Organizing work: Network based organizations

Group 3Apoorv Sharma (0011/56)Parimal Korde (0033/56)Mergu Surya Teja (0281/56)Md Nazimuddin (0441/56)

Company Overview

•Amway short for "American Way" is an American multi-level marketing company that sells health, beauty, and home care products

•The company was founded in 1959 by Jay Van Andel and Richard DeVos and is based in Ada, Michigan.

•Amway and its sister companies under Alticor reported sales of $8.4 billion in 2019. It conducts business through a number of affiliated companies in more than a hundred countries and territories.

Individual

Recruited downline distributors

Recruited downline distributors

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What is Multi Level Marketing?Multi-level marketing, also called network marketing or pyramid selling , is a controversial marketing strategy for the sale of products or services where the revenue of the MLM company is derived from a non-salaried workforce selling the company's products or services, while the earnings of the participants are derived from a pyramid-shaped or binary compensation commission system. An MLM strategy may be an illegal pyramid scheme.

The compensation plan theoretically pays out to participants only from two potential revenue streams. The first is paid out from commissions of sales made by the participants directly to their own retail customers. The second is paid out from commissions based upon the wholesale purchases made by other distributors below the participant who have recruited those other participants into the MLM; in the organizational hierarchy of MLMs, these participants are referred to as one's down line distributors

❑ Amway brands include Artistry, Atmosphere, Body Blends, Bodykey, Body Works, Clear Now, eSpring, Glister, iCook, Legacy of Clean, Nutrilite, Peter Island, Perfect Empowered Drinking Water, Personal Accents, Ribbon, Satinique, Artistry Men and XS.

❑ In 2018, nutrition and wellness products were 52% of total sales, and beauty and personal care products, 26%.

❑ It developed the scope for transitioning from the client’s existing patient consent management process to a blockchain-based process.

❑ The process allows the patients to receive a consistent level of health information exchange service across all member medical hospitals

❑ It is in prototype phase and is still not extended to patients or other stakeholders

❑ The team is also working on using the blockchain template provided by AWS in a testbed environment

Amway – Products, Philosophies & Allegations

Products

❑ Promotion of Christian Ideology within the group. Heavily influenced with the dual ideology of free enterprise and Christian ideology

❑ Operating like a private army with common aim and brotherhood atmosphere

❑ A way of life, a cause, marketing and motivational system, in a fervid emotional atmosphere and political religious revivalism

Philosophies❑ More than half the distributors did

not make any money with the average across all distributors making about USD 100

❑ FTC requires Amway to label products saying that 54% people lose money and average person makes USD 65

❑ The company often organizes seminars to showcase the lifestyle of few high earning members to attract new recruits

Allegations

Features of a Network based system

Goals

❑ Servicing the Customer

❑ Locus of production is the individual

❑ Earnings through individual effort and

network effort

Aspects Coordinated

❑ Network Model – Built in the leverage

of effort and leverage of skill

❑ So, labor and markets get coordinated

How do they coordinate?

❑ Through norms & ties within the

network

Company encourages prospects to discuss with Amway direct

sellers to know how their business can

achieve personal goals

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Product KnowledgeTaught free of cost by Amway representatives

Network buildingBy virtue of being a part of the network, you are upskilled

Cross networking not allowedTo reduce any differences that may arise

Customer SatisfactionWillingness to pay can be ascertained. Product returnable if you are buying through the network

Network as a site of Support – Insights from Primary interviews

Governance structure

► Amway works on multilevel network structure where the agent is directly are people (down line) who encourage others till a chain is formed. connected to global leader of that functional group.

► Amway allows to build the business through retailing products and sponsoring other people who in turn can retail products and offer business opportunity for others.

► The Amway distributors referred to as independent business owners earn commission on direct selling to end users.

► The agents sign up for Amway agent, Start selling or recruiting other

► The agents make commissions on what you sell, also earn percentage commission for the people down the line.

► Thus, the Organization is virtually divided into 2 types of corporation: Amway corporation and Retailers/distributors association

Governance structure and challenges

► Amway unwittingly created organizational structure which evolved into 2 powerful, symbiotic organizations : The corporation and distributors organization

► Both the organization are dependent and constraints by one another

Amway corporation constraints:

► Amway corporation is constraint by its ability to garner profits because of distributors incentives and because of fact that direct sellers are more inclined to sponsor than to sell.

► Organization are also constrained by Legal wars because of illegal and deviant behaviour of some of its direct sellers.

► Organization also faces challenges by decisions regarding distributors by Board of Amway distributor association

Constraints for Retailers Association

The direct sellers/retailers

must abide by set of 10 guidelines or rules specified

by Amway organisation to

be authorised as the member of organisation

Direct sellers are not permitted to

display / sell their products through

retail stores or e-com websites.

The agents are required to pay joining fees and

maintain minimum inventory.

Quality assurance

standards are amended from time to time.

Noncompliance of these rules

and conduct and policies can

cause termination of

contracts between the

company and direct sellers

The distributors organization is also dependant

upon Amway Corp. for

products and visibility (through

advertising).

The distributors are also under

pressure by Amway Corp. to sell and recruit

more.

Challenges to the organization from distributors

Despite substantial number of distributors, the attrition rate is alarmingly high at 60-65%.

Percentage of self consumption by distributer is 50-60% in volume

End consumers take advantage of 18-30% margin by becoming distributors

Among the active distributors, only 10% show reasonably high activity

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ExternalitiesSocial Cost

Support Mechanism

Social Legitimacy

▪ Selling and recruitment efforts focused on strangers and remote friends.▪ Concerns among distributors over possibly upsetting their friends and acquaintances.▪ High effort and potential social cost associated with selling to friends1.▪ Strangers are better targets as the IBOs feel less pressure2.▪ Linked with one’s own reputation and values; which in turn makes IBOs reach out to

remote acquaintances

▪ Sponsors actively transforming their connections with their downline by developing close relationships directed towards building direct ships* between an IBO and its downline.

▪ Combination of friendship and instrumentality coupled with various forms of support.

▪ Skills required for the job are attained after recruitment; new IBOs are trained by their upline through product-specific and self-improvement training, business management tools, and various other mentoring programs.

▪ Efforts driven towards gaining social legitimacy among doubters.Reference(s)

Grayson, Kent (1996), “Examining the Embedded Markets of Network Marketing Organizations,” in Networks in Marketing, Dawn Iacobacci, ed. Thousand Oaks, CA: Sage Publications, p. 325 –41. Lan, Pei-Chia (2002), “Networking Capitalism: Network Construction and Control Effects in Direct Selling,” Sociological Quarterly Vol.43 (2), p.165 –184.Pratt, Michael G.(2000), “The Good, the Bad, and the Ambivalent: Managing Identification Among Amway Distributors,” Administrative Science Quarterly Vol.45 (3), p. 456 –493.

Footnote(s)*A direct ship is achieved when an agent’s downline exceeds specific sales targets

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Effici

enci

esEfficiency of the Business

Model

Revenue Sources

Organizational Structure

▪ The efficiency of the structure lies in its unique business model and very low entry barrier.

▪ According to FTC, some 75% of Amway distributors drop out within the first year; according to Amway’s own figures, nearly 60% of those left are “inactive”.

▪ One needs to build up a stable network of around 7,000 active distributors in order to break even.

▪ Only 1% of IBOs breaking even, according to a study conducted in 2008 involving 33,000 distributors across geographies.

Beside direct product sales, IBOs primarily generates revenue from two additional sources:

▪ Fees and products sold when people sign up as Independent Business Owners (IBOs)

▪ Business materials (i.e., motivational books, videos, audiotapes, etc.) intended to turn the new and existing IBOs into successful retail franchises

As in most personal networks, most Individual Business Owners (IBOs) operate in the service space. They continue to hard-sell their business proposition, as opposed to selling the Amway products. Their focus remains mostly on recruiting new distributors and increasing their downline, which in turn becomes a more efficient way of generating commissions or bonuses.

Reference(s)

Juman M., Christopher J. (2015), “A Study on Direct Selling Business (Amway India Limited) in Kerala: A Case Study of Calicut District Of Kerala,” International Research Journal of Engineering and Technology (IRJET) Vol. 2(8), p. 1489-1500.

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