This presentation is the analysis of GINO SA-Distribution Channel Management (HBR Case Study)

1. GINO SA
Distribution Channel Management
(HBR Case Study Analysis)

2. Introduction
Current Issues
Knowing Market Analysis
Alternatives
Evaluation Decision
Implementation

3. What is
Gino SA ?
IntroductionIntroduction

4. Gino Burner Co. is ...
• One of the world’s largestburner manufacturer
• Founded in Paris,France in 1931
• Company that offers over 50 models of burners
in the domestic, commercial and industrial
range
IntroductionIntroductionIntroduction

5. Who are the
Players ?
Introduction

6. • David Zhou
(China Marketing Manager of Gino SA)
• Henry Gong
(General Manager of Jhingua’s MEC)
• Jean – Michel Pierre
(Asia-Pacific Area Manager of Gino SA)
IntroductionIntroduction

7. Current Issues
of
Gino SA
in 2000

8. Tianjin Feima Boiler Company
had requested permission to Zhou, Gino
China`s manager, to purchase burners
directly from Gino instead of from
Jinghua, Gino’s largest distributor.
Current Issues

9. Gino had six weeks to decide
between granting Feima OEM
status, harming its relationship
with current distributors or
denying the request and risk
losing Feima as a customer.
Current Issues

10. Aspects to Consider while deciding…
 Relationship with Jinghua
 Feima`s response
 The possible response of Gino`s other distributors (FUNG`s
& Wayip)
 The attitude of Gino`s corporate management
 The message that the decision will send to the competitors
Current Issues

12. • Become a leader in the industrial range, the most robust
and vigorous market
• Achieve annual combined sales volume of 15,000 units
• Achieve annual sales of industrial burners of over 200
units
• Optimize distribution channels
• Develop a minimum of two OEM accounts and two end
user key accounts within two years
• Improve service and spare supply
• Build brand image
Next three years goals …
Current IssuesCurrent Issues

13. Market of
Burner Industry

14. About Burner Industry…
SEGMENT BOILER CAPACITY USES
Domestic Upto 0.5 ton households/sauna
Commercial 0.5 to 2 ton Offices/shops/restaurants
Industrial >2 ton Absorption typechillers/boilers
• The industry does not follow a single standard to classify burners
• Becket is the market leader in U.S.
• U.S. market has high entry barrier.
• China is a rising star.
Knowing Market

15. • Worldwide market in thousands
• Developed markets of Europe and U.S. have become saturated
• Highest growth in Asia, Middle East and Africa
• Demand was increasing in domestic and commercial
Area Market Size Gino Sales
Europe 574 276
North America 433 45
Asia 291 36
Rest of World 250 24
Total 1548 381
Market AnalysisKnowing Market

16. Before
1990
China rich
in coal-low
efficiency
and
polluting-
coal
combustion
boilers and
hence no
burners
1990-1995
• Emphasis on pollution
control, replaced with
oil combustion boilers
• Weishaupt (Germany),
Baltur & Ridello
(Italy), Elco (Germany),
Quenod (France),
Corona (Japan)
1995-1998
• New applications for burners & demand for
commercial range began to increase
• Price became an issue-Local manufacturers-
only 5000 units-5 years to become a threat-
small burners
• Gino- price leader in domestic range (reference
point for competitors)
• Despite offering 10% to 20% less than
Weishaupt low penetration in industrial
burners
Post 1999
• Domestic-
price wars ;
commercial
mainstrea
m market
• Industrial
burners
growth
expected at
20% for
next 5
years
Burner Market in China
MarketMarket AnalysisKnowing Market

17. Gino’s position in Burner Market
• Competitive Advantages
In-house production capability
Well established channel network
International Exposure
MarketMarket AnalysisKnowing Market

18. Market Analysis
Gino’s position in Burner Market (contd..)
• Gino had cost advantage and was known for providing &
best value
• Gino was best known for its domestic burners
• Margins were higher in developing countries
SEGMENT OUTPUT RANGE(kcal/hour) GINOPRODUCTION- 1999 MARGINS
Domestic 50000-3,000,000 329 <20%
Commercial 3,000,000-20,000,000 49 25%
Industrial >20,000,000 3 30%
Total 381
Knowing Market

19. Analysis of Situation

20. 1.GINO’s Burner Channels in China
Analysis

21. Analysis
2.Consumer Buying Process
• Most manufacturers relied completely on
distributors
• Weishaupt : own sales force and distribution
networks OEM’s often tried to bypass
distributors
• Manufacturers refrained from giving
quotations
• Issues: Services, spares and pricing going to
OEM
• OEM Customers and End user customers

22. 3.SEGMENTATION
Domestic Boilers & Water heater
• 310 Major manufacturers; Avg. Price: RMB2,500; Size:
RMB194 million
Commercial Boilers & Industrial applications
• Avg. Price: RMB9,000; Size: RMB198 million
Domestic Boilers &amp; Water heaters
• 60 Major manufacturers; Avg. Price: RMB65,000; Size:
RMB221 million; Weishaupt
Analysis

23. 3.SEGMENTATION(contd..)
Estimated Sizes in Units Sold
Analysis
79,900
20,080
2,920
Domestic
Commercial
Industrial
102,900Total:

24. 4. Distribution Networks
Analysis
• Three distributors were set up in 1995
• Revenue: burners/spares : by 80/20 rule
• Operates in Gungzhou
• 100% Gino (HVAC)Wayip
• Operates in Shanghai
• Textile Machinery(90% rev.)Fung
• Operates in Beijing
• 50% boilersJinghua

25. 4. Distribution Networks (contd..)
DistributionPerformanceStatistics
Jinghua FUNG’s Wayip Total
Domestic 4,354 3,075 3,458 10,887
Commercial 876 433 568 1,877
Industrial 37 48 52 137
Total 5,267 3,556 4,078 12,901
Analysis

26. Credit Function: Line of Credit
Sales & Service function: customer interface
function
Stock function : 10 major models is accounted for
80% of sales
5.Distributor Functions
Analysis

27. 6.
P
R
I
C
I
N
G
Percentage USD RMB
Transfer Price
Import Duty 15
Value Added Tax 17
Shipping & Insurance 5
Domestic Transportation 3
Misc. & Handling Fee 2
Transfer Price in USD*12.32 gives
Base Price 142 1232
60% Grossing up of Base gives the
Public Price or Listed Price 227.2 1972
Contract Price is equal to a discount of 20% to 25% on
Public Price
Contract Price 181.81 1578
Gross Profit to the distributor = (contract price – base price) 39.87 346
Profit % 28
Analysis

28. Demand for better
Stolen Sales
Reluctance to stock industrial
burners
7.Distributor Behavior
Analysis

29. 8. FEIMA Analysis
Range Volume Currently
from GINO
Offer
Domestic 1055 350 1055
Commercial 163 50 81
Industrial 71 3 35
Total 1289 403 1171
Analysis

30. So what can we do ?
What are our options to
approach ?

31. Options Generated
3. Proceed with Feima as an Original
Equipment Manufacturer
1.Deny Feima’s request and Refuse
to bypass distributors
2.Approve Feima’s request but only
for its industrial segment
Alternatives

32. Deny Feima’s request and Refuse to
bypass distributors
Option #1
GINOcan deny theFeima’s Requestfor status as OEM . It would
preservetheinterestof distributorsbut may affect relationship
with Feima .GINOmay loseFeima asa customerGinowill also
possessaheavyopportunitycost forindustrial segment.Moreover,
the bargainingpowerof distributorwillbe difficultto control
Alternatives

33. Option #1
Advantages
Disadvantages
• Strengthen distributor-
manufacturing relationship
• No threat to domestic leadership
position
• Shortened cycle time
• Industrial Segment Sales promoted
• Three-month forecast
• Loss of OEM Account
• Opportunity Loss in terms
of incremental sales from
Feima
• Will increase distributor
power
• Loss of opportunity to
enter in account handling
with OEMs in industrial
segment
• High investment
• Continuation of
Distributors; bad behavior
Alternatives

34. Option #1
Advantages
Disadvantages
• Strengthen
distributor-
manufacturing
relationship
• No threat to
domestic leadership
position
• Shortened cycle time
• Industrial Segment
Sales promoted
• Three-month
forecast
• Loss of OEM Account
• Opportunity Loss in terms of
incremental sales from Feima
• Will increase distributor power
• Loss of opportunity to enter in account
handling with OEMs in industrial
• segment
• High investment
• Continuation of Distributors; bad
behavior
Alternatives

35. Option #2
Approve Feima’s request but only for
its industrial segment
Feima wants to get into OEM contract with Gino mainly for reduction in prices.
With this alternative, Gino should sign OEMcontract with Fiema for industrial
segment only with 10%additional margin in Industrial segment, and push
Jinghua for 10% discount to Feima’s commercial and domestic burners. Jinghua
cancompensate the 10% discounts from additional sales of domestic burners.
The warehouse will be built by Gino for these additional 33 industrial burners to
Feima. The service contracts can be given to existing distributors. This
alternative is also consistent with Gino’s goals of OEM accounts and market
penetration in Industrial segment.
AlternativesAlternatives

36. Option #2
Advantages
• Achieving long term unit sales
increase
• Penetration in Industrial Segment
• Partially satisfies both Jinghua and
Feima
• Improved service Standards
• Maintain Distributor relationships
• New OEM accounts
Disadvantages
• High investment
• Distributor
bargaining
power remains
• Difficult to
convince Feima
and Jinghua
• Difficult to
determine price
Alternatives

37. Option #2
Advantages
• Achieving long term unit
sales increase
• Penetration in Industrial
Segment
• Partially satisfies both
Jinghua and Feima
• Improved service
Standards
• Maintain Distributor
relationships
• New OEM accounts
Disadvantages
• High investment
• Distributor bargaining power
remains
• Difficult to convince Feima and
Jinghua
• Difficult to determine price
• Can impact the entire profit
margin of industry
Alternatives

38. Option #3
Proceed with Feima as an Original
Equipment Manufacturer
Ginocan ProceedwithFeima asan OEM whichwould strongstep
in accomplishingits goalto OEM’saccountsbut primarilyitwill
destroytherelationshipwithJinghuaand GinowillloseJinghua
as distributorwhich willaffect the GINOpositionindomestic
burnermarket.
Alternatives

39. Option #3
Advantages
• Eliminate middleman
• Distributors’ bad behavior
• Inline with management strategy goals
• Penetration into high growing
Industrial segment & relationship with
OEM’S
• Combats increasing distributor
bargaining power
• Increase in Overall Sales & profitability
Disadvantages
• A possibility of losing
out Jinghua as a
distributor
• Outside core
competencies
• Sensitive distributors
• Annual sales targets
• Difficult to determine
prices
• No ideal replacements
• Destroys confidence
Alternatives

40. Option #3
Advantages
• Eliminate middleman
• Distributors’ bad
behavior
• Inline with management
strategy goals
• Penetration into high
growing Industrial
segment & relationship
with OEM’S
• Combats increasing
distributor bargaining
power
• Increase in Overall Sales
& profitability
Disadvantages
• A possibility of losing out
Jinghua as a distributor
• Outside core competencies
• Sensitive distributors
• Annual sales targets
• Difficult to determine prices
• No ideal replacements
• Destroys confidence
Alternatives

42. Current
Industry
growth
(2%,5%,20%)
Addn in
Feima
Sales
Proj. Dec
2000 Sales
2001 2002
Domestic 10887 11105 705 11810 12047 12288
Commercial 1877 1971 32 2003 2104 2210
Industrial 137 165 33 198 238 286
Forecasting Of Number of Units
Evaluation

43. GINO Financial Evaluation for Alternative 1:
Domestic Commercial Industrial Industrial
Direct
Sell
Total
Units Sold by all
distributors
Transfer Price(RMB)
10887
2500
1877
9000
137
65000
Revenue from burners
(RMB)
Revenue from
Spares(RMB)(80/20 split)
27,217500
6,804,375
16,893,000
4,223,250
8,905,000
2,226,250
53,015,500
13,253,875
Net Revenue of Gino(RMB)
Net Revenue of Gino (USD)
34,021,875
4,099,021.08
21,116,250
2,544,126.51
11,131,250
1,341,114.46
66,269,375
7,984,262.05
Total Contribution
Margin(20%,25%,30%) $819,804.22 $508,825.30 $268,222.89 $1,596,852.40
Evaluation

44. GINO Financial Evaluation for Alternative 2:
Domestic Commercial Industrial Industrial
DirectSell
Total
Price per unit for Gino Burners
(RMB)
Forecasted Units
2500
11810
9000
2003
65000
165
120575
36
Revenuefrom burners(RMB)
Revenue from Spares (RMB)
(80/20 split)
29,525,000
7,381,250
18,027,000
4,596,750
10,725,000
2,681.250
4,340,7000
1,085,175
58,277,000
14,569,250
NetRevenueof Gino (RMB)
NetRevenueof Gino (USD)
36,906,250
4,446,536.14
22,533,750
2,714,909.64
13,406,250
1615,210.84
5,425,875
663,719.88
78,272,125
9,430,376.51
Total Contribution
Margin(20%,25%,30%) $889,307.23 $678,727.41 $484,563.25 $196,116.96 $2,248,713.86
Gino’s Extra Cost for Operating
Industrial Selling $152390.01*
Net Contribution $889,307.23 $678,727.41 $484,563.25 $43725.96 $2,096,323.85
*Sum of Cost of Setting up warehouse(30000*/8.3) ,other cost of shipping etc.(48.4% of CM), Outsourcing Cost of SalesAnd Services(5% of SP)
Evaluation

45. GINO Financial Evaluation for Alternative 3:
Domestic Commercial Industrial Industrial
Direct
Sell
Total
Price per unit for Gino
Burners
Forecasted Units
2500
11810
9000
2003
65000
198
Revenue from burners
(RMB)
Revenue fromSpares (RMB)
(80/20 split)
29,525,000
7,381,250
18,027,000
4,596,750
12870,000
3,217,500
60,422,00
15,105,500
Net Revenue of Gino (RMB)
Net Revenue of Gino (USD)
36,906,250
4,446,536.14
22,533,750
2,714,909.64
16,087,500
1,938,253.01
75,527,500
9,099,698.80
Total Contribution
Margin(10%,15%,20%) $444,653.61 $407,236.45 $387,650.69 $1,239,540.66
Evaluation

46. Jinghua’s Financial Evaluation for Alternative 1:
Domestic
(2500RMB/8.3*1.4
84)
Commercial
(9000RMB/8.3*
1.484)
Industrial(6500
RMB/8.3*1.484)
Total
Jinghua’sCostto
Acquire
(Q*2500*1.484/8.3)
JinghuaRevenue
(5%public, 95%
Contracts)
$1,946,185.54
$2,552,256.46
$1,409,621.20
$1,826,869.08
$430,002.41
$557,283.12
$3,785,809.16
$4,906,408.67
Jinghua’s Profit $576,070.92 $417,247.88 $127,280.71 $1,120,599.51
Segmentation
Shareofprofit
51% 37% 11%
Evaluation

47. Jinghua’s Financial Evaluation for Alternative 2:
Domestic
(2500RMB/8.3*1.4
84)
Commercial
(9000RMB/8.3*
1.484)
Industrial(6500
RMB/8.3*1.484)
Total
Jinghua’sCostto
Acquire
(Q*2500*1.484/8.3)
JinghuaRevenue
(5%public, 95%
Contracts)
DiscountstoFeima
$2,261,312.05
$2,930,660.41
$47,157.23
$1,461,114.22
$1,892,604.03
$8,783.13
$395,137.35
$512,098.00
$4,117,563.61
$5,336,362.44
Jinghua’sProfit $662,191.14 $423,706.68 $116,960.66 $1,162,858.47
Segmentation
Share ofprofit
54% 36% 10%
Evaluation

48. Jinghua’s Financial Evaluation for Alternative 3:
Domestic
(2500RMB/8.3*1.4
84)
Commercial
(9000RMB/8.3*
1.484)
Industrial(6500
RMB/8.3*1.484)
Total
Jinghua’sCostto
Acquire
(Q*2500*1.484/8.3)
JinghuaRevenue
(5%public, 95%
Contracts)
$1,946,185.54
$2,226,436.26
$1,409,621.20
$1,612,606.66
$430,002.41
$491,922.76
$3,785,809.16
$4,330,965.68
Jinghua’s Profit $280,250.72 $202,985.45 $61,920.35 $545,156.52
Segmentation
Shareofprofit
51% 37% 11%
Evaluation

50. Decision Matrix
Resolve
Jinghua’s
problem
Revenue
And
Profitability
Industrial
Segment
Penetration
Bargaining
powerof
Distributors
Total
Alternative 1 1 1 2 1 1.35
Alternative 2 3 3 3 2 2.9
Alternative 3 2 2 1 3 1.85
Decision

51. So after analyzing the Pro’s &
Con’s of each option and
as according calculated using
Decision Matrix
Decision

53. Implementation

54. • Beforetheglobaldistributorsmeeting,Gino should convince
Jinghuaaboutthisoffer highlightingits increasein
profitability.
• Duringthesame period,Ginoshould keepFUNG’sand Wayip
intoconfidencewiththisactionplan.FUNG’sandWayipwill
also benefitas theirhighinventorycycle timefor industrial
burners canbe reduced fromGino’swarehouse.
• Thewarehouseto house theinventorywould also built a good
competitiveadvantageas comparedto othercompetitors.
Implementation

55. Recommended Plan…
 By Endof March-
• It wouldtake approximately1 month forlegal formalities and to sign thecontract.
 By End of April-
• Gino shouldstart buildinga warehouse
 3 – 7 months
• To builda fully functionalwarehouseand hencethe delivery date shouldset
accordinglywhilesigning the contract.
• Warehouseshouldbe locatedin northern region ofChina becauseofclose proximityto
Feima
Implementation

56.  From August ,2000
• The delivery ofindustrial burners shouldstart.
 July ,2000 to August ,2000
• A service and maintenance contractshouldbe given to Jinghua highlighting all the SLA
guidelines and frequent feedbackshouldbe collectedfromFeima about service &
productquality.
 End ofNov,2000
• The building ofwarehouseshouldbe completedby now
 December 2000
• Gino canstart building its sales forcein China forfurther industrial burners OEM
Contracts.
Implementation

57. GINO Long Term Strategy
(to achieve three year goals)
Formulate key account policy for future clients
• Purchase of large number of units qualifies for direct
customers.
• For existing OEM accounts go through Distributor OEM model.
Set ‘margin’ targets for distributors
• Expanding industrial segment
• Gross margin in industrial segment was 35% (commercial –
25% and domestic less than 20%)
ImplementationImplementation

58. Set up its own warehouse
• Restrict it to key end users and OEM accounts
• Backup for distributor stocks
Eventually develop & expand own sales force for
industrial burners
Better Marketing Strategies
To build a better brand image
Expanding the business
GINO should expand its business to emerging Asian markets
like India etc.
Implementation

59.  Decrease cost of stocking industrial burners
• Discontinue slow moving models
• Incentivize distributors – multiple product line volume
discounts & incentives for stocking industrial burners
Build stronger relationship with distributors
• Provide incentives , Mutual respect & Better credit
terms
• Helping Distributors with Marketing and Technical
Support
Implementation

61. Himank Airon
IIT-BHU

62. These slides were created by Himank Airon , IIT-BHU
as part of an internship done under the guidance of
Prof. Sameer Mathur (www.IIMInternship.com)"