Analysis Formulation and Implentation of Channel Systems: of 3M Canada - Case Study Example

3M Canada: Industrial Business Division Q 1 Table1 Financial Summary ________________________ (Dollars in millions, except per share amounts) 2010 2009 2008 2007 2006 2005 ________________________________________________________________________________ Operating Results Net sales $26,662 $23,123 $25,269 $24,462 $22,923 $21,167 --------------------------------------------------------------------------------------------------------------------------------------------------- Operating income 5,918 4,814 5,218 6,193 5,696 4,854 ________________________________________________________________________________________ Net income 4,085 3,193 3,460 4,096 3,851 3,139 Per share – basic 5.72 4.56 4.95 5. 70 5. 15 4. 10 Per share – diluted 5.63 4.52 4.89 5. 60 5.06 4.02 ________________________________________________________________________________________ Net income attributable to 3M 4,085 3,193 3,460 4,096 3,851 3,104 Per share – basic 5.72 4. 56 4.95 5.70 5.15 4.06 Per share – diluted 5.63 4.52 4.89 5 .60 5.06 3.97 The above table 1 gives a summary of the financial position of the company for last three year. After the change of management of the Industrial business Division (IBD) of 3D Canada Company, the company was mandated to increase its annual growth rate of 2 to 3 % to 12 to 15 % in the next two years. The company was to achieve this independent from the ongoing acquisitions. Some of the recommended plan of actions according to the accounts manager Mr. Yengnaswami was to change the focus of the customer segment from the Original Equipment Manufacturers (OEMs) to Maintaince, Repair and Overhaulers (MROs) since there had been experienced slow growth in the company due to the EOMs segment had matured and there were no more prospects for growth in the segment. While IBD had not concentrated on the MRO segment with the division experiencing contraction, due to limited brand loyalty and fragmentation. The shift from OEMs to MROs however comes with some challenges and opportunities alike. Some of the opportunities included taking advantage of the ever increasing number of national distributors. The number of these distributors was growing at a double digit rate hence reduced unit margins. Taping the niche and special markets emerging from the losing the traditional competitive edge is the other opportunity that larger players can take advantage of it through acquiring process and product skills through making inroads into the customers of the niche players. Acquisitions are the other growth avenues for the company to grow. This is because this has been common while most firms going for consolidations in order to purchases and reducing the number of distributors. E-commerce was the other opportunity that is available for craps as it gathers ground. This would help in retaining of customers through physical medium of a salesperson (Tybout & Calder, 2010). Though the opportunities of changing from OEMs outweigh the challenges that the process face, there are a number of challenges that hinders the company from realizing its full potential. This includes the business structure of the company that has long contained two segments of customers that can either be reached. Focusing the MROs only would therefore mean that a significant number of customers would be dissatisfied and would even quit. The process of shifting would cause the mean that the additional cost would be incurred while expanding to reach the national figure that is with networks, procedures and protocol to be followed (Tybout & Calder, 2010). Conflicts in the channel are the other area of concern. The draining of the sales forces without actually realizing the revenue is the other. This would appear in the type of an offer to OEM. Logistical problems are the other challenge that is experience in the process of shifting to MROs. If the supply chain management is not strengthened through linkages with incentive programs, there would be experienced increase in the cost of maintaining large national players. Marketing programs may not all work as expected to deliver the desired results. This is because of the traditionally used programs that may be hard to avoid or totally forget about them. The table 2 below gives the summary of the financial position of the company for the last six year: Table 2 Below is summarized financial information for 3D: IBD CANADA for the last 6 years Financial Ratios ________________________________________________________________________________________ Percent of sales 2010 2009 2008 2007 2006 2005 Cost of sales 51.9% 52.4% 52.9% 52.1% 51.1% 49.2% Selling, general and administrative expenses 20.5 21.2 20.8 20.5 22.1 21.9 Research, development and related expenses 5.4 5.6 5.6 5.6 6.6 6.0 Other expense (income) – – 0.1 (3.5) (4.6) – Operating income 22.2 20.8 20.6 25.3 24.8 22.9 Net income before cumulative effect of Accounting change attributable to 3M 15.3 13.8 13.7 16.7 16.8 14.8 ________________________________________________________________________________________ Total debt to total capital (total capital = debt plus equity) 25% 30% 39% 29% 26% 18% Q2 OEM and MRO are the two main customer segments that IBD operated in with OEM being the medium and large businesses that focused mainly on the industry and while having a strong base in the manufacturing. This segment has however been affected of the decline in the in the manufacturing industry. This decline has led to reduced sales in among the OEM customers. This has forced IBD to look beyond this segment for revenue and customers. Vendors for instance are the affected first in case of any slow down in the industry while being the last one to recover from the same. This makes it a volatile customer group. Although this has forced the sales volumes of this group to drop significant, IBD has been able to remain on course through offering or coming up with new innovative products that are specified. This involves having a robust relationship with customers by being close to and working closely to reduce operation costs (Tybout & Calder, 2010). The tracking of customers’ needs is also one of the easier things done with OEM. MRO on the other hand is the segment that dealt with items that are not critical and re used in repairing and maintaining of plant facilities or equipment. This has been a barrier that has psychologically prevented the many entrants into the market that is dominated by brand suppliers. As a result of this there has been minimal brand loyalty; products are not being specified among other disincentives that become important business driver. Due to the growing commoditization of the IBD products, they have been pushed to the MRO category while some few items were closely identified with 3M. According to Yegnaswami, IBD sales representatives have are used to dealing with individuals on one to one basis in their respective Niche and special categories. They have been compelled to change the tactic as they are required to deal large corporations that have procedures and protocol. The trend is that the national distributors among the MRO are growing tremendously with double digit growth (Icun & Getty, 2007). The 3DIBD products and sale influence the decisions by majority of the key market participants in the supply process prior to the product reaching the final user. The suppliers pass their products to the distributors who will in term pass the products to the various types of distributors which included large national distributors, regional specialists and generalists and the niche. The end users who include but not limited to the industry centers, appliances, marine general industrial market will then get the product from the distributors. The table 3 below give additional financial information of the company for the last six year: Table 3 Additional Information 2010 2009 2008 2007 2006 2005 Cash dividends paid $1,500 $1,431 $1,398 $ 1,380 $ 1,376 $ 1,286 Per share 2.10 2.04 2.00 1 .92 1.84 1.68 Stock price at year-end 86.30 82.67 57.54 84.32 77.93 77.50 Total assets 30,156 27,250 25,793 24,699 21,294 20,541 Long-term debt (excluding current portion) 4,183 5,097 5,166 4,019 1,047 1,309 Capital expenditures 1,091 903 1,471 1,422 1,168 943 Depreciation and amortization 1,120 1,157 1,153 1,072 1,079 986 Research, development and expenses 1,434 1,293 1,404 1,368 1,522 1,274 Number of employees at year-end 80,057 74,835 79,183 76,239 75,333 71,227 Average shares outstanding – basic 713.7 700.5 699.2 718.3 747.5 764.9 Average shares outstanding – diluted 725.5 706.7 707.2 732.0 761.0 781. Q3 IBD’s current sales model has to change to effectively and efficiently reach the entire national distributor network. This is in the aim of expanding the market share and expanding its distribution network in order to reach out to more customers. To carry out these changes, the Current president Yegnaswami points out three critical issues that needed to be changed. These are the sales model, logistics and marketing programs. On the change of the sales model, the president pointed out the need to change the sales focus that has traditionally been on “what to sell” to the current one that is “how to sell”. This would involve the shift from the current centric of division/product model to the modern account/customer centric model. This should however be done without necessarily forfeiting the current product expertise which as been the hallmark of the company. To do this, the company had to establish a competent cadre of specialists in the “channel” that would complement the IBD product specialists (Icun & Getty, 2007). This for instance would be done by adding one salesperson in Ontario, Quebec and Western Canada. This additional salesperson would help in the cultivation and building the relationships with both the national and regional players. The existing cadre can replace them. The main idea behind this change is to be able to come up with employees that are well-rounded businesspersons who can represent the single face of the IBD MRO channel. The other change would be outsourcing the sales. This is an option that IBD sees as a way of making sure that their sales volume increases. This would possible through partnering with the independent manufacturers’ representatives and sales agents. This is however applied only on particular products like the adhesives. IBD would however take make good use of the sales force of the sales agents while working on commission basis of about five percent on any additional sale and 2 % on the on the existing business. The agents would also handle the complementary product lines involving more than one supplier that are in the same category. Concerns are however the introduction of outsourcing would create a new layer in the 3m’s interface with the company’s customers. The other strategy was to use of private levels that would be the key drivers of growth volumes. This is seen as a breakthrough as there has been experienced low penetration of the private labels in the MRO which as been around 2 % of the total sales. The national distributors would however want to grow the private label business so as increase their closeness with the manufacturers hence equity of their own in the business. This means therefore that the company would have to move the tonnage in the market (Icun & Getty, 2007). This not however increase or improve on the brand of the company or the market share of the company has it does not have the 3m label. IBD on the other hand make was of the opinion that it uses the available resources in its plant to manufacture its own privately owned label. They would then use the private labels to supply the MRO resulting in the total commitment.mr. Yegnaswami the president argues that the company is ready to move into the use of the private labels. Q 4 Due to the ongoing consolidation efforts and the need for faster growth among other reasons, there was need for the company to target the national distributors. This because of the nature of their business that is lead by the qualified technocrats who have worked in companies like 3m.The to the untapped market available nationally and the fact that IBD had initially concentrated in the regional OEM market due to their organizational structure that was flat and quick footed. It was therefore high time that they set their foot on the national category apart from having their special and niche market since they have not in the past extended their footprints nationally (Coughlan, 2001). The main reason as why the company is advised to focus on the national distributors is because unlike in the past whereby the representatives of the firm have had to deal with store managers who acted individually on behave of the company, in very special or niche market or categories, they however have to deal with large corporations driven by procedures and protocol and networks. The corporations are widely different and coordinate more than fifty branches of the same customer hence will not be dealing with one branch or product but several hence answerable to more than one product in which they are the mega-distributors deal with. As part of the changes that the company planned to have, its is evident that the IBD had to change from emphasizing on the niche and special players to national players while moving closer to the MRO end user. These include but not limited to tools engineer and the foremen who maintain. The end user in MRO is however are not the consumer or distributor. Its is however not easy to have the customer as there is need to connect to the end user who uses MRO. This is the required mindset in the new change sales forces (Coughlan, 2001). According to Yegnaswami, there was apparently the need to have a different model of entering the market in order to maximize some of the national accounts that were growing in double digits. These were seen as opportunities for IBD to grow with. The company had to change from selling the products on the division on premium, specializing on the product at the sales force and doing well in the relationship building to the current new model with attributes like selling the product at the low end and having businesspersons who are all-rounded to be able to provide a common face for the company. These representatives should be able to manage the ever changing distribution dynamics of in the channel. To help achieve some of these endeavors, there is need for incentive programs tat will reduce the costs incurred in the supply chain of these big national players while sticking to some of the marketing programs that considers the constraints and protocols create by the national players. Marketing strategies that are ‘regional specialist’ in nature should be replaced with customized programs that put into consideration all the constraints and protocols of the national players. IBD should also standardize the SKUs and fulfilling the logistics which will see deliveries made just- in- time while maintaining a competitive edge (Coughlan, 2001). Recommendations In conclusion, its highly recommended for the 3M Canada: Industrial Business Division should continue with it change of business focus from the EOMs to MROs since the changes in terms of the product application, customer expectations, service delivery mechanism and all the logistical requirement would be improved hence better revenue and business growth for the company. This is however possible without necessarily changing or having a total overhaul of the business model that the company is currently using (Beechey &Perkins, 2007). The changes would according to Mr. Yegnaswami, would see the company drive scale in the relative markets through the introduction of the partnership with agent marketers which have wide and established networks. This would result in the increase in market share of the company. A part from controlling a significant amount of the mainstream market the company will also control a relatively high market share in the small markets. This is only through customization which one of the new management’s target. In their vision they will also aim at managing the rate at which customers are retained. Through the development of locally differentiated products, private labeling is extended to fill in products with white spaces. All these changes are guided by the customer focus that IBD is seeking. The opportunities according to Yagaswami are available more readily in the MRO business wing (Beechey &Perkins, 2007). This can illustrated in the improvement of share for the first quarter of the year 2011 a shown in the graph one below: Graph 1 . Reference: Beechey, V. &Perkins, T. (2007). Marketing Mix and strategies. Minneapolis: University of Minnesota Press. Tybout, A. & Calder, J. B. (2010)Kellogg on Marketing, River Street Hoboken, NJ: John Wiley and Sons. Coughlan, A.T. (2001) Marketing channels: The Prentice Hall international series in marketing, Upper Saddle River, NJ: Prentice Hall. Icun Y. & Getty, M. (2007) BCI: In Sales & Distribution, New York: Elex Media Komputindo 3M: Canada Company files Read More