INDIAN INSTITUTE OF PLANNING AND MANAGEMENT NEW DELHI

SUBJECT SELECTION AND MOTIVATION OF DISTRIBUTION CHANNEL IN FMCG COMPANY

SUBMITTED BY: BATCH: PHONE NO.: E-MAIL: SECTION:

ABSTRACT
In corporate India, till not so long ago, any marketing professional in the FMCG sector would typically have a long innings within the sector to his credit. Career growth was either vertical within the company, or horizontal, to other FMCG companies.Put it down to an absence of good opportunities outside the category or the lack of an appetite for taking risks, but instances of FMCG professionals hopping to other sectors were fairly rare. Today, however, more and more professionals from FMCG companies are moving to new sectors, helping pollinate marketing ideas and strategies that were hitherto unique to FMCG. FMCG has, in fact, become the resource pool that almost every other industry is happily fishing in for marketing talent these days. Erstwhile FMCG professionals are the poster boys for sunrise verticals like retail, insurance, banking and telecom, and from marketing soaps and colas and chocolates, these fast movers are now chalking out strategies to market insurance, banking and pre-paid recharge cards. For most professionals, the lure of doing something different in rapidly growing sectors is a big motivator. And while there are risks given the nascence of the some of these sectors, its a calculated move. For J Suresh, CEO, brands & retail, Arvind Mills, joined the apparel group in 2005 after spending nearly 22 years in FMCG, moving to a sector like retailing was thrilling. Retail had just started to boom and it was clear that it will be the future. The present position gives me an opportunity to exercise both my brand and retail skill-sets, he says. Sanjeev Kapur, country head, marketing & innovation, Citibank, moved to the financial sector in 2009 after conducting an in depth SWOT analysis.

ACKNOWLEDGEMENT

Through this acknowledgement I express my sincere gratitude towards all those people who helped me in this project, which has been a learning experience. I appreciate the co-ordination extended by my friends and also express my sincere thankfulness to the entire faculty members of Indian Institute of Planning & Management, Delhi, giving me the opportunity to do this project/study and also assisting me for the same.

TABLE OF CONTENTS

Topic 1. Abstract 2. Acknowledgment 3. Introduction 4. Theoretical Review/Perspective 5. Review and Research 6. New Developments in the Research Area 7. Recommendations 8. Conclusion 9. Bibliography

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INTRODUCTION TO THE TOPIC Sales systems can also affect sales management. Here are some examples:

The sales manager, rather than gathering all the call sheets from various sales people and tabulating the results, will have the results automatically presented in easy to understand tables, charts, or graphs. This saves time for the manager.

Activity reports, information requests, orders booked, and other sales information will be sent to the sales manager more frequently, allowing him/her to respond more directly with advice, product in-stock verifications, and price discount authorizations. This gives management more hands-on control of the sales process if they wish to use it.

The sales manager can configure the system so as to automatically analyze the information using sophisticated statistical techniques, and present the results in a user-friendly way. This gives the sales manager information that is more useful in :
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Providing current and useful sales support materials to their sales staff Providing marketing research data: demographic, psychographic, behavioural, product acceptance, product problems, detecting trends

Providing market research data: industry dynamics, new competitors, new products from competitors, new promotional campaigns from competitors, macro-environmental scanning, detecting trends Co-ordinate with other parts of the firm, particularly marketing, production, and finance Identifying your most profitable customers, and your problem customers Tracking the productivity of their sales force by combining a number of performance measures such as: revenue per sales person, revenue per territory, margin by customer segment, margin by customer, number of calls per day, time spent per contact, revenue per call, cost per call, entertainment cost per call, ratio of orders to calls, revenue as a percentage of sales quota, number of new customers per period, number of lost customers per period, cost of customer acquisition as a percentage of expected lifetime value of customer, percentage of goods returned, number of customer complaints,

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and number of overdue accounts. More complex models like the PAIRS model (by Parasuraman and Day) and the Call Plan model (by Lodish) can also be used. 2. Advantages to the marketing manager It is also claimed to be useful for the marketing manager. It gives the marketing manager information that is useful in :

Understanding the economic structure of your industry Identifying segments within your market Identifying your target market Identifying your best customers in place Doing marketing research to develop profiles (demographic, psychographic, and behavioral) of your core customers Understanding your competitors and their products Developing new products Establishing environmental scanning mechanisms to detect opportunities and threats Understanding your company's strengths and weaknesses Auditing your customers' experience of your brand in full Developing marketing strategies for each of your products using the marketing mix variables of price, product, distribution, and promotion Coordinating the sales function with other parts of the promotional mix (such as advertising, sales promotion, public relations, and publicity) Creating a sustainable competitive advantage Understanding where you want your brands to be in the future, and providing an empirical basis for writing marketing plans on a regular basis to help you get there Providing input into feedback systems to help you monitor and adjust the process

THEORETICAL REVIEW/PERSPECTIVE

DISTRIBUTION STRATEGY Physical distribution represents the way businesses provide goods and services to their customers. In some businesses, particularly retail businesses, the customer comes to the business. Their locations may be important. Several other businesses usually go to the customer (e.g. B2B) The location of their businesses is not so important. The designing a Distribution Strategy deals with the following issues: Best Channel to deliver product Three different distribution systems: o Retail consideration. o Channel length. o Channel exclusivity. Choice of channel: Cost/benefit of each alternative.

Why Is Distribution Important? (1) It greatly affects all decisions in the marketing mix, including pricing, promotion, sales and packaging through its impact on marketing costs and relationships.

(2) It creates a mutually dependent commitment between participants through an infrastructure that is not easily changed and would be expensive to re-create. It becomes a part of the service delivery structure that the customers become accustomed to and trained in using.

Most of the activities for a product manager are usually related to working with the existing distributors, dealers or agents and perhaps expediting shipments as necessary. However,

some new products necessitate changes in the channel of distribution, or market and competitive forces will require changes for existing products. This could also be a critical element of the plan if a product manager is rolling out a product into new regions and/or expanding globally. As a result, distribution strategy becomes an important aspect for the development of the annual marketing plan and an effective marketing strategy. Choice of Intermediaries versus Direct Marketing Producers may lack financial resources to carry out marketing Customer support may be required o Early days of computers Many firms set up partially owned distribution o Auto manufacturers o Fast food New technologies such as internet and logistics are affecting choice o Dell Computer Corporation Choice may also vary with Product Characteristics Perishable products o Problem of delay and handling Bulky products o Minimize shipping distance Nonstandard product o Direct sales High unit value product (airplanes) Dedicated sales force in company

A supply chain is a network of facilities and distribution options that performs the functions of procurement of materials, transformation of these materials into intermediate and finished products, and the distribution of these finished products to customers. Supply chains exist in both service and manufacturing organizations, although the complexity of the chain may vary greatly from industry to industry and firm to firm.

Below is an example of a very simple supply chain for a single product, where raw material is procured from vendors, transformed into finished goods in a single step, and then transported to distribution centers, and ultimately, customers. Realistic supply chains have multiple end products with shared components, facilities and capacities. The flow of materials is not always along an arborescent network, various modes of transportation may be considered, and the bill of materials for the end items may be both deep and large. Traditionally, marketing, distribution, planning, manufacturing, and the purchasing organizations along the supply chain operated independently. These organizations have their own objectives and these are often conflicting. Marketing's objective of high customer service and maximum sales dollars conflict with manufacturing and distribution goals. Many manufacturing operations are designed to maximize throughput and lower costs with little consideration for the impact on inventory levels and distribution capabilities. Purchasing contracts are often negotiated with very little information beyond historical buying patterns. The result of these factors is that there is not a single, integrated plan for the organization---there were as many plans as businesses. Clearly, there is a need for a mechanism through which these different functions can be integrated together. Supply chain management is a strategy through which such an integration can be achieved.

Supply chain management is typically viewed to lie between fully vertically integrated firms, where the entire material flow is owned by a single firm, and those where each channel member operates independently. Therefore coordination between the various players in the chain is key in its effective management. Cooper and Ellram [1993] compare supply chain management to a well-balanced and well-practiced relay team. Such a team is more competitive when each player knows how to be positioned for the hand-off. The relationships are the strongest between players who directly pass the baton, but the entire team needs to make a coordinated effort to win the race. Supply Chain Decisions We classify the decisions for supply chain management into two broad categories -strategic and operational. As the term implies, strategic decisions are made typically over a longer time horizon. These are closely linked to the corporate strategy (they sometimes {\it

are} the corporate strategy), and guide supply chain policies from a design perspective. On the other hand, operational decisions are short term, and focus on activities over a day-today basis. The effort in these type of decisions is to effectively and efficiently manage the product flow in the "strategically" planned supply chain. There are four major decision areas in supply chain management: 1) location, 2) production, 3) inventory, and 4) transportation (distribution), and there are both strategic and operational elements in each of these decision areas.

Location Decisions The geographic placement of production facilities, stocking points, and sourcing points is the natural first step in creating a supply chain. The location of facilities involves a commitment of resources to a long-term plan. Once the size, number, and location of these are determined, so are the possible paths by which the product flows through to the final customer. These decisions are of great significance to a firm since they represent the basic strategy for accessing customer markets, and will have a considerable impact on revenue, cost, and level of service. These decisions should be determined by an optimization routine that considers production costs, taxes, duties and duty drawback, tariffs, local content, distribution costs, production limitations, etc. (See Arntzen, Brown, Harrison and Trafton [1995] for a thorough discussion of these aspects.) Although location decisions are primarily strategic, they also have implications on an operational level. Production Decisions The strategic decisions include what products to produce, and which plants to produce them in, allocation of suppliers to plants, plants to DC's, and DC's to customer markets. As before, these decisions have a big impact on the revenues, costs and customer service levels of the firm. These decisions assume the existence of the facilities, but determine the exact path(s) through which a product flows to and from these facilities. Another critical issue is the capacity of the manufacturing facilities--and this largely depends the degree of vertical integration within the firm. Operational decisions focus on detailed production scheduling. These decisions include the construction of the master production schedules, scheduling

production on machines, and equipment maintenance. Other considerations include workload balancing, and quality control measures at a production facility. Inventory Decisions These refer to means by which inventories are managed. Inventories exist at every stage of the supply chain as either raw materials, semi-finished or finished goods. They can also be in-process between locations. Their primary purpose to buffer against any uncertainty that might exist in the supply chain. Since holding of inventories can cost anywhere between 20 to 40 percent of their value, their efficient management is critical in supply chain operations. It is strategic in the sense that top management sets goals. However, most researchers have approached the management of inventory from an operational perspective. These include deployment strategies (push versus pull), control policies --- the determination of the optimal levels of order quantities and reorder points, and setting safety stock levels, at each stocking location. These levels are critical, since they are primary determinants of customer service levels.

Transportation Decisions The mode choice aspect of these decisions are the more strategic ones. These are closely linked to the inventory decisions, since the best choice of mode is often found by tradingoff the cost of using the particular mode of transport with the indirect cost of inventory associated with that mode. While air shipments may be fast, reliable, and warrant lesser safety stocks, they are expensive. Meanwhile shipping by sea or rail may be much cheaper, but they necessitate holding relatively large amounts of inventory to buffer against the inherent uncertainty associated with them. Therefore customer service levels, and geographic location play vital roles in such decisions. Since transportation is more than 30 percent of the logistics costs, operating efficiently makes good economic sense. Shipment sizes (consolidated bulk shipments versus Lot-for-Lot), routing and scheduling of equipment are key in effective management of the firm's transport strategy.

Supply Chain Modeling Approaches

Clearly, each of the above two levels of decisions require a different perspective. The strategic decisions are, for the most part, global or "all encompassing" in that they try to integrate various aspects of the supply chain. Consequently, the models that describe these decisions are huge, and require a considerable amount of data. Often due to the enormity of data requirements, and the broad scope of decisions, these models provide approximate solutions to the decisions they describe. The operational decisions, meanwhile, address the day to day operation of the supply chain. Therefore the models that describe them are often very specific in nature. Due to their narrow perspective, these models often consider great detail and provide very good, if not optimal, solutions to the operational decisions. To facilitate a concise review of the literature, and at the same time attempting to accommodate the above polarity in modeling, we divide the modeling approaches into three areas --- Network Design, ``Rough Cut" methods, and simulation based methods. The network design methods, for the most part, provide normative models for the more strategic decisions. These models typically cover the four major decision areas described earlier, and focus more on the design aspect of the supply chain; the establishment of the network and the associated flows on them. "Rough cut" methods, on the other hand, give guiding policies for the operational decisions. These models typically assume a "single site" (i.e., ignore the network) and add supply chain characteristics to it, such as explicitly considering the site's relation to the others in the network. Simulation methods is a method by which a comprehensive supply chain model can be analyzed, considering both strategic and operational elements. However, as with all simulation models, one can only evaluate the effectiveness of a pre-specified policy rather than develop new ones. It is the traditional question of "What If?" versus "What's Best?".

Network Design Methods As the very name suggests, these methods determine the location of production, stocking, and sourcing facilities, and paths the product(s) take through them. Such methods tend to be large scale, and used generally at the inception of the supply chain. The earliest work in this area, although the term "supply chain" was not in vogue, was by Geoffrion and Graves [1974]. They introduce a multicommodity logistics network design model for optimizing

annualized finished product flows from plants to the DC's to the final customers. Geoffrion and Powers [1993] later give a review of the evolution of distribution strategies over the past twenty years, describing how the descendants of the above model can accommodate more echelons and cross commodity detail. Breitman and Lucas [1987] attempt to provide a framework for a comprehensive model of a production-distribution system, "PLANETS", that is used to decide what products to produce, where and how to produce it, which markets to pursue and what resources to use. Parts of this ambitious project were successfully implemented at General Motors.

Cohen and Lee [1985] develop a conceptual framework for manufacturing strategy analysis, where they describe a series of stochastic sub- models, that considers annualized product flows from raw material vendors via intermediate plants and distribution echelons to the final customers. They use heuristic methods to link and optimize these sub- models. They later give an integrated and readable exposition of their models and methods in Cohen and Lee [1988].

Cohen and Lee [1989] present a normative model for resource deployment in a global manufacturing and distribution network. Global after-tax profit (profit-local taxes) is maximized through the design of facility network and control of material flows within the network. The cost structure consists of variable and fixed costs for material procurement, production, distribution and transportation. They validate the model by applying it to analyze the global manufacturing strategies of a personal computer manufacturer.

Finally, Arntzen, Brown, Harrison, and Trafton [1995] provide the most comprehensive deterministic model for supply chain management. The objective function minimizes a combination of cost and time elements. Examples of cost elements include purchasing, manufacturing, pipeline inventory, transportation costs between various sites, duties, and taxes. Time elements include manufacturing lead times and transit times. Unique to this model was the explicit consideration of duty and their recovery as the product flowed

through different countries. Implementation of this model at the Digital Equipment Corporation has produced spectacular results --- savings in the order of $100 million dollars.

Clearly, these network-design based methods add value to the firm in that they lay down the manufacturing and distribution strategies far into the future. It is imperative that firms at one time or another make such integrated decisions, encompassing production, location, inventory, and transportation, and such models are therefore indispensable. Although the above review shows considerable potential for these models as strategic determinants in the future, they are not without their shortcomings. Their very nature forces these problems to be of a very large scale. They are often difficult to solve to optimality. Furthermore, most of the models in this category are largely deterministic and static in nature. Additionally, those that consider stochastic elements are very restrictive in nature. In sum, there does not seem to yet be a comprehensive model that is representative of the true nature of material flows in the supply chain.

Rough Cut Methods These models form the bulk of the supply chain literature, and typically deal with the more operational or tactical decisions. Most of the integrative research (from a supply chain context) in the literature seem to take on an inventory management perspective. In fact, the term "Supply Chain" first appears in the literature as an inventory management approach. The thrust of the rough cut models is the development of inventory control policies, considering several levels or echelons together. These models have come to be known as "multi-level" or "multi-echelon" inventory control models. For a review the reader is directed to Vollman et al. [1992]. Multi-echelon inventory theory has been very successfully used in industry. Cohen et al. [1990] describe "OPTIMIZER", one of the most complex models to date --- to manage IBM's spare parts inventory. They develop efficient algorithms and sophisticated data structures to achieve large scale systems integration.

Although current research in multi-echelon based supply chain inventory problems shows considerable promise in reducing inventories with increased customer service, the studies have several notable limitations. First, these studies largely ignore the production side of the supply chain. Their starting point in most cases is a finished goods stockpile, and policies are given to manage these effectively. Since production is a natural part of the supply chain, there seems to be a need with models that include the production component in them. Second, even on the distribution side, almost all published research assumes an arborescence structure, i. e. each site receives re-supply from only one higher level site but can distribute to several lower levels. Third, researchers have largely focused on the inventory system only. In logistics-system theory, transportation and inventory are primary components of the order fulfillment process in terms of cost and service levels. Therefore, companies must consider important interrelationships among transportation, inventory and customer service in determining their policies. Fourth, most of the models under the "inventory theoretic" paradigm are very restrictive in nature, i.e., mostly they restrict themselves to certain well known forms of demand or lead time or both, often quite contrary to what is observed. The preceding sections are a selective overview of the key concepts in the supply chain literature. Following is a list of recommended reading for a quick introduction to the area. A distribution channel links the manufacturer of a product with the end users i.e. the consumers. Decisions regarding distribution channels are of great significance to the manufacturers. Organizations can have strategic distribution systems that help them to examine the current distribution system and decide on the distribution system that can be useful in the future. In designing a distribution channel for an organization, there are mainly three steps identifying the functions to be performed by the distribution system, designing the channel, and putting the structure into operation. There are different types of distribution channels depending on the number of levels that exist between the producer and the consumer. In deciding on the kind of distribution strategy to be used, there are various considerations to be kept in mind considerations on middlemen, customers, product, price, etc. The middlemen should have the necessary financial capacity to carry

out the task effectively. Customers should be able to get the products conveniently. Product features to be considered include durability, toughness etc. The price of the product also requires consideration in deciding the distribution strategies.

Distribution intensity can be referred to in terms of the number of retail stores carrying a product in a geographical location. In intensive distribution, the manufacturer distributes the products through the maximum number of outlets. In exclusive distribution, the number of distribution channels will be very limited. In selected distribution, the number of retail outlets in a location will be greater than in the case of exclusive distribution and fewer than in the case of intensive distribution. Distribution management is of strategic importance to any organization as distribution plays a crucial role in the success of the product in the market. Distribution management also helps to maximize profits.

In managing the distribution channels, maintaining a mutually beneficial relationship between the manufacturer and distributor is necessary. International distribution is gaining importance with the increase in the number of multinational companies. There are certain factors to be considered in international distribution. The distributors should be chosen carefully with a long-term focus. It is better to build a long-term relationship with the local distributors. They should be provided with all the necessary support in expanding their operations. The marketing strategy for the product should be controlled solely by the MNC. Information plays an important role in distribution and the MNC has to ensure that the local distributors provide them with the required information which will help them to increase sales and expand their business. We all know that, the products fall into three categories- convenience, shopping and specialty.

Convenience goods are those for which the consumer before the need arises posses a preference map that indicates willingness to purchase any of a number of known substitutes rather than to make the additional effort required to buy a particular item.

Shopping goods are those for which the consumer has not developed a complete preference map before the need arises, requiring him to undertake search to construct such a map. Specialty goods are those for which the consumer, before his need arises, posses a preference map that indicates a willingness to expend the additional effort required to purchase the most preferred item rather than to buy a more readily accessible substitute.

Convenience goods/stores are those for which the consumer, before his need arises, possesses a preference map that indicates willingness to buy from the most accessible store. Shopping stores are those for which the consumer has not developed a complete preference map before the need arises requiring him to requiring him to undertake search to construct such a map. Specialty stores are those for which the consumer, before his need arises, posses a preference map that indicates a willingness to buy an item from a particular establishment even though it is not the most accessible one.

The above categorization of products and stores results in nine unique category of consumers who subscribe to a particular product-store mix. The product-store matrix along with the resulting consumer categories that fall in the various categories of the matrix is given below.

The characteristics of consumers that fall under each category are given below.

1. Convenience good- Convenience store: Consumer prefers to buy the most readily available brand at the most accessible store.

- Shopping store: Consumer is indifferent to the brand but shops in different store to get the best service/price. - Specialty store: Consumer prefers to trade at a specific store but is indifferent to the brand of the product purchase. 4. Shopping good - Convenience store: Consumer selects the purchase from an assortment available at the most accessible store. - Shopping store: Consumer makes comparisons among both retail controlled factors and product related factors. - Specialty store: Consumer prefers to purchase from a specific store but is uncertain as to which product to purchase and hence searches the assortment of products available at the store to make the purchase. 7. Specialty good - Convenience store: Consumer purchases his favored brand from the most accessible store that has that item. - Shopping store: Consumer has a strong preference with respect to the brand of the product but shops among a number of stores in order to secure the best retail service/price. - Specialty store - Consumer has both a preference for a specific brand and a particular store.

Now we have find the various forms of promotion that will ensure that the channel performs the function of brand communication as well as brand experience along with the function of product availability for the above mentioned consumer category.

The concept of convenience, shopping, specialty good/store varies with every consumer. Perhaps the best method of design the promotion for a product would be to evaluate where the product is most likely to lie in the product-store matrix.

The consumer undergoes four basic stages for his consumption. They are as followsi. Need recognition ii. Information search and alternative evaluation, iii. Purchase and iv. Post purchase use and evaluation.

The various forms of promotions that are at a company's disposal are - mass advertising through electronic and print media, merchandising at the purchase point, word of mouth advertising, inducing usage (through samples) etc. These promotions impact the consumer at various stages of his consumption cycle and thereby create a brand image of the product in his mind. In the case of category 1, 2 and 3, the consumer is indifferent to the brand of the product but preference for which outlet he will make a purchase in a given area will depend on which category of the product-store matrix he falls in. Hence product availability and product visibility at store is best way to ensure brand communication as well as brand experience. In the case of category 4, 5 and 6, the consumer is willing to shop around for the best available brand. The outlet where he would make the purchase would again depend on his position at the matrix. Merchandising at the store, push strategy by the retailer, sales promotions, mass advertising, product visibility and product availability would be major influencers in his purchase decisions. In the case of category 7, 8 and 9, the mass communication, word of mouth advertising, previous experience with brand would be the major influencers in his purchase decisions. The position of the consumer on the productstore matrix would also determine the king of distribution strategy, which a company should adopt in terms of whether the company should go for intensive, selective or exclusive distribution.

If the consumer of the product were most likely to fall in the categories 1, 2 or 3, then intensive distribution, which aims to provide saturation coverage of the market by using all available outlets, would yield best results. If the consumer falls in the categories 4, 5 or 6,

then selective distribution which involves a producer using a limited number of outlets in a geographical area to sell products would be optimum strategy and if the consumer falls in the categories 7, 8 or 9 exclusive distribution, an extreme form of selective distribution in which only one wholesaler, retailer or distributor is used in a specific geographical area would deliver the desired goal of brand communication and brand experience along with ensuring product availability. Direct selling as a marketing tool, which is used in the rural India through Project Shakti, is another method of imparting brand experience and communicating the brand message to the consumer. The three-pronged objectives of distribution will no doubt result in consumer making a more informed purchase and greatly reflect the success/failure of a company's marketing strategy, however to map the entire product range on the matrix as well as tailoring the promotion to the specific requirements of each category in the matrix would be a Herculean task. HLL as always has become the first in the country to initiate a paradigm change in its distribution strategy.

REVIEW AND RESEARCH

Its the entire spectrum of lifecycle management of customers that FMCG professionals have had to contend with as they picked up the threads of new segments. At one level, lifecycle management involves acquiring the customer and providing continuous triggers

for her to use the service. At the second level, after understanding the demographics and characteristics, the effort has to be to improve share-of-wallet for your brand, says Kapur. Suresh, who spent nearly 18 years in HLL, realised that the lifecycle in apparel was much shorter than in the food business. Every shirt is a different SKU. So one has to keep in mind season change, merchandising and stock outs. If the stock doesnt sell within a month, its a dead stock. Thats a critical difference, he says, adding that achieving higher operational efficiencies for each brand in the portfolio was another learning. One of parameters these marketers had to adapt to was the quick go-to-market, which needed faster innovation cycles. At Barista, Dattagupta has to tackle a product cycle thats faster than what he faced in FMCG. There, Dattagupta had the luxury of a higher development lead time with capex requirements; at Barista, the dynamics of retailing necessitates dexterity in product innovation. Here, there is a new theme around product launch every three months, where based on consumer and international trends, we come out with a range of products, he says. He adds that work on new themes begin six months in advance, with the development of new products, supply chain feasibility and consumer feedback. One of the learnings is the quick feedback in retailing, theres no need for focus group discussions to know how the product is doing, he says. Keeping in mind faster go-tomarket, Barista has a huge innovation funnel with around 50 to 60 beverages in the pipeline. It is certainly higher than what one has in FMCG. Kapur believes that while in FMCG the S curve for innovation diffusion is gradual, in banking it is relatively steep. In FMCG, product development typically requires capital intensive manufacturing upgrades which sets up competitive barriers for a longer duration. In banking the technology barriers to product & services improvement is relatively lower and not as capital intensive. So to retain competitive advantage, either the rate of

innovation needs to be much faster or innovation has to be significantly disruptive says Kapur. Citing an example, at the bottom of the pyramid, Citibank wanted a competitive barrier for its offering targeted towards illiterate consumers. So the bank introduced biometric ATMs with voice navigation systems accessible to this segment of consumers using thumb prints. The difference in the belief system in marketing and branding between FMCG and financial services is something Kapur noticed early. In FMCG, certain values are taken for granted. Like minimum advertising spends as a percentage of revenue to make a strong consumer brand. Its an unwritten rule and no one questions it. In new sectors, these principles will gradually evolve once there is more granular brand health data and better recognition of intangibles values while evaluating marketing ROIs. he explains. While FMCG has a fair dose of high-decibel communication and activation, the move to new verticals also meant getting used to communication minus the razzmatazz. Kapur believes his current stint at Citibank has enabled him to acquire direct marketing skills. Skills like analytics are not as prevalent in FMCG as they are in financial services. In FMCG, trends are accumulated and used over a longer time horizon, whereas in banking, strategies change faster and frequency of use is higher, he says. So initiatives like direct mailers, events and online are some of the new tools which Kapur has picked up at Citibank. Events are done at a strategic level like the Lakme Fashion Week, where the scale is huge. But in financial services, event-led marketing could be as micro as acquiring ten customers from Pali Hill, Bandra, he adds. Barista has no mass media advertising, and therefore, reliance on PR for the coffee retailing format is very high. Its something that Dattagupta had to adapt to. In retailing, a brand relies heavily on word-of-mouth. While in FMCG theres passive interaction with the

brand, at Barista, even the service from the brew master matters. So its a combination of products and other attributes as well, he says. And in the highly competitive world of telecom, Khosla has been able to look closely at the rural markets and devise strategies to foray into the hinterland. There is a segmented approach to the business, unlike any other. From making factory visits every second day to marketing to rural customers, its been a new experience, he says. Thus, aspects like route to market, products and services introduction by segmenting the consumer pie is a learning which Khosla picked up at Bharti. With the FMCG industry growth rates slowing down in the last two years, the stock markets have beaten down FMCG stocks. Many of them are quoted at yearly lows. Few have shown appreciation and fund managers have clearly abandoned these stocks. Despite a mild recovery in the last month or so, the long-term approach to FMCG stocks by fund managers remains negative. Many analysts have discounted the future of FMCG companies. In fact, a well-known fund manager recently argued that the FMCG industry has undergone a secular change and growth rates have slowed down considerably and permanently. That is worth investigating. If the argument is not true, then why are FMCG companies showing flat growth rates? Is there a need to take a fresh look at the strategies of FMCG companies and see if something is wrong? The first question is a no-brainer. Forty per cent of the Indian population officially lives in poverty, i.e., live on less than $1 a day. Now these are the classes that will soon start earning meaningful money when liberalisation reaches the lower sections of our society. Their basic needs like soaps, detergents, toothpaste, beverages etc will have to be met. Therefore, the question whether FMCG products are going to see permanently lower growth rates can be rejected prima facie. For FMCG products to have poor growth, Indian economy will have to stop growing for a considerable number of years.

Then why the slow down in FMCG products and companies last year when the Indian economy grew by 8 per cent? This leads us to the second question Are Indian companies getting their strategy right? After all, if the potential is so good, why did they report flat volume growth? We argue that every player in the FMCG industry got his strategy wrong in the last couple of years. We also argue that most of the analyst assumptions about the FMCG industry is wrong. Growth in the future will be very different from that of the past. Like many other industries, it is time for FMCG companies to reinvent themselves. It is time for them to fundamentally rethink customer requirements, pricing strategies, distribution structure and the 'one model fits all' approach. The silver lining is that there is clear evidence that players like Hindustan Levers have begun to ask the very same questions, understand these very trends and have reformulated their strategies to forge ahead. Most others are clearly not and are likely to see large drops in real top line growth. Our first understanding of the trends in the FMCG companies came from a speech delivered by Professor C K Prahalad in February this year. For more details on the speech on 'Learning to lead' see In his speech, professor Prahalad argued that there is more money to be made at targeting the lower end of the population rather than selling products that meet the requirements of affluent sections of the society. Professor Prahalad pointed out that the traditional multinational business models are oriented to the top 10 - 15 million people at the most. Also, the assumption by multinationals and many Indian companies is that the poor cannot afford to have the use of products and services that are sold in developed markets. This is wrong because multinational strategy is based on a product, not functionality. To quote Professor Prahalad, "We worry about detergents; we worry about soaps, not about cleanliness." In fact as an example of the strategy of targeting lower end of the market, professor Prahalad pointed out that Nirma, which makes products for the lower end of the market, enjoys a return on capital employed of 130% and HLL made 93% on its lower end detergent 'Wheel' but only 22% on its high end detergents. Do the bells toll? Current Assumptions about the FMCG industry

We will first look at the fundamental assumptions about the FMCG industry and see whether they stand. The basic assumption is that India poor economy with millions under the poverty line. With the economy fast growing and most of these populations fast getting into higher income categories, they will start buying more and more FMCG products. The assumption has been more or less right till date. FMCG companies have grown at a fantastic rates till date. More and more Indians in the last 2 decades started purchasing basic day to day necessities and more and more products were launched offering the consumers real choice. This translated into superb growth rates and profits for FMCG companies. In the last 20 years, no other industry has matched the FMCG industry in growth or shareholder returns Are these assumptions valid today? We argue it is not. One way to look at it is to break down the entire Indian population into various income brackets. Data on this is available from the 1998 survey by the National Council for Applied Economic Research (NCAER). The following table gives the classification by NCAER on various economic groups. Class Lower Class Lowe Middle Class Middle Class Upper Middle Class Upper Class Annual Income level/household Less than Rs25000 25000-50000 50000-77000 77000-106000 Greater than Rs106000

Before we analyse the NCAER data, a caveat NCAER classifications are, we believe, over estimations. It is hard to imagine how any household (of average 5 people) with an annual income less than Rs25000 can even imagine spending this meagre resource on consumer goods. Or for that matter the ability of households say with an income of Rs60000 per annum can educate 2-3 children and also spend on basic amenities and live comfortably. This has to be kept in mind when we analyse the purchasing abilities of different groups. What is called middle class could be a 5 member household earning an

annual income of Rs60000. If anything, our analysis will be biased in favour of FMCG companies. Now let us take a look at the various income levels of these constituents. 80 per cent of the Indian population are in the lower, lower middle and middle income bracket. And according to the survey, they spend around Rs200 a month on an average on FMCG products. Also, the NCAER survey includes three products generally not included as FMCG by analysts namely tea, electric bulbs and cooking oil. Again, the amount spent on the three products is likely to eat into overall FMCG purchase. Now at an average monthly expenditure of Rs200 on FMCG products, 80 per cent of India clearly cannot afford a detergent for Rs100-150 a month. For that matter 5 Lux soaps (a very conservative estimate that one person uses one cake of soap a month) will cost Rs50 a month or 25 per cent of the entire FMCG budget. A single meal of Maggie noodles for the family will cost Rs80. This is the consumer professor Prahalad is talking about. This is the consumer that Indian FMCG companies have ignored. Yes. But it will be a slow process. Infact it will be much slower than what many FMCG companies think. Assuming that the Indian economy grows at 8 per cent per annum for the next ten years, the monthly spend on FMCG products by this 80 per cent of the population will be Rs432 at the end of this ten years. Even at this level most products at current prices will be unaffordable. Also we must take into account the fact that income levels of lower income groups grow at lesser rates than higher income groups. For example between 199293 and 1997-98, the income of households above Rs.50,00,000 grew by 55.3%, households above Rs.20,00,000 grew 40.9% and those of above 5,00,000 grew 33.8%. This is the hard fact about Indian income levels today. While it is easy to compare with South East Asian economies, one should not loose sight of the fact that we grew our GDP at a rate of 1 per cent per annum for over 100 years till 1975. For over a 100 years our population growth was greater than our GDP growth rate. What we are trying to undo is undoing one of the lowest base consumerism in the world where even a high compounding growth rate will take atleast 2 decades to show quantum jumps.

Then how come the FMCG industry saw rapid growth these many years? It doesn't mean that if 80 per cent of India is out of the FMCG net, the market is small. The other 20 per cent constitute 200 million strong population. Most of the growth in FMCG industries has been driven by this section of the population. A significant portion of this 200 million have seen a large increase in their expendable income in the last 20 years and by all means these are the emerging affluent classes of tomorrow. These sections caught up with their basic FMCG needs and upgraded to better quality. This in turn pushed up the profits of FMCG companies. Will this 200 million drive future growth? Highly unlikely. These 200 million consumers are almost fully penetrated. Additional profits from these customers can come from only two new means either by making them upgrade into more premium products or sell them new products like food. Upgrading to more premium products will be difficult when you consider that only 10 per cent of the 200 million are millionaires who are likely to be immune to these changes. Even here there are two important issues. One is the ability of the FMCG industry to command an increasing or atleast stable portion of the consumers expendable income. In fact Peter Drucker says in his latest book Management Challenges for the 21st Century that ability to attract an increasing portion of the consumer is the only thing that matters for any industry. Here is where the biggest challenge for FMCG companies will be How to get the 200 million current customers to spend an ever increasing or at least same share of their annual income? Going by all pointers, FMCG companies have miserably failed on this front till date. According to NCAER data, the ratio of amount spent on FMCG goods by higher classes to lower classes is a mere 1.3. Despite an income of 5 times that of lower classes, upper classes spent just 30 per cent more on FMCG goods per annum than higher classes. In toilet soaps, despite a growth in income of 14.98 per cent, the increase in expenditure was only 11.6 per cent. Thus till date FMCG companies are commanding a reducing share of a growing income pie.

The biggest threat to FMCG share of the pie can be partly explained by Abraham Maslow's need hierarchy theory. Once people meet their basic needs like food, clothing and shelter (also read as FMCG), they move into esteem needs. For lower classes esteem needs are having a TV, a cable connection, basic consumer durables like watches and refrigerators. In the coming years the entertainment and the consumer durables industries are likely to be a bigger threat to companies like HLL than a P&G. The second part of the threat is value for the customer. The advantage of upgrading from say a Surf Ultra to a Surf Super Excel is likely to be very incremental. In fact according to a survey by KSA Technopack, Indian consumers have actually downgraded FMCG products for consumer durable products. So the only growth area left within this 200 million population are products which have very little penetration like sanitary napkins and packaged food products. The problem here is that most of these products cater to urban populations resulting in almost no distribution barriers. Most of these products also have no development costs associated with them as they are sourced from their international portfolios. So all international FMCG products eventually enter the premium market with their products. Experience shows that when all products offer the same value to the customer, then the battle is fought on advertisement and price. That will result in poor shareholder returns in the long run. The victors in this area will have to give a lot of thought to their strategy and clearly differentiate the product. The recently introduced Heinz ketchup seems to be a rare example of a FMCG company getting the premium market right. While there cannot be a one size fits all strategy, what we can look at is where the potential money is and where competitive barriers can be built. Very clearly there is a need by 80 per cent of the population who are not served by FMCG companies to use soaps to bath, detergents to clean their cloths and toothpaste to brush their teeth. When HLL 's Wheel took on Nirma, it had only one single point agenda. It has to make the product affordable to match Nirma. For this HLL had to fundamentally rethink its entire raw material and other costs, its distribution strategy and overall pricing. HLL had to question many costs it had taken as given. It had to challenge lot of other assumptions like price performance

relationships. In the end they did come up with solutions and according to Professor Prahalad, they returned a return on capital of 93 per cent on Wheel compared to a mere 22 per cent on the premium Surf. Why this difference in returns? One is the intense competition due to no entry barriers. A Henkel or P&G can take HLL head-on in the large urban markets. They cannot replicate HLLs pricing and distribution reach of Wheel in the rural markets. So Wheel has significantly higher competitive advantage than Surf. Next is the cost of staying in the market. There is no significant performance or quality difference between a Surf, Ariel and a Henkel. When many players enter the fray, the product starts following commodity economics and the wars are fought on advertisements and selling prices. The second reason the capital employed by FMCG companies. All major players in the FMCG industry have been moving towards outsourcing of products and positioning themselves as pure marketing companies. Overall capital employed required per unit of sales is decreasing and more importantly working capital is negative for all these companies. This simply means that a more the company sells, the more will it be its return on equity. Margins are important but incremental sales at positive contribution is much more important. Rs10 crores sales of Surf at 50 per cent net profit margin and Rs100 crores of Wheel at 10 per cent net profit margin is likely to require the same capital requirements. So if a detergent can be sold at half the price of a wheel to the 80% of the population who are untouched by current products will mean more money than even what Wheel makes currently. If a company's existence is to maximise shareholder returns, then the choice is very clear. This is exactly where companies have to think in terms of what Professor Prahalad and Mr. Narayana Murthy call opportunity share rather than market share. FMCG companies are going to loose a massive opportunity to create wealth if they don't concentrate on the poorer sections of the market. FMCG companies will have to make products for the lower sections of the society rather than wait for income levels of these sections to catch up with that of their products. Unfortunately only HLL seems heading in that direction.

Till date investing in FMCG companies was similar to what the father of security analysis Benjamin Graham did during the end of the great depression years. Graham picked a stake in all companies that were quoting at less than 50 per cent of book value. The assumption was that most of these companies will recover when the economy looked up and on the whole they will make money. FMCG companies had a great run in the last 2 decades as middle class Indian consumers bereft of basic goods caught up with their needs. Every player in the FMCG industry made money as long as they were decently managed. Even there we have seen a significant difference between the performance of HLL and the rest. The days of every player producing high returns are over. Only companies who can increase their topline, create product differentiation, penetrate the lower sections of the society and erect entry barriers will see the kind of returns seen in the past. The current consumers will resist annual price increases and will see through regular brand extensions at higher prices. P/E multiples in the FMCG industry will come down to the global levels of 15 for the average performers. Only the best will be able to maintain P/Es in excess of 35. One cannot keep on decreasing capital by 10 per cent annually and topline by 5 per cent forever. When denominator management meets its ultimate end, markets will brutally downgrade P/Es. The best buys will be players who position themselves to cater to all sections of the society. So whenever there is a shift in consumer trends, they will be able to capitalise on it. Companies catering to premium or super premium segments must have a superbly thought out strategy which will rook in the moolah without disproportionate ad spends. Most players seem to be more confused and playing a dart game like launching many products in the hope of a few hitting the jackpot. Like all darts they can achieve at the most only average returns. They will do better if they go back to the basic marketing lesson make what the consumer wants and not what you want the consumer to buy. According to the census of India village with clear surveyed boundaries not having a municipality, corporation or board, with density of population not more than 400sq.km and with at least 75 per cent of the male working population engaged in agriculture and allied activities would quality as rural. According to this definition, there are 6.38,000 villages in

the country. Of these, only 0.5 cent has a population above 10,000 and 2 per cent have population between 5,000 and 10,000. Around 50 per cent has a population less than 200. Interestingly, for FMCG and consumer durable companies, any territory that has more than 20,000 and 50,000 population, respectively, is rural market. So, for them, it is not rural India which is rural. According to them, it is the class-II and III towns that are rural. According to the census of India 2001, there are more than 4,000 towns in the country. It has classified them into six categories-around 400 class-I towns with one lakh and above population (these are further classified into 35 metros and rest non-metros), 498 class-II towns with 50,000-99,999 population, 1,368 class-III towns with 20,000-50,000 population, 1,560 class-IV towns with 10,000-19,999 population. It is mainly the class-II and III towns that marketer's term as rural and that partly explains their enthusiasm about the so-called "immense potential" of rural India. About 285 million live in urban India whereas 742 million reside in rural areas, constituting 72% of India's population resides in its 6, 27,000 villages. The number of middle income and high income households in rural Indian is expected to grow from 46 million to 59 million. Size of rural market is estimated to be 42 million households and rural market has been growing at five times the pace of the urban market. More government rural development initiates. Low literacy rate Increasing agricultural productivity leading to growth of rural disposable income. Lowering of difference between taste of urban and rural customers. Rural Initiators "Going rural" the new marketing mantra-all corporate companies agreed that the rural market the key to survival in India. The real India lives in villages-6, 38,365 villages to be precise. This is where the fortunes of many of Indian biggest corporations are likely to be shaped. To expand the market by tapping the countryside, more and more MNC`s are foregoing into rural markets. Among those that have made some headway are HLL, Coca-

cola, LG Electronics, Britannia, Standard life, Philips, Colgate Palmolive, ITC and the foreign-invested telecom companies. Gone are the days when a rural consumer went to a nearby city to but branded Products and services`. Time was when only a select household consumed branded goods, be it tea (or) jeans. There were days when big companies flocked to rural markets to establish their brands. Today, rural markets are critical for every marketer-be it for a branded shampoo (or) an automobile. Time was when marketers thought van campaigns, cinema commercials and a few wall paintings would suffice to entice rural folks under their folds. Thanks to television, today a customer in a rural area is quite literate about myriad products that are on offer in the market place. An Indian farmer going through his daily chores wearing jeans may sound idiotic. Not for Arvind Mills, though. When it launched the Ruf & Tuf kits, it had created quite a sensation among the rural folks as well within few months of their launch. The Indian rural market with its vast size and demand base offers great opportunities to marketers. Two-thirds of countries consumers live in rural areas and almost half of the national income is generated here. It is only natural that rural markets form an important part of the total market of India. Our nation is classified in around 450 districts, and approximately 630000 villages which can be sorted in different parameters such as literacy levels, accessibility, income levels, penetration, distances from nearest towns, etc. The success of a brand in the Indian rural market is as unpredictable as rain. It has always been difficult to gauge the rural market. Many brands, which should have been successful, have failed miserably. More often than not, people attribute rural market success to luck. Therefore, marketers need to understand the social dynamics and attitude variations within each village though nationally it follows a consistent pattern.While the rural market certainly offers a big attraction to marketers, it would be naive to think that any company can easily enter the market and walk away with sizable share. Actually the market bristles with variety of problems. The main problems in rural marketing are: Physical Distribution Channel Management

 Promotion and Marketing Communication The problems of physical distribution and channel management adversely affect the service as well as the cost aspect. The existent market structure consists of primary rural market and retail sales outlet. The structure involves stock points in feeder towns to service these retail outlets at the village levels. But it becomes difficult maintaining the required service level in the delivery of the product at retail level. One of the ways could be using company delivery vans which can serve two purposes- it can take the products to the customers in every nook and corner of the market and it also enables the firm to establish direct contact with them and thereby facilitate sales promotion. However, only the bigwigs can adopt this channel. The companies with relatively fewer resources can go in for syndicated distribution where a tie-up between non-competitive marketers can be established to facilitate distribution. As a general rule, rural marketing involves more intensive personal selling efforts compared to urban marketing. Marketers need to understand the psyche of the rural consumers and then act accordingly. To effectively tap the rural market a brand must associate it with the same things the rural folks do. This can be done by utilizing the various rural folk media to reach them in their own language and in large numbers so that the brand can be associated with the myriad rituals, celebrations, festivals, melas and other activities where they assemble. One very fine example can be quoted of Escorts where they focused on deeper penetration .In September-98 they established rural marketing sales. They did not rely on T.V or press advertisements rather concentrated on focused approach depending on geographical and market parameters like fares, melas etc. Looking at the 'kuchha' roads of village they positioned their mobike as tough vehicle. Their advertisements showed Dharmendra riding Escort with the punchline 'Jandar Sawari, Shandar Sawari'. Thus, they achieved whopping sales of 95000 vehicles annually.

One more example, which can be quoted in this regard, is of HLL. A year back HLL started 'Operation Bharat' to tap the rural markets. Under this operation it passed out lowpriced sample packets of its toothpaste, fairness cream, Clinic plus shampoo, and Ponds cream to twenty million households. Thus looking at the challenges and the opportunities which rural markets offer to the marketers it can be said that the future is very promising for those who can understand the dynamics of rural markets and exploit them to their best advantage. Tends indicates that the rural the rural markets are coming up in a way and growing twice as fast as the urban, witnessing a rise in sales of hitherto typical urban kitchen gadgets such as refrigerators, mixer-grinders and pressure cookers. According to a National Council for Applied Economics Research (NCAER), study, there are as many 'middle income and above' households in the rural areas as there are in the urban areas. There are almost twice as many 'low middle income' households in rural areas as in the urban areas. At the highest income level there are 2.3 million urban households as against 1.6 million households in rural areas. According to Mr.D.Shiva Kumar, Business Head (Hair), personal products division, Hindustan Lever Limited, the money available to spend on FMCG (Fast Moving Consumer Goods) products by urban India is Rs.49,500 crores as against is Rs.63,500 crores in rural India. As per NCAER projections, the number of middle and high-income households in rural India is expected to grow from 80 million to 111 million by 2007. In Urban India, the same is expected to grow from 46 million to 59 million. Thus, the absolute size of rural India is expected to be double that of urban India. Rural income levels are largely determined by the vagaries of monsoon and, hence, the demand there is not an easy horse to ride on. Apart from increasing the geographical width of their product distribution, the focus of corporate should be on the introduction of brands and develop strategies specific to rural consumers. Britannia industries launched Tiger Biscuits especially for the rural market. An important tool to reach out to the rural audience is through effective communication. A rural consumer is brand loyal and understands symbols better. This also makes it easy to sell look-alike. The rural audience has matured enough to understand the communication developed for the urban markets, especially with reference to FMCG products. Television

has been a major effective communication system for rural mass and, as a result, companies should identify themselves with their advertisements. Advertisements touching the emotions of the rural folks, it is argued, could drive a quantum jump in sales.

RECOMMENDATIONS

Procter & Gamble Hygiene and Health Care Ltd (P&G) is chalking out a strategy aimed at enhancing its topline growth. It is targeting at increasing its distribution reach on the longterm objective of tapping the one billion consumer potential that exists in India. Elaborating on these plans in his first media interaction since taking over as P&Gs managing director (India) in June this year, Shantanu Khosla said: There are learnings from my past experiences at other P&G assignments. India is a tough and challenging market. One word that aptly describes my plan for India is, growth. Mr Khosla did not elaborate on growth projections. P&G has been operating in India for the last 10-12 years, and has been able to build stable equity in brands like Vicks, Ariel, Head & Shoulders, among others. The Cincinnati-based parent operates through two subsidiaries Procter & Gamble Home Products, which is wholly-owned, and Procter & Gamble Hygiene and Health Care, in which it holds 65 per

cent. The latter reported a net profit of Rs 77 crore on gross sales of Rs 449.8 crore in the year ended June 2002. We have already built a strong competitive advantage, and we would definitely look at the one billion consumer potential in India, which is the biggest advantage India has, as in China, said Mr Khosla. After the successful implementation of the Golden Eye distribution model, which was put in place by the companys former managing director Gary Cofer, the next move is to invest in distribution and penetration. According to Mr Khosla, Golden Eye is the most efficient distribution system in the country. But this is not sufficient. The challenge is to win the hearts and minds of the consumer by being cost efficient. We are putting this in place and hope to accomplish the task in the next 2-3 years.

P&G had earlier pronounced that its strategy would largely revolve around the urban consumer, given the huge growth potential therein. Commenting on broad-basing of the strategy now, Mr Khosla said: Personally, Im not too much into this urban-rural divide. Availability is the key to meet consumers expectations. It is not an end, but it is an enabler. Mr Khosla said that distribution is the key driver, and to increase its distribution reach is the challenging task, considering the countrys spread and the spread of the consumer, but it essentially is a necessity to enable products to get into...

CONCLUSION
Sales management refers to the administration of the personal selling component of a company's marketing program. It includes the planning, implementation, and control of sales programs, as well as recruiting, training, motivating, and evaluating members of the sales force. In a small business, these various functions may be performed by the owner or by a specialist called a sales manager. The fundamental role of the sales manager is to develop and administer a selling program that effectively contributes to the organization's goals. The sales manager for a small business would likely decide how many salespeople to employ, how best to select and train them, what sort of compensation and incentives to use to motivate them, what type of presentation they should make, and how the sales function should be structured for maximum contact with customers.

Sales management is just one facet of a company's overall marketing mix, which encompasses strategies related to the "four Ps": products, pricing, promotion, and place (distribution). Objectives related to promotion are achieved through three supporting functions: 1) advertising, which includes direct mail, radio, television, and print advertisements, among other media; 2) sales promotion, which includes tools such as coupons, rebates, contests, and samples; and (3) personal selling, which is the domain of the sales manager.

Although the role of sales managers is multidisciplinary in scope, their primary responsibilities are: 1) setting goals for a sales force; 2) planning, budgeting, and organizing a program to achieve those goals; 3) implementing the program; and 4) controlling and evaluating the results. Even when a sales force is already in place, the sales manager will likely view these responsibilities as an ongoing process necessary to adapt to both internal and external changes.

Goal Setting

The overall goals of the sales force manager are essentially mandated by the marketing mix. The company coordinates objectives between the major components of the mix within the context of internal constraints, such as available capital and production capacity. The sales force manager, however, may play an important role in developing the overall marketing mix strategies. For example, the sales manager may be in the best position to determine the specific needs of customers and to discern the potential of new and existing markets.

One of the most critical duties of the sales manager is to estimate the market potential and sales potential of the company's offerings, and then to make realistic forecasts of sales. Market potential is the total expected sales of a given product or service for the entire industry in a specific market over a stated period of time. Sales potential refers to the share of a market potential that an individual company can reasonably expect to achieve. A sales forecast is an estimate of sales (in dollars or product units) that an individual firm expects to make during a specified time period, in a stated market, and under a proposed marketing plan.

Estimations of sales and market potential are often used to set major organizational objectives related to production, marketing, distribution, and other corporate functions, as well as to assist the sales manager in planning and implementing the overall sales strategy. Numerous sales forecasting tools and techniques, many of which are quite advanced, are available to help the sales manager determine potential and make forecasts. Major external factors influencing sales and market potential include: industry conditions, such as stage of maturity; market conditions and expectations; general business and economic conditions; and regulatory environment.

Planning, Budgeting, and Organizing

After determining goals, the sales manager of a small business must develop a strategy to attain them. A very basic decision is whether to hire a sales force or contract with independent selling agents or manufacturers' representatives outside of the organization. The latter strategy eliminates costs associated with hiring, training, and supervising workers, and it takes advantage of sales channels that have already been established by the independent representatives. On the other hand, maintaining an internal sales force allows the manager to exert more control over the salespeople and to ensure that they are trained properly. Furthermore, establishing an internal sale force provides the opportunity to hire inexperienced representatives at a very low cost.

The type of sales force developed depends on the financial priorities and constraints of the organization. If a manager decides to hire salespeople, the next step is to determine the optimal size of the force. This determination typically entails a compromise between the number of people needed to adequately service all potential customers and the resources available to the company. One technique sometimes used to determine sales force size is the "work load" strategy, whereby the sum of existing and potential customers is multiplied by the ideal number of calls per customer. That sum is then multiplied by the preferred length of a sales call (in hours). Next, that figure is divided by the selling time available from one salesperson. The final sum is theoretically the ideal sales force size. A second technique is the "incremental" strategy, which recognizes that the incremental increase in sales that results from each additional hire continually decreases. In other words, salespeople are gradually added until the cost of a new hire exceeds the benefit.

A sales manager who is in the process of hiring an internal sales force also has to decide the degree of experience to seek and determine how to balance quality and quantity. Basically, the manager can either "make" or "buy" his force. "Green" hires, or those without previous experience whom the company must "make" into salespeople, cost less over the long term and do not bring any bad sales habits with them that were learned in other companies. On the other hand, the initial cost associated with experienced

salespeople is usually lower, and experienced employees can start producing results much more quickly. But as Irving Burstiner noted in The Small Business Handbook, few star salespeople are ever unemployed, and a small business probably lacks the resources to find and hire those who are. Furthermore, if the manager elects to hire only the most qualified people, budgetary constraints may force him to leave some territories only partially covered, resulting in customer dissatisfaction and lost sales. Therefore, it usually makes more sense for small businesses to hire green troops and train them well.

After determining the composition of the sales force, the sales manager creates a budget, or a record of planned expenses that is (usually) prepared annually. The budget helps the manager decide how much money will be spent on personal selling and how that money will be allocated within the sales force. Major budgetary items include: sales force salaries, commissions, and bonuses; travel expenses; sales materials; training; clerical services; and office rent and utilities. Many budgets are prepared by simply reviewing the previous year's budget and then making adjustments. A more advanced technique, however, is the percentage of sales method, which allocates funds based on a percentage of expected revenues. Typical percentages range from about two percent for heavy industries to as much as eight percent or more for consumer goods and computers.

After a sales force strategy has been devised and a budget has been adopted, the sales manager should ideally have the opportunity to organize, or structure, the sales force. The structure of the sales force allows each salesperson to specialize in a certain sales task or type of customer or market, so that they will be more likely to establish productive, longterm relationships with their customers. Small businesses may choose to structure their sales forces by product line, customer type, geography, or a combination of these factors.

Implementing

After setting goals and establishing a plan for sales activities, the next step for the sales manager is to implement the strategy. Implementation requires the sales manager to make decisions related to staffing, designing territories, and allocating sales efforts. Staffingthe most significant of these three responsibilitiesencompasses recruiting, training, compensating, and motivating salespeople.

RECRUITING. The first step in recruiting salespeople involves analyzing the positions to be filled. This is often accomplished by sending an observer into the field, who records the amount of time a salesperson must spend talking to customers, traveling, attending meetings, and doing paperwork. The observer then reports the findings to the sales manager, who uses the information to draft a detailed job description. The observer might also report on the characteristics and needs of the buyers, since it can be important for salespeople to share these characteristics.

The manager may seek candidates through advertising, college recruiting, company sources, and employment agencies. Candidates are typically evaluated through personality tests, interviews, written applications, and background checks. Research has shown that the two most important personality traits that salespeople can possess are empathy, which helps them relate to customers, and drive, which motivates them to satisfy personal needs for accomplishment. Other important traits include maturity, appearance, communication skills, and technical knowledge related to the product or industry. Negative traits include fear of rejection, distaste for travel, self-consciousness, and interest in artistic or creative originality.

TRAINING. After recruiting a suitable sales force, the manager must determine how much and what type of training to provide. Most sales training emphasizes product, company, and industry knowledge. Only about 25 percent of the average company training program, in fact, addresses personal selling techniques. Because of the high cost, many small businesses try to limit the amount of training they provide. The average cost of training a

person to sell industrial products, for example, commonly exceeds $30,000. Sales managers can achieve many benefits with competent training programs, however. For instance, research indicates that training reduces employee turnover, thereby lowering the effective cost of hiring new workers. Good training can also improve customer relations, increase employee morale, and boost sales. Common training methods include lectures, case studies, role playing, demonstrations, on-the-job training, and self-study courses. Ideally, training should be an ongoing process that continually reinforces the company's goals.

COMPENSATION. After the sales force is in place, the manager must devise a means of compensating individuals. The ideal system of compensation reaches a balance between the needs of the person (income, recognition, prestige, etc.) and the goals of the company (controlling costs, boosting market share, increasing cash flow, etc.), so that a salesperson may achieve both through the same means. Most approaches to sales force compensation utilize a combination of salary and commission or salary and bonus. Salary gives a sales manager added control over the salesperson's activities, while commission provides the salesperson with greater motivation to sell.

Although financial rewards are the primary means of motivating workers, most sales organizations also employ other motivational techniques. Good sales managers recognize that salespeople have needs other than the basic ones satisfied by money. For example, they want to feel like they are part of a winning team, that their jobs are secure, and that their efforts and contributions to the organization are recognized. Methods of meeting those needs include contests, vacations, and other performance-based prizes, in addition to selfimprovement benefits such as tuition for graduate school. Another tool managers commonly use to stimulate their salespeople is quotas. Quotas, which can be set for factors such as the number of calls made per day, expenses consumed per month, or the number of new customers added annually, give salespeople a standard against which they can measure success.

DESIGNING TERRITORIES AND ALLOCATING SALES EFFORTS. In addition to recruiting, training, and motivating a sales force to achieve the company's goals, sales managers at most small businesses must decide how to designate sales territories and allocate the efforts of the sales team. Territories are geographic areas assigned to individual salespeople. The advantages of establishing territories are that they improve coverage of the market, reduce wasteful overlap of sales efforts, and allow each salesperson to define personal responsibility and judge individual success. However, many types of businesses, such as real estate and insurance companies, do not use territories.

Allocating people to different territories is an important sales management task. Typically, the top few territories produce a disproportionately high sales volume. This occurs because managers usually create smaller areas for trainees, medium-sized territories for more experienced team members, and larger areas for senior sellers. A drawback of that strategy, however, is that it becomes difficult to compare performance across territories. An alternate approach is to divide regions by existing and potential customer base. A number of computer programs exist to help sales managers effectively create territories according to their goals. Good scheduling and routing of sales calls can reduce waiting and travel time. Other common methods of reducing the costs associated with sales calls include contacting numerous customers at once during trade shows, and using telemarketing to qualify prospects before sending a salesperson to make a personal call.

Controlling and Evaluating

After the sales plan has been implemented, the sales manager's responsibility becomes controlling and evaluating the program. During this stage, the sales manager compares the original goals and objectives with the actual accomplishments of the sales force. The performance of each individual is compared with goals or quotas, looking at elements such as expenses, sales volume, customer satisfaction, and cash flow. According to Burstiner, each salesperson should be evaluated using both subjective (i.e., product knowledge,

familiarity with competition, work habits) and objective (i.e., number of orders compared to number of calls, number of new accounts landed) criteria.

An important consideration for the sales manager is profitability. Indeed, simple sales figures may not reflect an accurate image of the performance of the sales force. The manager must dig deeper by analyzing expenses, price-cutting initiatives, and long-term contracts with customers that will impact future income. An in-depth analysis of these and related influences will help the manager to determine true performance based on profits. For use in future goal-setting and planning efforts, the manager may also evaluate sales trends by different factors, such as product line, volume, territory, and market. After the manager analyzes and evaluates the achievements of the sales force, that information is used to make corrections to the current strategy and sales program. In other words, the sales manager returns to the initial goal-setting stage.

Environments and Strategies

The goals and plans adopted by the sales manager will be greatly influenced by the company's industry orientation, competitive position, and market strategy. The basic industry orientations available to a firm include industrial goods, consumer durables, consumer nondurables, and services. Companies that manufacture industrial goods or sell highly technical services tend to be heavily dependent on personal selling as a marketing tool. Sales managers in those organizations characteristically focus on customer service and education, and employ and train a relatively high-level sales force. In contrast, sales managers that sell consumer durables will likely integrate the efforts of their sales force into related advertising and promotional initiatives. Sales management efforts related to consumer nondurables and consumer services will generally emphasize volume sales, a comparatively low-caliber sales force, and an emphasis on high-volume customers.

In his classic book Competitive Strategy, Michael Porter lists three common market strategies adopted by firmslow-cost supplier, differentiation, and niche. Companies that adopt a low-cost supplier strategy are usually characterized by a vigorous pursuit of efficiency and cost controls. Sales management efforts in this type of organization should generally stress minimizing expensesby having salespeople stay at budget hotels, for exampleand appealing to customers on the basis of price. Salespeople should be given an incentive to chase large, high-volume customers, and the sales force infrastructure should be designed to efficiently accommodate large order-taking activities.

Companies that adhere to a differentiation strategy achieve market success by offering a unique product or service. They often rely on brand loyalty or patent protection to insulate them from competitors, and thus are able to achieve higher-than-average profit margins. In this environment, selling techniques should stress benefits, rather than price. Firms that pursue a niche market strategy succeed by targeting a very narrow segment of a market and then dominating that segment. The company is able to overcome competitors by aggressively protecting its niche and orienting every action and decision toward the service of its select group. Sales managers in this type of organization would tend to emphasize employee training or to hire industry experts. The overall sales program would be centered around customer service and benefits other than price.

Regulation

Besides markets and industries, another chief environmental influence on the sales management process is government regulation. Indeed, selling activities at companies are regulated by a multitude of state and federal laws designed to protect consumers, foster competitive markets, and discourage unfair business practices.

Chief among anti-trust provisions affecting sales managers is the Robinson-Patman Act, which prohibits companies from engaging in price or service discrimination. In other

words, a firm cannot offer special incentives to large customers based solely on volume, because such practices tend to hurt smaller customers. Companies can give discounts to buyers, but only if those incentives are based on real savings gleaned from manufacturing and distribution processes.

Similarly, the Sherman Act makes it illegal for a seller to force a buyer to purchase one product (or service) in order to get the opportunity to purchase another producta practice referred to as a "tying agreement." A long-distance telephone company, for instance, cannot require its customers to purchase its telephone equipment as a prerequisite to buying its long-distance service. The Sherman Act also regulates reciprocal dealing arrangements, whereby companies agree to buy products from each other. Reciprocal dealing is considered anticompetitive because large buyers and sellers tend to have an unfair advantage over their smaller competitors.

Several consumer protection regulations also impact sales managers. The Fair Packaging and Labeling Act of 1966, for example, restricts deceptive labeling, and the Truth in Lending Act requires sellers to fully disclose all finance charges incorporated into consumer credit agreements. Cooling-off laws, which commonly exist at the state level, allow buyers to cancel contracts made with door-to-door sellers within a certain time frame. Additionally, the Federal Trade Commission (FTC) requires door-to-door sellers who work for companies engaged in interstate trade to clearly announce their purpose when calling on prospects.

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