3Ms Industrial Business Division - Case Study Example

Applied Channel Systems Question 1 Evaluate the opportunities and challenges that 3M’s Industrial Business Division faces from changing the customer focus from OEM to MRO. Opportunities IBD has been serving as a broad range of industrial market in sale of appliances, paper and electronics. Some of its products include abrasives, adhesives and supply chain execution software solutions. To generate top line growth of the company, IBD decided to focus on MRO and this division brought about various product opportunities. These included improved technology platforms which increased growth potential for example through the introduction of composite conductors, liquid filtration and supply chain execution software. The other opportunity included use of direct sales by facing the customers and this stimulated sales into the company. The company was also able to pursue corporate initiatives such as by eroding the edge of Canadian manufacturers. Arikan (2008) describes that this strategy involves incorporation of various elements such as growing the entire business, aiming at developing business opportunities, being involved in acquisitions and finally increases in investment especially in the emerging markets. According to Baker and Hart (2008) customisation of products and management of customer retention would be another way of achieving the growth of the business. In this, IBD gets an opportunity of driving scale and increased market share which is more at MRO. The reason for this is that MRO has a bigger market especially in Canada. The other opportunity that IBD acquirers by using MRO is that large distributors are growing faster in the market as compared to the rate of MRO growth. There are also vacant spaces in various product lines showing that IBD will have a competitive position in the market by filling the vacant places. A better opportunity for IBD that contributed in improving its revenue and profit margins was private labeling. IDB had two major customer groups which include original equipment manufacturers (OEMs) and maintenance, repair and over haulers (MROs). The two customer groups were different in their way of sale for example OEM concentrated on selling high value items and mostly they were finished products while MRO was selling low value products which were mostly consumables. IBD had concentrated on distributing to OEM segment and its growth had stated deteriorating since the segment had reached it maturity stage and therefore expansion would be difficult. MRO segment on the other hand was fragmented and there was lack of brand loyalty though it was significantly growing. IBD came to a conclusion that the two major ways of attaining its target would be to find new customers for the present products and the other method would be to introduce new products to the market which will be aimed at targeting new customers in the market. Other opportunities included improved technology platform and having potential in growth. One of the faced by changing customer focus from OEM to MRO was that IBD would get additional sales within the targeted time frame. This means that the time taken in delivering products from the manufacturer to the customer will be shortened. This is because IDB had been distributing to retailers and not concentrating with the customers. Challenges Some of the challenges faced by 3M’S industrial Business Division are that the company had stood the test of times and had not changed in terms of product applications, service delivery mechanisms, customer expectations and logistics requirements. The other challenge facing IBD dealing with subsidiaries and that its products could not be specified. Brand loyalty was also minimal and the company had mostly been driven by price of product. The customers in IBD had been perceived as ongoing and the company focused in maintaining existing business account. The sales model of 3M was also a major challenge as it used the traditional focus of what to sell to customers rather than considering how to sell through inventing various channel of distributors. Supply chain logistics and marketing programs were also challenges faced which had to be changed for the company to effectively market to the national distributors. Question 2: How does the sales relationship with OEM customers differ from that of MRO customers? Why? The sales relationship in OEM and that of MRO differed in the sense that OEM was a volatile customer group and aimed at buying from the manufacturers of the products through product innovation, introduction of new products and building relationships with customers by working closely with them to reduce the cost of operation. OEM was also able to work with the end user by understanding their needs and preferences therefore building customer loyalty. MRO on the other hand the distributors of the customer group controlled the market more than the suppliers. This caused a major challenge to 3M since it created a psychological entry barrier to the company. In MRO, products were not specified and there was lack of brand loyalty. Customers were driven by price of the product. In MRO, the national distributors were significantly growing and therefore it was easy for them to get large contracts. Selling high volumes was crucial to them as it brought in profitability, as their fixed costs were also high. The MRO national distributors also supplied to OEM. MRO was also product driven and had a strong R& D orientation which made it to understand the marketing needs. Question 3: How will IBD’s current sales model have to be changed to effectively reach national distributors? Why? There are three major issues faced by 3M which included its sales model, logistics and marketing programs. In order for 3M IDB to survive in moving to MRO, it had to replace its sales model for example by replacing the question of what to sell to that of how to sell. The company has to change the current division centric model to one that concentrates on the needs of the customers such as the customer centric model. The sales people should be capable of cultivating and building good relationships with the national players in the market. The other model that would improve IBD’s sales model to reach national distributors is by outsourcing sales. IBD should form a team that will be responsible for forming a good relationship with sales agents and manufacturers’ representatives. This will be formed for example for specific products such as adhesives. The reason why the sales model has to be changed to effectively reach national distributors is in order for IBD to be able to make their own sales where they will be paid a commission for example 3 percent will be given for any existing business and five percent will be offered for an additional sale made by the representative. Agents at IBD will take product lines but not have more than one supplier. However, through outsourcing, IBD might another boundary to its customers which may see reduction of sales. Private labels may also improve growth of volumes as in MRO the generation of private labels was low. In order to increase their power, national distributors wanted to increase their private label which would build good equity. The other source of concern in reaching national distributors was conflict with the channels of distributions. William and Perreault, Jr. et al., (2008) shows this had been reducing sales force therefore reducing productivity and thus profits. This is for example where a distributor would ask for price reduction from 3M for products that had been negotiated with OEM. Channel conflicts should therefore be avoided in order for 3M to effectively reach national distributors. The above diagram represents the number of distribution channels where each layer of the marketing intermediaries has a duty of bringing the product closer to the final consumer. Louis and Stern et al. (2006) describes that channel one is the direct marketing where the manufacturer directly sells to the consumer while the other channels represent indirect marketing. Question 4: Develop a plan of action for IBD, addressing these and related issues: Should IBD target national distributors? If so, what changes in the sales model and supporting marketing strategy should IBD pursue? To develop a plan of action for IBD, it is important to understand the importance channel power in terms of how to get it, how to use it and how to keep it. In achieving this, various factors should be considered such as service output demands. These include the productive outputs of the marketing channel and in this end users tend to demand and show their preference. The other factor is channel flows supply which includes the activities that produce services outputs that are mostly demanded by the end users. The Company should also decide on the channel structure to be used for example by analysing the types of members that will be constituted in one channel. The intensity and their aggressiveness to sell should also be analysed since distinct channels coexist (Best 2009). Finally, the company should look at the ideal structure that will be capable of meeting the targeted segment and their respective needs in the market. The gaps that exist within the channels of distribution should be closed and several aspects solved such as the relationship and interdependency should be well managed. IBD should also be capable of analysing how players in the market gain and use their power in order to drive sales. Marketing channels need power due to the need for interdependency and need for cooperation. Robert (2008) describes that power is also used to convince, defend them and influence the way people purchase products in the market. There are five power sources in the market which include coercive power, coercion which involves removing something that one member already has and meditated power. Should IBD target national distributors? IBD should target national distributors since they were among the trends in MRO and had significantly grown in number in Canada. The national distributors also had a huge sales infrastructure as it had many branches, delivery centers and sales force around the region. It is also important that IBD target national distributors since they have a good position in the market. This is because special and niche stores had started losing their competitive position due to reasons such as competition from large players in the market who built up a domain of expertise by acquiring various skills, which enabled them to target their niche players’ customers. The other reason that made special and niche store lose their competitive position is the increase in technologies which made manufacturing be open to all (Julian 2008). To be competitive in the national distributors IBD had to make several changes in the sales model and supporting marketing strategy. The new strategies that should be introduced by IBD include four elements one is that IBD should aim at growing the core business for example by focusing on the most important factors that will increase sales. Secondly, IBD should pursue acquisition for example through MRO, which will make it easier for them in targeting the national distributors. Thirdly, IBD should concentrate on emerging business opportunities such as driving scale and increased market share which is more at MRO. The reason for this is that MRO has a bigger market especially in Canada. The other opportunity that IBD acquirers by is that large distributors are growing faster in the market. Finally, IBD’s new strategy will include doubling investments in the emerging markets. To achieve this, general guidelines will have to be put in place such as the driving scale in large markets, taking higher relative share in the market and use of customization are other guidelines that should be used in order to grow the core business (Wisner et al. 2009). IBD should also try to develop local and differentiated products in order to target various groups in the market. Extending private labeling will be another guideline and planning for cannibalization. The other changes include getting closer to the end users of MRO supplies and connecting with them to find out their needs and preferences. Sales people located in various locations such as Western Canada, Quebec and Ontario had to be increased in number and had to be well trained on customer specialisation rather than product specialisation. IBD should also form strategies retaining its customers since most of its customers were ongoing. IBD had to change in such a way that it would sell products at low end of the market and should have a well rounded business perspective in order to face the customers. Distribution channel dynamics had to be managed effectively to by putting up supply chain processes (Rosenbloom 2004). What other recommendations do you have that would assist IBD in meeting the aggressive revenue growth mandate they face from their new CEO? In order IBD to generate top line growth, I think the new CEO should aim at designing the marketing channels. This will be aimed at focusing not at what the end users are buying but how they prefer to buy for example in terms of sizes and quantities. Some of the consumers’ general demands include bulk breaking, spatial convenience, waiting time, customer service and the processing of information. Richard (2008) shows in order to meet the above service output demands it is necessary to consider the cost of the product, competition in the market for example the existing competitors who are able to beat the channel’ service provision. IBD should also consider the ease of entry for it to be able to formulate strategies of beating the new entrants in the market. The company should also carry out gap analysis which will be able to determine the current position in the market and the future expectations. In case there exists channel gaps, IBD should analyse the types of gaps and the techniques to be used in closing those gaps. Some of the sources of gaps include environmental bounds and managerial bounds. According to Kotler (1991) environmental bounds include local legal constraints, infrastructure and local physical retailing. Managerial bounds include constraints caused as a result of lack of knowledge and optimization of an increased level. The types of gaps include demand-side gaps or supply side gaps. In order to close these gaps, the company should expand the provision of service outputs and change the segment targeted in the market. Lancaster and Massingham (1998) describes that to close the supply side gaps, the company should change flow responsibilities of channel members and should also invest in low cost distribution technologies which will make the flow effective. The company should also consider bringing new channel members who will be responsible in reaching the end user and increasing the volume of sales. The diagram below shows the bounds, gaps and how to close the gaps. References Arikan, A 2008, Multichannel marketing: Metrics and methods for on and offline success, Indianapolis, Ind.: Wiley Technology Pub. Baker, M & Hart, S 2008, The marketing book, Oxford: Butterworth-Heinemann. Best, R 2009, Market-based management: Strategies for growing customer value and Profitability, Upper Saddle River, N.J.: Pearson/Prentice Hall. Julian, D 2008, Distribution channels: Understanding and managing channels to market, London, Prentice-Hall. Kotler, P 1991, Marketing management, 7th ed., London, Prentice-Hall. Lancaster, G & Massingham, L 1998, Essentials of marketing, New York, McGraw-Hill. Louis, W. & Stern et al. 2006, Marketing channels, 7th ed., London, Prentice-Hall. Richard, E 2008, A blueprint for designing marketing channels, viewed 26 May 2011, www.chicagostrategy.com. Roberts, M 2008, Internet marketing: integrating online and offline strategies, Macmillan, Southbank. Rosenbloom, B 2004, Marketing channels: A management view, Mason, Ohio: Thomson/South-Western. William, D & Perreault, Jr. et al., 2008, Basic marketing: A marketing strategy planning approach, 16th ed., New York, McGraw-Hill. Wisner, J, Tan, K, & Leong, C 2009, Principles of supply chain management: A balanced approach, Mason, OH: South-Western Cengage Learning. Read More