Effectiveness in Multi-Level Marketing
Groningen, January 7
th2007
Author:
Matthijs M. Deiman
First supervisor:
Drs. R.W. de Vries
Second supervisor: Drs. J.J. Hotho
Faculty of Management and Organisation
Rijksuniversiteit Groningen
Effectiveness in Multi-Level Marketing
Master Thesis
Groningen, January 7
th2007
Author:
Matthijs M. Deiman
Student number:
1077139
Faculty of Management and Organization
Department of International Business
Rijksuniversiteit Groningen
First supervisor:
Drs. R.W. de Vries
Second supervisor:
Drs. J.J. Hotho
Company advisor:
Drs. M. Kuiper
Management Summary
This thesis is the result of a research conducted for the company Jaap Gerrijts (from now on JG), which is a franchise of ACN Europe B.V. (from now on ACN). ACN is the world’s largest direct selling telecommunications company. ACN uses multi-level marketing (from now on MLM) for its distribution of Telecom (landline and mobile) and Internet (broadband and VOIP) services. MLM also referred to as network marketing, is a way of distributing and selling products and services through a chain of independent representatives rather than through retail outlets. Each representative has two basic jobs: the first to sell the company's products or services and secondly to recruit more representatives to sell the company's products or services. Representatives get sales commissions not only from their own direct product sales but also on the sale of the representative’s down line. MLM companies concentrate ownership, management and labor within every representative. MLM is the fastest growing sales method worldwide after Internet. JG, which was founded in 2001, has 1200 representatives in its organization. The top people of JG asked the researcher, to provide a structure that would raise revenues. According JG’s top people the new structure should suit the industry and the characteristics of the independent representatives. This resulted in the following problem statement:
Research goal: Improving the long-term revenues for JG’s independent representatives by developing an effective structure.
Research question: How is effective structuring possible in JG taking into account the diverse characteristics of the company’s independent representatives?
Four clusters namely, ‘current structure’, ‘communication’, ‘network marketing’ and ‘motivation’ were the input for the conceptual model with subsequent sub-questions. As a primary data source for this research sixteen semi-structured interviews were conducted (appendix 1). Articles, books, hyperlinks, audiotapes, DVD’s, presentations and internal documents were used as secondary data sources.
The primary process within JG consists of four phases, namely joining, quick start, clients and recruiting and presentation. People have to help other people within the ACN system to become successful themselves. Nine primary motivation factors can be distinguished why people start as representatives, namely; extra income, financial freedom, own company, more leisure time, personal development, helping other people, meeting new people, retirement, inheritance. Also it can be seen that there is a high variation concerning the representatives’ age, backgrounds and time input for their ACN careers. The analysis of JG’s current structure shows the following problems which cause organizational goals not to be reached:
• The division of work and responsibilities has not been done effectively. • Some people feel that they lack the capabilities to perform certain activities.
• Up line representatives and down line representatives have different expectations from each other, which causes friction
• There is low/medium cooperation within JG and the level of trust is low towards some ‘leaders’ within JG.
• There is no initial training to prevent pitfall number one in MLM, namely rejection.
• People’s organizations are built instead of focusing on building new representatives in terms of skills and personal development. Leadership within JG is lacking because this is not being done.
• Representatives tend to manage a lot instead of staying in phase 1, which means the acquiring of clients and the recruitment of new representatives.
• The depression pitfall is not being dealt with enough in the initial training
• The top people of JG often exaggerate towards new representatives and many duplicate this behavior.
JG’s representatives lack a good background foundation looking at MLM. MLM must be seen as a new profession, which has to be taught. At the moment this is not being done within JG. Besides this JG’s top must raise their integrity level.
Theoretical analysis shows that JG fits Mintberg’s professional bureaucracy. This bureaucracy relies for coordination on the standardization of skills and its associated design parameters are training and indoctrination. A difference, which can be seen, is that according to Mintzberg the professionals are trained and indoctrinated in outside institutes and not within companies. Representatives should get the necessary training inside JG if they are to act as professionals with considerable control over their work.
The proposed structure is based on the professional bureaucracy’s standardization and design parameters. The proposed structure includes five important matters:
1. The positions, which are derived from ACN’s compensation scheme, have their own specific tasks. This is done to bring clarity in the division of work and responsibilities.
2. Skill training has to be done in four different areas to create a standardization of skills. These four learning areas are foundation, prospecting, presentation and duplication.
3. Short and long-term planning has to be implemented within JG. Short-term planning can be done by a monthly Plan-Do-Review system. Long-term planning can be done by writing a long-term game plan, which can include financial, spiritual, physical, emotional and relational goals.
4. Indoctrination. This is used to formally socialize JG’s representatives for JG’s benefit. An example of indoctrination is to bring representatives together for social events or inspiring speeches. Bringing JG’s representatives to ACN’s international conventions can accomplish this. 5. Personal development, this can take form with the listening of audiotapes and the reading of
certain books.
This proposed structure creates a culture of coaching and skill development within JG. Skills create self-confidence and independence. The goal within a MLM system is to create a self confident and independent network of representatives, which will grow even when the representative itself is not there. As a final recommendation, the researcher wants JG to create a think tank. This think tank must analyze this research and has to decide about the input for the four learning areas, the personal development to take place and the short and long-term planning. Important for the think tank to consider is the wide variety of characteristics and motivations the representatives have and the problems, which do exist at the moment. A variety of personal development role-outs must be available which suits different groups of people. Housewives will usually need different personal development, than for example bankers, on their road to success. Important for the four learning areas and the short and long-term planning is the fact that these areas must be able to be learned and taught in a simple manner. Each person, from every background, should be able to succeed within JG if they have a long-term commitment. When the think tank is created, the advices are acted on and the proposed structure is implemented, the improvement of the long-term revenues (research goal) for JG’s independent representatives will be accomplished.
Table of Contents
Abbreviations... 7
Chapter 1 Introduction ... 8
1.1 ACN ... 8
1.2 JG and research motives... 8
1.3 MLM ... 9
1.3.1 History of MLM ... 9
1.3.2 How does MLM work? ... 9
1.3.3 Characteristics of MLM companies ... 10
1.3.4 Global Statistics MLM and forecasts ... 11
1.4 ACN, MLM or pyramid scheme? ... 14
1.5 Summary ... 15
Chapter 2 Research Plan ... 16
2.1 Introduction ... 16
2.2 Role author ... 16
2.3 Problem signals ... 17
2.4 Problem Statement ... 17
2.5 Type of research ... 19
2.6 Research strategy... 20
2.6.1 Introduction ... 20
2.6.2 Theoretical framework ... 20
2.6.3 Methodological answers... 21
2.7 Data Collection... 22
2.8 Structure of the thesis ... 23
2.9 Summary ... 23
Chapter 3 System and Primary Process... 25
3.1 Introduction ... 25
3.2 Franchise system ... 25
3.3 Opportunity ... 26
3.4 Compensation plan ... 26
3.4.1 Residual income ... 26
3.4.2 Bonus income ... 28
3.5 Primary process ... 31
3.6 Conclusion... 32
Chapter 4 Motivation and Characteristics... 33
4.1 Introduction ... 33
4.2 Primary Motivation Factors ... 33
4.3 Characteristics ... 36
4.4 Conclusion... 36
Chapter 5 Effectiveness current structure ... 37
5.1 Introduction ... 37
5.2 Effectiveness current structure ... 37
5.2.2 Social internal processes ... 38
5.2.3 Pitfalls in MLM ... 40
5.3 Conclusion... 43
Chapter 6 Proposed Structure ... 45
6.1 Introduction ... 45
6.2 Desired structure ... 45
6.2.1 Theoretical background... 45
6.2.1.1 Coordinating Mechanisms... 45
6.2.1.2 Key parts JG ... 46
6.2.1.3. Design Parameters JG ... 48
6.2.2 Desired Structure for JG... 49
6.3 Realization desired structure ... 51
6.4 Conclusion... 53
Chapter 7 Recommendations ... 54
7.1 Introduction ... 54
7.2 Coaching Role ... 54
7.3 Final advice for JG ... 56
Bibliography ... 57
Appendix 1: Interviews
Appendix 2: How to start your own ACN organization
Appendix 3: 24-hour game plan
Abbreviations
JG: The Company Jaap Gerrijts (franchisee) ACN: Direct Selling Telecommunications Company MLM: Multi-Level Marketing
VOIP: Voice Over Internet Protocol TT: Team Trainer
ETT: Executive Team Trainer ETL: Executive Team Leader TC: Team Coordinator RVP: Regional Vice President SVP: Senior Vice President
Chapter 1 Introduction
This introductory chapter contains the information necessary for a full understanding of the research that will be set out in this thesis. The principal in this research, the company Jaap Gerrijts (from now on JG) is operating in the boundaries of its franchiser ACN Europe B.V. (from now on ACN). ACN is a company, which uses multi-level marketing (from now on MLM) for its distribution of Telecom and Internet services. In the first paragraph the company ACN will be introduced. Paragraph two will deal with the company JG and her motives for this research. In paragraph three the concept of MLM will be introduced.
1.1 ACN
ACN operates in a massive market that has been created by deregulation. As a result of deregulation consumers have seen many benefits in terms of quality of service but more significantly in the cost of these services as they can now choose which company they get these services from. Fourteen years ago the founders of ACN recognized the opportunity created by deregulation, and realized that with such a large market they only needed to take a very small share of that market to be a successful company. Thirteen years later ACN is a leader in the rapid expansion of the global telecommunications industry and has become the world’s largest direct selling telecommunications company
(ACN, one world one vision, 2006)
. Today, ACN offers local calling, long distance, DSL/Internet, mobile and VOIP (Voice Over Internet Protocol) services to consumers and small businesses in countries across the United States, Canada, Europe and Asia Pacific. “With a yearly double-digit growth and revenue over $600 million, ACN is one of the fastest growing privately held companies in the world.” (Time Inc., 2004) To distribute its services ACN uses independent representatives instead of traditional ways of acquiring clients such as media, direct mail and telemarketing. To become an independent representative people have to buy a franchise from ACN for a fee. This fee is 399 euros plus tax in the mainland of Europe. To compensate the independent representatives ACN is making use of a multilevel compensation scheme by means of which representatives can be paid for their own efforts and efforts of others. Recently Donald Trump started to endorse ACN to the public in the United States. Magazines around the globe are speculating if ACN has the potential of becoming the largest company in the world (Temmink, 2005: 55).1.2 JG and research motives
JG is a franchisee of the organization ACN and is one of the bigger ones within the Netherlands. JG was founded in the year 2001 and has around 1200 independent representatives in her organization. One of those representatives is the author of this thesis. The author was asked to fabricate a structure for JG, which will lead to higher revenues for the independent representatives. According to the top people in JG the independent representatives could earn more money if there was a clear structure within JG, which is not present at the moment. It is also assumed that the number of representatives who quit would be lower if the earnings where higher straight from the start. This subsequently would also benefit ACN’s image. According to JG’s top people the new structure should suit the industry and the characteristics of the independent representatives. Some company members put the focal point especially on the different characteristics of the team members. Some representatives work with ACN part-time, some more hobby-like and for others it is their full time income. Also the goals of the representatives are assumed to be very different. The researcher was asked to take this into account and provide a structure that would raise revenues. The researcher is well aware that being a member of the organization implies a risk of subjectivity. In paragraph 2.2 it will be explained how the researcher will deal with this issue.
1.3 MLM
1.3.1 History of MLM
This form of distribution has led to much controversy in its existence, but these days it is starting to become a common way of doing business in parts of the world, especially in America and Asia. Before we take a look at the current status and the way MLM works we shall first look at its beginnings. The first company in the world, which in 1941 used MLM for its way of distribution, was Nutrilite. This company, which was founded in 1934, established a new scheme by which representatives could earn a bonus of 3% for the sales of people they sponsored into the organization (Biggart, 1989: 44). In the fifties a new phenomenon entered the market, Tupperware parties. Tupperware was distributed simultaneously in retail stores and through the Tupperware Home Demonstration system. Because company findings showed that the Tupperware Home Party’s where very successful Tupperware pulled out all its products from retail stores and began to distribute solely through direct selling (Time Inc., 2003). In the sixties a new company emerged, Amway. Amway introduced the MLM-method on a larger scale and bought the founding company of this industry Nutrilite (The Profit Clinic, 2006). The success of network marketing at that time drew the attention of people who wanted to misuse the concept of MLM and this resulted in pyramid schemes. Especially Amway lobbied and succeeded in conduct of legislation in order to ban pyramid schemes. This happened in 1979 when the Federal Trade Commission concluded that the MLM system was a legal form of distribution (Ziglar, 2001: 27). In these days MLM has evolved into serious ways of doing business and international companies like Numico, Colgate, Palmolive, Gilette, Coca-Cola, Sony, Chrysler, Nike, General Electric and the Body Shop market part of their products through MLM (Wagenaar, 1994: 26-27). Mercedes and BMW recently started to use MLM with the selling of smart cars and C1 motors in Italy(KvK-krant Friesland, 2005
)
. From the aforesaid it can be seen that MLM has surpassed the embryonic stages and is starting to become an important means of distributing and selling services and products.1.3.2 How does MLM work?
MLM also referred to as network marketing, is a way of distributing and selling products and services through a chain of independent distributors rather than through retail outlets. Each representative has two basic jobs: firstly to sell the company's products or services and secondly to recruit more distributors to sell the company's products or services (MLM Know How, 2006).
Each new recruit a representative brings into the organization is in turn encouraged to bring in his or her own recruits. The result is that a representative eventually develops a hierarchical substructure known as a ‘down line’ that looks somewhat like an organization chart in a company (MLM Know How, 2006).
Figure 1: Organizational genealogy of Martha’s line (Biggart, 1989: 17)
* up line
** down line
Representatives get sales commissions not only from their own direct product sales but also on the sale of the representative’s down line. There are also likely to be performance bonuses available for reaching certain sales levels. Since each representative profits not only from his own sales but also from sales of his down line, it is to the advantage of the representative to guide and help those below to succeed (MLM Know How, 2006).
1.3.3 Characteristics of MLM companies
This sub-paragraph will give a brief comparison between MLM companies and bureaucratic companies. MLM companies differ fundamentally from bureaucratic companies both in their social relations and in their managerial relations (Biggart, 1989: 8). MLM companies concentrate ownership, management and labor within every representative. Whereas bureaucratic companies seek to exclude non-work social relations in order to control workers, the MLM industry pursues profit in the opposite way, by making social networks serve business ends (ibidem, 8). “Under the guidance of corporate leaders, independent representatives are transformed into an entrepreneurial community dedicated to each other’s financial and personnel success.” (ibidem, 8) Other characteristics of MLM companies, in comparison with bureaucratic companies, are shown in the following table (ibidem, 131).
Anne
Martha
Alice
Mary
Paul
*
Bureaucratic MLM Organization Organization Legitimation Universal rules, laws Mission: substantive
philosophy of founder And belief in moral value Of entrepreneurialism Membership Bureaucratic officials Followers
Differentiation Horizontal differentiation Minimal differentiation of by function; vertical sales work; administration Differentiation by expertise separated and may be
differentiated by function Stratification Hierarchical distribution of Undifferentiated authority
Authority, rewards, status structure joined to status Hierarchy; administration may be hierarchical
Recruitment Universalist appointment Particularist recruitment for Based on expertise and commitment potential. experience
Compensation Financial rewards, especially Combination of material, salary purposive and solidary
incentives. Character of Tenure Career Way of life Table 1: Bureaucratic versus MLM organizations (Biggart, 1989: 131)
1.3.4 Global Statistics MLM and forecasts
MLM is after Internet the fastest growing sales method worldwide (Hospes, 2003: 34-36). These days there are an estimated 53 million representatives globally and an estimated 175.000 new representatives are joining MLM companies weekly in the U.S. and 475.000 globally (Heisz, 2006: 8-11). This business with annual sales of 120 billion a year is expected to grow over the next 10 years more than the entire prior sales over the past 50 years
(
Time Inc., 2004).Important to note is why MLM is growing and is expected to grow in such a way. Magazines, Internet pages and books especially focused on the United States, are showing the following six reasons:
1. The Economy: What is bad economic news for most people is good news for network marketers. Historical research has shown that in times of declining conjuncture MLM flourishes (MarketWave, 2006). This is because of an increase in unemployment and job uncertainty becoming greater. Through MLM representatives independently try to generate an income (Hospes, 2003: 34-36). Also the trends in the economy itself will have a positive effect on MLM. It can be seen that the overall economy is changing towards a new economy. Companies in this new economy have to (Ludbrook, 2004: 21):
Pay more for high tech, high qualified employees Pay less for other people
Substitute employees, especially parts of the managerial, administrative and production workers, for new technologies
Hire employees on a part-time contract basis, without the terms of employment concerning redundancy, training, retirement, illness and holidays
Through this process two kinds of employees are emerging:
a. Core employees: These employees have to be considered as the capital of the company. These are the people who maintain the valuable human element of the company such as people with important client relations and those with specific skills and qualities. These valuable employees will receive higher wages and more responsibilities and consequently more stress. This stress undermines the health and life-style of many core employees. Many core employees are, according to Ludbrook, looking for ways to get out of this ‘rat race’ in order to gain a better life-style.
Figure 2: Employees in the new economy (Ludbrook, 2004: 23)
b. Support employees: These employees are not of vital importance for a company. These employees form the greatest part of the companies; they fulfill the tasks in parts of management, administration, finance, production and service. They are the first victims of the changes in the corporate world. In their wages and positions is being cut. They are made dispensable or hired on contract or seasoning basis. Because they possess common skills they have more need for job guarantees. The problem is that they get the opposite of what they want and are, according to Ludbrook, starting to look for alternative sources of income.
2. Demographics: In the United States alone 76 million babies have been born between
1946 and 1964 and they are called the baby boomers. The market for products that will make people look and feel younger is continuously going to expand dramatically over the next five to ten years as the boomers reach their fifties and sixties. The other trend caused by the United States boomers was that they got 75 million babies of whom 41 million reached or are reaching the age of 18 between 2002 and 2009. So the eligible pool of MLM prospects is increasing (MarketWave, 2006).
3. Wall Street: Securities investors look for companies and industries that are about to rise fast. Analysts are looking closely at MLM, which is outperforming the American stock exchange (Standard & Poor’s 500) the last years (MarketWave, 2006).
4. Internet: Experts are stating that the real breakthrough of MLM is yet to come through the increase in Internet
penetration
(KvK-krant Friesland, 2005 & MarketWave, 2006). These days it is possible that a representative who is somewhere in Korea makes a sale and the next day a commission is received by a representative elsewhere in America. Never in the history of MLM has this been seen before. (Charles King, 2001). Besides this, Internet is a sales, training and prospecting tool that can be aimed at the rapidly growing number of internet users worldwide (MarketWave, 2006).5. Positive Media Exposure: Making money of your friends was the title in a Dutch marketing magazine in 1995 (Schrameijer, 1995: 50). In these days the media are becoming positive and
Core Employees
Support
Employees
Support
Employees
have found methods to make money with MLM. Also politicians and other key figures in the society are promoting the MLM industry these days. Former president Bill Clinton hailed its opportunity: “The industry promotes core values all around the globe and gives people the chance to make the most of their lives.” British Prime Minister Tony Blair declared, “A tremendous contribution to the overall prosperity of the economy” (Heisz, 2006: 9).
6.
Growth Trends: The industry is not only growing the last years but the growth is also accelerating worldwide. Yet, despite its growth, less than one percent of the world’s population is currently involved in MLM (ibidem). The accelerating growth is depicted in figure 3.MLM growth 0 10 20 30 40 50 60 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 p a rt ic ip a n ts i n m il li o n s Asia America Europe
Figure 3: MLM growth (Ludbrook, 2004: 45)
An independent European research executed by PriceWaterHouseCoopers concerning MLM-sales in Europe showed the following (Ludbrook, 2004: 59).1
• MLM networks supply work with the equivalent of 3.9 million full-time jobs. • MLM is responsible for revenues totaling 40 billion euros a year
• More than 90% of the MLM representatives are happy with what they do.
Part of the conclusion of PriceWaterHouseCoopers research was the following: MLM offers an option for an alternative income- a social active and own change of employment with flexible working hours and considerable financial rewards for top representatives.
1
Note: The researcher was not able to acquire the above mentioned report from PriceWaterHouseCoopers and because of this wasn’t able to verify Ludbrook’s writings on this matter.
1.4 ACN, MLM or pyramid scheme?
An issue which can be addressed is the difference between a pyramid scheme and MLM. This paragraph will give this difference and will research how ACN fits into this picture.
As mentioned in paragraph 1.3.2. MLM is a way of distributing and selling products and services through a chain of independent distributors rather than through retail outlets (MLM Know How, 2006). Pyramid schemes have according the Federal Trade Commission of the United States a similar structure, but their purpose is different (Ziglar, 2001: 28). Pyramid schemes reward participants for the recruiting of new representatives and commonly not for the marketing and the sales of products (ibidem). Why are pyramid schemes prohibited? “Because plans that pay commissions for recruiting new distributors inevitably collapse when no new distributors can be recruited. And when a plan collapses, most people — except perhaps those at the very top of the pyramid — lose their money.” (Federal Trade Commission, Protecting America’s Customers, 2006) To see how ACN fits into this picture five questions (Munchy, 2004: 49) will be answered. These questions will determine if ACN appears to be a legitimate marketing opportunity or an illegal one.
1. How is the money being made? “Legitimate MLM companies compensate their salespeople for selling products or services to ultimate consumers and not for simply recruiting people. This is the primary distinction between legitimate direct selling opportunity and an illegal pyramid scheme.” (ibidem) As can be seen in paragraph 3.4 ACN only compensates representatives when people are being referred to ACN’s services. Even if a representative would build a team of 100.000 representatives, he will not be compensated one euro unless there are clients acquired by that particular group. Each active representative within JG has on average 15-25 personal clients.
2. Are the products legitimate? The main question here is if the products will benefit the people who buy them or if the representatives have to push low-value products on friends and family in order to receive compensation. As could be seen in paragraph 1.1 ACN offers local calling, long distance, DSL/Internet, mobile and VOIP (Voice Over Internet Protocol) services to consumers and small businesses in countries across the United States, Canada, Europe and Asia Pacific. ACN’s representatives can offer these services to people for a lower price than the main competitor (usually old monopoly) with a similar or higher service level. The price differences can be compared on the Internet. A big ACN customer in the Netherlands is for example ETOS (all the branches throughout the country).
3. How much does it cost to be involved? The cost to be involved includes three parts namely, registration, inventory and training. “The more money required to be involved, the higher the changes that money is primarily made from recruiting and not from the movement of products (ibidem, 51). A high registration fee sends up a red flag to both regulators and prospects so registration fees are usually low (ibidem). The way to make money from recruiting is through inventory loading. Here new representatives have to buy huge amounts of inventory of which the person’s line of sponsorship gets compensated for. “ Firms can slip into ethical problems where more money is being made from inventories being sold to new recruits than is being made from legitimate sales to bona fide customers.” (ibidem, 50) The third cost source is training. It is normal that representatives have to pay for training. “Getting students to take financial responsibility for their own training helps them transition from an employee mindset to that of an entrepreneur.” (ibidem, 51) Within ACN there is a starting fee of 399 euros plus tax. This money is paid for registration purposes, for the telecom licenses which ACN has to pay and the 500 people who work in Amsterdam who supply, amongst others, the customer and representative support. Inventory loading does not occur within ACN because there is no inventory whatsoever. For international training representatives have to pay a certain fee (about 120 Euro for three days) all other training are free or require a small (like 5-10 euro) room contribution..
4. How much work is required? When representatives are talking in terms of fast and easy money there is a change that a person is being exposed to a pyramid scheme. MLM is the opposite. It takes hard work and time to build a highly profitable MLM business that will last
(ibidem, 52). ACN presentations always emphasize that ACN is a three to five year plan and most definitely not a quick rich scheme. On every representative agreement ACN has printed the following line: Don’t be misled through claims that it is easy to gain a high income. 5. How long has the company been around? A company is less risky to be illegal if this company
has been around for years. This is because the quality of the opportunity diminishes over time and the person who is new recruited have a smaller change of being successful than people who are already in the system. MLM is more than 50 years old and in that time-frame 15.000 companies have started in a legal way. Of those only 30 companies have survived more than ten years (Ziglar, 2001: 76). ACN is one of those companies as could be seen in paragraph 1.1. In ACN
Looking at the answers on the five questions the researcher has the opinion that ACN appears to be a legitimate MLM company. ACN is as a member of the Dutch (Vereniging Directe Verkoop, 2006) and American (Direct Selling Association, 2006) association for direct selling.
1.5 Summary
The principal in this research, the company JG is operating in the boundaries of its franchiser ACN. ACN is a leader in the rapid expansion of the global telecommunications industry and has become the world’s largest direct selling telecommunications company (ACN, one world one vision, 2006). ACN is a company, which uses MLM for its distribution Today, ACN offers local calling, long distance, DSL/Internet, mobile and VOIP (Voice Over Internet Protocol) services of Telecom and Internet services. MLM also referred to as network marketing, is a way of distributing and selling products and services through a chain of independent distributors rather than through retail outlets. Each representative has two basic jobs: the first to sell the company's products or services and secondly to recruit more representatives to sell the company's products or services (MLM Know How, 2006). Each new recruit a representative brings into the organization is in turn encouraged to bring in his or her own recruits. The result is that an active representative eventually develops a hierarchical substructure known as a ‘down line’ that looks somewhat like an organization chart in a company (MLM Know How, 2006). Distributors get sales commissions not only from their own direct product sales but also get commissions on the sale of the distributor’s down line. This way of distribution has evolved worldwide into a serious way of doing business and these days international companies like Numico, Colgate, Palmolive, Gilette, Coca-Cola, Sony, Chrysler, Nike, General Electric and the Body Shop market part of their products through MLM (Wagenaar, 1994: 26-27).
MLM companies differ fundamentally from bureaucratic companies both in their social relations and in their managerial relations (Biggart, 1989: 8). MLM companies concentrate ownership, management and labor within every representative. Whereas bureaucratic companies seek to exclude non-work social relations in order to control workers, the MLM industry pursues profit in the opposite way, by making social networks serve business ends (ibidem, p.8). MLM is after Internet the fastest growing sales method worldwide (Hospes, 2003: 34-36). These days there are an estimated 53 million representatives globally and an estimated 175.000 new representatives are joining MLM companies weekly in the U.S. and 475.000 globally (Heisz, 2006: 8-11). This business with annual sales of 120 billion a year is expected to grow over the next 10 years more than the entire prior sales over the past 50 years
(
Time Inc., 2004). The top people of JG asked the researcher, to provide a structure that would raise revenues. According JG’s top people the new structure should suit the industry and the characteristics of the independent representatives.Chapter 2 Research Plan
2.1 Introduction
Through observations and talks with the founder as well with the leading people within JG it became obvious that an effective structure is lacking within JG. The explanation for this is that knowledge about this subject is missing within JG. In JG there is certainly a willingness to change so this research will be change driven.
For this research the researcher has to take into account the needs of science, those of management and his own insights. Research is finding answers, which have been found by a systematic way of searching for questions (De Leeuw, 1996: 8). These questions are important for science as well as management. Before going to those questions and frameworks, issues concerning the subjectivity of the author will be dealt with in a separate paragraph. The problem statement, which will be the foundation of this research, will be outlined in paragraph 2.4. The type of research will be shown in paragraph 2.5. The research strategy will be outlined in paragraph 2.6 in which the theoretical framework, conceptual research process model and the methodological questions and answers will be present. Paragraph 2.7 will include the ways of data collection, which will be used in this research. Paragraph 2.8 will outline the structure of this thesis.
2.2 Role author
The author of this thesis is a part of JG, for this reason the matter of subjectivity has to be addressed. The researcher has the opinion that in any research the researcher cannot be seen as a machine that conducts research without having any subjective views. So a certain level of subjectivity is, according the researcher, always in place in any research. Management literature shows the following remarks applicable in this matter. According to Arbnor and Bjerke every human being, including creators of knowledge, carry around certain ultimate presumptions about what his or her environment looks like, and about his or her role in this environment (Arbnor & Bjerke, 1997: 7). Subsequently history shows that observations are based on beliefs. “If we believe that mother earth is flat our observations and statements will be based on this belief and our models of navigation will be concerned with avoiding sailing over the edge.” (ibidem, 2) Arbnor and Bjerke also see problems comprehending the data we collect or try to explain/understand unless we already have considered how the particular approach will shape our observations, our understanding and explanations (ibidem, 3). “Each approach a researcher uses has already postulated its own constitution of reality and that determines the kind of data that will be collected. If we use such data to test an approach’s assumptions, they can lead only to confirmation.” (ibidem, 4) Morgan splits types of data collected for research into three categories. First-order data from an organization are indicators, or hard data. Second-order data are the accounts given by people from within the organization and third-order data are the researcher’s own interpretations (Morgan, 1993: addition). Arbnor & Bjerke as well as Morgan state that the researchers own interpretations and beliefs play a role in management research and subjectivity is subsequently present. Because the fact that the researcher is part of the company more emotions will be present within the researcher than in a case of an independent research. This emotional aspect is important and has to be taken into account. “Emotions are an essential part of our thinking ability and not just something extra that mucks up our thinking” (De Bono, 1985: 27). In order to deal with these extra emotions, which can lead to subjectivity, the researcher will mention, in the following chapters, which ways of thinking are being used. This according to the insights of De Bono’s book the six thinking hats. The six thinking hats represent a direction of thinking and are usually used as a model for exploring different perspectives towards a complex situation or challenge. The six thinking hats will be discussed briefly:
• White, neutral, focuses on information, available objective facts, what is needed and how it can be obtained.
• Red, emotions, feelings, intuition, hunches, presents view without explanation • Black, judgmental, critical, why something is wrong, logical negative view • Yellow, optimism, logical positive view, looks for benefits, what is good • Green, creative thinking, possibilities and hypotheses new ideas
• Blue, overview, control of processes, steps, chairperson, organizer, thinking about thinking. By mentioning in the introduction of each chapter which hats will be used the researcher will bring clarity in his thinking processes. For scientific reasons the white hat will be the hat, which will be used most of the time.
2.3 Problem signals
Problems are the difference between existing and desired situations (De Leeuw, 1997: 208). The top people of JG feel they have a problem. They pointed out that the desired situation is one in which most representatives achieve their short and long-term goals and in which team spirit is high. The existing situation is, according the top people, the opposite. Team growth is low and few representatives receive monthly bonuses (see paragraph 3.4.2). This is situation is occurring because representatives are not doing the activities they should do according JG’s top people. There is also some friction within JG and in only a few parts of JG the team is spirit high. This results in large numbers of people who quit being a representative.
As mentioned in paragraph 1.2. the author was asked to fabricate a structure for JG, which will lead to higher revenues for the independent representatives. It is supposed that higher revenues will also increase the team spirit and that people will continue being an independent representative within ACN.
2.4 Problem Statement
A problem statement must make clear why and what is being investigated (Verschuren, 1996: 11). To state it more specifically; the problem statement consists of a research question with a number of related researchable questions (sub-questions), research conditions and an argumentation of the relevancy of these questions, namely the research goal (De Leeuw, 1996: 123). The relevancy of this thesis and research is addressed in the following goal.
• Research goal
Improving the long-term revenues for JG’s independent representatives by developing an
effective structure
The following research question will be central in this thesis.
• Research question
How is effective structuring possible in JG taking into account the diverse characteristics of
the company’s independent representatives?
Before going to the research conditions at first two definitions have to be given concerning terms out of the research question. A definition is aimed to fix a term on its meaning (Verschuren, 1996: 88). The operational definition (ibidem, 96) of effective in this research means that the independent representatives within the company accomplish their set goals. As can be seen in paragraph 4.2
representatives within JG have different goals. The operational definition of structure is a definition used by Henry Mintzberg. The structure of an organization will be defined simply as the sum total of the ways in which its labor is divided into distinct tasks and then its coordination is achieved among these tasks (Mintzberg, 1983: 2).
• Research conditions
Research conditions are limitations to which the research results and methods are liable (De Leeuw, 1996: 85). This consists of the demands of management towards the research and results. There are product-limitations and process limitations in this research.
The product limitations are:
• Reports have to be in an English written form. The process limitations are:
• Research process has to be reliable, effective and useful to improve the current situation. • The proposed structure will not be tested in this research.
2.5 Type of research
Before going to the research strategy first the type of research will be addressed. Giving a clear view of what this research is aimed to be according to the researcher will do this. Ramondt addresses five questions in his first chapter of his book (Ramondt, 1996: 7). These questions will be dealt with subsequently.
1. Nature of the Knowledge
What kind of knowledge does the researcher wish to develop?
Within science an approximate parting can be made in two streams: the explanatory and the designing research (ibidem, 9). This research will be based on designing. This research strives at creating knowledge about the reality in three categories: desires, possibilities and probabilities (ibidem, 9). During the research the following questions will be answered. What kind of structure is possible taking into account the research restrictions? Is it desirable that this structure will be implemented? And what makes it probable that the desires and possibilities together will lead to the set out result?
2. Knowledge relationship
Which relationship does the researcher wish to develop and to keep with the organization where the research is being conducted?
In the designing research of organizations researcher are confronted with the unique characteristics of the organizations and subsequently have to give a lot of attention to the structuring of the research relations (ibidem, 14). This research has two defining characteristics on this issue. First of all the structuring of research relation is based on a subject-subject relation. The researcher does not see the organization as a supplier of data for knowledge purposes but also defines these knowledge purposes with the participants within the company. That is why the company is not seen as an object but as a subject.
Another relationship that will be present in this research is the symmetrical research relationship. In a symmetrical research relationship the research field is participating in the research (ibidem, 15). The goal is to design the research as a win-win situation, a situation in which all representatives will benefit. There is a common knowledge goal and the researcher will partly be lead by the representatives.
3. Theoretical or problem based research How is the research question being developed?
In theoretical-based research the research question is being developed out of scientific theories, in problem based research it is being developed with the research field (ibidem, 16). This research can be seen as a mixture between the two. This mixture is often called the clinical approach. The research question is developed out of the field and with scientific knowledge. Outcomes from the total research about the structure can in the future be input for scientific theories about the structure of network-marketing teams in general.
4. Linear or cyclical research
How are the research steps being arranged?
Linear research consists of the search for answers on a formulated problem statement. In the cyclical approach the problem statement is constantly being redefined (ibidem, 19). In this research redefining is not being done so the researcher will make use of linear research.
5. Neutral or intervention orientated research
This research is intervention orientated in the sense that things are aimed to bring about change within JG. The results of this research are aimed to be implemented.
2.6 Research strategy
2.6.1 Introduction
This paragraph will show how the author is planning to get the results looking at paragraph 2.4. This will be shown in two steps. The first and central element, which is closely connected to the problem statement, is the theoretical framework (also: concepts and conceptual research process model) and subsequently the dividing of the research question into sub questions taking into account the theoretical framework. The second element is the translation of the research questions into methodological answers.
2.6.2 Theoretical framework
This sub-paragraph will contain concepts, which will be used to tackle the problem statement and will be used as input for the conceptual model. The concepts will be given, plus the theories and authors by which these concepts will be analyzed in the following chapters of this research.
• Structure: the contingency theory of Mintzberg will be taken into account. The contingency theory claims that there is no best way to organize a corporation, to lead a company or to make decisions. Also the organizational configurations of Mintzberg will be used. Here Mintzberg shows six valid organizational set-ups and also goes in depth into the coordination mechanisms present in each configuration. Besides Mintzberg also insights of Jägers and Jansen will be used.
• Network marketing: the specifics of this industry are totally different than from the corporate world. Industry specific theories and opinions will be used from a wide variety of authors and speakers. The following authors and speakers will be used: Yarnell, Ludbrook, Kiyosaki, King, Zalucki, Ziglar, Clouse, Heisz, Hospes, Schrameijer, Temmink, Wagenaar, Tracy, ACN founders and many high achievers within ACN.
• Motivation: The primary motivation factors, which are present at a representative’s start and during its career, will be investigated. This will be done using insights of Bynner, Biggart and Kiyosaki.
• Communication: network marketing is based on the word of mouth, so communication is very important. Not only for recruiting, but also training and communication within the company. Theories which will be used, are the following ones: Biggart, Kaye, Singer, Covey, Rijkers, Ludbrook and Kiyosaki
These clusters are also the inputs for the conceptual research process model. In this research the four clusters will be researched towards the new structure.
Figure 4: Conceptual research process model
Looking at the theoretical framework the research question can be divided into sub questions. This is not being done to enlarge or complicate the research question, but to structure the answering by implementing a step plan (Verschuren, 1996: 65). All four sub-questions have a methodological question and answer shown in 2.6.3. For a better overview the research statement is stated again.
How is effective structuring possible within JG taking into account the diverse characteristics
of the company’s representatives?
This research question consists of four sub-questions
1. How does the ACN system work and what is the primary process within JG? 2. Why do people start as representatives and what are their characteristics? 3. How can the current structure be judged in terms of effectiveness?
4. What kind of effective structure is possible for JG? a. What kind of structure is desired?
b. How can this structure be realized?
2.6.3 Methodological answers
The four sub questions stated in 2.6.2 will now be translated into methodological answers.
• How does the ACN system work and what is the primary process within the company? The methodological answer is the following: To find out how the ACN system works and to get insights in the primary process, ACN’s compensation plan has to be analyzed and interviews with JG’s representatives have to be conducted.
• Why do people start as representatives and what are their characteristics?
Structure
Network
Marketing
Motivation
Theory
Reality
Current Structure
Company
New Structure
Company
Communication
The methodological answer is the following: This can be found out by interviewing JG’s representatives, by studying network marketing materials, such as books and audio cd’s. • How can the current structure be judged in terms of effectiveness? The methodological
answer is the following: This can be found out by studying network-marketing and management literature and by interviewing JG’s members and ex-members
• What kind of effective structure is possible for JG? The methodological answer is the following: this can be found out by studying network-marketing and management literature, interviews with JG’s representatives concerning their preferences and by studying audio cd’s concerning MLM and personal development.
2.7 Data Collection
To answer the research questions and accomplish the research goal data has to be collected. The data that will be used can be classified as primary and secondary data.
• Primary data, this kind of data can be classified as new because it has not yet been collected (Saunders, 2000: 188). There are three different ways to collect primary data namely:
1. Observations: if research questions and objective are concerned with what people do, an obvious way to discover this is to watch them do it. This is essentially what observation involves: the systematic recording, observation, description, analysis and interpretation of people’s behavior (ibidem, 218). In this research observation as a way of collecting primary data is not being used, because to answer the research question opinions, knowledge and attitudes are needed and not (subjective) observations done by the researcher.
2. Questionnaires: “A questionnaire (also known as self-administered survey) is a type of statistical survey handed out in paper form usually to a specific demographic to gather information.” (Wikipedia, the free encyclopedia, 2006) In this research questionnaires as a way of collecting primary data is not being used, because to answer the research question in depth opinions, knowledge and attitudes from the representatives are needed and not superficial written answers to fixed questions.
3. Interviews: an interview is used to find out what people know, think, feel and want concerning certain topic, persons or happenings (Baarda, 2005: 230). The researcher will use interviews as a mean for collecting data for this research. This because the researcher wants to find out the attitudes, opinions and the knowledge (Baarda, 1998: 143) of JG’s representatives in order to answer the research question and achieve the research goal. The researcher will be using semi-structured interviews. In appendix 1 the topic list can be seen which is used for the research. If the researcher would collect and analyze all the data from every representative in JG this would be termed a census (Saunders, 2000: 150). However it is impossible for the researcher to collect or to analyze all the data available to the researcher owing to restrictions of time, money and often access. “Sampling techniques provide a range of methods that enables researchers to reduce the amount of data they need to collect by considering only data from a sub-group rather then all possible cases or elements.” (ibidem) The sampling in this research is based on purposive sampling or judgmental sampling. This way of sampling enables researchers to use their judgments to select cases that will best enable them to answer their research question(s) and to meet their objectives.
Data has been gathered through short informal talks (Baarda, 2005: 226) and sixteen semi-structured interviews. Because of the needed personal and social data, the researcher has chosen to interview each person individually instead of group interviews. Each representative interviewed was told why this interview was taking place, the lengths of the interview and that the interview data would be processed with their privacy guaranteed. The people interviewed were chosen based on their positions and knowledge. Emphasis was put on people who are in the ACN system quite some time. Two TT’s (see paragraph 3.4.2), four ETT’s, six ETL’s and three (all) TC’s within JG were interviewed face-to-face. Besides this also a RVP was
interviewed by telephone. The order of interviews was purposeful (Miles, 1994: 27). First was considered which representative had to be interviewed and why and from there which other representatives should be interviewed (Maxwell, 2005: 87). More information about these interviews can be found in the first appendix.
• Secondary data, to answer research questions and to meet objectives researchers can also re-analyze data that has been collected for some other purpose (Saunders, 2000: 188). For many researchers the main advantage of using secondary data is the enormous savings in resources, in particular the researcher’s time and money. In general, it is much less expensive to use secondary data than to collect the data themselves (ibidem, 199).
In this research the researcher has used the following secondary data sources: - Articles - Books - Hyperlinks - Audiotapes - DVD’s - Presentations - Internal Documents
2.8 Structure of the thesis
The structure of this thesis will be an outline of the research and methodological questions. Chapter three will give insights in ACN’s franchise system, the opportunity it creates and the compensation plan with which ACN compensates its representatives. Besides this, the primary process within JG will be dealt with. Chapter four will deal with the representatives’ primary motivation factors. Considered will be why people start with ACN and what their characteristics are. Chapter five will look at the effectiveness of the current structure. After looking at ‘structure’ in a theoretical way the effectiveness will be judged through an internal processes method (Paul, 1994: 207). This method is followed by looking at the general pitfalls in the industry and if they also do apply to JG. Chapter six will give the desired structure and ways to realize this structure for JG. This chapter starts with a theoretical analysis concerning structure based on Mintzberg. Central are the coordinating mechanisms, the key parts of JG and the design parameters. After this analysis the proposed structure will be set out and thoroughly explained. Chapter seven will give the final recommendations.
2.9 Summary
For this research the researcher has to take into account the needs of science, those of management and his own insights. Research is finding answers, which have been found by a systematic way of searching for questions (De Leeuw, 1996: 8). These questions are important for science as well as management. Before going to those questions and frameworks, issues concerning the subjectivity of the researcher were dealt with. Arbnor & Bjerke as well as Morgan state that the researchers own interpretations and beliefs play a role in management research and subjectivity is subsequently present. Because the fact that the researcher is part of the company more emotions will be present within the researcher than in a case of an independent research. This emotional aspect is important and has to be taken into account. “Emotions are an essential part of our thinking ability and not just something extra that mucks up our thinking” (De Bono, 1985: 27). In order to deal with these extra emotions, which can lead to subjectivity, the researcher will mention which ways of thinking are being used. This according to the insights of De Bono’s book the six thinking hats. For scientific reasons the white hat will be the hat, which will be used most of the time.
The problem statement, which will be the foundation of this research, consists of a research goal and research question. The research goal is as follows: Improving the long-term revenues for JG’s independent representatives by developing an effective structure. This research goal is accompanied
by the following research question: How is effective structuring possible in JG taking into account the diverse characteristics of the company’s independent representatives?
An important research condition is the fact that the proposed structure will not be tested in reality. Four clusters namely, ‘current structure’, ‘communication’, ‘network marketing’ and ‘motivation’ are inputs for the proposed structure, this is outlined in the conceptual model with subsequent sub- questions. To answer the research questions and accomplish the research goal data has to be collected. The data that will be used can be classified as primary and secondary data. As a primary data input sixteen semi-structured interviews will be conducted (appendix 1). Articles, books, hyperlinks, audiotapes, DVD’s, presentations and internal documents will be used as secondary data.
Chapter 3 System and Primary Process
3.1 Introduction
In chapter three the first stated sub question (paragraph 2.6.2) will be answered. How does the ACN system work and what is the primary process within JG?
The researcher will use the white hat for this chapter looking at the six hats mentioned in paragraph 2.2.The information used comes from several secondary data resources namely ACN’s compensation plan, ACN’s policies & procedures, the 24-hour game plan (appendix 3) and the document ‘how to start your own ACN organization’ (appendix 2). As primary data input for this chapter interviews have been conducted with representatives holding ETL and TC positions within JG.
3.2 Franchise system
Representatives who participate in the ACN system are active as franchisees of ACN. To start as a franchisee 399 euros has to be paid plus tax. From the second year on there is a yearly fee of 149 euros plus tax. These fees enable the representatives to develop their own telecommunications business and outsource all aspects of servicing to ACN. These services include,amongst others, customer service, data entry, provisioning, rating and billing of customer’s calls, collection and certain marketing activities, which is done by 1200 employees worldwide. The fees also cover costs for supporting representatives, including marketing support, training materials, public and secure websites, representative call center, innovative online tools and the Team Trainer Success Kit. Besides this ACN has also made a commitment to excellence towards its representatives. ACN strives towards excellence in the following ways (Policies ACN, 2006):
• By maintaining the highest degree of integrity at every level of the company • By offering the highest quality service and products at competitive prices • By providing prompt, courteous service and products at competitive prices • By processing all orders in a prompt and efficient manner.
The ACN corporate management team is committed to support its customers and independent representatives, to give them quality service and to calculate and post reports and commissions in a timely manner. ACN has set these goals to give each independent representative the best opportunity to develop a successful business. “ACN will not exclude anyone from this opportunity, be it race, age, sex, national origin, religion or disability.” (Policies ACN, 2006)
Being a franchisee enables representatives to offer ACN’s services to clients in all the countries where ACN is active. It is also possible to grow the business with new representatives in the countries ACN is active in. ACN does not tell what the representatives have to do or when to do it. The only requirement ACN sets for the representatives is that they do business within the value framework set out by ACN’s founders. ACN permits no unethical or illegal activity and will intercede when such behavior may exist. ACN reserves the right to use its best judgment in deciding whether certain representative activities are unethical. Furthermore, ACN may use its own discretion in determining the appropriate course of action. “If ACN determines that unethical activities may exist, it reserves the right to suspend or terminate the independent representatives status,” (Policies ACN, 2006) Examples of unethical behavior are forging a signature on any document, collecting payments on behalf of ACN and violation of any country laws or regulations. It is not in the scope of this article to go into this subject very thoroughly. However it is important to note is that independent representatives are not employees of ACN but independent contractors.
3.3 Opportunity
ACN offers landline services, broadband, Internet, mobile calling and VOIP. ACN offers these services but not each service in every country. Looking at the Dutch market ACN offers landline and since February 2006 ACN offers mobile calling as well. As mentioned in Paragraph 1.1 ACN distributes its services through independent representatives instead of traditional ways of acquiring clients such as media, direct mail and telemarketing. ACN uses referral or relationship marketing. With this system people have the opportunity to get paid over something they do all the time. For example when people go to a good restaurant or see a good movie they usually tell other people. When friends go to that particular restaurant or rent that movie they will not get paid over this result. In ACN independent representatives recommend the services to their warm market, but this time they do get paid. Because ACN doesn’t spend money on traditional ways of marketing, two things happen. ACN gives a quality service for a competitive price and the representatives get money for recommending the services. The lead service in every country is the fixed line phone service. The representatives have to help a new customer to fill in a simple one-page form, which the representatives then faxes to ACN. ACN will connect the customer, bill the customer and collect the money from the customer. In addition to billing customers for their calling, ACN is introducing subscription services throughout Europe. Rather than the current system where the customers still pays the original monopoly provider for their line rental and ACN for their calls, customers will only pay one bill to ACN.
There is now a division in ACN headquarters whose sole role is to introduce broadband Internet services in many of the markets in Europe. This must pave the way for the launch of VOIP services; this is the technology of the future (Provenzano, 2006) and will enable calls to be made very cheaply over the Internet. The Internet is a pipeline and in the future ACN will be offering multiple services over the Internet starting with video conferencing. With video conferencing it is for example possible to arrange a business conference over the Internet linking colleagues around the world. They will not only be able to hear but also see each other and show each other visually what they are explaining at a fraction of the cost of traditional video conferencing.
ACN’s philosophy is directed towards the old monopolies. Most of the time these monopolies still hold 80-90 percent of the market. ACN always uses tariffs lower than the old monopolies. ACN’s main product for residential customers in all markets is ACN-2-ACN. This product allows people to call for free to other ACN users nationally for unlimited amount of time. Customers of ACN can make people in their environment client of ACN and by doing this reducing their bills.
3.4 Compensation plan
3.4.1 Residual income
ACN only allows clients to be made within the representative’s warm market. This warm market means their family, friends, referrals of those friends, etcetera. When representatives refer a customer to an ACN service, they do not get a one-time fee, but get an ongoing percentage of the customer’s bill. This percentage can be from one to ten percent of the customer’s bill every single month as long as the customer uses the ACN service. ACN totals the total billing of representative’s clients and pays a percentage. If the cumulative amount of billing is for example 3000 euros ACN pays a percentage of 3%. If the cumulative amount of billing is 10.000, ACN pays 10% and that means 1000 euros every month. This kind of payment is called residual income. Within ACN people can leverage their time and effort. This is a concept outlined by a gentleman called John Paul Getty the world’s first documented billionaire. Getty said: “it is much better to earn one percent of the efforts of one hundred other individuals than to earn one hundred percent of your own efforts.” (Ludbrook, 1998: 65) In ACN independent representatives can, besides introducing customers, also introduce some business partners. These people are generally looking for some extra income and are willing to go for a plan B
