technology or capabilities, products and services, and market segments or chains.
SV Chemicals, a U.S.-based thermoplastics resin company, took advantage of its position in the complex market chains of the automobile manufacturing industry, and demonstrated the benefits of converting to its technology for each participant in the value chain.
8. Encourage the building of trusting relationships across the key businesses.
There have been several studies cited on the effect of trust and trustworthiness on vertical solutions marketing systems. The authors conclude that trust is based on the overall relationship rather than individual episodes of behavior. Best relationships emerge based on satisfactory performance over time.
9. Build a strong team-selling model.
Team selling is required, given the complexity of industrial services. This necessitates the participation of commercial, quality specialists, and the integration of diverse types of expertise. Customers therefore want a flexible supplier of services with a complete and transparent organization. The best practice is illustrated in the EDS/Kearney marriage where clients could take advantage of a broader range of services from a supplier that became a “One-Stop-Shop”, ultimately leading to the Co-Sourcing model for entirely new products/services.
10. Management style should allow flexibility and encourage dynamic thinking.
Wausau combined its ability to find product areas and applications that were highly profitable and underserved by large competitors, with its unrivaled flexibility of operations and speed in tooling up for new products and markets. It helped that Wausau had excellent relations with suppliers, subcontractors and distributors, who were all critical players in this flexible vertical market system that Wausau defined.
11. Successful parent companies can assist in the transformation.
Parent companies can assist if: 1) the subsidiary firms in a multi-business corporation have some opportunity to improve performance; 2) the parent possesses some special capabilities or resources that will enable it to improve the subsidiary’s performance or exploit a parenting opportunity (growth through vertical solutions marketing); and 3) the parent has sufficient understanding of the critical success factors in that business (vertical industry) to make sure that it does not influence the business in inappropriate ways. Successful parent companies such as ABB, Canon and Emerson illustrate these best practices and possess value creation insights (Campbell, A. and Goold, M. And Alexander, M., “The Value of the Parent Company”, California Management Review, Fall 1995, 79-97).
Vertical Solutions Marketing can yield substantial financial rewards for the selling firm, if and only if the VSM initiative is properly designed and implemented. The following is a prescription for organizations considering moving toward full implementation.
- Undertake a segmentation analysis to determine which vertical markets might benefit from a total solution;
- Establish a set of selection criteria, and narrow down a short list of high potential industry verticals;
- Determine if the core competencies of the firm can be organized or augmented to create the solutions offerings for the short list of vertical markets;
- For each potential vertical, identifyknown customers that would potentially serve as a lead customer, and validate the solution design and the benefit; and
- For the verticals where a VSM approach is warranted, use the preceding best practices as a guideline for implementation.
Following these steps and the best practices outlined above will ensure that the transition to Vertical Solutions Marketing will be a successful one.