Selection and Motivation of Distribution Channel in Fmcg Company

INDIAN INSTITUTE OF PLANNING AND MANAGEMENT

NEW DELHI

SUBJECT

SELECTION AND MOTIVATION OF DISTRIBUTION

CHANNEL IN FMCG COMPANY

SUBMITTED BY:

BATCH:

PHONE NO.:

E-MAIL:

SECTION:

ABSTRACT

In corporate India, till not so long ago, any marketing professional in the FMCG sector

would typically have a long innings within the sector to his credit. Career growth was

either vertical within the company, or horizontal, to other FMCG companies.Put it down

to an absence of good opportunities outside the category or the lack of an appetite for

taking risks, but instances of FMCG professionals hopping to other sectors were fairly

rare. Today, however, more and more professionals from FMCG companies are moving

to new sectors, helping pollinate marketing ideas and strategies that were hitherto unique

to FMCG.

FMCG has, in fact, become the resource pool that almost every other industry is happily

fishing in for marketing talent these days. Erstwhile FMCG professionals are the poster

boys for sunrise verticals like retail, insurance, banking and telecom, and from marketing

soaps and colas and chocolates, these fast movers are now chalking out strategies to

market insurance, banking and pre-paid recharge cards.

For most professionals, the lure of doing something different in rapidly growing sectors is

a big motivator. And while there are risks given the nascence of the some of these

sectors, it’s a calculated move. For J Suresh, CEO, brands & retail, Arvind Mills, joined

the apparel group in 2005 after spending nearly 22 years in FMCG, moving to a sector

like retailing was thrilling.

“Retail had just started to boom and it was clear that it will be the future. The present

position gives me an opportunity to exercise both my brand and retail skill-sets,” he says.

Sanjeev Kapur, country head, marketing & innovation, Citibank, moved to the financial

sector in 2009 after conducting an in depth SWOT analysis.

ACKNOWLEDGEMENT

Through this acknowledgement I express my sincere gratitude towards all those people

who helped me in this project, which has been a learning experience.

I appreciate the co-ordination extended by my friends and also express my sincere

thankfulness to the entire faculty members of Indian Institute of Planning &

Management, Delhi, giving me the opportunity to do this project/study and also assisting

me for the same.

TABLE OF CONTENTS

Topic Page No.

1. Abstract 1

2. Acknowledgment 2

3. Introduction 4

4. Theoretical Review/Perspective 6

5. Review and Research 20

6. New Developments in the Research Area 37

7. Recommendations 39

8. Conclusion 41

9. Bibliography 44

INTRODUCTION TO THE TOPIC

Sales systems can also affect sales management. Here are some examples:

The sales manager, rather than gathering all the call sheets from various sales

people and tabulating the results, will have the results automatically presented in

easy to understand tables, charts, or graphs. This saves time for the manager.

Activity reports, information requests, orders booked, and other sales information

will be sent to the sales manager more frequently, allowing him/her to respond

more directly with advice, product in-stock verifications, and price discount

authorizations. This gives management more hands-on control of the sales process

if they wish to use it.

The sales manager can configure the system so as to automatically analyze the

information using sophisticated statistical techniques, and present the results in a

user-friendly way. This gives the sales manager information that is more useful

in :

o Providing current and useful sales support materials to their sales staff

o Providing marketing research data: demographic, psychographic,

behavioural, product acceptance, product problems, detecting trends

o Providing market research data: industry dynamics, new competitors, new

products from competitors, new promotional campaigns from competitors,

macro-environmental scanning, detecting trends

o Co-ordinate with other parts of the firm, particularly marketing,

production, and finance

o Identifying your most profitable customers, and your problem customers

o Tracking the productivity of their sales force by combining a number of

performance measures such as: revenue per sales person, revenue per

territory, margin by customer segment, margin by customer, number of

calls per day, time spent per contact, revenue per call, cost per call,

entertainment cost per call, ratio of orders to calls, revenue as a percentage

of sales quota, number of new customers per period, number of lost

customers per period, cost of customer acquisition as a percentage of

expected lifetime value of customer, percentage of goods returned,

number of customer complaints, and number of overdue accounts. More

complex models like the PAIRS model (by Parasuraman and Day) and the

Call Plan model (by Lodish) can also be used.

2. Advantages to the marketing manager

It is also claimed to be useful for the marketing manager. It gives the marketing manager

information that is useful in :

Understanding the economic structure of your industry

Identifying segments within your market

Identifying your target market

Identifying your best customers in place

Doing marketing research to develop profiles (demographic, psychographic, and

behavioral) of your core customers

Understanding your competitors and their products

Developing new products

Establishing environmental scanning mechanisms to detect opportunities and

threats

Understanding your company's strengths and weaknesses

Auditing your customers' experience of your brand in full

Developing marketing strategies for each of your products using the marketing

mix variables of price, product, distribution, and promotion

Coordinating the sales function with other parts of the promotional mix (such as

advertising, sales promotion, public relations, and publicity)

Creating a sustainable competitive advantage

Understanding where you want your brands to be in the future, and providing an

empirical basis for writing marketing plans on a regular basis to help you get there

Providing input into feedback systems to help you monitor and adjust the process

THEORETICAL REVIEW/PERSPECTIVE

DISTRIBUTION STRATEGY

Physical distribution represents the way businesses provide goods and services to their

customers. In some businesses, particularly retail businesses, the customer comes to the

business. Their locations may be important. Several other businesses usually go to the

customer (e.g. B2B) The location of their businesses is not so important.

The designing a Distribution Strategy deals with the following issues:

Best Channel to deliver product

Three different distribution systems:

o Retail consideration.

o Channel length.

o Channel exclusivity.

Choice of channel: Cost/benefit of each alternative.

Why Is Distribution Important?

(1) It greatly affects all decisions in the marketing mix, including pricing, promotion,

sales and packaging through its impact on marketing costs and relationships.

(2) It creates a mutually dependent commitment between participants through an

infrastructure that is not easily changed and would be expensive to re-create. It becomes a

part of the service delivery structure that the customers become accustomed to and

trained in using.

Most of the activities for a product manager are usually related to working with the

existing distributors, dealers or agents and perhaps expediting shipments as necessary.

However, some new products necessitate changes in the channel of distribution, or

market and competitive forces will require changes for existing products. This could also

be a critical element of the plan if a product manager is rolling out a product into new

regions and/or expanding globally. As a result, distribution strategy becomes an

important aspect for the development of the annual marketing plan and an effective

marketing strategy.

Choice of Intermediaries versus Direct Marketing

Producers may lack financial resources to carry out marketing

Customer support may be required

o Early days of computers

Many firms set up partially owned distribution

o Auto manufacturers

o Fast food

New technologies such as internet and logistics are affecting choice

o Dell Computer Corporation

Choice may also vary with Product Characteristics

Perishable products

o Problem of delay and handling

Bulky products

o Minimize shipping distance

Nonstandard product

o Direct sales

High unit value product (airplanes)

Dedicated sales force in company

A supply chain is a network of facilities and distribution options that performs the

functions of procurement of materials, transformation of these materials into intermediate

and finished products, and the distribution of these finished products to customers.

Supply chains exist in both service and manufacturing organizations, although the

complexity of the chain may vary greatly from industry to industry and firm to firm.

Below is an example of a very simple supply chain for a single product, where raw

material is procured from vendors, transformed into finished goods in a single step, and

then transported to distribution centers, and ultimately, customers. Realistic supply chains

have multiple end products with shared components, facilities and capacities. The flow of

materials is not always along an arborescent network, various modes of transportation

may be considered, and the bill of materials for the end items may be both deep and

large.

Traditionally, marketing, distribution, planning, manufacturing, and the purchasing

organizations along the supply chain operated independently. These organizations have

their own objectives and these are often conflicting. Marketing's objective of high

customer service and maximum sales dollars conflict with manufacturing and distribution

goals. Many manufacturing operations are designed to maximize throughput and lower

costs with little consideration for the impact on inventory levels and distribution

capabilities. Purchasing contracts are often negotiated with very little information beyond

historical buying patterns. The result of these factors is that there is not a single,

integrated plan for the organization---there were as many plans as businesses. Clearly,

there is a need for a mechanism through which these different functions can be integrated

together. Supply chain management is a strategy through which such an integration can

be achieved.

Supply chain management is typically viewed to lie between fully vertically integrated

firms, where the entire material flow is owned by a single firm, and those where each

channel member operates independently. Therefore coordination between the various

players in the chain is key in its effective management. Cooper and Ellram [1993]

compare supply chain management to a well-balanced and well-practiced relay team.

Such a team is more competitive when each player knows how to be positioned for the

hand-off. The relationships are the strongest between players who directly pass the baton,

but the entire team needs to make a coordinated effort to win the race.

Supply Chain Decisions

We classify the decisions for supply chain management into two broad categories --

strategic and operational. As the term implies, strategic decisions are made typically over

a longer time horizon. These are closely linked to the corporate strategy (they sometimes

{\it are} the corporate strategy), and guide supply chain policies from a design

perspective. On the other hand, operational decisions are short term, and focus on

activities over a day-to-day basis. The effort in these type of decisions is to effectively

and efficiently manage the product flow in the "strategically" planned supply chain.

There are four major decision areas in supply chain management: 1) location, 2)

production, 3) inventory, and 4) transportation (distribution), and there are both strategic

and operational elements in each of these decision areas.

Location Decisions

The geographic placement of production facilities, stocking points, and sourcing points is

the natural first step in creating a supply chain. The location of facilities involves a

commitment of resources to a long-term plan. Once the size, number, and location of

these are determined, so are the possible paths by which the product flows through to the

final customer. These decisions are of great significance to a firm since they represent the

basic strategy for accessing customer markets, and will have a considerable impact on

revenue, cost, and level of service. These decisions should be determined by an

optimization routine that considers production costs, taxes, duties and duty drawback,

tariffs, local content, distribution costs, production limitations, etc. (See Arntzen, Brown,

Harrison and Trafton [1995] for a thorough discussion of these aspects.) Although

location decisions are primarily strategic, they also have implications on an operational

level.

Production Decisions

The strategic decisions include what products to produce, and which plants to produce

them in, allocation of suppliers to plants, plants to DC's, and DC's to customer markets.

As before, these decisions have a big impact on the revenues, costs and customer service

levels of the firm. These decisions assume the existence of the facilities, but determine

the exact path(s) through which a product flows to and from these facilities. Another

critical issue is the capacity of the manufacturing facilities--and this largely depends the

degree of vertical integration within the firm. Operational decisions focus on detailed

production scheduling. These decisions include the construction of the master production

schedules, scheduling production on machines, and equipment maintenance. Other

considerations include workload balancing, and quality control measures at a production

facility.

Inventory Decisions

These refer to means by which inventories are managed. Inventories exist at every stage

of the supply chain as either raw materials, semi-finished or finished goods. They can

also be in-process between locations. Their primary purpose to buffer against any

uncertainty that might exist in the supply chain. Since holding of inventories can cost

anywhere between 20 to 40 percent of their value, their efficient management is critical

in supply chain operations. It is strategic in the sense that top management sets goals.

However, most researchers have approached the management of inventory from an

operational perspective. These include deployment strategies (push versus pull), control

policies --- the determination of the optimal levels of order quantities and reorder points,

and setting safety stock levels, at each stocking location. These levels are critical, since

they are primary determinants of customer service levels.

Transportation Decisions

The mode choice aspect of these decisions are the more strategic ones. These are closely

linked to the inventory decisions, since the best choice of mode is often found by trading-

off the cost of using the particular mode of transport with the indirect cost of inventory

associated with that mode. While air shipments may be fast, reliable, and warrant lesser

safety stocks, they are expensive. Meanwhile shipping by sea or rail may be much

cheaper, but they necessitate holding relatively large amounts of inventory to buffer

against the inherent uncertainty associated with them. Therefore customer service levels,

and geographic location play vital roles in such decisions. Since transportation is more

than 30 percent of the logistics costs, operating efficiently makes good economic sense.

Shipment sizes (consolidated bulk shipments versus Lot-for-Lot), routing and scheduling

of equipment are key in effective management of the firm's transport strategy.

Supply Chain Modeling Approaches

Clearly, each of the above two levels of decisions require a different perspective. The

strategic decisions are, for the most part, global or "all encompassing" in that they try to

integrate various aspects of the supply chain. Consequently, the models that describe

these decisions are huge, and require a considerable amount of data. Often due to the

enormity of data requirements, and the broad scope of decisions, these models provide

approximate solutions to the decisions they describe. The operational decisions,

meanwhile, address the day to day operation of the supply chain. Therefore the models

that describe them are often very specific in nature. Due to their narrow perspective, these

models often consider great detail and provide very good, if not optimal, solutions to the

operational decisions.

To facilitate a concise review of the literature, and at the same time attempting to

accommodate the above polarity in modeling, we divide the modeling approaches into

three areas --- Network Design, ``Rough Cut" methods, and simulation based methods.

The network design methods, for the most part, provide normative models for the more

strategic decisions. These models typically cover the four major decision areas described

earlier, and focus more on the design aspect of the supply chain; the establishment of the

network and the associated flows on them. "Rough cut" methods, on the other hand, give

guiding policies for the operational decisions. These models typically assume a "single

site" (i.e., ignore the network) and add supply chain characteristics to it, such as explicitly

considering the site's relation to the others in the network. Simulation methods is a

method by which a comprehensive supply chain model can be analyzed, considering both

strategic and operational elements. However, as with all simulation models, one can only

evaluate the effectiveness of a pre-specified policy rather than develop new ones. It is the

traditional question of "What If?" versus "What's Best?".

Network Design Methods

As the very name suggests, these methods determine the location of production, stocking,

and sourcing facilities, and paths the product(s) take through them. Such methods tend to

be large scale, and used generally at the inception of the supply chain. The earliest work

in this area, although the term "supply chain" was not in vogue, was by Geoffrion and

Graves [1974]. They introduce a multicommodity logistics network design model for

optimizing annualized finished product flows from plants to the DC's to the final

customers. Geoffrion and Powers [1993] later give a review of the evolution of

distribution strategies over the past twenty years, describing how the descendants of the

above model can accommodate more echelons and cross commodity detail.

Breitman and Lucas [1987] attempt to provide a framework for a comprehensive model

of a production-distribution system, "PLANETS", that is used to decide what products to

produce, where and how to produce it, which markets to pursue and what resources to

use. Parts of this ambitious project were successfully implemented at General Motors.

Cohen and Lee [1985] develop a conceptual framework for manufacturing strategy

analysis, where they describe a series of stochastic sub- models, that considers annualized

product flows from raw material vendors via intermediate plants and distribution

echelons to the final customers. They use heuristic methods to link and optimize these

sub- models. They later give an integrated and readable exposition of their models and

methods in Cohen and Lee [1988].

Cohen and Lee [1989] present a normative model for resource deployment in a global

manufacturing and distribution network. Global after-tax profit (profit-local taxes) is

maximized through the design of facility network and control of material flows within the

network. The cost structure consists of variable and fixed costs for material procurement,

production, distribution and transportation. They validate the model by applying it to

analyze the global manufacturing strategies of a personal computer manufacturer.

Finally, Arntzen, Brown, Harrison, and Trafton [1995] provide the most comprehensive

deterministic model for supply chain management. The objective function minimizes a

combination of cost and time elements. Examples of cost elements include purchasing,

manufacturing, pipeline inventory, transportation costs between various sites, duties, and

taxes. Time elements include manufacturing lead times and transit times. Unique to this

model was the explicit consideration of duty and their recovery as the product flowed

through different countries. Implementation of this model at the Digital Equipment

Corporation has produced spectacular results --- savings in the order of $100 million

dollars.

Clearly, these network-design based methods add value to the firm in that they lay down

the manufacturing and distribution strategies far into the future. It is imperative that firms

at one time or another make such integrated decisions, encompassing production,

location, inventory, and transportation, and such models are therefore indispensable.

Although the above review shows considerable potential for these models as strategic

determinants in the future, they are not without their shortcomings. Their very nature

forces these problems to be of a very large scale. They are often difficult to solve to

optimality. Furthermore, most of the models in this category are largely deterministic and

static in nature. Additionally, those that consider stochastic elements are very restrictive

in nature. In sum, there does not seem to yet be a comprehensive model that is

representative of the true nature of material flows in the supply chain.

Rough Cut Methods

These models form the bulk of the supply chain literature, and typically deal with the

more operational or tactical decisions. Most of the integrative research (from a supply

chain context) in the literature seem to take on an inventory management perspective. In

fact, the term "Supply Chain" first appears in the literature as an inventory management

approach. The thrust of the rough cut models is the development of inventory control

policies, considering several levels or echelons together. These models have come to be

known as "multi-level" or "multi-echelon" inventory control models. For a review the

reader is directed to Vollman et al. [1992].

Multi-echelon inventory theory has been very successfully used in industry. Cohen et al.

[1990] describe "OPTIMIZER", one of the most complex models to date --- to manage

IBM's spare parts inventory. They develop efficient algorithms and sophisticated data

structures to achieve large scale systems integration.

Although current research in multi-echelon based supply chain inventory problems shows

considerable promise in reducing inventories with increased customer service, the studies

have several notable limitations. First, these studies largely ignore the production side of

the supply chain. Their starting point in most cases is a finished goods stockpile, and

policies are given to manage these effectively. Since production is a natural part of the

supply chain, there seems to be a need with models that include the production

component in them. Second, even on the distribution side, almost all published research

assumes an arborescence structure, i. e. each site receives re-supply from only one higher

level site but can distribute to several lower levels. Third, researchers have largely

focused on the inventory system only. In logistics-system theory, transportation and

inventory are primary components of the order fulfillment process in terms of cost and

service levels. Therefore, companies must consider important interrelationships among

transportation, inventory and customer service in determining their policies. Fourth, most

of the models under the "inventory theoretic" paradigm are very restrictive in nature, i.e.,

mostly they restrict themselves to certain well known forms of demand or lead time or

both, often quite contrary to what is observed.

The preceding sections are a selective overview of the key concepts in the supply chain

literature. Following is a list of recommended reading for a quick introduction to the area.

A distribution channel links the manufacturer of a product with the end users i.e. the

consumers. Decisions regarding distribution channels are of great significance to the

manufacturers. Organizations can have strategic distribution systems that help them to

examine the current distribution system and decide on the distribution system that can be

useful in the future. In designing a distribution channel for an organization, there are

mainly three steps – identifying the functions to be performed by the distribution system,

designing the channel, and putting the structure into operation. There are different types

of distribution channels depending on the number of levels that exist between the

producer and the consumer. In deciding on the kind of distribution strategy to be used,

there are various considerations to be kept in mind – considerations on middlemen,

customers, product, price, etc. The middlemen should have the necessary financial

capacity to carry out the task effectively. Customers should be able to get the products

conveniently. Product features to be considered include durability, toughness etc. The

price of the product also requires consideration in deciding the distribution strategies.

Distribution intensity can be referred to in terms of the number of retail stores carrying a

product in a geographical location. In intensive distribution, the manufacturer distributes

the products through the maximum number of outlets. In exclusive distribution, the

number of distribution channels will be very limited. In selected distribution, the number

of retail outlets in a location will be greater than in the case of exclusive distribution and

fewer than in the case of intensive distribution. Distribution management is of strategic

importance to any organization as distribution plays a crucial role in the success of the

product in the market. Distribution management also helps to maximize profits.

In managing the distribution channels, maintaining a mutually beneficial relationship

between the manufacturer and distributor is necessary. International distribution is

gaining importance with the increase in the number of multinational companies. There

are certain factors to be considered in international distribution. The distributors should

be chosen carefully with a long-term focus. It is better to build a long-term relationship

with the local distributors. They should be provided with all the necessary support in

expanding their operations. The marketing strategy for the product should be controlled

solely by the MNC. Information plays an important role in distribution and the MNC has

to ensure that the local distributors provide them with the required information which will

help them to increase sales and expand their business.

We all know that, the products fall into three categories- convenience, shopping and

specialty.

Convenience goods are those for which the consumer before the need arises posses a

preference map that indicates willingness to purchase any of a number of known

substitutes rather than to make the additional effort required to buy a particular item.

Shopping goods are those for which the consumer has not developed a complete

preference map before the need arises, requiring him to undertake search to construct

such a map. Specialty goods are those for which the consumer, before his need arises,

posses a preference map that indicates a willingness to expend the additional effort

required to purchase the most preferred item rather than to buy a more readily accessible

substitute.

Convenience goods/stores are those for which the consumer, before his need arises,

possesses a preference map that indicates willingness to buy from the most accessible

store. Shopping stores are those for which the consumer has not developed a complete

preference map before the need arises requiring him to requiring him to undertake search

to construct such a map. Specialty stores are those for which the consumer, before his

need arises, posses a preference map that indicates a willingness to buy an item from a

particular establishment even though it is not the most accessible one.

The above categorization of products and stores results in nine unique category of

consumers who subscribe to a particular product-store mix. The product-store matrix

along with the resulting consumer categories that fall in the various categories of the

matrix is given below.

The characteristics of consumers that fall under each category are given below.

1. Convenience good-

- Convenience store: Consumer prefers to buy the most readily available brand at the

most accessible store.

- Shopping store: Consumer is indifferent to the brand but shops in different store to get

the best service/price.

- Specialty store: Consumer prefers to trade at a specific store but is indifferent to the

brand of the product purchase.

4. Shopping good –

- Convenience store: Consumer selects the purchase from an assortment available at the

most accessible store.

- Shopping store: Consumer makes comparisons among both retail controlled factors and

product related factors.

- Specialty store: Consumer prefers to purchase from a specific store but is uncertain as to

which product to purchase and hence searches the assortment of products available at the

store to make the purchase.

7. Specialty good –

- Convenience store: Consumer purchases his favored brand from the most accessible

store that has that item.

- Shopping store: Consumer has a strong preference with respect to the brand of the

product but shops among a number of stores in order to secure the best retail

service/price.

- Specialty store - Consumer has both a preference for a specific brand and a particular

store.

Now we have find the various forms of promotion that will ensure that the channel

performs the function of brand communication as well as brand experience along with the

function of product availability for the above mentioned consumer category.

The concept of convenience, shopping, specialty good/store varies with every consumer.

Perhaps the best method of design the promotion for a product would be to evaluate

where the product is most likely to lie in the product-store matrix.

The consumer undergoes four basic stages for his consumption. They are as follows-

i. Need recognition

ii. Information search and alternative evaluation,

iii. Purchase and

iv. Post purchase use and evaluation.

The various forms of promotions that are at a company's disposal are - mass advertising

through electronic and print media, merchandising at the purchase point, word of mouth

advertising, inducing usage (through samples) etc. These promotions impact the

consumer at various stages of his consumption cycle and thereby create a brand image of

the product in his mind.

In the case of category 1, 2 and 3, the consumer is indifferent to the brand of the product

but preference for which outlet he will make a purchase in a given area will depend on

which category of the product-store matrix he falls in. Hence product availability and

product visibility at store is best way to ensure brand communication as well as brand

experience. In the case of category 4, 5 and 6, the consumer is willing to shop around for

the best available brand. The outlet where he would make the purchase would again

depend on his position at the matrix. Merchandising at the store, push strategy by the

retailer, sales promotions, mass advertising, product visibility and product availability

would be major influencers in his purchase decisions. In the case of category 7, 8 and 9,

the mass communication, word of mouth advertising, previous experience with brand

would be the major influencers in his purchase decisions. The position of the consumer

on the product-store matrix would also determine the king of distribution strategy, which

a company should adopt in terms of whether the company should go for intensive,

selective or exclusive distribution.

If the consumer of the product were most likely to fall in the categories 1, 2 or 3, then

intensive distribution, which aims to provide saturation coverage of the market by using

all available outlets, would yield best results. If the consumer falls in the categories 4, 5

or 6, then selective distribution which involves a producer using a limited number of

outlets in a geographical area to sell products would be optimum strategy and if the

consumer falls in the categories 7, 8 or 9 exclusive distribution, an extreme form of

selective distribution in which only one wholesaler, retailer or distributor is used in a

specific geographical area would deliver the desired goal of brand communication and

brand experience along with ensuring product availability. Direct selling as a marketing

tool, which is used in the rural India through Project Shakti, is another method of

imparting brand experience and communicating the brand message to the consumer. The

three-pronged objectives of distribution will no doubt result in consumer making a more

informed purchase and greatly reflect the success/failure of a company's marketing

strategy, however to map the entire product range on the matrix as well as tailoring the

promotion to the specific requirements of each category in the matrix would be a

Herculean task. HLL as always has become the first in the country to initiate a paradigm

change in its distribution strategy.

REVIEW AND RESEARCH

It’s the entire spectrum of lifecycle management of customers that FMCG professionals

have had to contend with as they picked up the threads of new segments. “At one level,

lifecycle management involves acquiring the customer and providing continuous triggers

for her to use the service. At the second level, after understanding the demographics and

characteristics, the effort has to be to improve share-of-wallet for your brand,” says

Kapur.

Suresh, who spent nearly 18 years in HLL, realised that the lifecycle in apparel was much

shorter than in the food business. “Every shirt is a different SKU. So one has to keep in

mind season change, merchandising and stock outs. If the stock doesn’t sell within a

month, it’s a dead stock. That’s a critical difference,” he says, adding that achieving

higher operational efficiencies for each brand in the portfolio was another learning.

One of parameters these marketers had to adapt to was the quick go-to-market, which

needed faster innovation cycles. At Barista, Dattagupta has to tackle a product cycle

that’s faster than what he faced in FMCG. There, Dattagupta had the luxury of a higher

development lead time with capex requirements; at Barista, the dynamics of retailing

necessitates dexterity in product innovation.

“Here, there is a new theme around product launch every three months, where based on

consumer and international trends, we come out with a range of products,” he says. He

adds that work on new themes begin six months in advance, with the development of new

products, supply chain feasibility and consumer feedback.

“One of the learnings is the quick feedback in retailing, there’s no need for focus group

discussions to know how the product is doing,” he says. Keeping in mind faster go-to-

market, Barista has a huge innovation funnel with around 50 to 60 beverages in the

pipeline. “It is certainly higher than what one has in FMCG.”

Kapur believes that while in FMCG the S curve for innovation diffusion is gradual, in

banking it is relatively steep. “In FMCG, product development typically requires capital

intensive manufacturing upgrades which sets up competitive barriers for a longer

duration. In banking the technology barriers to product & services improvement is

relatively lower and not as capital intensive. So to retain competitive advantage, either

the rate of innovation needs to be much faster or innovation has to be significantly

disruptive” says Kapur.

Citing an example, at the bottom of the pyramid, Citibank wanted a competitive barrier

for its offering targeted towards illiterate consumers. So the bank introduced biometric

ATMs with voice navigation systems accessible to this segment of consumers using

thumb prints. The difference in the belief system in marketing and branding between

FMCG and financial services is something Kapur noticed early.

“In FMCG, certain values are taken for granted. Like minimum advertising spends as a

percentage of revenue to make a strong consumer brand. It’s an unwritten rule and no one

questions it. In new sectors, these principles will gradually evolve once there is more

granular brand health data and better recognition of intangibles values while evaluating

marketing ROI’s.” he explains.

While FMCG has a fair dose of high-decibel communication and activation, the move to

new verticals also meant getting used to communication minus the razzmatazz. Kapur

believes his current stint at Citibank has enabled him to acquire direct marketing skills.

“Skills like analytics are not as prevalent in FMCG as they are in financial services. In

FMCG, trends are accumulated and used over a longer time horizon, whereas in banking,

strategies change faster and frequency of use is higher,” he says. So initiatives like direct

mailers, events and online are some of the new tools which Kapur has picked up at

Citibank.

“Events are done at a strategic level like the Lakme Fashion Week, where the scale is

huge. But in financial services, event-led marketing could be as micro as acquiring ten

customers from Pali Hill, Bandra,” he adds.

Barista has no mass media advertising, and therefore, reliance on PR for the coffee

retailing format is very high. It’s something that Dattagupta had to adapt to. “In retailing,

a brand relies heavily on word-of-mouth. While in FMCG there’s passive interaction with

the brand, at Barista, even the service from the brew master matters. So it’s a

combination of products and other attributes as well,” he says.

And in the highly competitive world of telecom, Khosla has been able to look closely at

the rural markets and devise strategies to foray into the hinterland. “There is a segmented

approach to the business, unlike any other. From making factory visits every second day

to marketing to rural customers, it’s been a new experience,” he says.

Thus, aspects like route to market, products and services introduction by segmenting the

consumer pie is a learning which Khosla picked up at Bharti.

With the FMCG industry growth rates slowing down in the last two years, the stock

markets have beaten down FMCG stocks. Many of them are quoted at yearly lows. Few

have shown appreciation and fund managers have clearly abandoned these stocks.

Despite a mild recovery in the last month or so, the long-term approach to FMCG stocks

by fund managers remains negative.

Many analysts have discounted the future of FMCG companies. In fact, a well-known

fund manager recently argued that the FMCG industry has undergone a secular change

and growth rates have slowed down considerably and permanently. That is worth

investigating. If the argument is not true, then why are FMCG companies showing flat

growth rates? Is there a need to take a fresh look at the strategies of FMCG companies

and see if something is wrong?

The first question is a no-brainer. Forty per cent of the Indian population officially lives

in poverty, i.e., live on less than $1 a day. Now these are the classes that will soon start

earning meaningful money when liberalisation reaches the lower sections of our society.

Their basic needs like soaps, detergents, toothpaste, beverages etc will have to be met.

Therefore, the question whether FMCG products are going to see permanently lower

growth rates can be rejected prima facie. For FMCG products to have poor growth,

Indian economy will have to stop growing for a considerable number of years.

Then why the slow down in FMCG products and companies last year when the Indian

economy grew by 8 per cent? This leads us to the second question — Are Indian

companies getting their strategy right? After all, if the potential is so good, why did they

report flat volume growth? We argue that every player in the FMCG industry got his

strategy wrong in the last couple of years. We also argue that most of the analyst

assumptions about the FMCG industry is wrong. Growth in the future will be very

different from that of the past. Like many other industries, it is time for FMCG

companies to reinvent themselves. It is time for them to fundamentally rethink customer

requirements, pricing strategies, distribution structure and the 'one model fits all'

approach. The silver lining is that there is clear evidence that players like Hindustan

Levers have begun to ask the very same questions, understand these very trends and have

reformulated their strategies to forge ahead. Most others are clearly not and are likely to

see large drops in real top line growth.

Our first understanding of the trends in the FMCG companies came from a speech

delivered by Professor C K Prahalad in February this year. For more details on the speech

on 'Learning to lead' see In his speech, professor Prahalad argued that there is more

money to be made at targeting the lower end of the population rather than selling

products that meet the requirements of affluent sections of the society. Professor Prahalad

pointed out that the traditional multinational business models are oriented to the top 10 -

15 million people at the most. Also, the assumption by multinationals and many Indian

companies is that the poor cannot afford to have the use of products and services that are

sold in developed markets. This is wrong because multinational strategy is based on a

product, not functionality. To quote Professor Prahalad, "We worry about detergents; we

worry about soaps, not about cleanliness." In fact as an example of the strategy of

targeting lower end of the market, professor Prahalad pointed out that Nirma, which

makes products for the lower end of the market, enjoys a return on capital employed of

130% and HLL made 93% on its lower end detergent 'Wheel' but only 22% on its high

end detergents. Do the bells toll?

Current Assumptions about the FMCG industry

We will first look at the fundamental assumptions about the FMCG industry and see

whether they stand. The basic assumption is that India poor economy with millions under

the poverty line. With the economy fast growing and most of these populations fast

getting into higher income categories, they will start buying more and more FMCG

products. The assumption has been more or less right till date. FMCG companies have

grown at a fantastic rates till date. More and more Indians in the last 2 decades started

purchasing basic day to day necessities and more and more products were launched

offering the consumers real choice. This translated into superb growth rates and profits

for FMCG companies. In the last 20 years, no other industry has matched the FMCG

industry in growth or shareholder returns

Are these assumptions valid today?

We argue it is not. One way to look at it is to break down the entire Indian population

into various income brackets. Data on this is available from the 1998 survey by the

National Council for Applied Economic Research (NCAER). The following table gives

the classification by NCAER on various economic groups.

Class Annual Income level/household

Lower Class Less than Rs25000

Lowe Middle Class 25000-50000

Middle Class 50000-77000

Upper Middle Class 77000-106000

Upper Class Greater than Rs106000

Before we analyse the NCAER data, a caveat — NCAER classifications are, we believe,

over estimations. It is hard to imagine how any household (of average 5 people) with an

annual income less than Rs25000 can even imagine spending this meagre resource on

consumer goods. Or for that matter the ability of households say with an income of

Rs60000 per annum can educate 2-3 children and also spend on basic amenities and live

comfortably. This has to be kept in mind when we analyse the purchasing abilities of

different groups. What is called middle class could be a 5 member household earning an

annual income of Rs60000. If anything, our analysis will be biased in favour of FMCG

companies.

Now let us take a look at the various income levels of these constituents. 80 per cent of

the Indian population are in the lower, lower middle and middle income bracket. And

according to the survey, they spend around Rs200 a month on an average on FMCG

products. Also, the NCAER survey includes three products generally not included as

FMCG by analysts namely tea, electric bulbs and cooking oil. Again, the amount spent

on the three products is likely to eat into overall FMCG purchase. Now at an average

monthly expenditure of Rs200 on FMCG products, 80 per cent of India clearly cannot

afford a detergent for Rs100-150 a month. For that matter 5 Lux soaps (a very

conservative estimate that one person uses one cake of soap a month) will cost Rs50 a

month or 25 per cent of the entire FMCG budget. A single meal of Maggie noodles for

the family will cost Rs80. This is the consumer professor Prahalad is talking about. This

is the consumer that Indian FMCG companies have ignored.

Yes. But it will be a slow process. Infact it will be much slower than what many FMCG

companies think. Assuming that the Indian economy grows at 8 per cent per annum for

the next ten years, the monthly spend on FMCG products by this 80 per cent of the

population will be Rs432 at the end of this ten years. Even at this level most products at

current prices will be unaffordable. Also we must take into account the fact that income

levels of lower income groups grow at lesser rates than higher income groups. For

example between 1992-93 and 1997-98, the income of households above Rs.50,00,000

grew by 55.3%, households above Rs.20,00,000 grew 40.9% and those of above 5,00,000

grew 33.8%.

This is the hard fact about Indian income levels today. While it is easy to compare with

South East Asian economies, one should not loose sight of the fact that we grew our GDP

at a rate of 1 per cent per annum for over 100 years till 1975. For over a 100 years our

population growth was greater than our GDP growth rate. What we are trying to undo is

undoing one of the lowest base consumerism in the world where even a high

compounding growth rate will take atleast 2 decades to show quantum jumps.

Then how come the FMCG industry saw rapid growth these many years?

It doesn't mean that if 80 per cent of India is out of the FMCG net, the market is small.

The other 20 per cent constitute 200 million strong population. Most of the growth in

FMCG industries has been driven by this section of the population. A significant portion

of this 200 million have seen a large increase in their expendable income in the last 20

years and by all means these are the emerging affluent classes of tomorrow. These

sections caught up with their basic FMCG needs and upgraded to better quality. This in

turn pushed up the profits of FMCG companies.

Will this 200 million drive future growth?

Highly unlikely. These 200 million consumers are almost fully penetrated. Additional

profits from these customers can come from only two new means — either by making

them upgrade into more premium products or sell them new products like food.

Upgrading to more premium products will be difficult when you consider that only 10 per

cent of the 200 million are millionaires who are likely to be immune to these changes.

Even here there are two important issues.

One is the ability of the FMCG industry to command an increasing or atleast stable

portion of the consumers expendable income. In fact Peter Drucker says in his latest book

Management Challenges for the 21st Century that ability to attract an increasing portion

of the consumer is the only thing that matters for any industry. Here is where the biggest

challenge for FMCG companies will be — How to get the 200 million current customers

to spend an ever increasing or at least same share of their annual income?

Going by all pointers, FMCG companies have miserably failed on this front till date.

According to NCAER data, the ratio of amount spent on FMCG goods by higher classes

to lower classes is a mere 1.3. Despite an income of 5 times that of lower classes, upper

classes spent just 30 per cent more on FMCG goods per annum than higher classes. In

toilet soaps, despite a growth in income of 14.98 per cent, the increase in expenditure was

only 11.6 per cent. Thus till date FMCG companies are commanding a reducing share of

a growing income pie.

The biggest threat to FMCG share of the pie can be partly explained by Abraham

Maslow's need hierarchy theory. Once people meet their basic needs like food, clothing

and shelter (also read as FMCG), they move into esteem needs. For lower classes esteem

needs are having a TV, a cable connection, basic consumer durables like watches and

refrigerators. In the coming years the entertainment and the consumer durables industries

are likely to be a bigger threat to companies like HLL than a P&G.

The second part of the threat is value for the customer. The advantage of upgrading from

say a Surf Ultra to a Surf Super Excel is likely to be very incremental. In fact according

to a survey by KSA Technopack, Indian consumers have actually downgraded FMCG

products for consumer durable products.

So the only growth area left within this 200 million population are products which have

very little penetration like sanitary napkins and packaged food products. The problem

here is that most of these products cater to urban populations resulting in almost no

distribution barriers. Most of these products also have no development costs associated

with them as they are sourced from their international portfolios. So all international

FMCG products eventually enter the premium market with their products. Experience

shows that when all products offer the same value to the customer, then the battle is

fought on advertisement and price. That will result in poor shareholder returns in the long

run. The victors in this area will have to give a lot of thought to their strategy and clearly

differentiate the product. The recently introduced Heinz ketchup seems to be a rare

example of a FMCG company getting the premium market right.

While there cannot be a one size fits all strategy, what we can look at is where the

potential money is and where competitive barriers can be built. Very clearly there is a

need by 80 per cent of the population who are not served by FMCG companies to use

soaps to bath, detergents to clean their cloths and toothpaste to brush their teeth. When

HLL 's Wheel took on Nirma, it had only one single point agenda. It has to make the

product affordable to match Nirma. For this HLL had to fundamentally rethink its entire

raw material and other costs, its distribution strategy and overall pricing. HLL had to

question many costs it had taken as given. It had to challenge lot of other assumptions

like price performance relationships. In the end they did come up with solutions and

according to Professor Prahalad, they returned a return on capital of 93 per cent on Wheel

compared to a mere 22 per cent on the premium Surf. Why this difference in returns?

One is the intense competition due to no entry barriers. A Henkel or P&G can take HLL

head-on in the large urban markets. They cannot replicate HLLs pricing and distribution

reach of Wheel in the rural markets. So Wheel has significantly higher competitive

advantage than Surf. Next is the cost of staying in the market. There is no significant

performance or quality difference between a Surf, Ariel and a Henkel. When many

players enter the fray, the product starts following commodity economics and the wars

are fought on advertisements and selling prices.

The second reason the capital employed by FMCG companies. All major players in the

FMCG industry have been moving towards outsourcing of products and positioning

themselves as pure marketing companies. Overall capital employed required per unit of

sales is decreasing and more importantly working capital is negative for all these

companies. This simply means that a more the company sells, the more will it be its

return on equity. Margins are important but incremental sales at positive contribution is

much more important. Rs10 crores sales of Surf at 50 per cent net profit margin and

Rs100 crores of Wheel at 10 per cent net profit margin is likely to require the same

capital requirements. So if a detergent can be sold at half the price of a wheel to the 80%

of the population who are untouched by current products will mean more money than

even what Wheel makes currently. If a company's existence is to maximise shareholder

returns, then the choice is very clear. This is exactly where companies have to think in

terms of what Professor Prahalad and Mr. Narayana Murthy call opportunity share rather

than market share. FMCG companies are going to loose a massive opportunity to create

wealth if they don't concentrate on the poorer sections of the market. FMCG companies

will have to make products for the lower sections of the society rather than wait for

income levels of these sections to catch up with that of their products. Unfortunately only

HLL seems heading in that direction.

Till date investing in FMCG companies was similar to what the father of security analysis

Benjamin Graham did during the end of the great depression years. Graham picked a

stake in all companies that were quoting at less than 50 per cent of book value. The

assumption was that most of these companies will recover when the economy looked up

and on the whole they will make money. FMCG companies had a great run in the last 2

decades as middle class Indian consumers bereft of basic goods caught up with their

needs. Every player in the FMCG industry made money as long as they were decently

managed. Even there we have seen a significant difference between the performance of

HLL and the rest.

The days of every player producing high returns are over. Only companies who can

increase their topline, create product differentiation, penetrate the lower sections of the

society and erect entry barriers will see the kind of returns seen in the past. The current

consumers will resist annual price increases and will see through regular brand extensions

at higher prices. P/E multiples in the FMCG industry will come down to the global levels

of 15 for the average performers. Only the best will be able to maintain P/Es in excess of

35. One cannot keep on decreasing capital by 10 per cent annually and topline by 5 per

cent forever. When denominator management meets its ultimate end, markets will

brutally downgrade P/Es.

The best buys will be players who position themselves to cater to all sections of the

society. So whenever there is a shift in consumer trends, they will be able to capitalise on

it. Companies catering to premium or super premium segments must have a superbly

thought out strategy which will rook in the moolah without disproportionate ad spends.

Most players seem to be more confused and playing a dart game like launching many

products in the hope of a few hitting the jackpot. Like all darts they can achieve at the

most only average returns. They will do better if they go back to the basic marketing

lesson —make what the consumer wants and not what you want the consumer to buy.

According to the census of India village with clear surveyed boundaries not having a

municipality, corporation or board, with density of population not more than 400sq.km

and with at least 75 per cent of the male working population engaged in agriculture and

allied activities would quality as rural. According to this definition, there are 6.38,000

villages in the country. Of these, only 0.5 cent has a population above 10,000 and 2 per

cent have population between 5,000 and 10,000. Around 50 per cent has a population less

than 200.

Interestingly, for FMCG and consumer durable companies, any territory that has more

than 20,000 and 50,000 population, respectively, is rural market. So, for them, it is not

rural India which is rural. According to them, it is the class-II and III towns that are rural.

According to the census of India 2001, there are more than 4,000 towns in the country. It

has classified them into six categories-around 400 class-I towns with one lakh and above

population (these are further classified into 35 metros and rest non-metros), 498 class-II

towns with 50,000-99,999 population, 1,368 class-III towns with 20,000-50,000

population, 1,560 class-IV towns with 10,000-19,999 population. It is mainly the class-II

and III towns that marketer's term as rural and that partly explains their enthusiasm about

the so-called "immense potential" of rural India.

About 285 million live in urban India whereas 742 million reside in rural areas,

constituting 72% of India's population resides in its 6, 27,000 villages.

The number of middle income and high income households in rural Indian is expected to

grow from 46 million to 59 million.

Size of rural market is estimated to be 42 million households and rural market has

been growing at five times the pace of the urban market.

More government rural development initiates.

Low literacy rate

Increasing agricultural productivity leading to growth of rural disposable income.

Lowering of difference between taste of urban and rural customers.

Rural Initiators

"Going rural" the new marketing mantra-all corporate companies agreed that the rural

market the key to survival in India. The real India lives in villages-6, 38,365 villages to

be precise. This is where the fortunes of many of Indian biggest corporations are likely to

be shaped. To expand the market by tapping the countryside, more and more MNC`s are

foregoing into rural markets. Among those that have made some headway are HLL,

Coca-cola, LG Electronics, Britannia, Standard life, Philips, Colgate Palmolive, ITC and

the foreign-invested telecom companies. Gone are the days when a rural consumer went

to a nearby city to but branded Products and services`. Time was when only a select

household consumed branded goods, be it tea (or) jeans. There were days when big

companies flocked to rural markets to establish their brands. Today, rural markets are

critical for every marketer-be it for a branded shampoo (or) an automobile. Time was

when marketers thought van campaigns, cinema commercials and a few wall paintings

would suffice to entice rural folks under their folds. Thanks to television, today a

customer in a rural area is quite literate about myriad products that are on offer in the

market place. An Indian farmer going through his daily chores wearing jeans may sound

idiotic. Not for Arvind Mills, though. When it launched the Ruf & Tuf kits, it had created

quite a sensation among the rural folks as well within few months of their launch.

The Indian rural market with its vast size and demand base offers great opportunities to

marketers. Two-thirds of countries consumers live in rural areas and almost half of the

national income is generated here. It is only natural that rural markets form an important

part of the total market of India. Our nation is classified in around 450 districts, and

approximately 630000 villages which can be sorted in different parameters such as

literacy levels, accessibility, income levels, penetration, distances from nearest towns,

etc.

The success of a brand in the Indian rural market is as unpredictable as rain. It has always

been difficult to gauge the rural market. Many brands, which should have been

successful, have failed miserably. More often than not, people attribute rural market

success to luck. Therefore, marketers need to understand the social dynamics and attitude

variations within each village though nationally it follows a consistent pattern.While the

rural market certainly offers a big attraction to marketers, it would be naive to think that

any company can easily enter the market and walk away with sizable share. Actually the

market bristles with variety of problems. The main problems in rural marketing are:

Physical Distribution

Channel Management

Promotion and Marketing Communication

The problems of physical distribution and channel management adversely affect the

service as well as the cost aspect. The existent market structure consists of primary rural

market and retail sales outlet. The structure involves stock points in feeder towns to

service these retail outlets at the village levels. But it becomes difficult maintaining the

required service level in the delivery of the product at retail level.

One of the ways could be using company delivery vans which can serve two purposes- it

can take the products to the customers in every nook and corner of the market and it also

enables the firm to establish direct contact with them and thereby facilitate sales

promotion. However, only the bigwigs can adopt this channel. The companies with

relatively fewer resources can go in for syndicated distribution where a tie-up between

non-competitive marketers can be established to facilitate distribution.

As a general rule, rural marketing involves more intensive personal selling efforts

compared to urban marketing. Marketers need to understand the psyche of the rural

consumers and then act accordingly. To effectively tap the rural market a brand must

associate it with the same things the rural folks do. This can be done by utilizing the

various rural folk media to reach them in their own language and in large numbers so that

the brand can be associated with the myriad rituals, celebrations, festivals, melas and

other activities where they assemble.

One very fine example can be quoted of Escorts where they focused on deeper

penetration .In September-98 they established rural marketing sales. They did not rely on

T.V or press advertisements rather concentrated on focused approach depending on

geographical and market parameters like fares, melas etc. Looking at the 'kuchha' roads

of village they positioned their mobike as tough vehicle. Their advertisements showed

Dharmendra riding Escort with the punchline 'Jandar Sawari, Shandar Sawari'. Thus, they

achieved whopping sales of 95000 vehicles annually.

One more example, which can be quoted in this regard, is of HLL. A year back HLL

started 'Operation Bharat' to tap the rural markets. Under this operation it passed out low–

priced sample packets of its toothpaste, fairness cream, Clinic plus shampoo, and Ponds

cream to twenty million households. Thus looking at the challenges and the opportunities

which rural markets offer to the marketers it can be said that the future is very promising

for those who can understand the dynamics of rural markets and exploit them to their best

advantage.

Tends indicates that the rural the rural markets are coming up in a way and growing twice

as fast as the urban, witnessing a rise in sales of hitherto typical urban kitchen gadgets

such as refrigerators, mixer-grinders and pressure cookers. According to a National

Council for Applied Economics Research (NCAER), study, there are as many 'middle

income and above' households in the rural areas as there are in the urban areas. There are

almost twice as many 'low middle income' households in rural areas as in the urban areas.

At the highest income level there are 2.3 million urban households as against 1.6 million

households in rural areas. According to Mr.D.Shiva Kumar, Business Head (Hair),

personal products division, Hindustan Lever Limited, the money available to spend on

FMCG (Fast Moving Consumer Goods) products by urban India is Rs.49,500 crores as

against is Rs.63,500 crores in rural India.

As per NCAER projections, the number of middle and high-income households in rural

India is expected to grow from 80 million to 111 million by 2007. In Urban India, the

same is expected to grow from 46 million to 59 million. Thus, the absolute size of rural

India is expected to be double that of urban India. Rural income levels are largely

determined by the vagaries of monsoon and, hence, the demand there is not an easy horse

to ride on. Apart from increasing the geographical width of their product distribution, the

focus of corporate should be on the introduction of brands and develop strategies specific

to rural consumers. Britannia industries launched Tiger Biscuits especially for the rural

market. An important tool to reach out to the rural audience is through effective

communication. A rural consumer is brand loyal and understands symbols better. This

also makes it easy to sell look-alike. The rural audience has matured enough to

understand the communication developed for the urban markets, especially with

reference to FMCG products. Television has been a major effective communication

system for rural mass and, as a result, companies should identify themselves with their

advertisements. Advertisements touching the emotions of the rural folks, it is argued,

could drive a quantum jump in sales.

RECOMMENDATIONS

Procter & Gamble Hygiene and Health Care Ltd (P&G) is chalking out a strategy aimed

at enhancing its topline growth. It is targeting at increasing its distribution reach on the

long-term objective of tapping the one billion consumer potential that exists in India.

Elaborating on these plans in his first media interaction since taking over as P&G’s

managing director (India) in June this year, Shantanu Khosla said: “There are learnings

from my past experiences at other P&G assignments. India is a tough and challenging

market. One word that aptly describes my plan for India is, growth.” Mr Khosla did not

elaborate on growth projections.

P&G has been operating in India for the last 10-12 years, and has been able to build

stable equity in brands like Vicks, Ariel, Head & Shoulders, among others. The

Cincinnati-based parent operates through two subsidiaries — Procter & Gamble Home

Products, which is wholly-owned, and Procter & Gamble Hygiene and Health Care, in

which it holds 65 per cent. The latter reported a net profit of Rs 77 crore on gross sales of

Rs 449.8 crore in the year ended June 2002.

“We have already built a strong competitive advantage, and we would definitely look at

the one billion consumer potential in India, which is the biggest advantage India has, as

in China,” said Mr Khosla. After the successful implementation of the Golden Eye

distribution model, which was put in place by the company’s former managing director

Gary Cofer, the next move is to invest in distribution and penetration. According to Mr

Khosla, “Golden Eye is the most efficient distribution system in the country. But this is

not sufficient. The challenge is to win the hearts and minds of the consumer by being cost

efficient. We are putting this in place and hope to accomplish the task in the next 2-3

years.”

P&G had earlier pronounced that its strategy would largely revolve around the urban

consumer, given the huge growth potential therein. Commenting on broad-basing of the

strategy now, Mr Khosla said: “Personally, I’m not too much into this urban-rural divide.

Availability is the key to meet consumers’ expectations. It is not an end, but it is an

enabler.” Mr Khosla said that distribution is the key driver, and to increase its distribution

reach is the challenging task, considering the country’s spread and the spread of the

consumer, but it essentially is a necessity to enable products to get into...

CONCLUSION

Sales management refers to the administration of the personal selling component of a

company's marketing program. It includes the planning, implementation, and control of

sales programs, as well as recruiting, training, motivating, and evaluating members of the

sales force. In a small business, these various functions may be performed by the owner

or by a specialist called a sales manager. The fundamental role of the sales manager is to

develop and administer a selling program that effectively contributes to the organization's

goals. The sales manager for a small business would likely decide how many salespeople

to employ, how best to select and train them, what sort of compensation and incentives to

use to motivate them, what type of presentation they should make, and how the sales

function should be structured for maximum contact with customers.

Sales management is just one facet of a company's overall marketing mix, which

encompasses strategies related to the "four Ps": products, pricing, promotion, and place

(distribution). Objectives related to promotion are achieved through three supporting

functions: 1) advertising, which includes direct mail, radio, television, and print

advertisements, among other media; 2) sales promotion, which includes tools such as

coupons, rebates, contests, and samples; and (3) personal selling, which is the domain of

the sales manager.

Although the role of sales managers is multidisciplinary in scope, their primary

responsibilities are: 1) setting goals for a sales force; 2) planning, budgeting, and

organizing a program to achieve those goals; 3) implementing the program; and 4)

controlling and evaluating the results. Even when a sales force is already in place, the

sales manager will likely view these responsibilities as an ongoing process necessary to

adapt to both internal and external changes.

Goal Setting

The overall goals of the sales force manager are essentially mandated by the marketing

mix. The company coordinates objectives between the major components of the mix

within the context of internal constraints, such as available capital and production

capacity. The sales force manager, however, may play an important role in developing

the overall marketing mix strategies. For example, the sales manager may be in the best

position to determine the specific needs of customers and to discern the potential of new

and existing markets.

One of the most critical duties of the sales manager is to estimate the market potential and

sales potential of the company's offerings, and then to make realistic forecasts of sales.

Market potential is the total expected sales of a given product or service for the entire

industry in a specific market over a stated period of time. Sales potential refers to the

share of a market potential that an individual company can reasonably expect to achieve.

A sales forecast is an estimate of sales (in dollars or product units) that an individual firm

expects to make during a specified time period, in a stated market, and under a proposed

marketing plan.

Estimations of sales and market potential are often used to set major organizational

objectives related to production, marketing, distribution, and other corporate functions, as

well as to assist the sales manager in planning and implementing the overall sales

strategy. Numerous sales forecasting tools and techniques, many of which are quite

advanced, are available to help the sales manager determine potential and make forecasts.

Major external factors influencing sales and market potential include: industry

conditions, such as stage of maturity; market conditions and expectations; general

business and economic conditions; and regulatory environment.

Planning, Budgeting, and Organizing

After determining goals, the sales manager of a small business must develop a strategy to

attain them. A very basic decision is whether to hire a sales force or contract with

independent selling agents or manufacturers' representatives outside of the organization.

The latter strategy eliminates costs associated with hiring, training, and supervising

workers, and it takes advantage of sales channels that have already been established by

the independent representatives. On the other hand, maintaining an internal sales force

allows the manager to exert more control over the salespeople and to ensure that they are

trained properly. Furthermore, establishing an internal sale force provides the opportunity

to hire inexperienced representatives at a very low cost.

The type of sales force developed depends on the financial priorities and constraints of

the organization. If a manager decides to hire salespeople, the next step is to determine

the optimal size of the force. This determination typically entails a compromise between

the number of people needed to adequately service all potential customers and the

resources available to the company. One technique sometimes used to determine sales

force size is the "work load" strategy, whereby the sum of existing and potential

customers is multiplied by the ideal number of calls per customer. That sum is then

multiplied by the preferred length of a sales call (in hours). Next, that figure is divided by

the selling time available from one salesperson. The final sum is theoretically the ideal

sales force size. A second technique is the "incremental" strategy, which recognizes that

the incremental increase in sales that results from each additional hire continually

decreases. In other words, salespeople are gradually added until the cost of a new hire

exceeds the benefit.

A sales manager who is in the process of hiring an internal sales force also has to decide

the degree of experience to seek and determine how to balance quality and quantity.

Basically, the manager can either "make" or "buy" his force. "Green" hires, or those

without previous experience whom the company must "make" into salespeople, cost less

over the long term and do not bring any bad sales habits with them that were learned in

other companies. On the other hand, the initial cost associated with experienced

salespeople is usually lower, and experienced employees can start producing results much

more quickly. But as Irving Burstiner noted in The Small Business Handbook, few star

salespeople are ever unemployed, and a small business probably lacks the resources to

find and hire those who are. Furthermore, if the manager elects to hire only the most

qualified people, budgetary constraints may force him to leave some territories only

partially covered, resulting in customer dissatisfaction and lost sales. Therefore, it usually

makes more sense for small businesses to hire green troops and train them well.

After determining the composition of the sales force, the sales manager creates a budget,

or a record of planned expenses that is (usually) prepared annually. The budget helps the

manager decide how much money will be spent on personal selling and how that money

will be allocated within the sales force. Major budgetary items include: sales force

salaries, commissions, and bonuses; travel expenses; sales materials; training; clerical

services; and office rent and utilities. Many budgets are prepared by simply reviewing the

previous year's budget and then making adjustments. A more advanced technique,

however, is the percentage of sales method, which allocates funds based on a percentage

of expected revenues. Typical percentages range from about two percent for heavy

industries to as much as eight percent or more for consumer goods and computers.

After a sales force strategy has been devised and a budget has been adopted, the sales

manager should ideally have the opportunity to organize, or structure, the sales force. The

structure of the sales force allows each salesperson to specialize in a certain sales task or

type of customer or market, so that they will be more likely to establish productive, long-

term relationships with their customers. Small businesses may choose to structure their

sales forces by product line, customer type, geography, or a combination of these factors.

Implementing

After setting goals and establishing a plan for sales activities, the next step for the sales

manager is to implement the strategy. Implementation requires the sales manager to make

decisions related to staffing, designing territories, and allocating sales efforts. Staffing—

the most significant of these three responsibilities—encompasses recruiting, training,

compensating, and motivating salespeople.

RECRUITING. The first step in recruiting salespeople involves analyzing the positions to

be filled. This is often accomplished by sending an observer into the field, who records

the amount of time a salesperson must spend talking to customers, traveling, attending

meetings, and doing paperwork. The observer then reports the findings to the sales

manager, who uses the information to draft a detailed job description. The observer might

also report on the characteristics and needs of the buyers, since it can be important for

salespeople to share these characteristics.

The manager may seek candidates through advertising, college recruiting, company

sources, and employment agencies. Candidates are typically evaluated through

personality tests, interviews, written applications, and background checks. Research has

shown that the two most important personality traits that salespeople can possess are

empathy, which helps them relate to customers, and drive, which motivates them to

satisfy personal needs for accomplishment. Other important traits include maturity,

appearance, communication skills, and technical knowledge related to the product or

industry. Negative traits include fear of rejection, distaste for travel, self-consciousness,

and interest in artistic or creative originality.

TRAINING. After recruiting a suitable sales force, the manager must determine how

much and what type of training to provide. Most sales training emphasizes product,

company, and industry knowledge. Only about 25 percent of the average company

training program, in fact, addresses personal selling techniques. Because of the high cost,

many small businesses try to limit the amount of training they provide. The average cost

of training a person to sell industrial products, for example, commonly exceeds $30,000.

Sales managers can achieve many benefits with competent training programs, however.

For instance, research indicates that training reduces employee turnover, thereby

lowering the effective cost of hiring new workers. Good training can also improve

customer relations, increase employee morale, and boost sales. Common training

methods include lectures, case studies, role playing, demonstrations, on-the-job training,

and self-study courses. Ideally, training should be an ongoing process that continually

reinforces the company's goals.

COMPENSATION. After the sales force is in place, the manager must devise a means of

compensating individuals. The ideal system of compensation reaches a balance between

the needs of the person (income, recognition, prestige, etc.) and the goals of the company

(controlling costs, boosting market share, increasing cash flow, etc.), so that a salesperson

may achieve both through the same means. Most approaches to sales force compensation

utilize a combination of salary and commission or salary and bonus. Salary gives a sales

manager added control over the salesperson's activities, while commission provides the

salesperson with greater motivation to sell.

Although financial rewards are the primary means of motivating workers, most sales

organizations also employ other motivational techniques. Good sales managers recognize

that salespeople have needs other than the basic ones satisfied by money. For example,

they want to feel like they are part of a winning team, that their jobs are secure, and that

their efforts and contributions to the organization are recognized. Methods of meeting

those needs include contests, vacations, and other performance-based prizes, in addition

to self-improvement benefits such as tuition for graduate school. Another tool managers

commonly use to stimulate their salespeople is quotas. Quotas, which can be set for

factors such as the number of calls made per day, expenses consumed per month, or the

number of new customers added annually, give salespeople a standard against which they

can measure success.

DESIGNING TERRITORIES AND ALLOCATING SALES EFFORTS. In addition to

recruiting, training, and motivating a sales force to achieve the company's goals, sales

managers at most small businesses must decide how to designate sales territories and

allocate the efforts of the sales team. Territories are geographic areas assigned to

individual salespeople. The advantages of establishing territories are that they improve

coverage of the market, reduce wasteful overlap of sales efforts, and allow each

salesperson to define personal responsibility and judge individual success. However,

many types of businesses, such as real estate and insurance companies, do not use

territories.

Allocating people to different territories is an important sales management task.

Typically, the top few territories produce a disproportionately high sales volume. This

occurs because managers usually create smaller areas for trainees, medium-sized

territories for more experienced team members, and larger areas for senior sellers. A

drawback of that strategy, however, is that it becomes difficult to compare performance

across territories. An alternate approach is to divide regions by existing and potential

customer base. A number of computer programs exist to help sales managers effectively

create territories according to their goals. Good scheduling and routing of sales calls can

reduce waiting and travel time. Other common methods of reducing the costs associated

with sales calls include contacting numerous customers at once during trade shows, and

using telemarketing to qualify prospects before sending a salesperson to make a personal

call.

Controlling and Evaluating

After the sales plan has been implemented, the sales manager's responsibility becomes

controlling and evaluating the program. During this stage, the sales manager compares

the original goals and objectives with the actual accomplishments of the sales force. The

performance of each individual is compared with goals or quotas, looking at elements

such as expenses, sales volume, customer satisfaction, and cash flow. According to

Burstiner, each salesperson should be evaluated using both subjective (i.e., product

knowledge, familiarity with competition, work habits) and objective (i.e., number of

orders compared to number of calls, number of new accounts landed) criteria.

An important consideration for the sales manager is profitability. Indeed, simple sales

figures may not reflect an accurate image of the performance of the sales force. The

manager must dig deeper by analyzing expenses, price-cutting initiatives, and long-term

contracts with customers that will impact future income. An in-depth analysis of these

and related influences will help the manager to determine true performance based on

profits. For use in future goal-setting and planning efforts, the manager may also evaluate

sales trends by different factors, such as product line, volume, territory, and market. After

the manager analyzes and evaluates the achievements of the sales force, that information

is used to make corrections to the current strategy and sales program. In other words, the

sales manager returns to the initial goal-setting stage.

Environments and Strategies

The goals and plans adopted by the sales manager will be greatly influenced by the

company's industry orientation, competitive position, and market strategy. The basic

industry orientations available to a firm include industrial goods, consumer durables,

consumer nondurables, and services. Companies that manufacture industrial goods or sell

highly technical services tend to be heavily dependent on personal selling as a marketing

tool. Sales managers in those organizations characteristically focus on customer service

and education, and employ and train a relatively high-level sales force. In contrast, sales

managers that sell consumer durables will likely integrate the efforts of their sales force

into related advertising and promotional initiatives. Sales management efforts related to

consumer nondurables and consumer services will generally emphasize volume sales, a

comparatively low-caliber sales force, and an emphasis on high-volume customers.

In his classic book Competitive Strategy, Michael Porter lists three common market

strategies adopted by firms—low-cost supplier, differentiation, and niche. Companies

that adopt a low-cost supplier strategy are usually characterized by a vigorous pursuit of

efficiency and cost controls. Sales management efforts in this type of organization should

generally stress minimizing expenses—by having salespeople stay at budget hotels, for

example—and appealing to customers on the basis of price. Salespeople should be given

an incentive to chase large, high-volume customers, and the sales force infrastructure

should be designed to efficiently accommodate large order-taking activities.

Companies that adhere to a differentiation strategy achieve market success by offering a

unique product or service. They often rely on brand loyalty or patent protection to

insulate them from competitors, and thus are able to achieve higher-than-average profit

margins. In this environment, selling techniques should stress benefits, rather than price.

Firms that pursue a niche market strategy succeed by targeting a very narrow segment of

a market and then dominating that segment. The company is able to overcome

competitors by aggressively protecting its niche and orienting every action and decision

toward the service of its select group. Sales managers in this type of organization would

tend to emphasize employee training or to hire industry experts. The overall sales

program would be centered around customer service and benefits other than price.

Regulation

Besides markets and industries, another chief environmental influence on the sales

management process is government regulation. Indeed, selling activities at companies are

regulated by a multitude of state and federal laws designed to protect consumers, foster

competitive markets, and discourage unfair business practices.

Chief among anti-trust provisions affecting sales managers is the Robinson-Patman Act,

which prohibits companies from engaging in price or service discrimination. In other

words, a firm cannot offer special incentives to large customers based solely on volume,

because such practices tend to hurt smaller customers. Companies can give discounts to

buyers, but only if those incentives are based on real savings gleaned from manufacturing

and distribution processes.

Similarly, the Sherman Act makes it illegal for a seller to force a buyer to purchase one

product (or service) in order to get the opportunity to purchase another product—a

practice referred to as a "tying agreement." A long-distance telephone company, for

instance, cannot require its customers to purchase its telephone equipment as a

prerequisite to buying its long-distance service. The Sherman Act also regulates

reciprocal dealing arrangements, whereby companies agree to buy products from each

other. Reciprocal dealing is considered anticompetitive because large buyers and sellers

tend to have an unfair advantage over their smaller competitors.

Several consumer protection regulations also impact sales managers. The Fair Packaging

and Labeling Act of 1966, for example, restricts deceptive labeling, and the Truth in

Lending Act requires sellers to fully disclose all finance charges incorporated into

consumer credit agreements. Cooling-off laws, which commonly exist at the state level,

allow buyers to cancel contracts made with door-to-door sellers within a certain time

frame. Additionally, the Federal Trade Commission (FTC) requires door-to-door sellers

who work for companies engaged in interstate trade to clearly announce their purpose

when calling on prospects.

BIBLIOGRAPHY

Global Entertainment and Media Outlook: 2006–2010, a report issued by global

accounting firm PricewaterhouseCoopers

Bhatia (2000). Advertising in Rural India: Language, Marketing Communication, and

Consumerism, 62+68

Eskilson, Stephen J. (2007). Graphic Design: A New History. New Haven,

Connecticut: Yale University Press. pp. 58. ISBN 978-0-300-12011-0.

Advertising Slogans, Woodbury Soap Company, "The skin you love to touch", J.

Walter Thompson Co., 1911

McChesney, Robert, Educators and the Battle for Control of U.S. Broadcasting, 1928-

35, Rich Media, Poor Democracy, ISBN 0-252-02448-6 (1999)

http://www.canwestmediaworks.com/television/nontraditional/opportunities/

virtual_advertising/

Advertising's Twilight Zone: That Signpost Up Ahead May Be a Virtual Product -

New York Times

Lasch, Christopher. The Culture of Narcissism: American Life in an Age of

Diminishing Expectations. pp. 302. ISBN 978-0393307382.