Distribution Management – Decline of an Industry

Background:

XML Pvt. Ltd (name changed as the company still exists in a different sector) entered the market with a vision of being the market leaders in home appliances. They entered the market with Television as their only product in the market. When they entered the market, there were not many major players in that segment in India. Soon they became very famous and every household had its name associated with the company. The company had a wide network of local dealers and supplies. XML had very powerful sales forces who were locals from the various states in India and the market penetration was easy for XML. Slowly, XML expanded its product line from beyond TV and started manufacturing Washing machines, refrigerators and other electronic home appliances.

XML was an innovative organization with the R&D department consisting of engineers from the top engineering colleges of India who were working with the future technologies. Hence it always took its customers by surprise and quality was never a problem for XML as its products usually persisted for more than 10 years without a single complaint.

Supplier problem:

The main supplies XML had was of ICs, the manufacturing parts and cartons. It had tied up with various local vendors for supply of manufacturing parts and cartons. For sophisticated parts like high-end LCD and other ICs, it had tie-ups with international vendors.

The initial problems with the suppliers started when after monopolizing the television market, XML started demanding from the suppliers. The suppliers were given a credit period as high as 6 months. The suppliers also did not have much of a choice because XML being the major market player, if they are associated with XML, their value proposition increased at that point of time. Hence, XML exploited this situation even more. Even if the credit period was 6 months, the suppliers were being paid after a year or two. This lead to the descend of many local suppliers since they were not able to sustain the pressure of money.

On the other hand, the international suppliers were paid on-time. This increased the grudge in the local suppliers. They started meeting among each other without the knowledge of the company and started forming unions. Since the employees were also local people, the suppliers started encouraging for the employee unions. Finally after a lot of strikes, XML had to move its production unit to its headquarters.

In the new headquarters, XML decided to tie-up with more suppliers and spread its suppliers from over the entire country. This led them to take command over the few local suppliers they had. But this also put them into a lot of problems as the other suppliers were a lot more demanding with respect to the credit period. But XML did not change its strategy for the credit period. The suppliers now wanted to teach XML a lesson. Hence they now started to push all the rejected pieces into the manufacturing units by bribing the employees. This affected the quality of the products to a larger extent and the customer complaints started to increase. Since XML had never faced such a situation, it was not quick enough in responding to the customer queries and the service earned a very bad name.

Due to this, the international suppliers also did not see XML as the vendor they wanted to be associated with. Hence they also started to disassociate themselves with XML. This was a major hit-back for XML as it lost most of its suppliers. At the same time, competition had become fiercer in the market. Smoothening of the government norms had led to international brands enter the market. Hence the suppliers started to concentrate on tie-ups with the international brands. This lead XML to loose most of its quality suppliers.

Dealer problem:

Even though the government norms were eased and the foreign brands were allowed to enter India, these new brands had a very tough time initially. They had the main challenge of replacing the existing local players, setting up a distribution network and many other challenges.

With all the proceedings as depicted in the ‘Supplier problem’ section, the competitor took advantage of the situation. They paid a higher dealership price than what XML was paying. This made the dealers to concentrate more on the products of the competitors. The shelf space for XML kept reducing month-month. Many dealers discontinued their relationship with XML. The competitors need not have to think about penetration either. It was already present readymade in the market. This gave the competitors a cost advantage as the market was already open. Hence the competitors could manage a higher compensation to its dealers and suppliers.

Apart from the competition, dealer and the supplier problems, XML was also attacked by a family issue since it was a family run business. All this finally contributed to the collapse of the electronic home appliances section of XML.

Learning:

• For you to operate in a value chain created by your company, all the stakeholders in the supply chain have to be treated at par.
• Do not neglect competitors and update yourself on a regular basis. Though XML had a full fledged R&D team, they were not in par with the technology offered in the market by the competitors.
• Monopoly does not exist for long in an open market environment. Hence try to build brand values as long as you have the monopoly. These values will come handy during the time of immense competition. This will also help in arresting the competition from penetrating the market easily.
• Consider the business model of having exclusive dealers.
• Innovate the marketing strategies to be in sync with the changing business needs.

Sales ... A case study

Note: The discussions below are a true case study of a private company. Hence the name of the company, its clients and competitors are kept confidential for ethical purposes. Regret the inconvenience caused.

It was May 2008 and the top management of the entire organization was involved in a proposal to one of its most prospective clients. It was one of the highest revenue generating projects in the recent past for the organization. The company, XYZ Pvt. Ltd, is a niche telecom service provider in the market space of Europe. XYZ has been in a good relationship with its client organization CLT since more than half a decade providing constant innovative solutions to CLT and thus collaboratively helping them to growth in the highly competitive market. Due to the ever increasing demand of its customers, CLT decided to capture a place in the cloud to enable its systems to provide a cheap solution to its ever increasing client base. Hence CLT decided to change all the systems involved in providing the service so that the technical disability is avoided across the entire set of services.

XYZ was the most preferred vendor of CLT due to its constant innovative solutions provided. Hence they were asked to draft a proposal for this initiative. Over the period of more than seven years, many competitors had developed in the European market. Hence, along with XYZ, CLT also asked Comp A, Comp B and Comp C to bid for the proposal. Since the other three organizations were involved in supporting the other systems of CLT, this move of CLT did not surprise XYZ.

After a month’s long hard work, the final proposal was ready and a few top executives of XYZ headed to Europe for selling the services offered by XYZ. The major parameters considered for measurement of the proposal by CLT were as below:
• Quality of service provided (QOS)
• Cost incurred by CLT (ROI)
• Overall service package offered

For the ease of maintenance, CLT had divided the systems into eight logical domains ranging from customer registration to billing.

Among the above four expected parameters, XYZ had an edge in the quality of the service provided since it had a very good track record over a period of seven years and also due to the fact that XYZ was the most preferred vendor of CLT. The other vendors were also very reputed for their deliverables in the industry. But the fact that XYZ was in a long running relationship with CLT gave it a clear cut advantage.

Considering the second parameter under consideration, the variation in the bidding amount proposed by all the four vendors is depicted by the graph below:

From the above graph it can be incurred that the amount proposed by XYZ was comparatively the highest. It was around 50 million € greater than the lowest bidder. This is when CLT started to bend towards the other clients and the interest of CLT towards XYZ started reducing. Hence the chances of XYZ winning the bid were really less after the cost related statistics was portrayed.

Now XYZ had only one opportunity left to showcase that they are different from the other vendors in the room. They had to do a proper service mix to make sure that the contract is not lost. Instead of concentrating on what went wrong, the top management at XYZ decided to take advantage of the fact that they were the most preferred vendors of CLT. They concentrated on the quality of service they provide. Instead of just offering the solutions to the existing problem at CLT, XYZ also offered value additions to the systems at CLT. This meant that, along with the normal expected services, XYZ offered a free value addition to the domain under operation. They also went a step ahead to align themselves with the customer to identify their existing problems and providing a permanent solution for the same (thus removing the recurrence of the issue). This was a perfect mix of services which XYZ offered and CLT (who trusted the quality of deliverables of XYZ) had no other choice but to choose XYZ for the contract. At the end of the meeting, XYZ had won 50% stake of the entire bid and the remaining 50% was split among the other three vendors.

It was a win-win situation created by XYZ which led to it bagging 50% of the stake. Due to the non-reduction in the cost factor, XYZ was even more thrilled to provide a better QOS. CLT was happy that XYZ was closely working towards their business goals and were ready to improve their customer experience free of cost in the form of value addition to the domains under consideration.

A few points derived out of the above case study are as below:
• Cost or ROI is not the only factor on which businesses work in this highly competitive environment. You should always have a competitive edge so that you can make a difference.
• Proper pricing strategy has to be considered while selling. In the above case even if XYZ had lowered down the price by 50 million €, they might not have won 100% of the bid. Purely because of the fact that the perception of client to spread the domains was not because of the cost factor. It was because he had to increase the pressure of QOS due to cut throat competition.
• At times, a perfect product/service mix appeals to the clients. It might create a win-win situation.
• A sales force has to be flexible enough to cater to the customer demands. If the customer requires technical solutions or projections, the sales force should deploy technical people. If high level decisions have to be taken, the proper DMU (Decision Making Unit) has to be deployed.
• Customer perceptions play a very important role.

A business called Education...

It was a gloomy evening at the Gandhibazar CCD in Bangalore. I was hanging out with my friends as one of them was travelling to Germany for his higher studies. Pissed off with his job at one of the software majors, my friend decided to go behind his dreams; joined IISc for a project in Electrical engineering. After an year and a half, he got an admit in one of the technical Universities in Germany. Over the small talk we had, I got to know that the fee he paid for the education which was spanned for a period of 2.5 years was just 16,000 INR! It took all of us with a shock! He later revealed the fact about the universities in Europe being completely funded, do not take much money from the students who come to study at the universities... This lead me to a completely different thought process altogether.

If you imagine a similar quality of education in India, it would have not cost you lesser than a few lakh INRs. Even for that matter, the US universities also take a hell lot of money for their MS programs. In the due of learning, the people who cannot afford the education will loose the inclination towards the main intent of their visit and try to work out a deal in their lives where the main motive shifts from education to earning money to get over the heavy loans that was made in the due coarse of getting quality education. Even in India if you see, institutions like IIMs and IITs have a respectable amount of funding a real good Alumni who can work out to get more funding into the institutions. I do agree that there is a lot of government interventions in these institutes; but the whole point here is about quality and cheaper education. If you see the industry I am associated with (the service industry), I can atleast comment that the world is moving towards a mode where quality products are expected to be delivered with a highly reduced costs.

Coming back to the institutions in India, no doubt that they have a real good set of individuals who contribute to the technical innovations of the world. They have to be backed with a good funding from either private organizations or the government should work towards it so that atleast the quality is not lost. They are not here to make money by venturing into education considering it as a business and an evergreen market. (Of course, I do agree that money has to be associated but not to an extent at a which it is now) This is when even the poorest kid in the society can afford to get an access into the education offered in these institutes. This is when bright ideas won't die due to lack of money. This is when there will be an economic balance created between the poor and the rich. This is when India can grow as a super power!

Signing off as of now ... Good luck to my friend!