A centralized pricing organization

managed through changes in the product mix, so, for example, less value-added products are replaced by more value-added products, which is basically the same as drawing a line at a certain amount per KSM and then trying to raise prices that are below this amount or try-ing to get rid of the product (i.e. correspondtry-ing to the price per KSM benchmark described above). The second principle relies on changing the price index (PI)⁴⁷ that is applied to orders so that, for example, a current price index of 105 is changed to 110. However, the approach of directly and explicitly changing a price through the PI is seen as organi-zationally controversial and would likely result in objections among the sales force (in the case of price increase). This has led to a practice of not communicating price changes directly, but rather just implement-ing changes without informimplement-ing the organization, for example by drop-ping particular customers or changing the price cut-off point.

According to the commercial director, the idea behind Gamma’s or-ganization is to run the whole national operation as one business (profit center) with one sales force and one commercial center. This allows Gamma to approach the market in a coherent way with one single strategy and commercial approach. As noted above, a specific character-istic of Gamma is the organizational separation of pricing and sales re-sponsibility between the commercial director and the sales director. The sales director is responsible for the external sales force and for making sure that a sufficient volume is attained. The commercial director, on the other hand, has the main responsibility for pricing incoming orders.

The day-to-day costing and pricing is administered in a small “estimat-ing and pric“estimat-ing department”, which is run by a commercial manager, and his assistant. The commercial manager works closely with, and re-ports directly to, the commercial director.

The separation of the sales/commercial responsibility is stressed by the commercial director as an important characteristic of the present or-ganization. Having one member in the management team who is solely responsible for sales margin, and another member responsible for vol-ume, is an explicit policy of Gamma that helps the organization avoid the volume focus that is widespread throughout SCAP. This conclusion builds on the notion that a sales director who is responsible both for making sure that sufficient volume is achieved and that prices are set at an adequate level is likely to be affected by this dual responsibility when making pricing decisions. The organization of this matter at Gamma is, according to the commercial director, built on a setup where the com-mercial and sales directors act as each other’s “conscience” thus satisfy-ing both the volume and margin requirements of new orders.

All pricing decisions at Gamma are made on two different organiza-tional levels (note that sales reps have no input on price other than pro-viding the decision-maker with information).

• Commercial manager

• Management team

The ordinary day-to-day pricing is conducted by the commercial man-ager in the pricing department. This involves pricing of smaller and midsized new business and managing the continuous changes that oc-cur in the product portfolio of established customers (i.e. changes in

individual products or specifications, etc.). In situations where a cus-tomer rejects a price presented by the estimating department or when a larger order is being priced, the pricing decision is normally made on a management team level. This might involve tenders or large strategic customers that are priced at a very competitive level. Hence, all pricing decisions at Gamma are made by experienced persons who command a high level of authority in the organization. The organization of Gamma’s pricing is illustrated in Figure 6.5.

Commercial manager

Management team /Commercial director

• Commercial director has the overall responsibility for margin development and pricing of large/strategic accounts or when a lower price is considered due to strategic reasons

• Strategic decisions and tenders are priced on a management team level (following a team based decision involving the general manager, commercial- and sales director, financial director and often the commercial manager/sales rep)

• Commercial manager has the overall responsibility for costing/pricing and does the day-to-day costing/pricing together with his assistant

External sales force • One national sales force

• Sales reps manage the communication with customer but do not set price Commercial manager

Management team /Commercial director

• Commercial director has the overall responsibility for margin development and pricing of large/strategic accounts or when a lower price is considered due to strategic reasons

• Strategic decisions and tenders are priced on a management team level (following a team based decision involving the general manager, commercial- and sales director, financial director and often the commercial manager/sales rep)

• Commercial manager has the overall responsibility for costing/pricing and does the day-to-day costing/pricing together with his assistant

External sales force • One national sales force

• Sales reps manage the communication with customer but do not set price

Figure 6.5 Organizational levels involved in pricing at Gamma.

According to the commercial director, the basic organizational chal-lenge in making correct pricing decisions is creating a structure where the pricing decision is owned by people at a senior level in the organiza-tion. Normally, there is a constant “conflict of interest” going on in or-ganizations, where the sales force sees it as their job to please the cus-tomer and make sure that new business is brought in, while operations’

main interest is to be able to run work through the plant as efficiently as possible. If pricing is not owned at a senior level in the organization the risk is that that the pricing decision will only be made to satisfy the objectives of the sales force or operations.

The pricing of Gamma is characterized as “opportunity pricing” mean-ing that prices should always be set so that they capture the individual commercial opportunity. This requires that the person making the pric-ing decision is experienced enough to recognize opportunities when they occur and that he has enough authority to make an independent decision that is accepted by the rest of the organization. The situation described above is contrasted by the financial manager to the situation where pricing is “system-driven”, meaning basically that pricing deci-sions are made in accordance with a certain automated process that ex-cludes individual judgment. This practice is, according to the financial

manager, highly undesirable and related to pricing authority being delegated too far down in the organization to people who are not able to acknowledge opportunities when they appear.

As mentioned above, strategic pricing decisions (i.e. for tenders or large customers) are made on a management team level in the organization.

The way the strategic accounts are priced resembles the use of a pricing committee. However, rather than being a formal committee, the ap-proach at Gamma has more of an ad hoc character, with membership in the committee changing depending on the customer. The persons normally present are the general manager, the commercial director and the sales director. In addition, the financial manager and the commer-cial manager are often allowed to give input to the decision. This spread of competencies and different perspectives on the pricing situation is brought up as an important strength in how Gamma prices strategic accounts. The presence of the finance manager in these informal pric-ing meetpric-ings is especially emphasized by the commercial director. On a daily basis, the general manager, the sales manger and the commercial manager are heavily involved with the large customers served by Gamma, which makes it more difficult for them to be strictly objective in the pricing decision. Having the financial manager come in and look at the commercial aspects of an account from what is described as a

“cold accountancy view”, helps making an objective decision.

According to Gamma’s pricing organization, the quoted price is de-cided by either the estimating department or on a management team level. The sales reps are not supposed to be involved in the pricing deci-sions; still it is these who manage negotiations with customers. Thus, the set-up of pricing authority at Gamma would make the customer negotiations following the quotation rather unimportant for the price that is finally agreed upon. However, according to the commercial manager, the sales reps are often given room to maneuver within prede-fined limits set by the commercial manager. This involves a procedure where the sales rep, before visiting the customer, is given a target price and a minimum price, which gives the sales rep some degrees of free-dom to adjust the offer to new information and the reaction of the cus-tomer. A second function that the customer negotiation plays in pricing shows itself in the situation where a sales rep has been given a price to quote and the customer rejects the offer. In this situation, the sales rep

normally gets back to the commercial manager who then has to make a decision of either to agree with the demands of the customer, based on the additional information about the customer’s reaction, and reduce the price, or to drop the customer.

The sales reps general lack of influence over prices at Gamma is re-flected in how bonus or incentive systems are organized at the unit. Ac-cording to the commercial director, the sales reps do not receive bonus or variable incentive pay based on their individual performance. Instead they are evaluated against an annual volume budget. This is motivated by the fact that with the present set-up with the pricing authority cen-tralized to the commercial manager (and the commercial director), sales reps are unable to influence prices, and therefore neither changes in volume that are dependent on price levels.⁴⁸