Dealer Performance Evaluation at
Company X
By Jort Crevels Groningen, February 2005
Library version
Jort Crevels - Rijksuniversiteit Groningen 2
Date: February 2005 Place: Groningen Author: Jort Crevels Student Number: 1062441
---
First supervisor: W.G. Biemans Second supervisor: C. Carroll Company supervisor: IJcke Schaepman
---
Faculty of Management and Organization, Rijksuniversiteit Groningen
The author is responsible for the contents of this paper, the copyrights are with the author.
Management Summary
This research paper addresses the topic of dealer performance evaluation. Company X is a manufacturer of value measurement instrumentation and sells its products through 80 independent dealers in over 50 countries worldwide. In resent years, many dealers have not performed well or have performed irregularly in terms of Company X’s expectations. In order to get a better understanding of Company X’s dealers’ performances, a dealer performance evaluation model was developed. The main research question that was formulated to perform this task was:
“What should a Company X specific dealer performance evaluation model look like, with the help of which each individual dealer’s performance can be monitored and improved”
In order to come to a conclusion on this research question a literature review was conducted which led to the introduction of Quinn and Rohrbaugh’s Competing Values Framework. It was discussed how Kumar et.al. (1992) used the theory of the competing values to come to their eight performance facets of reseller (dealer) performance. These eight performance facets are:
• Contribution to Sales
• Contribution to Profit
• Contribution to Growth
• Dealer Competence
• Dealer Compliance
• Dealer Loyalty
• Dealer Adaptation
• Customer satisfaction
These eight performance facets were discussed in the light of current literature and Company X’s current situation. The performance facets can be divided into financial and behavioral performance facets. Contribution to sales, profit and growth are all financial performance facets, the others are all behavioral performance facets. In order to measure each performance facet, performance criteria were developed and assigned to them. The financial performance criteria could be calculated using financial data. The behavioral performance criteria were broken up into checklist questions. Checklist questions are questions used to score behavioral performance criteria. The scoring scales to score the performance criteria and checklist questions were developed in a way that prevented subjective scoring as much as possible. When all performance criteria and checklist questions were discussed and scaled, the preliminary dealer performance evaluation model could be formulated.
This preliminary model was tried out on 21 Company X dealers in order to find out how the model behaved in practice. It was found that one performance criterion was not a valid measure of its performance facet and was therefore left out of the final model. It was also found that the scales of two financial performance facets were inadequate. For these two performance facets, new more detailed scales were developed. The last step in the development of the model was the determination of weights. It was determined that some performance facets could be considered more important then others, accordingly weighting factors were applied in the calculation of the final scores.
The whole evaluation process is carried out in Microsoft Excel, which makes the evaluation process simple and fast. The spreadsheets automatically calculate the final scores using the weighting factors, and give a visual representation of the results in the form of a radar plot. The final Dealer Performance
Jort Crevels - Rijksuniversiteit Groningen 4 Evaluation Model, which answers to the main research question, is shown in appendix III and on the enclosed CD-rom in file: dealerscoresheet.xls.
In the instructions for use and interpretation, it is explained how the model should be used, how the results of the evaluations should be interpreted and compared to each other and over time, and it is explained how the model can be changed to fulfil future needs. Also in this section the dealer performance evaluation model was put to practice for the first time. Company X’s 19 biggest dealers were evaluated. This first evaluation has proven the model to be a valuable tool for Company X to make less visible problems more visible.
The dealer performance evaluation model should be seen as a flexible system and should be adjusted to Company X’s changing circumstances. The user-friendly design of the model and the use of Excel makes this possible.
The true value of the model for Company X will show in the long-term, when pattern can be seen, and isolated bad performances can be distinguished from structural poor performances. A poor performance of a dealer does not automatically say something about the causes behind it. Such performance has to be investigated first before corrective actions are taken.
Preface
Contents
Management Summary ... 2
Preface ... 5
Jort Crevels - Rijksuniversiteit Groningen 6
Contents ... 5
Chapter 1 Introduction to Company X ... 7
1.1 Company X’s History ... 7
1.2 Departmental Structure... 8
1.3 Products ... 9
1.4 Company X’s Dealer Network ... 11
1.5 Company X’s Distribution Objectives ... 12
1.6 The value Measurement Market... 12
1.6.1 Market Size and Growth... 13
1.6.2 Distribution Systems ... 13
1.6.3 Market Segments ... 13
1.7 Target Segments for Company X ... 14
Chapter 2 Research Outline... 14
2.1 Introduction ... 14
2.2 Problem Analysis ... 15
2.3 Reasons for Performance Measurement... 16
2.4 Research Question ... 17
2.5 Research Area ... 18
2.6 Research Model... 18
2.7 Type of Research ... 20
2.8 Data Collection and Sources ... 20
2.9 Performance Defined. ... 21
Chapter 3 Marketing Channels and Performance Measurement ... 22
3.1 Introduction ... 22
3.2 Marketing Channels... 23
3.3 Performance Measurement ... 24
3.4 The Competing Values Model ... 25
3.4.1 Rational Goal Model... 27
3.4.2 Human Relations Model... 27
3.4.3 Internal Process Model ... 28
3.4.4 Open System Model... 28
3.5 Integrating the Four Models... 29
3.6 Conclusion ... 29
Chapter 4 Defining the performance criteria. ... 30
4.1 Introduction ... 30
4.2 Scoring Method... 31
4.3 Scoring Scale... 32
4.4 Contribution to Sales ... 33
4.5 Contribution to Profit... 35
4.6 Contribution to Growth... 35
4.7 Dealer Competence... 36
4.8 Dealer Compliance ... 39
4.9 Dealer Loyalty... 40
4.10 Dealer Adaptation ... 42
4.11 Customer Satisfaction... 43
4.12 Conclusion ... 44
Chapter 5 The Dealer Performance Evaluation Model in Practice... 45
5.1 Introduction ... 45
5.2 The Evaluation Process... 45
5.3 Difficulties and Changes ... 48
5.4 Smaller Dealers ... 50
5.5 Determination of weights ... 50
5.6 Conclusion ... 52
Chapter 6 Instructions for Use and Interpretation ... 52
6.1 Introduction ... 53
6.2 Using the Model... 53
6.3 Data Collection ... 55
6.4 Interpreting Dealer Scores... 55
6.5 Comparing Dealers to Each Other ... 57
6.6 Comparing Dealer Scores over Time ... 58
6.7 Shelf Life and Future Changes ... 58
6.8 Results and Interpretation of the First Evaluation ... 59
6.9 Conclusion ... 61
Chapter 7 Conclusions and Recommendations... 62
7.1 Introduction ... 62
7.2 Conclusions ... 62
7.3 Recommendations for Use of the Model ... 63
7.4 Limitations... 64
7.5 Recommendations for Future Research... 64
References... 65
Appendix I SPECIALIZED Technology
Appendix II Pictures of Company X value Products Appendix III The Dealer Performance Evaluation Model Appendix IV Dealer Score Sheets of the First Evaluation.
Appendix V Radar Plots of the First Evaluation.
Chapter 1 Introduction to Company X
1.1 Company X’s History
Company X has had a rather turbulent past1. In the 20 years of its existence it has changed ownership 5 times. It all started in 1985, after the R&D department of Company Y was able to produce
1 All information about Company X’s history is sourced from internal documentation.
Jort Crevels - Rijksuniversiteit Groningen 8 economically viable sensors for heart catheters. Company X was the result of the collaboration between Company Y and Company A, In 1987, the Company A withdraw from the company and Company X was founded, a full subsidiary of Company Y
The activities of Company X BV were moving towards the analytical and industrial market, in particular the development, production and sales of value devices and meters. This did not entirely correspond with the strategy of Company Y, which was more medically oriented. As a result, in 1989 Company X was sold to the Company B Group, the market leader of climate control computers for the greenhouse industry. Investments were made to broaden the product assortment of Company X. However, the medical market still remained very important for Company X.
In 1994, the company was taken over by Synectics Medical AB. Two years later Synectics became part of Medtronic Inc., a leading international company in medical technology with approximately 30,000 employees worldwide. The company’s name was changed to Company X Europe BV and a sales subsidiary was established in the United States. In 1997 Medtronic made the decision to transfer all medical activities of Company X and to sell the remaining part of the analytical and industrial products. The latter activities were taken over by the (renewed) Company B Group, an umbrella organization for a diverse set of companies, which manufactures all sorts of high-tech products, and the subsidiary in the USA was closed down.
Just as this research paper was written, in October 2004, Company X changed owners again. This time by a management buy-out in combination with a Swiss-based medical company called Company Z. The three top managers/ engineers of Company X together with the owner of Company Z bought the company.
The constant change of ownership has had a profound effect on Company X’s market strategies through the years. The main market focus shifted between the analytical and medical markets each time Company X was taken over. In the beginning Company X purely focussed on the medical market by producing catheter tips and medical sensors. When it was taken over by Company B in 1989 Company X changed its focus to the analytical market for value meters and devices. Again in 1994, when Synectics Medical AB took over, Company X shifted activities to the medical markets. When Company B took over in 1997, Company X went back to analytical instruments like value and ion meters.
Since November 2004, Company X is partly owned by a medical company, Company Z. This time however Company X’s management realizes that Company X has great opportunities in both markets and therefore is determined to focus on both the medical and analytical markets.
1.2 Departmental Structure
The figure below gives a graphical overview of the departmental structure of Company X.
Board of Directors
Human resources Finance &
logistics
Figure 1: Departmental structure
Some departments consist only of one person. For example only one person occupies both departments of marketing and human resources. There is also some functional overlap within the departments: semiconductors, production, instrument and developments & engineering. To get a better understanding of the activities at Company X, each department will be discussed briefly.
• The finance and logistics department handles all administrative and financial business transactions, it is also concerned with the incoming and outgoing product flow.
• The human resources department manages all employer-employee relationships, such as acquisition of new personnel, salaries and training programs.
• The semiconductor department produces SPECIALIZED and pressure components that form the hart of every Company X product. These components are made in the semiconductor laboratory, through several processes, such as oxidation and photolithography.
• The instrument department develops and manufactures components for the final products as well as tools in order to simplify production processes.
• The production department builds the sensors into a device and conducts a functionality test in accordance with quality assurance procedures.
• The engineering & development department takes care of development and improvement of current and new products and processes. The department is involved with the optimization of current activities, troubleshooting, supporting the production department with the implementation of new products, developing customer specific products, and keeping the document system up-to- date
• The marketing department manages the external customer contacts. Its task is to improve sales and maintain close contact with dealers, distributors, and customers. Additionally, the department provides product support and visits exhibitions and conferences for promotional activities
1.3 Products
All products made by Company X are based on component technology. These components are manufactured at Company X’s own in-house semiconductor lab. In general Company X makes two types of components; pressure components and SPECIALIZED components. The pressure components are mainly used for medical purposes in for example catheters.
Jort Crevels - Rijksuniversiteit Groningen 10 The SPECIALIZED components are mainly used for value measurement instrumentation. For more details on the SPECIALIZED components see appendix I .The products that are made at Company X can be divided into two main categories. First of all there are the products for the OEM market. OEM stands for Original Equipment Manufacturer, OEM is used to refer to the company that acquires a product or component and reuses or incorporates it into a new product with its own brand2. OEM products produced by Company X are pressure sensors for medical use and SPECIALIZED value sensors of many different sizes and forms, for various purposes. Company X supplies SPECIALIZED value devices tips to Mettler Toledo, a major manufacturer of analytical instrumentation, and a direct competitor of Company X. All OEM products are sold directly to the customer, the products do not pass through intermediaries or dealers. The second product category consists of standard value measurement products that can be divided in two sub-categories: value devices3 and value meters.
value Devices
Company X value devices are hollow plastic rods, sealed at both ends, with at the tip a value SPECIALIZED component. Out of the other end of the device comes a cable that is connected to the value meter. The device must be held into a liquid or stuck into a semisolid to measure the value level.
The fact that they are made of plastic is very significant because traditional value devices were always made of other material. The other material tip of traditional value devices are very delicate and break easily. Other material devices may use up to half a minute to get a clear reliable reading. Furthermore, other material devices must be stored in a liquid to prevent drying out. Company X’s value devices don’t have this problem, they can be stored dry. Plastic devices are robust, virtually unbreakable and provide a stable signal within seconds. Company X makes four types of devices of similar appearance but with different tips. The different types are:
• Device 1: this device has a cup like tip, the benefit of this device is that it is able to measure very small samples.
• Device 2: a device with a lance-like metal tip and a sturdy handle especially suitable to be used for value measurements of semi solids like cheese, meat and soil. It is widely used in slaughterhouses to measure value levels in carcasses.
• Device 3: this device has a flat tip and is especially designed to measure value levels in surface area’s like skin and food surfaces. This way value levels can be measured without penetrating or damaging the surface of the sample.
• Device 4: the standard value device, which has a cone shaped tip. This device is suitable for general use.
In addition there is one special kind of device called the X device. This device has a special data converter unit in its handle so that the signal to the meter can be read by any value meter, also those of competitors. For more details and pictures of the value devices see appendix II.
Value Meters
A value meter consists of a handheld or benchtop calculator or processing unit that is connected with a value device. A value meter has a digital display on which the exact value values can be read.
Company X produces two types of value meters.
2 http://whatis.techtarget.com/definition/0,,sid9_gci214136,00.html
First of all there is the Argus, which is a handheld meter. This meter is especially designed to be taken out of the laboratory and into the field. The Argus comes in two models, the Argus, and the Argus X.
The two models look the same from the outside, but the latter has enhanced functions like more data storage space, and PC connection.
The second type of value meters is the Titan, which is a benchtop meter especially designed for laboratory use. The Titan comes just like the Argus in two different models. The Titan and the Titan X, the differences between the models are similar to those between Argus and the Argus X. For pictures value meters see Appendix II.
This research-paper will primarily look at the standard value measurement instrumentation products and not at OEM products. All standard value measurement instrumentation is sold through independent dealers around the world.
1.4 Company X’s Dealer Network
Around 1992, when Company X launched its first commercial SPECIALIZED value measurement product line, the marketing director of that time focused on building a dealer network for the analytical market. Together with a team of marketeers he contracted various dealers of analytical instrumentation around the world. But during a turbulent period following a change of Company X’s ownership, the director and the marketeers left the company. Since then the dealers network has grown steadily. In most cases prospective dealers contacted Company X with the request to become a dealer. In other cases Company X has sought actively for dealers in certain area’s in which they were underrepresented. For example in England, a trading company was contracted to search for dealers for Company X, but without much success.
In order to get acquainted with a prospective dealer, the dealer has to sign a letter of intent (LOI). This LOI serves as a preliminary dealership contract for the first six month. After these first six month the dealer is evaluated. If the new dealer has generated enough sales in the first six month, and the cooperation has been satisfactory, the dealer gets an official dealership contract. At the moment Company X has around 80 dealers in 50 different countries around the world.
Most dealers make use of either a sales force or a catalogue, or both. Most dealers have sales personnel who visit customers and trade fairs to sell their products. For these customer visits, Company X has put together a demo case containing a value meter and device.
There are also dealers who publish large product catalogues, which may include up to 15000 products. These catalogue companies are often large multinational dealers that serve a wide variety of market segments and have sales offices in several countries.
With some very few exceptions, dealers do not keep Company X’s products in stock. When they get an order from a customer they pass that order through to Company X. Company X on its turn processes the order and sends the product to the dealer, or directly to the customer. All delivery of Company X’s products is made ex works. This means that Company X puts all the obligations of shipment, including documentation for export, transit and import, on the buyer (Muhlbacher, 1999).
The buyer bears the risk of merchandise damage or loss as soon the goods have left the premise of Company X. Payments are always made through the dealer.
Jort Crevels - Rijksuniversiteit Groningen 12 The typical dealer discount is 30% on all products. But if the dealer’s sales volume increases, the dealer discount increases as well. The ten largest dealers all get discounts of 32.5% or more. The largest dealer, Dealer 1 in the US, receives a dealer discount of 42%.
The award of additional discounts (as described in the dealership contract, appendix 1: Distributors Conditions of Sale and Resale) is based on the following criteria:
o Amount of sales: discounts as reward for achieving a pre-determined amount of sales.
o Market share: discounts as reward for obtaining a certain amount of market share.
o Payment history: discounts as reward for a correct payment history.
o Promotional: discounts as reward for exceptional promotional activity.
o Limited discount: discounts on a part of the product range, on a temporary basis, or on other special conditions agreed in writing between the parties.
At the end of each period, when new sales targets and dealer discount have to be determined, these criteria are looked at. However, in the past such criteria have never been used on the basis of an objective measurement or scoring tool. Instead, other factors play an important role in the determination of dealer discounts and sales targets, such as the (personal) relationship with the dealer and Company X’s (gut) feeling about the dealer.
1.5 Company X’s Distribution Objectives
Company X has always pursued a global marketing strategy. Each country market is roughly approached in the same way because all global markets for value measurement are very similar. The main focus lays on North America, Europe and Pacific Asia. These regions have the highest demand levels and sales potential. Ideally Company X likes to have at least one dealer that can cover the food and beverages, water, laboratory and small chemical segments in each sales territory.
Historically Company X has chosen to contract two different categories of dealers:
1. First of all there are small to medium sized regional dealers that make use of a sales force that sell their products through customer visits and trade shows. These dealers should carry a mainstream of general laboratory equipment/ products in a similar price range as Company X.
2. The second category of dealers is typically the large catalogue based dealer with a very wide geographic coverage, both by catalogue and field sales representatives.
Each dealer must have a reasonable experience with, and current dealership of, established value meter brands based on other material technology. They also must have a reasonable command of the English or German language, and must be capable of translating marketing and product information and documentation.
1.6 The value Measurement Market
In this research the value meter market is defined as the global sales market of all value measurement instrumentation, including other material value electrodes, SPECIALIZED sensors, fiber optic value sensors, handheld and benchtop meters. Paper based (litmus) value measurement however is not included because paper based value measurement has a different product application; it can not be
used to measure value in an accurate way and therefore is not considered to be a direct competitor or a substitute product. The value measurement instruments industry is characterized by typical aspects of market maturity such as stagnation of technological advancements, steady prices, and no great expansion of the revenue pie (Frost & Sullivan, 2003). Commoditization occurs when a technology has been around for so long that there are no essential differences among products from various manufacturers. The greater the extent of commoditization, the more sensitive customers are to price as a differentiating factor between products. This is more so in a mature market such as value measurement instrumentation.
1.6.1 Market size and growth
The combined global revenue in the value measurement market can be divided into two parts. First there is the sale of value measurement systems, and there is the sale of replacement sensors. The world value measurement system market was estimated to be US$ 381.3 million in 2002. The market is projected to increase at an annual growth rate of 4.5 percent (Frost & Sullivan, 2003). The sensor replacement market is estimated to be around US$ 573 million with an annual growth rate of around 4.7%. Asian Pacific countries are forecasted to has an average annual growth rate of around 10%
Market size
In millions US$
Growth rate In %
value Systems 381.3 4.5
Replacement 573 4.7
Total market size 954.3 4.64
1.6.2 Distribution systems
value measurement instrumentation is sold through analytical instrumentation dealers, who are either independent or are a subsidiary of a analytical instrumentation manufacturer. These dealers are supplied directly by the manufacturers or by laboratory instrumentation wholesalers, who can again be independent or a subsidiary of a manufacturer.
In general dealers generate sales through the following sales methods in order of mostly used:
• Sales representatives in combination with Paper catalogues
• Sales representatives
• Trade shows
• The Internet
• Stores/ Sales outlets
1.6.3 Market segments
The classification of segments is also partially derived from Frost & Sullivan’s research report: World value Meter and Value 2 markets, (2003). Some segments have such specific product application needs that special value products are designed specifically to serve that segment. In the market for value measurement the following application area’s can be identified:
• Water: In water, the value level determines its solubility and biological availability. Optimum value levels differ greatly in drinking water, aquarium and seawater, and in ultra pure water applications.
Ultra pure water used in semiconductor manufacturing, power plants, and utilities requires careful Table 1: market size and growth, source: Frost & Sullivan, 2003
Jort Crevels - Rijksuniversiteit Groningen 14 control of value level to maintain the purity of the water that will ultimately determine the quality of the final product.
• Wastewater treatment: One of the most widely used applications of the value meter is wastewater treatment. Industrial and municipal wastewater could have either high acidic or alkaline content that is harmful to the environment and therefore needs to be treated before being released into water ways and seas. Accurate value measurement enables neutralization and monitoring of the final quality of wastewater.
• Food and beverages: In the food and beverages industry, value level determines the uniformity, acidity levels, and structure of various food stuff. Among others, level of value is influential in fermenting of dough with yeast, getting uniformity in curd texture/setting, and other milk products.
• Chemicals and petrochemicals: accuracy of value levels in chemical process is important in understanding the reaction as well as obtaining uniformity in form, consistency, and structure of the chemical process or research.
• Environmental protection and pollution control: Level of value plays a significant role in pollution control as it influences the function and use of nutrients by flora and fauna. In this capacity, measurement of value becomes increasingly more relevant in environmental protection and pollution control.
• Laboratory, Research & Education: One of the areas where the value meter is used most widely is in laboratory and research facilities. These also include educational, pharmaceutical and biotechnology-related labs where value measurement plays an important role in the success of research.
1.7 Target Segments for Company X
The most distinct competitive advantage of plastic SPECIALIZED based value sensors over other material value sensors is that they are virtually unbreakable. This makes them especially attractive for those segments in which other material breakage is harmful. The food and beverages segment is the most obvious segment in which this is the case. Broken pieces of other material in a production line will ruin the whole production batch and cleanup and recovery costs are in most cases very high. Also the segment of wastewater treatment and environmental control, where the sensors are taken into the field for field research, are segments that demand sturdy value sensors. In the other segments the demand for plastic SPECIALIZED value sensors has been less because in for example laboratory settings, sensors are less likely to break. Also the damage done by broken other material is in laboratories less than in food and beverage manufacturing. These segments have therefore been more price sensitive, and less sensitive to technological improvements (Frost & Sullivan, 2003).
Chapter 2 Research Outline
2.1 Introduction
This chapter will start with an analysis of the problems this research will focus on. The so-called problem tangle (De Leeuw, 2001) will be discussed, which will lead to the main research question of
this theses. After that the sub-questions and the conceptual model will be discussed and explained followed by a discussion of the used research methods.
2.2 Problem Analysis
The starting point of this problem analysis is in the assignment of my internship at Company X. The main job was stated as: “Create a policy-plan how to handle dealers and measure dealer activities”. In this section, the nature and origin of the problems that formed the input of this task will be discussed.
The fact that Company X has asked me to come into their company and do research on their dealers suggests the presence of a problem. The first step of this problem analysis will be to get more insight on the nature of the problem, and the bearer of the problem. In other words, what is the problem, and whose problem is it? Based on this information, the problem statement can be formulated.
A problem is a situation of subjective discomfort of the problem bearer, mixed with the wish to do something about it (De Leeuw, 1997). In this research the problem bearer is Company X’s marketing and sales department. This department is in charge of Company X’s marketing channel and takes care of all activities and decisions related to the dealers such as determining dealer targets and discounts, but also the recruitment and selection of new dealers.
The nature of a problem can be either instrumental or functional. Instrumental problems relate to the properties of a system. Functional problems on the other hand relate to the output of a system (Sheets BiO 5, 2001). In this research the “system” is Company X’s marketing channel. The problems regarding Company X’s marketing channel and the ways they are related to each other are schematically represented in the figure below:
Note: the arrows indicate how one problem is influenced by the other, it does not mean that one problem is the exclusive cause of the other.
In resent years many dealers have not performed well or have performed irregularly in terms of Company X’s expectations. Some have not reached their sales target or have shown negative growth in their revenue and/ or marketing activities. The strange thing is that not all dealers perform badly, some dealers perform really well and generate large sales volumes, while other dealers in similar sales territories and economic environments do the opposite.
Figure 2: The problem spiral.
Dealers perform badly,
do not meet expectations
Wrong decisions,
Wrong expectations
Uncertainty about channel
decisions
Uncertainty about causes
of bad performance
Jort Crevels - Rijksuniversiteit Groningen 16 The poor or irregular performances of some dealers on the one hand and the good performances of other dealers on the other hand cause a lot of uncertainty in Company X’s marketing and sales department. They do not fully understand the reasons behind the bad performances.
History has shown that exclusively assessing dealers on their generated revenue of a certain period, gives only a partial and in many cases unreliable indication of that dealer’s future performance. The obscurity about the underlying reasons of good or bad performance causes uncertainty in the decision making processes affecting the dealers, for example in the determination of sales targets and dealer discounts but also in the decisions about whether to renew a distribution contract and in the assessment of a dealer’s future value.
The uncertainty about a dealer’s future performance can lead to making the wrong channel decisions and / or having unrealistic expectations. For example when Company X reduced its product prices by 25% last year, they had made the assumption that all dealers would comply and implement this price reduction. However some dealers didn’t comply, cashing in on the reduced purchase price they got from Company X while keeping the old sales prices in place, it is in any case not clear which prices the dealers ask for the Company X products, Company X has never tracked this in a systematic way. An other example is that Company X often extends contracts with dealers that have shown very poor results, hoping the dealer will change, or will generate more revenue in the future. In general this doesn’t happen.
These poor and irregular dealer performances bring up an additional problem, which is the obscurity about Company X’s market coverage. Company X aims for global market coverage but (mainly because of irregular dealer performance) does not know for sure if all desired markets and all target segments within these markets are fully reached by the current dealers. There is too little insight on whether dealers have the adequate resources and capabilities to cover all target segments in their sales territory. Company X suspects that due to certain dealers’ underachievement or lack of resources or capabilities, there still is insufficient market coverage in several sales territories.
In recent years, Company X has done little research on all these problems and has relied by and large on the marketing department’s intuition (“gut feeling”) when it came to channel decisions. The lack of real marketing insight and the lack of a reliable dealer performance measurement model can be viewed as an instrumental problem, since it says something about the properties of the system and not about the output of the system. The problem of bad or irregular dealer performance however is related to the output of Company X’s marketing channel and is therefore a functional problem.
2.3 Reasons for Performance Measurement.
In order to get to a structural and sustainable improvement in marketing insight and dealer performance, the proverbial (downward) problem spiral has to be broken. Going back to figure 2, we can conclude that the best way in doing this is to take away or at least significantly reduce the level of uncertainty Company X experiences about the dealers’ performances. The underlying motive of this research is that structured performance measurement can take away much of this uncertainty. As Bogan and English (1994) note: “What gets measured, gets managed and improved”. A dealer performance measurement model can be used to make data manageable and make problems and area’s of concern visible, providing more insight on how and why dealers perform as they do. It can be used to track dealers’ performances over the years to come.
In the short run such a system can provide better insight into different aspects of dealer performance.
In the long run it can be used to see patterns so that isolated poor performances can be better distinguished from structural poor performances. Deviation of the required level of performance can be detected, and as a result of that, intervention can take place.
2.4 Research question
Now that the tangle of problems that Company X faces is somewhat unraveled, the main question of this research can be introduced. The main research question for this research will be:
“What should a Company X specific Dealer Performance Evaluation Model look like, with the help of which each individual dealer’s performance can be monitored and improved?
A research question should be relevant, feasible and efficient (De Leeuw 2001). Relevance is determined by the true value of the end product of the research for the end user. This implies that the end product has to be understandable for those who have to work with it. The end product of this research, the Dealer Performance Evaluation Model, will be of valuable for the end user because it will give better insight into the relevant aspects of dealer performances. Feasibility is concerned with the fact whether it is possible to produce a reliable product within the preconditions of the research. As far as the preconditions reach for this research we may assume that no unrealistic requirements are written down and therefor it should be possible to fulfil this qualification. Finally, the efficiency of the research question is concerned with whether the benefits of the research outweigh the costs. For this research, this will presumably be the case. As explained in the reasons for performance measurement section, a dealer performance evaluation model will be a valuable management tool for Company X.
Sub questions
To be able to come to a conclusion on the main research question, the following four sub questions will have to be answered first:
1. Which facets of performance are appropriate for the evaluation of dealer performances4 ?
To answer this sub question the history, pitfalls and limitations of performance measurement and the concept of marketing channels will first briefly be discussed. After that, different aspects of performance will be discussed using the competing values framework of Quinn and Rohrbaugh (1983). Based on this competing values framework, Kumar et. al. (1993) introduced eight performance facets to measure resellers performance. These eight performance facets will be discussed in more detail and evaluated in the light of current literature.
2. How should the proposed performance facets be customized to fit with Company X’s specific situation in order to come to a preliminary dealer performance evaluation model?
When the various performance facets are discussed and possibly customized to Company X’s situation, a decision has to be made on which criteria should be used to measure the various performance facets. This means that we have to find out which performance criteria are important for Company X to evaluate dealer performance and so obtain the better insight it requires. To acquire this
4 Most of the literature on this subject uses the term “resellers”, however Company X uses the term “dealers”. In this research paper the term “dealers” will be used.
Jort Crevels - Rijksuniversiteit Groningen 18 information the know-how of Company X’s managers and engineers is crucial. Discussions and interviews will reveal the company specific distribution wants and needs that have to be taken into account. The criteria that result from these discussions and interviews will then be checked on relevance using literature where possible. Also in order to be able to measure the various performance criteria, different scales and scoring methods will be discussed and the most suitable ones will be used. At the end of this sub question we will have a preliminary dealer performance evaluation model, only without weighting factors.
3. How workable is the proposed model in practice?
At this point in the research, the preliminary performance model will be tried out on a selected group of dealers to find out how effective and workable the model is. Experience with the model might show that some performance criteria have to be adjusted or taken out. Also by trying out the model, the scoring method and scale can be tested and tuned where needed. At the end of this try-out we have acquired more experience with the model and gotten better insight on how the various performance facets relate to each other. This might shown that some performance facets should be considered more important then others. This will be expressed in the weights assigned to them. At the end of this sub-question the final dealer performance evaluation model will be finished.
4. How should the dealer evaluation model be used and interpreted?
This sub question will explain how the dealer performance evaluation model should be used in practice, how the results must be interpreted, and it give suggestions on how to change the model in order to fulfil future performance needs. Also to illustrate this sub-question, Company X’s 19 biggest dealers will be evaluated, using the finished dealer performance evaluation model for the first time.
2.5 Research area
This research is about how Company X can assess and improve its current dealer network and not about whether distribution through dealers is the right distribution channel for Company X. At the beginning of this research, Company X has made clear that they are not willing to end the long-term relationships that they build up through the years with most of their dealers. Therefore this research will not evaluate different distribution channel alternatives but focus on the existing dealer network.
2.6 Research Model
The research model shown below can be seen as a schematic “viewing instrument” to see how different concepts and steps in the research relate to each other, and how they are used to come to conclusions.
Competing Values Model
Performance facets
Preliminary Performance Evaluation Model
One might have noticed that some of the terms used in the research model have already been briefly discussed in the sub-questions. They will now be discussed in relation to each other.
The first task of this research is to find out which facets of performance are relevant to measure dealer performance. Quinn and Rohrbaugh (1983) have introduced the competing values model in which all performance criteria to measure organizational effectiveness can be sorted. Kumar et al. (1992) used this competing values framework to come to eight performance facets that can be used to measure dealer performance.
As the next step each performance facet will be discussed in more detail using literature, and applying them to Company X’s specific dealer want’s and need’s. By doing this, it will become clear with which performance criteria the various performance facets can be measured. This will result in a preliminary dealer evaluation model.
The preliminary model will then be tried out on a selected group of dealers to see how the different performance criteria reflect the different performance facets, and whether the scoring method works as it is supposed to. After the tryout, some performance facets may be considered more important than others, therefor weights have to be ascribed to them.
Finally, the dealer performance evaluation model will be put to use for the first time. Company X’s 19 biggest dealers will be evaluated to show how the model works and how to interpret the results.
Figure 3: Research Model
Jort Crevels - Rijksuniversiteit Groningen 20 2.7 Type of research
This research can be classified as policy supporting research (De Leeuw, 2001) because it will supply a tool with which dealer performance can be measured and tracked. The tool is not a total solution to Company X’s dealer problems but it can be used to get more insight into how and why dealers perform as they do and consequently to improve Company X’s dealer policy.
The research will be so called “design focussed” , which means that the end product of the research will be some sort of new product, instrument or method. In this research the end product will be a tool in the form of an evaluation model. With design focussed research it is useful to speak in terms of testing or trying out. First a preliminary dealer evaluation model will be designed, after which this model will be tried out on a selected group of dealers to see if the model works the way it is supposed to. After this tryout, adjustments will be made where needed so that the final dealer evaluation model can be formulated.
2.8 Data collection and sources
For this research both primary and secondary data will be used. Primary data is data especially gathered first hand to answer specific research questions, whereas secondary data is data that is already gathered and used for its original intend. The table below shows what data is used to answer each sub question.
Sub-question Primary data Secondary data
Sub-question 1: Which facets of performance are appropriate for the evaluation of dealer performances?
Literature about performance measurement, organizational effectiveness and analysis.
Sub-question 2: How should the proposed performance be customized to fit with Company X’s specific situation in order to come to a preliminary dealer performance evaluation model?
Discussions with Company X employees. Literature about performance criteria, internal documents, internet.
Sub-question 3: How workable is the model in practice?
Discussions with Company X employees during and after try out.
Internal documentation, financial reports, internet
Sub-question 4: How should the dealer evaluation model be used and interpreted?
Literature about performance measurement, External research reports.
Next, the data collection and sources of each sub-question will briefly be discussed.
Sub-question 1: In order to get to an answer on sub-question 1, only secondary data will be used. A literature review will be conducted. The history, pitfalls and limitations of performance measurement will briefly be reviewed. Different methods of performance measurement will be reviewed and common elements will be analyzed. This literature review will lead us to the introduction of Quinn and Rohrbaugh’s (1983) competing values framework. It will be discussed how Kumar et.al. (1992) used this framework to come to their eight facets of dealers performance measurement.
Sub-question 2: To answer this sub-question, each proposed performance facet will be thoroughly discussed with (a group of, or individual) Company X employees. Within Company X there is a very open and informal working atmosphere. The primary data will therefor be collected during ongoing discussions with Company X’s employees, in stead of formal interviews. These discussions range from discussions with board members during official meetings to discussions with employees during Table 2: Sub-questions and data collection
lunch breaks, and everything in between. Every time a specific discussion has taken place, or an important fact has come to light, I will make notes to prevent that important information is left out or forgotten. During the six month of my internship at Company X, I will be doing a few other smaller research projects for Company X as well that are outside the scope of this research paper. During these activities, Company X’s problems and needs in relation to the eight performance facets will likely become more clear as well.
In the development of the preliminary dealer performance evaluation model also secondary data will be used. Each performance facet will be discussed and clarified (where possible) making use of literature on the various subjects. This literature will mostly be about organizational performance, marketing channels, measurement methods and scales. Another type of secondary data that will be used here comes from internal documents. Every dealer has its own paper archive consisting of all the correspondence between Company X and that dealer for the past 10 years. These archives will be used to search for past events and circumstances that relate to the eight performance facets.
Sub-question 3: To find out how workable the model is, the model will be tried out on a selected group of dealers. For this try-out, the persons at Company X who will be using the model in the future will be asked to score the criteria. For the scoring of the financial criteria, financial reports and dealer sales listings will be used, for the scoring of the behavioral criteria, personal experience and secondary data, such as payment records, customer complaint records and the internet will be used.
After all selected dealers have been evaluated the results will be discussed. During this discussion the validity and reliability of the performance criteria and the measurement method and scale will be evaluated and adjustments will be made where needed.
Sub-question 4: In the instructions for use and interpretation section I will use my own and Company X’s experience with the model as input. Besides that, secondary data from external research reports, such as the report on World value meter markets by Frost & Sullivan (2003), will be used to put the results into perspective. Also in order to be able to make valid comparisons between dealer performances, literature on environmental factors will be reviewed. Finally, this sub-question will be illustrated by the first evaluation of Company X’s 19 biggest dealers. For this first time evaluation, the input of the try-out evaluation will be used, but now the data will be filled into the final revised dealer performance evaluation model.
2.9 Performance Defined.
In this research paper, the term performance is used in many contexts. This paragraph will therefor give definitions and explanations of the various meanings of the term performance and the contexts it is used in. It is recognized that ‘performance’ is itself an ambiguous term, and capable of no simple definition (Spriggs, 2001). For this research the following definitions will be used.
Performance: The results of activities of an organization over a given period of time5. For this research we will assume that an organization that is performing well is one that successfully attains its objectives and standards (Otley, 1999).
Performance measurement: Performance measurement is the activity of tracking the performance of an organization or investment over a period of time against specific quantifiable criteria. The purpose
5 http://www.investorwords.com/3665/performer.html
Jort Crevels - Rijksuniversiteit Groningen 22 of performance measurement is to improve performance in critical areas by creating accountability to goals and objectives6.
Performance facets: Performance facets are the different dimensions of which the total performance of a dealer is made up of. Two kinds of performance facets exist: financial performance facets and behavioral performance facets.
Performance criteria: Performance criteria are quantifiable measures with which the performance facets are scaled. The performance criteria used to measure financial based performance facets are scored directly using financial figures. The performance criteria used to measure behavioral based performance facets are scored using checklist questions.
Checklist questions: Checklist questions are questions used to score performance criteria, which measure behavioral performance facets. The answers for each checklist question are multiple choice and each answer holds a specific value. These values add up to the final score for the specific behavioral performance criteria.
Chapter 3 Marketing Channels and Performance Measurement
3.1 Introduction
This chapter will start of with a discussion about marketing channels. Followed by a summary of the history of performance measurement and its pitfalls and limitations. Different models for performance measurement will be evaluated and common elements will be discussed. In order to make a link between marketing channels and performance measurement, Quinn and Rohrbaugh’s competing values framework will be introduced, from which the dealer performance facets will be derived. These
6 www.commerce-database.com
performance facets will form the basis on which the dealer performance evaluation model will be based in chapter 4 and 5.
3.2 Marketing Channels
The main focus of this research is on Company X’s marketing channel. Before theoretical concepts with respect to the analysis of marketing channels can be discussed, the concept of marketing channels itself has to be defined first. For this research the definition of Roosenbloom (2004) will be used:
A marketing channel is the external contactual organization that management operates to achieve its distribution objectives.
Four terms in this definition should be especially noted:
• The term “external” means that the marketing channel exists outside the firm and is not part of the firms internal organizational structure
• The term “contactual organization” refers to those firms that are involved in negotiatory functions as a product or service moves from the producer to its ultimate user.
• The term “operates”, suggests involvement by the management in the affairs of the channel.
• The term “distribution objectives” means that the firm has certain distribution objectives in mind, the marketing channel exists as a means of reaching these. The structure and management of the marketing channel are thus in part a function of a firm’s distribution objectives.
Coughlan e.a. (2002) determines that every marketing channel can be at least divided into three distinct links. First there are the producers or manufacturers of a product of service, second there are the intermediaries, the wholesalers, distributors and retailers of a product or service, and finally there are the end-users or customers of a product of service.
The question soon arises, why do intermediaries exist, and why does Company X use them to fulfil its distribution objectives. Roosenbloom (2004:16) names two main reasons:
1. Specialization and division of labor. This principle was first introduced by Adam Smith’s classic book The Wealth of Nations in 1776. In this book he described the production of pins in a pin factory. He concluded that breaking down the complex task of pin making into smaller less complex ones and allocating them to parties who are specialists at performing them would result in much greater efficiency. Roosenbloom (2004) notes that the only difference in the application of the specialization and division of labor concept as applied to production versus distribution is that the production tasks have been allocated intraorganizationally whereas the distribution tasks have been allocated interorganizationally. Hence, just as the manufacturer’s production manager should allocate production tasks on the bases of specialization and division of labor, so should the channel manager.
2. The second reason for the existence and use of intermediaries is the principle of contactual efficiency. From a channel manager’s viewpoint, contactual efficiency is the level of negotiation effort between sellers and buyers relative to achieving a distribution objective.
Contactual efficiency can best be illustrated with an example. If we assume that if four different producers each would like to sell one product to ten different customers without making use of intermediaries, then (4x10) forty contact moments have to take place. When
