Case 3.1: Smith & Alvarez: Selling in an Industry with Diverse and Demanding Buyers

Smith & Alvarez is a world leader in the design, manufacture, and service of aircraft engines, industrial gas turbines, and space propulsion systems. Smith & Alvarez reported an operating profit of over $2.11 billion in 2010 on revenues of $12.58 billion. The company's 36,000 employees support more than 11,000 customers in 195 countries around the world.

Smith & Alvarez was founded in Raleigh, North Carolina, in 1925 by William Smith. Smith & Alvarez's first aircraft engine was the 410-horsepower, air-cooled Wasp, which delivered unprecedented performance and reliability for the time and transformed the aviation industry. Smith & Alvarez has been leading change ever since. Now, Smith & Alvarez's large commercial engines power more than 30 percent of the world's passenger aircraft fleet.

Smith & Alvarez Rocketmotion has been the power behind over 1,600 launches and has been a key engine provider to the U.S. space program since its inception. That service continues today with the Space Shuttle Main Engines and the engines for the current Delta and Atlas launch vehicles. The U.S. return to the Moon and innovative missile defense products will also be powered by Smith & Alvarez Rocketmotion engines.

The current strategy of the company is twofold: it hopes to expand efforts in the manufacture of engines via new, innovative technologies and also hopes to expand its current service capacities. Smith & Alvarez has the capability to service and repair not only its own engine brands but also other manufacturers' engines. It would like to grow this area of the business because of the far smaller necessary capital expenditures and expenses involved. Its customer portfolio is somewhat mixed as well. Customer groups can be found along with financial information in Table 3.1.

Because of the unique nature of each customer group, Smith & Alvarez has chosen to organize its sales force by customer account. Each major customer category, as indicated in Table 3.1, has a Vice President of Sales of the division concerned. Each vice president has a full staff to assist with each segment, including a sales force, sales analysts, customer service reps, and materials management planners. The vice presidents who have government responsibilities also have additional staff to assist them with complex government buying procedures such as red tape and other necessary forms that must be filled out for every sale. They also have additional legal staff to help them decipher ever-changing government guidelines and laws for each of their product categories.

The sale of product to the government has been getting more and more difficult over the past few decades. Most of the product Smith & Alvarez sells needs to go through theDefense Logistics Agency (DLA), which is the arm of the U.S. government that handles purchases for the military services. While the DLA used to wait for multiple bids for every purchase, now nearly 20% of all government contracts are awarded on the basis of only one bid. Most purchases are made by either negotiated contracts or open bids, and the award usually goes to the lowest-cost qualified bidder. The government basically wants no service during the sale and views purchases as transactional in nature. Add to this mounting red tape and legal changes, and these accounts are seen as less and less profitable to Smith & Alvarez.

However, there is significant brand awareness and "bragging rights" for those companies that are awarded these contracts. Sales to the U.S. government significantly enhance sales to other product groups, although this number cannot be quantified. Also, there is a lot of leeway in terms of the "negotiated price." The government will increase the allowable price if the supplier is seen as a preferred supplier. The government has what essentially amounts to a good, better, and best system. If a supplier can convince the government that it is better or best, the allowable bid price can be increased. These are not easy sales. The sales rep must get themselves in front of much higher-level decision makers than those who typically make themselves available to sales reps.

It is important to note that for some of these sales Smith & Alvarez needs to go directly through the government, and for some sales Smith & Alvarez is a supplier to the aircraft and spaceship companies, which then deal with the government. However, the rules and procedures affect Smith & Alvarez no matter who their ultimate consumer is. The big exception to this is that aircraft and spaceship manufacturers have very different buying needs. They need consistency, reliability, and near-perfect quality. They are typically considered "at fault" when something goes wrong, not the suppliers.

An example of this in another industry was the oil leak disaster in the Gulf of Mexico by BP in summer 2010. BP seemed to get all the blame in the media and its stock price subsequently dropped by over 100%. However, almost no one ever heard about companies like Halliburton or Transocean, which were the contractors responsible for staffing and inspecting the oil rig that exploded. Likewise, Cameron International was the actual manufacturer of the blowout prevention valve that failed, causing the disastrous leak.

Likewise, in 2010 Toyota took a huge hit to its reputation, and finally had to halt sales of all Toyota vehicles for a few weeks because of faulty acceleration pedals. CTS was the supplier of the sticky Toyota accelerator pedals that led the Japanese automaker to make the recall. However, as with BP, the public scarcely heard of CTS. The blame was placed on Toyota. The manufacturer typically gets the blame, so when Smith & Alvarez is selling to aircraft makers, their buyers are extremely demanding.

Things are just as challenging when selling in the commercial sector. Commercial airline companies have been hit extremely hard over and over again in the past few decades. They will not purchase new aircraft until these are badly needed or if they are looking to achieve a competitive advantage by having innovative planes such as smaller, fuel-efficient aircraft or the much larger superjets. Thus, there are two markets for Smith & Alvarez's engines in the commercial aircraft industry: Companies making new aircraft, such as Boeing, want the absolute best-quality, most high-tech products on the market. Commercial airliners are frequently buying new engines and engine components to repair or replace existing aircraft and engines.

Smith & Alvarez executives have been pushing all the Vice Presidents of Sales of Government Services and the Vice President of Sales of Commercial and Private Services togrow sales in their divisions. The vice presidents concerned find this a particularly challenging request, for a few reasons. First, they feel that they do not get the appropriate "face time" with high-level buyers to make these sales. The sales reps who sell the original equipment are the ones who have well-established relationships with the buyers. The service vice presidents feel that if they went out on their own and started setting up appointments with buyers, the buyers would feel confused as to why they are being visited by multiple Smith & Alvarez sales reps. Also, given the recent recession, most buyers have already said that they cannot have weekly meetings with sales reps anymore. Because of recent layoffs and restructurings, most are so busy that they make themselves available by email and will only schedule an in-person visit once a month. The service vice presidents do not want to take this precious time away from the rest of the organization.

Additionally, the Vice President of Sales of Government Services and the Vice President of Sales of Commercial and Private Services have been extremely successful in finding new buyers for their services who do not have Smith & Alvarez engines. The sales reps find this an easy sale to make. While not bashing the competition, the sales reps very indirectly imply to the buyer that their engines are failing because they bought a non-Smith & Alvarez product to begin with and if they enter a service arrangement with Smith & Alvarez, they will not then own a Smith & Alvarez engine, but it will nevertheless be maintained at Smith & Alvarez's extremely high level of quality. It will be a very different sale as compared with going to current owners of Smith & Alvarez engines and inquiring whether they are failing and what they can do to help.

The Vice President of Manufacturing also has some qualms about current organizational objectives and goals. He has always felt that the organization's structure is set up for a sales organization, not a top-notch, high-tech, innovative manufacturing firm. He feels that the organization should support his division, given that the business's key capability is extremely high-quality and innovative products. He would prefer an organizational structure built by product, not by customer. He feels the current structure makes his division somewhat at the beck and call of the customer. While the Vice President of Manufacturing does totally believe in a customer-centric organization, he feels that he gets product information back from the other sales divisions in bits and pieces instead of hearing all at once about his products. This causes extremely difficult inventory management issues. He also feels that this puts him at a disadvantage in aiding the service vice presidents in their quest to grow.

Case Questions

1. How common is it for companies to have such diverse customers? List all the unique issues and needs of the customers mentioned in this case. Be specific; there are quite a few things mentioned. How common are these issues across all industries?
2. Does Smith & Alvarez have the appropriate organizational strategy for its capabilities and the needs of its customers? Why, or why not? Whether you answer yes or no, make sure you provide suggestions for improvement in your answer.
3. Does Smith & Alvarez have the appropriate sales force organization structure for its capabilities and the needs of its customers? Why, or why not? Whether you answer yes or no, make sure you provide suggestions for improvement in your answer.
4. What changes would you make to its current structures and plans, and plans for growth?
5. Very specifically, how would you implement your plan?
6. Should companies restructure their sales forces to accommodate changing buyers' needs? If so, how?

US US US Commercial Commercial Commercial Total Government: Government: Government: Government: and Private and Private and Private Military Space Maintenance Services aircraft Maintenance Services Aircraft Equipment Equipment Net sales $2,560,000 $1,160,000 $980,000 $450,000 $3,700,000 $2,300,000 $1,430,000 $12,580,000 Select expenses Total sales expense per customer group $1,075,200 $510,400 $372,400 $99,000 $1,443,000 $805,000 $271,700 $4,576,700 (includes compensation) Total R&D per unit $1,152,000 $533,600 $19,600 $9,000 $1,443,000 $23,000 $14,300 $3,194,500 All other expenses $512,000 $313,200 $147,000 $112,500 $851,000 $391,000 $371,800 $2,698,500 Income by customer group -$179,200 -$197,200 $441,000 $229,500 -$37,000 $1,081,000 $772,200 $2,110,300