Assigned case and case questions Please carefully study the P&G Polska case that follows (was attached fife) and try to answer the following questions (note that NONE of the questions requires knowledge of the specific numbers in the case): 1. What is the strategy for entering a country as a new consumer products firm? What are alternative methods for achieving coverage (distribution)? 2. What was the approach of P&G in Poland? Why do you think they chose this approach? 3. What cost data are available to distributors? What data would you like to have for managing the business? 4. As Bill Brown, how would you set up an incentive system for the distributors? Do you need to provide strong incentives? Which measures of distributor performance would you use?
December 2004 P&G Polska - Abridged The sales function's job, no matter where you are in the world, is a very simple one. We are responsible for delivering superior in-store presence on P&G products. Everything turns on how to get more of my product in front of the consumer, priced correctly, merchandised in a robust fashion that will allow the great product development, market research, packaging and advertising to work. Whether I'm leading a sophisticated customer development program for a major retail chain in the U.S. or running the sales operation in Poland, fundamentally the mission doesn't change... but how you do it changes dramatically. Bill Brown National Sales Manager, P&G Poland Bill Brown arrived in Warsaw in July 1994 from the New York office of Procter & Gamble (P&G) to become the National Sales Manager of Poland. He replaced Jim Wilen, who had been promoted to Director of Sales-P&G Central & Eastern Europe. Brown was well-prepared to enact P&G's strategy of partnering with retailers to achieve lowest total cost and \"value pricing.\"1 However he was unaware of the unique challenges that awaited him in implementing the strategy in an emerging market with distribution partners who were budding entrepreneurs. On reviewing the status of operations, Brown found a well-established network of regional distributors. The distributors had exclusive rights to distribute P&G products in their region using three major channels to reach customers: (i) delivering directly to major retailers, (ii) delivering to subwholesalers that could reach the large number of retail outlets in rural regions, and (iii) an emerging van sales initiative (direct store delivery of P&G brands to medium-sized retailersa major departure from traditional P&G strategy). However, data on the performance of the Van Selling Representatives (VSRs) and the regional distributors revealed some disturbing patterns. These data indicated wide discrepancies between the best and worst VSR performance both within a region and among regions. At the same time, the balance between the three major distribution channels had been disrupted with recent expansions of the van selling fleet. Reviewing the trends of van sales and subwholesaler sales volume growth, it appeared that about 70 percent of van sales growth had been incremental on net. However, the balance reflected reductions in subwholesaler sales. Brown was concerned that continued growth in van sales would result in retaliation by subwholesalers (still a significant portion of the business). He also wondered whether van sales had inadvertently expanded to the point of diminishing or perhaps negative returns. As Brown described: It was clearly time for our relationship with regional distributors to mature and to be more focused on delivering value to all distribution channels. In the first twelve months of the relationship everyone was working hand-in-hand, we were all going to be 1 See Bill Saporito, \"Behind the Tumult at P&G,\" Fortune, March 7, 1994. 2004 Shannon Anderson, William Lanen, and Michal Matejka. This case is a revised and abridged version of University of Michigan cases P&G Polska (A) and (B), which were developed with funding provided by the William Davidson Institute at the University of Michigan Business School and with the cooperation of the Procter & Gamble Corporation. The case is intended for the purposes of classroom discussion of business issues. All data and the names of the local managers in the case are fictitious. P&G Polska Page 2 millionaires and there was nothing that we couldn't do. With heightened competition we began to understand our limitations in using dedicated regional distributors to supply the subwholesale channel. In October, at our quarterly distributor symposium, we instituted 'tough love' measures. The theme of the symposium was that the gap between the best and worst distributors was becoming unacceptable. Distributors had to understand that this was not a guaranteed marriage for life. They needed to perform well to continue in partnership with P&G. Consistent with that theme was a second message: that we needed to ensure competitive margins and look for cost reduction opportunities wherever they existed. So you could say that the love-in ended in October, and, if you talked with distributors they'd probably link it to my arrival. P&G Central & Eastern European Division When P&G entered Poland in 1991, they found no retailing or distribution infrastructure and more stores per capita than in any other country in Europe. Even Russia, with 150 million people, had 25 percent fewer points of sale than Poland, with approximately 38 million people. The retail industry structure was consistent with population demographics45 percent of the population lived in outlying rural areas and relatively few households had automobiles. After three years of early developmental work in Poland, P&G faced a growing and significant competitive threat from Western firms with premium branded products such as Lever (UK-Holland), Benckiser (Germany), Henkel (Germany), Colgate-Palmolive (US), Johnson and Johnson (US) and L'Oreal (France). At the same time, the quality of local products had improved significantly creating additional competition from lower priced brands. In June 1995, P&G had several hundred employees in Poland, nearly all of whom were Polish nationals. The National Sales Group constituted over 20 percent of this number, the majority of whom were in line grocery sales. Remaining sales employees were in two other groups, pharmacy sales and national accounts, or in two corporate sales support functions, the sales and merchandising organization (SMO) or customer business development (CBD). Exhibit 1 is an organization chart for the National Sales Group. The line sales organization is responsible for sales to most supermarkets and cosmetics shops, which account for the bulk of total sales. Line grocery sales is organized along geographic lines with District Managers responsible for regions of the country. Unit Managers report to District Managers and are responsible for distributor sub-regions. P&G Sales Representatives are assigned to either retail and wholesale accounts or to distributor van sales. Vans are used to service mid-sized stores. While the vans are owned by P&G, they are maintained and operated by regional distributors. Van sales representatives are employees of the regional distributor. Employees of the regional distributor, including van sales representatives, warehouse operators, and administrators, do not appear on the P&G organization chart. Pharmacy sales have to comply with state regulations and are handled by a separate organization. The National Accounts Organization is another small sales organization, which was established in April 1995 to serve an emerging sector of Western multinationals and the state-owned company, Ruch, controlling 20,000 of the 40,000 small kiosks found on major street corners throughout Poland. Brown's Group at the Warsaw headquarters of P&G Poland includes the two sales support groups, SMO and CBD. The SMO group is responsible for developing strategies for succeeding in local stores. CBD works closely with retailers to achieve total system efficiency from product production through the sale of the product to consumers. In Poland, where major retailers are the exception rather than the rule, the CBD group has primarily supported regional distributors. The CBD group is a multi-functional group that identifies barriers to distributor growth and profitability by focusing on total systems efficiency. Having P&G Polska Page 3 identified these barriers the group works to identify best practices from current distributors, other P&G organizations, or other companies and develops programs to implement these practices in all distributors. Market Entry in Poland Between 1991 and mid-1993, the typical Polish wholesaler of P&G products was a person who owned a Polski Fiat (a domestically produced automobile) and stored inventory in their home garage. A P&G sales representative would canvas an area gathering large retail orders for products. Then he or she would try to find a wholesaler who had the product in stock and was willing to deliver to the retail store. This process would take several days and typically resulted in orders that were, at best, 50 percent complete. Small retailers bought inventory on a cash basis directly from the wholesaler's warehouse. In the fall of 1993, as a result of the extreme fragmentation of the Polish market, P&G took what was for the company an atypical approach for achieving market share growth in Poland. As Brown described: We were going crazy trying to keep up with thousands of points of sale and trying to work with hundreds of wholesalersa third of whom went out of business every day and a third of whom opened shop every dayall 'entrepreneurs.' In order to get control of our physical transportation costs and, more important, our receivables, we approached 15 of the most promising wholesalers and invited them to become exclusive distributors of P&G products in their region. None of the competitors in Poland followed this strategy and none of the P&G groups in other Central European countries went this far. While the regional distributors solved the problem of dealing with several hundred wholesalers, the fundamental problem of achieving market coverage with the large number of points of sale remained. Jim Wilen, the first P&G National Sales Manager in Poland, described the structure of the Polish grocery trade as a pyramid. At the top of the pyramid were the so-called \"A\" stores, high volume stores that were relatively few in number and typically found in the large cities. The more common, mid-volume or \"B\
