.

M600 Case Report

Table of contents

EXECUTIVE SUMMARY

1

PROBLEM/OPPORTUNITY

2

SWOT ANALYSIS

2

ALTERNATIVES

Accept Feima as Jinghuas customer

3

Develop Feima as OEM

4

Reject Feima

4

ALTERNATIVE ASSESMENT

4

RECOMMENDATION

5

IMPLEMENTATION/ACTION PLAN

5

CONTINGENCY PLAN

6

Appendix-A7

Appendix-B8

Appendix-C9

Appendix-D10

EXECUTIVE SUMMARY:M600 Case Report Jeevana J Adusumilli | #1192298

Gino SA is one of the largest burner manufacturers and exporters in the world and enjoys up to 14% market share with its product mix. The key issue that could potentially grow or break the brand is choosing between an OEM proposal from Feima and agitating its well-established distribution channel, especially Jinghua. The company further aims to grow its annual unit sales by 20%, industrial sales by 200 units, build two OEM & end user channels by improving service standards. After an in-depth analysis into Ginos internal and external factors that may influence its strategic goals for the future, the report identifies three alternatives that could potentially address all the concerns. Weighing each alternative across key factors; investment, unit sales, channel development, brand image, customer service and risks involved, it is found that continuing Feima as Jinghuas customer and offering its requested discount is the best fit. Since the accepted additional discount will eat into Jinguas profit margin reducing it by 13%, Gino is suggested to take a 1% hit to its transfer price for Feima account. This brings the company closer to its annual unit sales goal. The distributor channels are aligned by implementing a service charge as a percentage of public prices of industrial, commercial and spare parts to increase their revenue by 3.6% and profit margin by 3%. This new fee, along with a customer feed back component will be implemented on purchases made from March 2000. The plan optimizes the existing channel, reduce its power but also instigate service standards, spares stocking and motivated industrial unit sales. It also attracts OEM channels, which base their purchase decision on availability of spares and service. To reduce the cycle times that may have forced Gino to lose industrial sales, it will open a warehouse in South China and employ a sales force of 36 individuals that work toward acquiring new channels, increasing unit sales and promoting the brand image. The plan aims to achieve its aim by December 2000. In the event that Gino fails to achieve its unit sales by August by more than 20% and distributor shirking continues, the company moves toward contingency plan. Where distributors will be offered product volume discounts and sales force assigned new sales targets. With the new push strategy, the regional sales managers will closely monitor sales performances to ensure Ginos success. PROBLEM/OPPORTUNITY: The impending issue concerning Gino SA is the choice between Feimas OEM businesses, which may lead to frayed relationship with existing distributor, Jinghua that constitute 40% of revenue in China and Fiema as Jinghuas. In the event that the company chooses to accept this proposal Gino SA needs a pricing strategy for potential OEMs including Feima. Although Jinghua is not believed to leave Gino SA, any action that Zhou may perform is bound to influence Gino SAs brand equity and recognition in the market and other distribution channels that it plans to build further in the next three years. Further the company aims to open two OEM accounts, develop more distributors and assist through marketing and technical support, increase annual industrial burner sales to 200 units, and over all sales to 15,000 units.IMPORTANCE

LowHigh

URGENCYLow Increase Industrial Sales Increase overall unit Sales Improve service and spare supply

High Develop OEM channel Optimize Distributor channel Build brand image Feima Proposal

SWOT ANALYSIS: Strengths Gino SA benefits from global presence, well-established channel network and strong brand reputation. In-house production capability adds to the competitive advantage for the company to enjoy a substantial price gap from competition of up to 30% and significant contribution margins (30% - Industrial, 25% - Commercial, less than 20% - Domestic). The company also sustains a 14% domestic range market share. As one of the largest burner manufacturers and exporters, Gino SA banks on reputable employee base (technical and marketing) that is motivated by its compensation structure. Weaknesses Excessive reliance on oligopolistic distribution channel for meeting the sales targets leaves Gino SA with little to no power in managing its product flow and after sales services. Shirking amongst distributors in stealing sales from other provinces and reluctance to stock Industrial burners is leading to an opportunity loss of at least 50 units. Opportunities Increasing demand (20% higher in the next five years) in Industrial range has remained an unexploited market for Gino SA despite lower comparative offering price (10-20%) due to lack of brand image in the segment. Threats Political influence of local manufacturers leading to increased output and selling power may lead to reduced profit margin within the next five year time period. Declining growth in western markets forces Gino SA to bank on developing markets like China to meet the sales targets.ALTERNATIVES:1. Accept Feima as Jinghua customer: This alternative proposes to continue Feima as a distributors customer with new pricing (appx-b). This allows Gina a 2% increase in profit margin, and brings it closer to achieving the unit sales volume budget including industrial burners for the next three years. In order to address reduced Jinghuas profit margin to 4%, Gina will offer the additional discount through reducing the transfer prices for Feima account by 1%. Further issues concerning distributor channel conflicts, a service fee of 5% (of commercial, industrial & spare public price) for appointments, which include burners post warranty (one year), installation and start of commercial and industrial burners added to contract price would be implemented. This will further increase the distributors revenue by 3.6%(appx-a) as opposed to revenue being lost due to excessive contract discounts and encourages industrial and commercial products. This further increases services standard & spares stocking in the channel. Gino will supplement its existing channel with a penetrating sales force to attract OEMs by promoting its products at design institutes and trade shows. Focusing on the industrial segment, the company will establish a warehouse in the Southern part of China assisting major industrial market handled by Wayip, which accounts for 38% of Ginos industrial sales to compensate for stocking issues. Gino will continue to leverage its current brand image as well as acquire new accounts. Advantages: Increase in unit sales. Relationship with distributors strengthened. Improved service standards. Industrial burners emphasized. New OEM accounts. New distribution channel established. Reduced cycle time. Decreasing power of distributors. Disadvantages: Loss of potential OEM. High investment. 2. Develop Feima as OEM: With this alternative Feima will be developed as an OEM with its proposed pricing, since it is a leading boiler manufacturer in Northern China and constitutes major portion of revenue in that area. This increases Ginos profit margin by 2%. A slab based price mix is introduced for all potential OEMs (appx-d) to ensure OEM referencing in the future. In order to compensate for the distributor dissatisfaction, a service fee will be implemented as in alternative 1 that increases their revenue by 3.6%. Also Gino will support its existing channel with an integrated advertising campaign targeted at industrial burners to create a brand image through global consumer culture positioning. Advantages: Increased unit sales through Feima. Brand image and potential end-user channels built. New OEM channel developed. Decreasing distributor power. Disadvantages: Disappointed Jinghua. Fear in distributor channel may lead to poaching and exits. Industrial stocking remains a challenge. High marketing investment. Longer cycle times. 3. Reject Feima: Under this option, Feima proposal will be rejected to ensure distributor channels cooperation. But an in-house sales force will be developed that will concentrate on acquiring OEMs and end users through design school presentations and tradeshows. Further, a warehouse will be established in Southern part of China to encourage industrial sales across the country. Gino will remain as a budget manufacturer leveraging its current brand perception. Advantages: New OEM and end user accounts. Relationships with distributors remain undeterred. Industrial segment sales promoted. Shortened cycle time. Disadvantages: OEM account lost. Guaranteed unit sales lost. Distributor power remains. High investment.ALTERNATIVE ASSESSMENT: The alternatives are weighed across investment, unit sales, brand image, customer service, channel development and risk factors. Investment defines cost of upfront capital (including warehouse, marketing and sales force expenses). Unit sales define the comparative projected increase in units towards meeting the company sales targets. Brand Image contributes to the unit sales by positioning Gino as a culturally associated, budget product in domestic and a reliable brand in its industrial segments. Further customer service takes spare parts and technical assistance into account toward escalating distributor revenue and future sales for OEM channel and industrial products. Channel development weighs contribution of each alternative into efficiently diversifying Ginos distribution channel. Risk factor takes into account the possibility of fraying distributor relationships due to the decision made in the designated alternative. Decision CriterionWeightsAlternative 1Alternative 2Alternative 3

(Accept Feima as Jinghuas customer)(Develop Feima as OEM)(Reject Feima)

Investment0.1233

Unit Sales0.2543

Brand Image0.1343

Customer Service0.2551

Channel dev.0.2343

Risk0.2515

Total4.13.12.8

RECOMMENDATION: Alternative 1 poses to be the most strategic fit for the current situation and future corporate goals of Gina. Despite the high capital warehouse and sales force expense (appx-d), this alternative is bound to motivate existing channels to build new OEM and end user channels with Ginos in-house sales force and promote spares sales/stock and service. Which further structure consumer confidence in the brand leading to development of industrial segment. In addition a warehouse built in Southern China, which accounts for 26% profit margin and 38% of industrial sales as opposed to Central China with 35% industrial unit sales contribution (appx-a), will ensure stocking with most profitable product mix for Gino to invest in. The risk of disturbing the existing distribution channel being negligible, this plan ensures increase in unit sales through Feima and new channels underway bringing Gino closer to its sales targets with additional 28 industrial and 1299 commercial/domestic to be sold annually (appx-c) in order to meet its target.IMPLEMENTATION/ACTION PLAN:The implementation is carried out in 2 phases (appx-c). Phase 1: This phase will last from March to July. During first month, Feima will be issued the additional discount and distributors, a new contract of service charge to be implemented for new purchases starting March 2000. This ensures distributor satisfaction and further a customer feedback component with each service (form to be mailed to Gino) is added which allows Gino to recognize any technical or service issues the customers may incur during the appointment. A sales force of 36 individuals (9 per region) is recruited and field trained. The warehouse establishment procedure is underway in this period. From April to July the sales force is assigned sales targets of 1299 units of domestic/commercial burners and 28 industrial burners, which is the differential amount to reaching the annual unit sales target. Sales teams will approach design schools and trade shows to pitch their sales with a fully functional warehouse setup by June. This phase ensures the stocking of industrial burners and further in assisting the regional distributor in reducing cycle times and increasing sales. Phase 2: In the end of July, sales force performance and distributor service standards are assessed. Necessary adjustments to the sales targets and distributor service contract are made. This will compensate for any discrepancies in unmet roll over sales targets from the previous period. In the next five months the push strategy will continue and periodic feedback is collected to track progress. An assessment of sales performance is conducted in the end of December.CONTINGENCY: Contingency plan (appx-c) comes into force at the end of July 2000 in the event that the sales targets are missed by more than 20% and distributor shirking continues despite the service fee contract. This plan banks on increasing the existing sales force by 9 new individuals, expanding each region to 12 members in the first one-month. The push strategy continues, with monthly sales budgets (of 520 (1560 total) commercial/domestic burners and 12 (36 total) industrial burners per region) as opposed to annual and a quarterly review by Sales managers of the concerned regions. Also, in order to motivate the sales staff, commission based compensation system is introduced to ensure unit sales. Distributor dissatisfaction will be addressed with a volume-based discount on transfer price (appx-c). The volume scales are structured to encourage distributors to sell more as well as avail the discounts on their current sales performances. The contingency plan promises Gino SA in reaching its corporate goals in the remaining short period.Appendix-A

Appendix-B

Appendix-C

Implementation/Contingency plan:PhaseTimelineObjectives

1March 2000(1 month) Announce and implement service charges for all future accounts Form sales force of 36 by region (9*4 regions) Launch warehouse establishment in Southern China Sales force training with targets for each region being 1299(433 per region) commercial/ domestic & 28(10 per region) industrial burners, 1 OEM & 1 end user account per region.

Apr-Jul(4 months) Fully operational warehouse to stock all segments (June) Sales force presentations in design schools and tradeshows. Collect periodic feedback from customers through sales force Asses sales force and distributor performance Analyze feedback from customers and distributors

2Aug-Dec(5 months) Form new targets if necessary New service contract if necessary Continue push strategy

Contingency

Aug(1 month) Form new targets (of 520 (1560 total) commercial/domestic burners and 12 (36 total) industrial burners per region) Recruit 10 new sales members and assign new targets Announce volume discounts for all distributors

Aug-Dec(5 months) Asses sales force and distributor performance Analyze feedback from customers and distributors Monthly review of sales performance by sales manager Continue push strategy

Proposed Contingency discounts for distributors

ProductRangeTarget PriceDealerGino

PriceDiscount

Domestic1-4000 301 301 0%

4000-4500 301 2865%

4500-5000 301 27110%

Above 5000 301 25615%

Commercial1-900108410840%

900-1300108410305%

1300-1600108497610%

Above 1600108492115%

Industrial1-15783178310%

15-20783174395%

20-307831704810%

Above 307831665615%

Appendix-D

Proposed OEM pricing

ProductRangeBase PriceOEMGino

PriceMark-up

Domestic1-750 3,708 4,450 20%

750-9003708425215%

900-10503708407910%

Above 1050370838964%

Commercial1-40133551602620%

40-60133551535815%

60-80133551469110%

Above 8013355140284%

Industrial1-159647811577420%

15-209647811095015%

20-309647810612610%

Above 30964781003374%

Ware house expenses

CostYear 1Year 2

Setup cost $200,000 0

Operation $360,000 $360,000

Capacity $5,000,000 $5,000,000

Expected Rev*5560000 5560000

Gross Margin720,000 920,000

* Computed assuming Gino will reach its 15000 annual sales targets

12Jeevana J Adusumilli | #1192298 | M600 Case report |