Medical Device Link.

Originally Published MX March/April 2002

ADVERTISING, DISTRIBUTION, & SALES

Structuring the Sales Force to Sell New Products

Medtech companies with expanding product portfolios can benefit from restructuring their sales forces.

Peter Masloski

Illustration by EYEWIRE

In an attempt to gain greater leverage with group purchasing organizations and integrated delivery networks as well as to sustain revenue growth, many medical technology companies have been expanding their product portfolios through licensing, acquisitions, and increased R&D efforts. However, the sales of a company's new medical products are rarely large enough to support a dedicated sales force on their own; after all, blockbuster devices such as stents simply do not appear on the market that frequently. Consequently, the product portfolios of medtech companies have evolved over time to include a large number of products with relatively modest sales potential.

For medtech company senior managers, such product-line proliferation has created an organizational design dilemma: should they continue to increase the number of products their current representatives sell, or should they create separate sales teams responsible for different products? Medtech companies that want to leverage current relationships and keep costs low typically assign new products to an existing sales team. Such companies may struggle to achieve sufficient focus on both new and existing products because their sales reps have competing priorities and may be spread too thin across the products they cover (see sidebar). Conversely, medtech companies that create a separate sales team for each new product may achieve high product focus, but they have higher sales-force costs and a greater potential for customer confusion when multiple reps visit them. There are, in fact, several alternatives to these two approaches.

The wrong sales-force structure can result in a much less effective selling organization and can ultimately lead to significant underperformance for medtech companies. These problems can be ameliorated when medtech companies follow a straightforward four-step process for determining the best sales-force structure:

1. Research the sales process.
2. Create a limited number of viable sales-structure alternatives.
3. Rigorously evaluate the structure alternatives.
4. Select and implement the best structure.

Step 1: Research the Sales Process

For medtech companies, the first step in determining the best sales-force structure is to research the sales process for every product in the company's portfolio. This involves understanding the fundamental units of the sales process—the specific activities required to complete the sale—for all products and customer segments. It is important for medtech companies to understand not only what these components are, but also the workload associated with each of them, in order to compute the number of reps required. The best way for medtech companies to collect such information is to conduct a brief time-allocation survey of the sales force, or to have management spend time in the field with sales reps to understand how they are allocating their time. It is also important for medtech companies to know how their customers would perceive or react to different sales-force structures. This can be accomplished by conducting a customer survey.

Step 2: Create Viable Sales-Structure Alternatives

Once a detailed understanding of the sales process is developed, medtech companies can begin creating reasonable sales-force structures for consideration. There are as many structure alternatives as there are ways to combine a company's products, activities, and customer segments. The four fundamental types of sales-force structures are product-based, customer-based, activity-based, and mixed. To promote comparative analysis, the best approach for medtech companies is to start with a generalized structure and create separate positions where specialization—whether product, activity, or customer—brings the most value.

Step 3: Evaluate Structural Alternatives

When deciding among sales-force structure alternatives, medtech companies should evaluate how each structure performs on four dimensions: efficiency, effectiveness, manageability, and implementation considerations.

Efficiency. Efficiency is defined as the total sales-force cost per unit of selling time, whereas effectiveness is the expected revenue per unit of selling time. Typically, a trade-off exists between the efficiency of generalist reps and the effectiveness of specialized reps.

Geographic structures, which consist of a generalist rep selling all products to all customers in a specified region, have smaller territories, resulting in lower travel costs and more face time with customers. Consequently, these structures can be as much as 10–15% less costly than specialized structures.

Costs increase as specialization is introduced into the sales force. Sources of higher costs include travel, systems and administration, and duplication of sales efforts caused when multiple reps call on the same customer. Training costs can actually be higher in generalized structures, however, because reps will need to maintain a baseline level of product knowledge across more products. Salary and incentive costs can also vary across different sales structures. Medtech companies can reduce sales-force costs by creating a separate, lower-paying position to handle routine inventory management and having their more highly paid sales reps focus on selling.

Effectiveness. Medtech companies that introduce specialization into their sales forces do so for one reason: to increase sales effectiveness. In general, focusing on fewer products, activities, or customer segments allows reps to become more effective. However, estimating the incremental effect of specialization on sales revenues can be very difficult for medtech companies. A critical dimension of sales effectiveness is how well the sales-force structure supports a company's strategy. Structures that are aligned with company strategy will be better at implementing that strategy, and therefore more effective.

Manageability. The manageability of a medtech company's sales-force structure depends on four elements—permanence, coordination, effort control, and human resource issues.

Permanence. Permanence is the ability of a sales-force structure to perform well over time. Two factors that define permanence are adaptability and flexibility. An adaptable sales force is designed around the most rapidly evolving market dimension, and will continue to perform well in a changing environment. A customer-aligned sales-force structure, for example, is more adaptable to changes in customer buying behavior than a product-focused structure, but less adaptable to changes in product technology or new product launches.

Flexibility is the ability of the structure to remain viable in the face of an uncertain future. For example, a medtech company may choose to create a new sales team specifically for a new product launch. If the product fails, the new team is no longer needed and it may be very difficult to integrate the reps back into the remaining organization. However, this structure may provide the new product with its best chance for market success, because it ties the viability of the sales team to it.

Coordination. Complex sales-force structures require more coordination across positions. Such structures can be slower to react to market changes, have greater opportunities for miscommunication, and can be more difficult to manage. It is best for medtech companies to avoid structures where routine sales activities require coordination across multiple sales reps.

Effort Control. Sales-effort control is the ability to direct sales effort to specific products, customers, or activities. The more specialized the sales force, the greater the amount of effort control possible. But there is a trade-off between control and flexibility. Medtech companies with generalist structures, for example, have more flexibility in shifting focus from product to product but less control because it is the rep who ultimately decides how much time to spend on specific products.

Human Resource Issues. When evaluating a sales-force structure, it is also important for medtech companies to consider how the structure will affect the individual sales rep. Key questions to consider include the following.

• Are the sales positions that have been created attractive and rewarding?
• Will there be difficulty hiring for the new position?
• Do any of the jobs require excessive travel?
• What career-advancement opportunities are there in the new structure?
• How will reps react to the newly defined roles?

Implementation Considerations. Almost all sales-force structure changes require territory realignment, new compensation plans, new job-description documentation, and training and internal systems changes—each with associated costs and planning. Changes to the sales-force structure are usually also significantly disruptive events, and it is important for medtech companies to evaluate their effect on company resources, revenues, and costs. While it is possible that short-term disruption can outweigh short-term benefits, in the long term, the fundamental strength of the sales-force structure—not the temporary hurdles—should drive a company's decision.

In well-functioning sales forces, the structure, support processes, culture, systems, and strategy are all aligned. Changing the sales-force structure will upset the alignment among these factors and require some reworking in other areas. Medtech companies should therefore consider the following questions when seeking to implement a new sales-force structure.

• What changes in processes, systems, and culture will be required if the structure is changed?
• What efforts are needed to align the rest of the company?
• What additional costs must be incurred to implement the new structure?
• What will the effect of disruption be on customer relationships, management-reporting relationships, and in changing roles and responsibilities for reps?

Step 4: Select and Implement the Best Alternative

The management team may propose structural options for consideration that represent interests from various camps within the company and serve somewhat conflicting priorities. When choosing among options, it is best for medtech companies to rank each on how it supports the company's top strategic objectives to make sure that the selection is focused on what is best for the entire organization. Ultimately, the best sales-force structure maximizes efficiency and effectiveness while minimizing implementation and market risks. But a great structure can easily fail in implementation. Table I lists the key steps and approximate timing required for planning and implementing a change in sales-force structure.

Structural Options for Adding New Products

Figure 1. Options for incorporating a new product line into an existing product-based sales force. Source: ZS Associates.

The preceding evaluation process can provide medtech companies with a framework for decision making when it comes to determining the best sales-force structure, which makes it more likely to result in a successful outcome. When medtech companies are preparing to sell a new product, however, there are four structural approaches for integration that they should also take into account (see Figure 1).

A Separate Sales Force. This option realizes the fewest synergies with a medtech company's existing sales force, but results in the greatest degree of focus on the new product line. While this option is typically more expensive to manage in the long term, it may provide the new product with its best opportunity for market success. When one or more of the following scenarios apply, this option becomes the choice best suited for medtech companies.

• Planned expansion of the new product line will eventually require a new sales force.
• Disrupting the current sales force is not an option.
• The sales potential of the new product requires a high degree of focused sales effort for success, is a new technology or application, or requires the customer to change his or her behavior.
• The new product is large enough to achieve sales-force economies of scale (i.e., desired reach or full national coverage is affordable) on its own.
• Few sales synergies exist between the new product and the current portfolio.

Management Integration. If something between the two extremes of establishing a separate sales team or adding the product to the bag of an existing team is desired, this option may be the best choice for medtech companies. Here, a separate sales position is created for the new product, but the rep reports to an existing field sales manager. New managers will need to be hired to keep manager-to-rep ratios manageable. If aligning first-line sales managers' product responsibilities with their reps is important, a variation on this approach establishes specialized first-line managers that report to common sales directors. This option is best for medtech manufacturers when any of the following occur.

• Dissimilar products are sold to a similar audience.
• Some level of coordination is required in the selling effort, due to a common contracting process across products or common
  customers.
• Sales synergies are high between the new product and the existing portfolio, but the bag would be too big if the new product were added.

Integration with Restructuring. In this alternative, a separate sales team is created and made responsible for the new product as well as some existing products. While not as common as the other alternatives, complete restructuring may be the best option for medtech companies when any of the following occur.

• The sales effort required for the new product does not support a stand-alone sales position.
• The new product's sales synergies are high with only a subset of the current portfolio.
• Sufficient economies of scale can still be achieved when the sales force is split into two teams.

Fully Integrated. Assigning new products to an existing sales team is typically the least costly approach and one of the most common choices for medtech companies. Selecting this option without increasing the number of sales reps can be a big mistake because all sales effort devoted to the new product comes at the expense of selling existing products. For medtech companies, this approach is the best choice when all of the following apply.

• Sales synergies are high between the new product and the current products.
• Low cost is a priority.
• The number of products being promoted is manageable.
• Reps have the capacity to promote the new product.
• The desired degree of management control in terms of how sales efforts are allocated across products is still achievable.

Conclusion

Medtech companies with product-based sales forces have several options available to them when faced with the difficult problem of structuring a direct-selling effort for a new or newly acquired product or product line. These options vary in their degree of integration with the current sales force.

By following a straightforward evaluation process, medtech companies can ensure that they implement the right structure. Ultimately, the best option is a manageable structure that can be implemented effectively and that will achieve an appropriate balance of short-term and long-term sales efficiency and effectiveness.

Peter Masloski is a manager at ZS Associates (Evanston, IL), a global sales and marketing consulting firm specializing in the healthcare industry.

Copyright ©2002 MX