Academic journal article IUP Journal of Business Strategy

Effective Salesforce Management Practices: A Real Option Approach

Academic journal article IUP Journal of Business Strategy

Effective Salesforce Management Practices: A Real Option Approach

Article excerpt

Introduction

For sales organization, salesforce are an asset that can provide value and competitive advantage; however, such assets have associated uncertainties and risks. Salesforce represents the single largest marketing investment for most Business-to-Business (B2B) companies. In aggregate, the US companies alone spend more than $800 bn on it each year-three times more than they spend on advertising (Steenburgh and Ahearne, 2012). Salesforce are valuable assets to the sales organization, but their returns may not remain stable over time due to changes in business conditions. The 'real options' approach enables organizations to evaluate investment opportunities of salesforce in uncertain environments and highlights how these investments create value through future choices. Researchers apply this logic to analyze the uncertainties associated with human assets in sales organizations (i.e., salesforce) and discuss how sales organizations manage these uncertainties through salesforce 'options' which are capabilities generated by some Salesforce Management (SFM) practices and their combinations. The paper discusses these practices and develops an options model for managing different types of uncertainties.

The issue of managing the uncertainties related to salesforce has been unexplored in the area of SFM, leaving a gap in existing research. The paper addresses this gap in the literature and provides an alternative theoretical rationale on how SFM practices may create or maintain the value of salesforce. The study presents the 'real options' view currently popular in the field of strategic management. Real options theory, explicitly addresses the issue of investment choices for future resources and capabilities. It assumes that organization develops a level of foresight sufficient to invest in resources and processes with 'options' characteristics that provide implicit or explicit claims on future opportunities and generate flexibilities for future investments (Leiblein, 2003). In other words, it analyzes how sales organizations can lay claim to future rent-generating capabilities through investment in salesforce options. The paper offers a theoretical framework that investigates the link between uncertainty, salesforce and sales organizations' capabilities to manage uncertainty.

In the following sections, the paper provides a brief overview of the real options concept and develops real options framework focusing on the uncertainties that it seeks to address, apply this framework to identify the types of uncertainties associated with salesforce and examine the implications of this framework for making decisions regarding salesforce investments in organizations through SFM practices.

Real Options and Salesforce Management Practices

Real Options Approach

Real options investments refer to those investments that are in the form of physical and human assets, as opposed to financial instruments (Kogut and Kulatilaka, 1994). These investments are associated with higher value when there is a concurrent ability to adapt and revise investment-related decisions in response to unexpected market conditions (Lee et al., 2008). An organization's flexibility to adapt its future actions in response to altered future market conditions expands the value of an investment by improving its upside potential while limiting downside losses relative to its initial expectations under passive management (Trigeorgis, 1993). This adaptability gives the organization additional "options" for action under differing scenarios.

These different scenarios are shown in option space (Figure 1), in a two-dimensional graph-with expected profitability on the x-axis and the volatility on the y-axis. As shown in Figure 1, it is possible to split the graph of option space into a number of regions. When the volatility of an investment is low an investment decision can be made whether the value-tocost ratio is greater than one (invest now, Region 1 in Figure 1) or less than one (do not invest, Region 6 in Figure 1). …

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