gino sa case study analysis
TRANSCRIPT
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GINO SADistribution Channel Management
(HBR Case Study Analysis)
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Introduction
Current Issues
Knowing Market Analysis
Alternatives
Evaluation Decision
Implementation
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What is Gino SA ?
IntroductionIntroduction
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Gino Burner Co. is ...• One of the world’s largest burner manufacturer• Founded in Paris, France in 1931• Company that offers over 50 models of burners
in the domestic, commercial and industrial range
IntroductionIntroductionIntroduction
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Who are the
Players ?
Introduction
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• David Zhou (China Marketing Manager of Gino SA)
• Henry Gong(General Manager of Jhingua’s MEC)
• Jean – Michel Pierre (Asia-Pacific Area Manager of Gino SA)
IntroductionIntroduction
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Current Issuesof
Gino SA in 2000
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Tianjin Feima Boiler Company had requested permission to Zhou, Gino China`s manager, to purchase burners directly from Gino instead of from Jinghua, Gino’s largest distributor.
Current Issues
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Gino had six weeks to decide between granting Feima OEM status, harming its relationship with current distributors or denying the request and risk losing Feima as a customer.
Current Issues
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Aspects to Consider while deciding…
Relationship with Jinghua Feima`s response The possible response of Gino`s other distributors (FUNG`s
& Wayip) The attitude of Gino`s corporate management The message that the decision will send to the competitors
Current Issues
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• Become a leader in the industrial range, the most robust and vigorous market
• Achieve annual combined sales volume of 15,000 units• Achieve annual sales of industrial burners of over 200
units• Optimize distribution channels• Develop a minimum of two OEM accounts and two end
user key accounts within two years• Improve service and spare supply• Build brand image
Next three years goals …Current IssuesCurrent Issues
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Market of Burner Industry
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About Burner Industry…
SEGMENT BOILER CAPACITY USES
Domestic Upto 0.5 ton households/saunaCommercial 0.5 to 2 ton Offices/shops/restaurants
Industrial >2 ton Absorption type chillers/boilers
• The industry does not follow a single standard to classify burners
• Becket is the market leader in U.S.• U.S. market has high entry barrier.• China is a rising star.
Knowing Market
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• Worldwide market in thousands
• Developed markets of Europe and U.S. have become saturated
• Highest growth in Asia, Middle East and Africa• Demand was increasing in domestic and commercial
Area Market Size Gino SalesEurope 574 276
North America 433 45
Asia 291 36
Rest of World 250 24
Total 1548 381
Market AnalysisKnowing Market
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Before 1990
China rich in coal-low efficiency
and polluting-
coal combustion boilers and
hence no burners
1990-1995• Emphasis on pollution
control, replaced with oil combustion boilers
• Weishaupt (Germany), Baltur & Ridello(Italy), Elco (Germany), Quenod (France), Corona (Japan)
1995-1998• New applications for burners & demand for
commercial range began to increase• Price became an issue-Local manufacturers-
only 5000 units-5 years to become a threat-small burners
• Gino- price leader in domestic range (reference point for competitors)
• Despite offering 10% to 20% less than Weishaupt low penetration in industrial burners
Post 1999• Domestic-
price wars ; commercial mainstream market
• Industrial burners growth expected at 20% for next 5 years
Burner Market in ChinaMarketMarket AnalysisKnowing Market
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Gino’s position in Burner Market
• Competitive Advantages
In-house production capability
Well established channel network
International Exposure
MarketMarket AnalysisKnowing Market
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Market Analysis
Gino’s position in Burner Market (contd..)
• Gino had cost advantage and was known for providing & best value
• Gino was best known for its domestic burners
• Margins were higher in developing countries
SEGMENT OUTPUT RANGE(kcal/hour) GINO PRODUCTION - 1999 MARGINSDomestic 50000-3,000,000 329 <20%
Commercial 3,000,000-20,000,000 49 25%Industrial >20,000,000 3 30%
Total 381
Knowing Market
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Analysis of Situation
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1.GINO’s Burner Channels in ChinaAnalysis
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Analysis
2.Consumer Buying Process• Most manufacturers relied completely on
distributors• Weishaupt : own sales force and distribution
networks OEM’s often tried to bypass distributors
• Manufacturers refrained from giving quotations
• Issues: Services, spares and pricing going to OEM
• OEM Customers and End user customers
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3.SEGMENTATIONDomestic Boilers & Water heater
• 310 Major manufacturers; Avg. Price: RMB2,500; Size: RMB194 million
Commercial Boilers & Industrial applications• Avg. Price: RMB9,000; Size: RMB198 million
Domestic Boilers & Water heaters
• 60 Major manufacturers; Avg. Price: RMB65,000; Size: RMB221 million; Weishaupt
Analysis
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3.SEGMENTATION(contd..)
Estimated Sizes in Units Sold
Analysis
79,900
20,080
2,920
Domestic
Commercial
Industrial
102,900Total:
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4. Distribution NetworksAnalysis
• Three distributors were set up in 1995• Revenue: burners/spares : by 80/20 rule
• Operates in Gungzhou• 100% Gino (HVAC)Wayip• Operates in Shanghai• Textile Machinery(90% rev.)Fung• Operates in Beijing• 50% boilersJinghua
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4. Distribution Networks (contd..)
Distribution Performance Statistics
Jinghua FUNG’s Wayip Total
Domestic 4,354 3,075 3,458 10,887
Commercial 876 433 568 1,877
Industrial 37 48 52 137
Total 5,267 3,556 4,078 12,901
Analysis
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Credit Function: Line of Credit
Sales & Service function: customer interface function
Stock function : 10 major models is accounted for 80% of sales
5.Distributor FunctionsAnalysis
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6.PRICING
Percentage USD RMB
Transfer Price
Import Duty 15
Value Added Tax 17
Shipping & Insurance 5
Domestic Transportation 3
Misc. & Handling Fee 2
Transfer Price in USD*12.32 gives
Base Price 142 1232
60% Grossing up of Base gives the
Public Price or Listed Price 227.2 1972
Contract Price is equal to a discount of 20% to 25% on Public Price
Contract Price 181.81 1578
Gross Profit to the distributor = (contract price – base price) 39.87 346
Profit % 28
Analysis
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Demand for better
Stolen Sales
Reluctance to stock industrial burners
7.Distributor BehaviorAnalysis
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8. FEIMA AnalysisRange Volume Currently
from GINOOffer
Domestic 1055 350 1055
Commercial 163 50 81
Industrial 71 3 35
Total 1289 403 1171
Analysis
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So what can we do ? What are our options toapproach ?
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Options Generated
3. Proceed with Feima as an Original Equipment Manufacturer
1.Deny Feima’s request and Refuse to bypass distributors2.Approve Feima’s request but only for its industrial segment
Alternatives
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Deny Feima’s request and Refuse to bypass distributors
Option #1
GINO can deny the Feima’s Request for status as OEM . It would preserve the interest of distributors but may affect relationship with Feima . GINO may lose Feima as a customer Gino will also possess a heavy opportunity cost for industrial segment. Moreover, the bargaining power of distributor will be difficult to control
Alternatives
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Option #1
AdvantagesDisadvantages
• Strengthen distributor-manufacturing relationship
• No threat to domestic leadership position
• Shortened cycle time• Industrial Segment Sales promoted• Three-month forecast
• Loss of OEM Account• Opportunity Loss in terms
of incremental sales from Feima
• Will increase distributor power
• Loss of opportunity to enter in account handling with OEMs in industrial segment
• High investment• Continuation of
Distributors; bad behavior
Alternatives
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Option #1
AdvantagesDisadvantages
• Strengthen distributor-manufacturing relationship
• No threat to domestic leadership position
• Shortened cycle time• Industrial Segment
Sales promoted• Three-month
forecast
• Loss of OEM Account• Opportunity Loss in terms of
incremental sales from Feima• Will increase distributor power• Loss of opportunity to enter in account
handling with OEMs in industrial• segment• High investment• Continuation of Distributors; bad
behavior
Alternatives
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Option #2Approve Feima’s request but only for
its industrial segmentFeima wants to get into OEM contract with Gino mainly for reduction in prices. With this alternative, Gino should sign OEM contract with Fiema for industrial segment only with 10%additional margin in Industrial segment, and push Jinghua for 10% discount to Feima’s commercial and domestic burners. Jinghua can compensate the 10% discounts from additional sales of domestic burners. The warehouse will be built by Gino for these additional 33 industrial burners to Feima. The service contracts can be given to existing distributors. This alternative is also consistent with Gino’s goals of OEM accounts and market penetration in Industrial segment.
AlternativesAlternatives
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Option #2
Advantages• Achieving long term unit sales
increase• Penetration in Industrial Segment• Partially satisfies both Jinghua and
Feima• Improved service Standards• Maintain Distributor relationships• New OEM accounts
Disadvantages
• High investment • Distributor
bargaining power remains
• Difficult to convince Feima and Jinghua
• Difficult to determine price
Alternatives
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Option #2
Advantages• Achieving long term unit
sales increase• Penetration in Industrial
Segment• Partially satisfies both
Jinghua and Feima• Improved service
Standards• Maintain Distributor
relationships• New OEM accounts
Disadvantages• High investment • Distributor bargaining power
remains• Difficult to convince Feima and
Jinghua• Difficult to determine price• Can impact the entire profit
margin of industry
Alternatives
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Option #3Proceed with Feima as an Original
Equipment Manufacturer
Gino can Proceed with Feima as an OEM which would strong step in accomplishing its goal to OEM’s accounts but primarily it will destroy the relationship with Jinghua and Gino will lose Jinghua as distributor which will affect the GINO position in domestic burner market .
Alternatives
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Option #3
Advantages• Eliminate middleman• Distributors’ bad behavior• Inline with management strategy goals• Penetration into high growing
Industrial segment & relationship with OEM’S
• Combats increasing distributor bargaining power
• Increase in Overall Sales & profitability
Disadvantages• A possibility of losing
out Jinghua as a distributor
• Outside core competencies
• Sensitive distributors• Annual sales targets• Difficult to determine
prices• No ideal replacements• Destroys confidence
Alternatives
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Option #3
Advantages• Eliminate middleman• Distributors’ bad
behavior• Inline with management
strategy goals• Penetration into high
growing Industrial segment & relationship with OEM’S
• Combats increasing distributor bargaining power
• Increase in Overall Sales & profitability
Disadvantages• A possibility of losing out
Jinghua as a distributor• Outside core competencies• Sensitive distributors• Annual sales targets• Difficult to determine prices• No ideal replacements• Destroys confidence
Alternatives
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CurrentIndustry growth
(2%,5%,20%)
Addn in Feima Sales
Proj. Dec 2000 Sales
2001 2002
Domestic 10887 11105 705 11810 12047 12288
Commercial 1877 1971 32 2003 2104 2210
Industrial 137 165 33 198 238 286
Forecasting Of Number of Units
Evaluation
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GINO Financial Evaluation for Alternative 1:Domestic Commercial Industrial Industrial
Direct Sell
Total
Units Sold by all distributorsTransfer Price(RMB)
10887
2500
1877
9000
137
65000Revenue from burners (RMB)Revenue from Spares(RMB) (80/20 split)
27,217500
6,804,375
16,893,000
4,223,250
8,905,000
2,226,250
53,015,500
13,253,875Net Revenue of Gino(RMB)Net Revenue of Gino (USD)
34,021,8754,099,021.08
21,116,2502,544,126.51
11,131,2501,341,114.46
66,269,3757,984,262.05
Total Contribution Margin(20%,25%,30%) $819,804.22 $508,825.30 $268,222.89 $1,596,852.40
Evaluation
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GINO Financial Evaluation for Alternative 2:Domestic Commercial Industrial Industrial
Direct SellTotal
Price per unit for Gino Burners (RMB)Forecasted Units
2500
11810
9000
2003
65000
165
120575
36Revenue from burners(RMB)Revenue from Spares (RMB)(80/20 split)
29,525,000
7,381,250
18,027,000
4,596,750
10,725,000
2,681.250
4,340,7000
1,085,175
58,277,000
14,569,250Net Revenue of Gino (RMB)Net Revenue of Gino (USD)
36,906,2504,446,536.14
22,533,7502,714,909.64
13,406,2501615,210.84
5,425,875663,719.88
78,272,1259,430,376.51
Total Contribution Margin(20%,25%,30%) $889,307.23 $678,727.41 $484,563.25 $196,116.96 $2,248,713.86Gino’s Extra Cost for OperatingIndustrial Selling $152390.01*
Net Contribution $889,307.23 $678,727.41 $484,563.25 $43725.96 $2,096,323.85*Sum of Cost of Setting up warehouse(30000*/8.3) ,other cost of shipping etc.(48.4% of CM), Outsourcing Cost of Sales And Services(5% of SP)
Evaluation
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GINO Financial Evaluation for Alternative 3:Domestic Commercial Industrial Industrial
Direct Sell
Total
Price per unit for Gino BurnersForecasted Units
2500
11810
9000
2003
65000
198Revenue from burners (RMB)Revenue from Spares (RMB)(80/20 split)
29,525,000
7,381,250
18,027,000
4,596,750
12870,000
3,217,500
60,422,00
15,105,500
Net Revenue of Gino (RMB)Net Revenue of Gino (USD)
36,906,2504,446,536.14
22,533,7502,714,909.64
16,087,5001,938,253.01
75,527,5009,099,698.80
Total Contribution Margin(10%,15%,20%) $444,653.61 $407,236.45 $387,650.69 $1,239,540.66
Evaluation
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Jinghua’s Financial Evaluation for Alternative 1:Domestic
(2500RMB/8.3*1.484)
Commercial (9000RMB/8.3*
1.484)
Industrial(6500RMB/8.3*1.484)
Total
Jinghua’s Cost to Acquire (Q*2500*1.484/8.3)Jinghua Revenue (5% public , 95% Contracts)
$1,946,185.54
$2,552,256.46
$1,409,621.20
$1,826,869.08
$430,002.41
$557,283.12
$3,785,809.16
$4,906,408.67
Jinghua’s Profit $576,070.92 $417,247.88 $127,280.71 $1,120,599.51
Segmentation Share of profit
51% 37% 11%
Evaluation
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Jinghua’s Financial Evaluation for Alternative 2:Domestic
(2500RMB/8.3*1.484)
Commercial (9000RMB/8.3*
1.484)
Industrial(6500RMB/8.3*1.484)
Total
Jinghua’s Cost to Acquire (Q*2500*1.484/8.3)Jinghua Revenue (5% public , 95% Contracts)Discounts to Feima
$2,261,312.05
$2,930,660.41
$47,157.23
$1,461,114.22
$1,892,604.03
$8,783.13
$395,137.35
$512,098.00
$4,117,563.61
$5,336,362.44
Jinghua’s Profit $662,191.14 $423,706.68 $116,960.66 $1,162,858.47
Segmentation Share of profit
54% 36% 10%
Evaluation
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Jinghua’s Financial Evaluation for Alternative 3:Domestic
(2500RMB/8.3*1.484)
Commercial (9000RMB/8.3*
1.484)
Industrial(6500RMB/8.3*1.484)
Total
Jinghua’s Cost to Acquire (Q*2500*1.484/8.3)Jinghua Revenue (5% public , 95% Contracts)
$1,946,185.54
$2,226,436.26
$1,409,621.20
$1,612,606.66
$430,002.41
$491,922.76
$3,785,809.16
$4,330,965.68
Jinghua’s Profit $280,250.72 $202,985.45 $61,920.35 $545,156.52
Segmentation Share of profit
51% 37% 11%
Evaluation
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Decision MatrixResolve
Jinghua’s problem
Revenue And
Profitability
IndustrialSegment
Penetration
Bargaining power of
DistributorsTotal
Alternative 1 1 1 2 1 1.35
Alternative 2 3 3 3 2 2.9
Alternative 3 2 2 1 3 1.85
Decision
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So after analyzing the Pro’s & Con’s of each option and as according calculated using Decision Matrix
Decision
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Implementation
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• Before the global distributors meeting, Gino should convince Jinghua about this offer highlighting its increase in profitability.
• During the same period, Gino should keep FUNG’s and Wayip into confidence with this action plan. FUNG’s and Wayip will also benefit as their high inventory cycle time for industrial burners can be reduced from Gino’s warehouse.
• The warehouse to house the inventory would also built a good competitive advantage as compared to other competitors.
Implementation
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Recommended Plan… By End of March-• It would take approximately 1 month for legal formalities and to sign the contract.
By End of April-• Gino should start building a warehouse
3 – 7 months • To build a fully functional warehouse and hence the delivery date should set
accordingly while signing the contract.• Warehouse should be located in northern region of China because of close proximity to
Feima
Implementation
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From August ,2000• The delivery of industrial burners should start.
July , 2000 to August ,2000• A service and maintenance contract should be given to Jinghua highlighting all the SLA
guidelines and frequent feedback should be collected from Feima about service &product quality.
End of Nov,2000• The building of warehouse should be completed by now
December 2000• Gino can start building its sales force in China for further industrial burners OEM Contracts.
Implementation
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GINO Long Term Strategy (to achieve three year goals)
Formulate key account policy for future clients • Purchase of large number of units qualifies for direct
customers.• For existing OEM accounts go through Distributor OEM model.
Set ‘margin’ targets for distributors• Expanding industrial segment• Gross margin in industrial segment was 35% (commercial –
25% and domestic less than 20%)
ImplementationImplementation
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Set up its own warehouse • Restrict it to key end users and OEM accounts• Backup for distributor stocks
Eventually develop & expand own sales force for industrial burners
Better Marketing Strategies To build a better brand image
Expanding the businessGINO should expand its business to emerging Asian marketslike India etc.
Implementation
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Decrease cost of stocking industrial burners• Discontinue slow moving models• Incentivize distributors – multiple product line volume
discounts & incentives for stocking industrial burners
Build stronger relationship with distributors• Provide incentives , Mutual respect & Better credit
terms• Helping Distributors with Marketing and Technical
Support
Implementation
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Himank AironIIT-BHU
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These slides were created by Himank Airon , IIT-BHUas part of an internship done under the guidance of Prof. Sameer Mathur (www.IIMInternship.com)"