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Evan Davis gets to the heart of the big finance stories at The Bottom Line.

Does the Internet herald the death of a salesman? Not according to leading retailers like the John Lewis Partnership. Charlie Mayfield, CEO of the partnership, recently said customer service in the store is likely to play a big part in the future success of the business.

Over the last 30 years, there has been a general sense of willingness on behalf of suppliers and customers to develop increasingly close ‘emotional’ relationships based on trust. Buyers reward suppliers with brand loyalty, suppliers in turn develop strategies to energise this ‘connective’ relationship.

Until the Internet became a commercial tool, relationships were developed personally through sales representatives and customer service staff. As customers and suppliers become increasingly physically connected to one another via the Internet, the big issue is whether the nature of the relationship is changing as a result of transactions taking place online.

Technology companies have eagerly taken on the challenge to create digital solutions which can replace human interaction. Recently, Skymol has launched new software to add the human touch in a virtual world where customers can expect to engage in live voice and video chat to aid their purchasing decision. In other words, businesses can do personal selling online.

However, digital sales personnel are nothing new. In 2001 LifeFX created business avatars to help make customers feel more ‘at home’ when using the Internet to purchase goods and services. The company added a human face to standard email communications but it never became a mainstream business application.

Perhaps the heart of the question lies in whether online sales are based on short term transactional relationships, like those in the 1960 and 70’s, whereby sales personnel were concerned about making the one-off sales. Or alternatively, whether they’re based on longer-term close connective relationships.

Relationship marketing was a fundamental shift in the philosophy of the organisation, which rapidly grew in the 1980. It’s based on the fundamental premise that it’s important to develop ongoing relationships with a customer by focusing on quality, marketing, and customer service.

At the turn of this century prophets of doom suggested the internet would annihilate existing business methodologies and professions. Indeed, leading retail consultants predicted the demise of the high street in late 1990 as a result of online selling via the Internet. However, as we approach the end of the 00s, personal selling is still very important to many businesses. Whilst Internet sales continue to grow, and in some sectors account for a significant proportion of sales, this is not the case for all businesses and for the time being at least the high street remains with us.

Find out more

Keeping customers

Marketing in a complex world

Stephanie Flanders on online sales

It has been hard, in the blizzard of financial crisis news, to see anything positive in the business pages. But beneath the storm of bankruptcies and bank rescues, some companies have been quietly making careful acquisitions. Typically, these haven’t been the “buy a rival” sort of purchases that firms make in order to simply get bigger and realise “economies of scale”. The more recent examples have usually quoted the fashionable term “synergy”. The question is what is synergy and how do firms make it?

Of course the simple definition of synergy is 2+2 =5, so the reason for a merger or acquisition is that the combined firm is more effective than the two separate partners. But synergy is cited as a reason to merge or acquire only slightly more often than “failure to realise synergies” is cited as the reason for a merger failure. It’s important therefore to understand what synergy really is and how, in practice, firms realise it.

A true, realised, synergy means that something must happen in the combined firm that either didn’t happen or happened less well in the two individual firms. In practice, there are two types of synergy a firm can create:

• Internal synergies: these are created when the combined firm can do something more efficiently internally than could the two separate firms. This might simply be by combining two departments (and cutting costs) or it might by rationalising product, like the car companies do when they share parts for different models.
• External synergies: these are created when the customers of the two firms somehow interact in a positive way to allow a kind of cross selling. In the past, financial service firms did this, buying mortgage businesses to help sell insurance and other products.

The trick in making synergy happen, therefore, is to know in advance how the mechanism of synergy is suppose to work. Some recent examples make the point.

As I write, the consumer electronics giant Panasonic is considering buying Sanyo. At first sight, this doesn’t make much sense as Sanyo’s business is mostly struggling and Panasonic have lots of other investment opportunities. But look more closely and you will see that Sanyo have some great battery and solar panel technology coming out of their labs. Panasonic reason that those technologies would make lots more money if they were built into to their own green technology strategies, an example of external synergy.

Similar ideas motivated Bank of America when it recently bought Merrill Lynch. The global banking business is complicated and made up of several complementary businesses, like retail banking and investment banking. Banks tend to be more efficient if they have significant presence in more than one area so the combined business of Merrill Lynch/Bank of America is much more effective than the two separate entities. Or at least it will be in time.

A more problematic situation faces Ian Smith, the new boss of Reed Elsevier. One of his major challenges is to repay $2bn dollar that his predecessor borrowed to acquire ChoicePoint. Given the tricky situation facing media markets (Reed Elsevier’s main business), paying back the loan means realising promised internal synergies from the ChoicePoint acquisition. These, it seems, are proving more elusive that was hoped for at the time of the acquisition.

The moral of the story is to not be mislead by the mirage of synergy. Instead, think carefully about what kind of synergy you are trying to realise and how exactly that is going to happen. And that, of course, is exactly what the leaders of these huge firms, and their consultants, are paid for.

About the author

Dr Brian D Smith is a Visiting Research Fellow in The Open University’s Marketing and Strategy Research Unit. He is the author of over 100 books and articles and runs PragMedic, a specialist strategy consultancy.

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In the first blog in this series I discussed the lamentable failure of Europe and the UK to develop start-up companies into large gorilla-sized organisations similar to American companies such as Microsoft, Intel, Apple, Oracle and Google. Apart from a few recent exceptions, such as Vodafone, Nokia and SAP, Europe and the UK have lagged far behind. A number of plausible reasons why UK and European technology companies have failed to become world-beaters on the same scale as their US counterparts have been forwarded and include:

• A lack of appropriate funding and tax arrangements
• The absence of a large homogeneous home market
• An inability to bring products rapidly to market
• A lack of entrepreneurial culture and spirit

Doug Richard.

The current UK scenario, however, is not all doom and doom as the Cambridge University technology cluster, famously known as Silicon Fen, starts to come of age after thirty years of development. According to Doug Richard, founder and chairman of Library House and former judge on Dragon’s Den:

“The Cambridge cluster has just tipped over and a period of explosive growth is ahead. It manages to attract a very large quantity of capital without variation”. 

Cambridge has already spawned a number of successful £1bn companies such as Arm, Autonomy and CSR radio. So do we have a Silicon Valley in the making or is this simply California dreaming? If Silicon Fen is to provide a lead role in nurturing the next generation of “gorillas” there are still a number of obstacles in its way. For example:

• There is a tendency for early stage entrepreneurs to exit their businesses through trade sales rather than undertaking a public flotation (this usually means selling-out to a larger US firm). According to Walter Herriot, head of St. John’s Innovation Centre in Cambridge: “If too many Cambridge companies are acquired by foreign companies the people and the intellectual property will disappear”.
• There is a tendency for European venture capital groups to invest smaller sums than their US rivals. The differential can  sometimes be as high as 50%.
• There is a failure of leading UK companies to invest in entrepreneurial start-ups. Cisco invests in start-up companies which benefit from the funding they receive whilst Cisco gains access to cutting-edge research.
• There has been a failure on the part of European stock exchanges to attract young companies. Neither the LSE nor AIM are considered to be as attractive as the Nasdaq where new listings are able to achieve higher valuations.

Another way of interpreting the superior growth trajectory of US start-up companies is the American business culture itself. Europeans do not lack technical expertise (and Silicon Fen is living proof of this) but does Europe have the same level of ambition and attitude to risk as the USA? According to David Wither, CEO and founder of UK technology company Sarantel:

“In the US, you know from the start you are on your own. Nobody is going to look after you – there is no healthcare or safety net. It breeds a competitiveness, which is part of the culture.” 

It might also be said that UK and European entrepreneurs are acting wisely by avoiding head-on competition with major organisations by adopting niche and complementary strategies, thereby avoiding conflict with larger rivals. This was a lesson that was learned by the pioneering UK personal computer companies such as Acorn, Sinclair and Apricot. Another interpretation is that by selling out early UK entrepreneurs are behaving in a totally rational manner. True serial entrepreneurs are good at starting and growing businesses but not well equipped to professionally manage them, so their early departure is not such a bad thing after all.

The problem is that they are not being acquired by other UK or European companies or as Walter Herriot, head of St. John’s Innovation Centre in Cambridge once commented: “I am slightly concerned that we are selling off the family silver”.

So should Europe be written off as a promising location for technology companies and is Silicon Fen really on hold until key obstacles are removed from the equation? 

Further reading

• 'Fen tries to be a valley' by Maija Pesola in the Financial Times on 16th Feb 2005
• 'The fertile soil of Silicon Fen' by Maija Pesola in the Financial Times on 9th Feb 2005
• 'Why progress requires ambition and risk' by Alan Cane in the Financial Times on 11th Feb 2005

About the author

Nigel Walton is an associate lecturer for the Open University and the University of Worcester, specialising in strategy, entrepreneurship and international marketing. He previously worked as a management consultant, primarily advising medium-sized companies with growth problems.

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