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,
it’s 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.
 TABLE OF CONTENTS

Topic Page No.

1. Abstract 1

2. Acknowledgment 2

3. Introduction 4

4. Theoretical Review/Perspective 6

5. Review and Research 20

6. New Developments in the Research Area 37

7. Recommendations 39

8. Conclusion 41

9. Bibliography 44
 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 :
o Providing current and useful sales support materials to their sales staff
o Providing marketing research data: demographic, psychographic,
behavioural, product acceptance, product problems, detecting trends
o Providing market research data: industry dynamics, new competitors, new
products from competitors, new promotional campaigns from competitors,
macro-environmental scanning, detecting trends
o Co-ordinate with other parts of the firm, particularly marketing,
production, and finance
o Identifying your most profitable customers, and your problem customers
o 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, 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-to-day 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 trading-
off 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 follows-

i. 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 product-store 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

It’s 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 doesn’t sell within a
month, it’s a dead stock. That’s 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
that’s 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, there’s no need for focus group
discussions to know how the product is doing,” he says. Keeping in mind faster go-to-
market, 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. It’s 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 ROI’s.” 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. It’s something that Dattagupta had to adapt to. “In retailing,
a brand relies heavily on word-of-mouth. While in FMCG there’s passive interaction with
the brand, at Barista, even the service from the brew master matters. So it’s 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, it’s 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 Annual Income level/household

Lower Class Less than Rs25000
Lowe Middle Class 25000-50000
Middle Class 50000-77000
Upper Middle Class 77000-106000
Upper Class 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 1992-93 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 low–
priced 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
long-term 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&G’s
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 company’s 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, I’m 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 country’s 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, long-
term 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. Staffing—
the most significant of these three responsibilities—encompasses 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 self-improvement 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 firms—low-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 expenses—by having salespeople stay at budget hotels, for
example—and 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 product—a
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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