ATLAS COPCO CASE ANALYSIS

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Market Entry Management by Atlas Copco

Atlas Copco managed an excellent market entry strategy. This opinion is based on the evaluation of various strategies and tactics employed by the company at the time of its entry into US market. When Atlas Copco entered the US market for compressors, the market was already dominated by strong and established players in the industry. The situation required a very detailed strategy for Atlas Copco, in order to create its market share amongst companies like Ingersoll-Rand and Sulliers which possessed established distribution network and industrial client base. The market entry management by Atlas Copco was done through multifarious steps.

Foremost among these steps is the creation of a novel four-level franchise network. For industrial equipment sales, distribution is the key factor for competitive advantage (Wisner et al.’s, 2009). The four-level franchise network comprised of four distinct forms of distribution options offered to prospective distributors of Atlas Copco. The first type of franchise was termed basic franchise. Basic franchisee distributed compressors of capacity 200 horse power and less. The second level of franchisee was allowed to carry larger compressor equipment for the company. Sales targets were placed on the second-level distributors in exchange for giving access to high-value products of Atlas Copco. The targets were not imposed on the second-level distributors; rather they were mutually discussed, negotiated and then decided. The third-level franchisees were those who have exhibited laudable sales as a second-level franchisee. These had then qualified for higher margins available as a level-three franchisee. Fourth-level distributors consisted of general service franchise, which were only available to those distributors who were willing to invest in development of such provisions. It is worth mention that Atlas Copco allowed a business to own multiple franchises provided the conditions associated with the respective distribution level was met.
 

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A key component of market entry management at Atlas Copco was the design of organizational hierarchy at sales division of the company. In traditional business setting, those product categories do not receive attention from line managers which carry lesser contribution margin for the company. The structure of the sales division was carefully drafted to ensure each product category received due attention irrespective of its contribution towards the profitability of the company. At Atlas Copco, four Regional Managers reported to National Sales Manager. Each of these Regional Managers headed twelve sales persons who were direct contact with the industrial customers of the company. Such design of the sales team ensured that the span of control of each manager is not too wide to manage adequately. Given that the total number of franchises was eighty five at the time, the management of the company entered the market with a salesperson to distributor ratio of 1:2.

In addition, Atlas Copco chose to have three marketing managers instead of one. First marketing manager was assigned to look after the smaller-sized compressor category, while the second one for medium- and large-sized product categories of the company. The third marketing manager has the responsibility to look after sales, service and spare parts distribution. This exhibits that the market entry strategy of Atlas Copco was to create focus in each category separately to attain market leadership in each one of them. The division of responsibility among three marketing managers was designed to formulate a separate strategy for each competitor in US market. Key competitors were different for various product categories at the time of Atlas’s entry. For instance, Ingersoll-Rand possessed a consolidated market share in the mining and construction industries for its large-sized compressor products.

Other key components of market entry design by Atlas Copco were to modify its products for US market and to grant above-industry-average margins for its distributors. Atlas Copco offered its distributors up to fifteen percent margin on list price. This measure was essential for a new entrant in the market because Ingersoll-Rand and Sulliers commanded consolidated market shares and distributors were assured of sustainable revenues from their dealership. Distributors are generally restricted by exclusive contracts in US markets (William et al.’s, 2008). A new entrant, like Atlas Copco, would not be able to create a dealership network unless it offered higher margins than other competitors. In addition, cash received by Atlas Copco from maintenance contracts was used as an incentive for distributors. Moreover, the company adopted a single distributor rather than multiple distributors for a given territory. This consideration was part of the entry management by giving careful attention to ensure territories does not overlap among distributors and create disputes.

Atlas Copco’s management of market entry was excellent also because of other key tactics adopted by the company at the time of entry in US market. Atlas Copco created exclusive product line for each competitor. It also undertook training of distributors in their specific product area corresponding to distributor-level. Also, the company changed perception of Atlas Copco’s spare parts’ availability by stocking inventory in significant amounts with distributors. The improved appearance of the product was given key attention, even though it was an industrial product. At the same time, Atlas Copco chose to maintain some direct accounts by the personnel of the company.  

Impact Of Four-Level Franchising Policy on Distributors

The overall impact of four-level franchising policy on the distributors of Atlas Copco was positive. The four-level franchising provided the ease to distributors to choose the particular level which is most suitable according to their resources and according to the risk they were willing to take. Those distributors who wanted to keep their resource investment and risk at a minimum towards the start of the franchise relationship. This also provides the utility of giving a cushion against incurring significance financial losses, had Atlas Copco’s products did not perform well in US market. Secondly, and more importantly, territory conflicts among distributors were avoided through four-level franchise system. The four-level design of the franchise system ensured that a single distributor exists rather than multiple distributors for a given territory. A level-one franchise and level-two franchise differ in terms of product offering. This implies that they do not compete by reducing their margins to gain business accounts. Specialization took place amongst franchises based on their level. Some distributors focused on smaller compressors, some on larger equipment and others earn revenue through provisions of servicing. Each distributor, thus, gets the opportunity to get in-depth knowledge in a particular product segment and carry an extensive inventory related to a particular segment like construction. Distributors received advice on effective display of merchandize as a result of four-level franchise system being in place.

One major impact of four-level franchise system is that the distributors are given an incentive of executing high sales. A level-two distributor can gain access to higher margins associated with level-three distributor by reaching sales targets. Each level in the franchise system serves as a motivational goal for the distributor to increase sales of Atlas Copco compressors. Generally distributors seek to maximize their payoff and do not generally provide after-sales service adequately in industrial equipment (Kotler, 1991). Formation of the fourth level of franchise also made it profitable for a category of distributors to provide servicing of equipment. Conversely, there is no compulsion on level-one franchisee and level-two franchisee to service the accounts. Majority of the distributors that focus on sales finds the obligation of providing servicing unpleasant (Lancaster, 1998). In this manner, every distributor gained importance as a separate entity in the marketing chain. This influenced Atlas Copco to create buy-in of a local distributor when the organization served an account directly. This shows that the net worth of each distributor is high in a four-level franchise system, for they acquire a particular niche as a specific level of franchisee. Training of distributors in their specific product area is conducted by Atlas Copco, which could not have been possible in the alternative general distribution system. Hence, the impact of four-level franchise system on the distributors of Atlas Copco is overall positive.

Impact Of Four-Level Franchising Policy on Customers

Four-level franchising system provides ease to customers in multifarious ways. Customers are given a clear demarcation for the distributor to approach for particular categories of products. Customers seek distributors for key advice and service provision in industrial goods category (reference). Four-level franchise system ensures that every distributor is specialized in a given category of compressors. Customers get better functionality from four-level distribution network, for trained distributors provided better level of advice in making product choice. The net outcome is that customers are assured of a knowledgeable distributor who carries an extensive inventory of product options in a narrow category. An even greater benefit for customers is adequate provision for servicing of Atlas Copco compressors, for the level-four distributors is dedicated to the function of providing servicing the customers.   
Purchase managers of small sized-businesses feel ignored by distributors traditionally, for distributors find it more profitable to focus on large scale procurements than smaller orders (Louis et al.’s, 2006). In a four-level franchise system, small sized business procurement managers do not feel left out. The level-one franchise is specifically designed to small-scale buyers.

Customers come as a winner in another major way. Better management of overhead costs takes place with distributed four-level franchise system. The cost saving which occur through this management implies that cost savings are transferred to customers. Research evidence supports the fact that in a competitive market, cost savings of suppliers are transferred to customers as a means of gaining market share (Rosenbloom, 2004). Industrial compressor market of US is a competitive one due to the presence of previously established suppliers.

One negative impact on customers of four-level franchising system is that they cannot gain large discounts by playing one distributor against the other. In a given territory, only one distributor operates for a product category. Consequently, customers lose the opportunity to negotiate a very low price on Atlas Copco products. Nevertheless, in the context of this case, customers are a net winner owing to efficiencies brought about by four-level franchise system. This conclusion is also supported by the fact that Atlas Copco readily gained market share during a short time span. This shows that customers were influenced positively by the channel design system implemented by the company and preferred its products over other competitors.

Impact Of Four-Level Franchising Policy on Atlas Copco

The four-level franchise system impacts Atlas Copco in several ways. Some of them are useful while others are counterproductive for company. The first impact on Atlas Copco is that it has to deal with a greater number of distributors than it would have to deal with in a traditional franchise system. In place of one distributor performing the functions of servicing and selling all products in different categories, four distributors fulfil the same purpose in a four-level franchising. The administrative workload on the company increases fourfold. According to William et al.’s, (2008) the number of distributors is inversely proportional to marketing efficiency of an organization. This increases the amount of work for the management and executives of Atlas Copco. It is not surprising that the company had to resort to three marketing managers in place of one.   

Similarly, strategy formulation for Atlas Copco becomes complex, since the company has to create a separate strategy for the four levels of a franchise system. In addition, every franchise needs to be provided with sufficient stock in their particular product category. The capital of the company tied up in inventory is, therefore, higher in this mode of the franchise system. Therefore, capital requirements of the company are raised.

The positive manner in which four-level franchise system has impacted Atlas Copco is that penetration in each market segment is intensified. When a specialized distributor is assigned to a particular product category, increased focus is achieved on each one of the market segments. This makes for a much more aggressive channel design than traditional franchise system. The visible outcome for Atlas Copco is that the company gained market share in lesser time span than other compressor manufacturers. For instance, Atlas Copco achieved concentrated efforts in mining and construction industries – two major clients – through the approach of four-level franchise system and formed major clients in these sectors. The organization has, thus, sacrificed efficiency for effectiveness by opting for this mode of the franchise system.

Atlas Copco was also able to enhance the provisions of product servicing to its clients, as well. By creating specialized level of franchise form, the organization has been able to built customer orientation in its channel design, which other competitors failed to do so (Hibbard et al.’s, 2001). The company also benefited by creating levels which motivated distributors to make greater sales and move to higher levels of franchise structure. The company also gets to place sales targets on the distributors which are at level-two of the franchise system. The level-four franchises make considerable investment in building servicing infrastructure. This makes for cost savings for Atlas Copco. Training of dealership network becomes easier for each dealer is required to be trained for their respective level of the franchise system rather than given holistic training. On the whole, the four-level franchise system has a positive impact on Atlas Copco. 

What Would I have done Differently to Ensure Gain in Market Share

There are a number of things which I would have done differently. Firstly, I would have chosen to share cost benefits of production outsourcing with customers (Coughlan et al.’s, 2007). Atlas Copco gained significant cost savings when the production of the company was shifted to Mexico. Atlas Copco’s management decided to retain these cost savings and maintained the pricing of the products. I would have passed on these cost savings to customers by decreasing the price of compressor equipments. Compressor equipment sector of US is a competitive industry. For a monopoly, it is more beneficial to retain cost savings. For a firm operating in a competitive market, it makes more sense gain market share by reducing the price at the retail levels (Rosenberg et al.’s, 1971). In my perspective, the organization lost a valuable opportunity to expand its business presence in US.

Secondly, I would have actively engaged in marketing research to find holes in the product offering of existing customers. The function of marketing initiates at the product development stage (Wisner et al.’s, 2009). While Atlas Copco paid a lot of attention on the aspect of the distribution system in marketing, the company ignored one fundamental aspect of the marketing function. By engaging prospective industrial clients in marketing research, I would have gained insight into the needs and wants which are left unfulfilled by Ingersoll-Rand and Sulliers. This step would have greatly facilitated the goal of gaining market share from the existing competitors.

The third area in which I would have acted differently is the design of the distribution channel. I would have set up company’s own direct channel as well along with franchise distribution network. Franchise distribution network creates a dependency of the entire sales of the organization on an external entity (Anderson et al.’s, 1990). This creates risk for the business of jeopardizing its entire cash inflow if distributors are alienated for some reason. Perhaps a new competitor might enter the US market with distribution margin offer of greater than fifteen percent. In such an instance, the company will have no recourse but to comply with the demands of distributors. My choice would have improved the bargaining situation of the company.

Bibliography

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