Global Marketing Channels

IndustroServ is a mid-sized manufacturer of specialised laser components, used in equipment that monitors the quality of products coming off an assembly line.These devices monitor precisely factors such as design, sizing, and any other surface defects on the products.The devices are used in a wide range of manufacturing facilities, everything from basic fabricated metal products to advanced machinery and components.Because of the uniqueness of the products that IndustroServ have developed through market development with industry experts, they require technical support to ensure they are fitted and functioning according to IndustroServ's well-defined standards.IndustroServ's mission is to foster a competitive manufacturing sector through efficient quality control, leading to customer satisfaction.

The value of these products to customers is a reduction in the rejection rate of many products.For some manufacturing companies, the rejection rate has declined from 10% to 2% after the use of these products.As an example, a manufacturing company producing 1000 units per month would only reject 20 units versus one hundred.That would increase sales and revenue from 900 to 980 - or 9%.The cost of making one product is $25/unit variable cost.Fixed production costs are $2.7m annually.Fixed sales costs (including salaries and expenses for six sales team members) were $2.4m annually.Other fixed corporate and administrative costs were 1.2m annually.The company makes a net profit of 5% on the sale of all units.

The company produces and sells around 300,000 of these units each year.The company sells them through specialised distribution centres at a price of around $50 each.Most distribution centres sell these products to small manufacturers - on average around 50 units per month.These products are then marked up at 10% by the distribution centres and sold to a variety of small manufacturing centres.After distribution centres cover their costs, the margin on each product is only on average 1-2% of the selling price to the end use customer.Distribution centres usually purchased similar products from around 3-5 producers.Distribution centres were required to keep sufficient inventory on hand, as users needed product immediately if required. Most small companies were not prepared to hold inventory of spare parts, and depended on distributors to play the role of stock management.

However, around 20% of IndustroServ's sales went directly to large end users.Large end users normally purchase around 500 units each month, compared with the 1000 units per month distributors purchased.The purchasing policy of a typical large end user is to acquire 50-80% of their product needs from one supplier, on a contract of around 2 years, provided a reasonable market discount was offered. Reliable supply and technical support was critical for large end users.Many of these companies were also willing to engage in product development initiatives.

Hugh Martin, the President of IndustroServ, has looked to expand his business overseas.His production planners believe the company could easily manufacture another 300,000 units annually.While the company has been successful, he knows domestic growth opportunities are limited, especially with the decline in manufacturing sector in North America.At the same time, Hugh is facing increasing competition from other companies that, in addition to their traditional products, are now making similar products in which IndustroServ has specialised.He has looked to many emerging nations that have an evolving manufacturing sector.However, Hugh has expressed concern about specifically what nation or nations he should enter.

He has stated, "I have considered selling into Guangzhou in China. There are a large number of small sized manufacturers who wish to enter the global markets.They are growing at a phenomenal rate.However, the quality of their product is an issue for them, and we feel we can assist them in becoming more globally competitive and reliable suppliers".His marketing team has identified several hundred of these manufacturing companies."My concern", he says, "is that the distribution network is limited to only a few large players that trade in a wide range of industrial components.This is different compared to here in North America, where I have a good selection of specialized distributors, who are prepared to work with us on technical support and product promotion and endorsement."

He has thought about overcoming that issue. "The cost of building my own distribution centre would be around $3.0 million to handle 100,000 units annually.I am certain I could run one centre for $750,000 in operating costs, and would need to hire 3 additional sales personnel for each one.My concern is finding the right technical and qualified people and training them.I would be further concerned about the costs and frequency of sending qualified people from here overseas."

As he pondered his decision, he also considered selling into Taiwan, where there was a presence of large industrial companies that are embracing this technology and are conscious of competitive positioning, especially with the emergence of low cost small manufacturers in other nations. "Certainly I could move large volumes directly to these customers.However, I know other competitors are making aggressive moves with these customers.I am confident we have a differentiated product that makes us unique from our competitors, but it would be tough.I would hope we can find agents or brokers who would support us in this effort. We really do not know any players in these areas."

Hugh has much to consider.He has invested $10 million in this business and wants to make certain it remains viable and grows. However, he is not certain about the best way to enter these markets, or what markets and types of customers he should serve.He has asked for your analysis and help in making a decision.

Questions:

As you decide whether IndustroServ enter international markets to sell through distributors or to direct end users, consider the following questions. For your analysis, be certain you are clear on any assumptions you make.

1)How much profit is the company making?

2)Is the profit level providing a sufficient return on investment of $10m? Why do you believe it is or isn't?

3)Do you believe their marketing efforts are efficient? Explain in detail why or why not?

4)Consider seriously what you would advise Hugh to do.Should he sell to existing distributors in China, establish his own distribution channel in China, or sell directly to large volume customers in Taiwan.Discuss in detail and consider:

a.The challenges IndustroServ faces in entering international markets

b.The pros and cons of your decision

c.Why it is a better alternative to the others