MKTG 763.01 Case#9 Biomed Co., Ltd.

Relevant Facts/Background

 About Biomed & Thai Drugs:

Thai Drugs Co., Ltd. (Thai Drugs), a family-owned business which provided more than 100 items of drugs, was one of the 170

small-to-medium sized local Thai pharmaceutical manufacturers. Its main strength was in the over-the-counter market, selling to

drug stores. It expanded into the generic pharmaceutical market in 1990. Biomed Co., Ltd. (Biomed), a subsidiary of Thai Drugs,

basically was a sales organization which acts as Thai Drug’s sole agent to sell generic pharmaceuticals to the market.

 About Sales Force and Organization:

Ponlerd Chiemchanya, who earned his MBA from Ivey Business School in May 2006, just rejoined Biomed as the new general

manager, led 1 sales manager, 11 sales representatives and several sales administration clerks. The role of salesperson was

complex because the Biomed sales force was the single contact and means of communication with the customer. The overall

compensation package was on par with the rest of the industry. The commission and bonus payments were based on salesperson’s

sales volume. Biomed sales were so minimal that they accounted for only .07% share of local generic market in 2002.

• Current Situation:

Since whether Biomed sales were profitable was even undetermined, the small market share and small margins in the generics

market had been concerns of Thai Drug’s management for a few years. Moreover, the changes in GMP requirements were

expected to be effective in 2008, which means Biomed had to cover THB4 million annually in fixed overhead to meet the

investment standard for upgrading manufacturing most of its products. Management decided to give Biomed another 1-2 years to

test the viability of Biomed and make efforts to increase Biomed’s sales and profitability. Chiemchanya returned at the moment

the new market strategy was launched in 2006. His risky and challenging responsibility is to design a new sales compensation

plan to fit with the new situation.

Case Issues and Problem Identification

1. Fierce Market Competition

According to 2002 figures, the following conclusion could be reached:

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→ (100%, THB40 billion) Total domestic market for pharmaceuticals =

(65%, THB26 billion) Foreign companies & original products + (35%, THB14 billion) Local Thai companies w/o R&D

→ (35%, THB14 billion) Local Thai companies w/o R&D = Local generic market =

(35%×53%=18.55%, THB7,369 million) Top 5 manufacturers + (35%×47%=16.45%, THB6,631 million) 170 small private or

family-owned businesses

170 local manufacturers shared a THB6, 631 million market for generics, while Biomed hovered around THB10 million, which is

far below an idealized average level THB39 million (6631×1/170). The market share was too minimal. In other words, Biomed

was not competitive at all in local generic market.

2. No Market Focus (Place)

Biomed targeted all 3 markets (hospitals, drugstores and clinics) throughout Thailand. There was no primary market segmentation,

and no emphasis on one specific market. Sales representatives called on any customer where they thought they could increase

sales volume. However, the hospital segment was not a good target for Biomed anymore, because Biomed had no competitive

edge in the bidding process driven by hospitals buying groups. Biomed was unlikely to win in this segment and to be one of few

providers who pursuing low-cost strategy, which was inconsistent with Biomed’s pricing strategy all along.

3. Disconnected Marketing Strategy

 (Product) Lack of direction in terms of product focus. The generic products Biomed offered covered almost all types of drugs.

However, most of them were undifferentiated, commodity-type products. In a word, customers had no preference for these

types of generics, thus basically price played a significant role in competing in this market.

 (Price) Improper selling price to drugstores. Generics were widely prescribed in drugstores due to their lower cost. The target

consumers were people with lower incomes who view generics as cheap and convenient alternatives compared to

prescription drugs. Nevertheless, Biomed’s pricing was medium-high to high range of the generics market and it seldom used

aggressive price promotions with its customers because its lack of economies of scale in production.

 (Promotion) Single contact and complex sales role. The sales rep was the only person who contacted the customer, which

make it hard for the salesperson to understand his primary role and goal. Besides, there were no other means of advertising.
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Biomed failed to build brand awareness among customers, let alone brand loyalty.

4. Outdated Sales Compensation Plan

 Commission and bonus were simply and directly tied to sales volume. Salesperson pursued sales volume on a case-by-case

basis in all 3 markets without any emphasis or specific discipline. Therefore, they hardly considered the cost of the products,

transportation costs and ordering costs aiming at maximize THB contribution.

 No specific standards for different territory. The management failed to consider that different sales territories were not with

equal potential because of different income and education levels in Thailand.

5. Issues that may Resulted From the New Compensation Plan

How to help sales reps to adapt themselves quickly to the new market strategy? What if some reps could not make the switch?

The sales reps may feel that their income would be at risk and some negative reactions may result.

Critical Analysis

1. After analyzing the local generics market, Biomed should fully realize that its direct competitors were other 169 small

manufacturers. Despite of intense competition, it still had market potential as long as Biomed differentiate itself from others

and maintain its high quality and excellent service. In order to stand out, Biomed need to build a branding strategy to draw

more attention from customers.

2. The new market strategy tended to focus more on drugstores and clinics rather than hospitals. The 30% of the local market

was its emphasized market segment. On one hand, without low-cost structure, it was difficult for Biomed to compete in

hospital market. On the other hand, Biomed’s products were more likely to satisfy the demand in drugstores and clinics. The

new requirement for sales reps was that at least 60% of contribution derived from drugstores and clinics.

3. Right products: Instead of selling more than 100 items, the new strategy focused only 10-15 selected items, including

Biomed’s differentiated and sole products. The sales volume for each item would increase dramatically, leading to economies

of scales in production and lower unit costs. The prices would be further reduced and a virtuous circle would be formed.

Sales reps had to make sure that 75% of contribution derived from these focused items.

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Right prices: lower the prices of above selected items to the same range as competitors and maintain the prices of

high-quality items valued by customers in the past. Reminder, right pricing doesn’t mean low pricing.

4. New sales role and goals were adjusted to fit with the changes. The sales force should consider themselves as the single

contact point with the customer as well as the THB contribution generator. While focusing on maximizing contribution

margin, sales reps had to combine price decreases in unit contribution with increased volumes on an order-by-order basis to

ensure profitability. Accordingly, they would be notified the costs set to assist them in negotiating. The tasks were remained

complex, but Chiemchanya would put a specific list of tasks and their associated goals in the training process.

Alternative Solutions

 Design a new compensation plan to motivate sales force to change their behaviors according to the new strategy.

 Develop nonfinancial incentive programs and introduce CRM system.

 The training is highly necessary to be added in agenda as soon as possible.

 Use promotion mix to stand out among small manufacturers.

Recommendations

 The recommended changes in new compensation plan:

 Remain basic salary and other benefits to make sure of security.

 Design a variable commission rate set, paying a much higher commission on the focus items.

 Quarterly bonus based on 2 quotas: repeat sales and number of new accounts.

 Adjust various standards for different territories.

 Consider a recognition program based on sales reps’ performance, such as maintaining good relationship with customers.

 The training is organized for three purposes: 1) understand the changing situation and the new market strategy, 2) learn to

transfer focuses for adapting to new strategy, and 3) associate new compensation mix to a salesperson’s performance.

 Keep tracking the feedback from customers and make efforts to build long-term customer relationship.

 Prepare sufficiently to face with role conflicts may be resulted during the transition period.

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MKTG 763.01 -- Individual Case 2

Biomed Co., Ltd.:

Designing a New Sales Compensation Plan

Name: *******