H e in e k e n International
Bralima S.A.R.L.
Kinshasa, La République Démocratique du Congo
Value-based management in direct sales channels,
achieving operational excellence with performance-based pay
S.T.J. Driessen
H e in e k e n International
Bralima S.A.R.L.
Kinshasa, La République Démocratique du Congo
Value-based management in direct sales channels,
achieving operational excellence with performance-based pay
April 2004
S.T.J. Driessen
Address: Boterdiep 5a, 9712 LH Groningen, The Netherlands E-mail: stefdriessen@hotmail.com
Telephone: +31642719809 Student number: 1138286
University of Groningen
Faculty of Management and Organisation Master of Science Financial Value Management
Supervisors Bralima S.A.R.L.;
J.H. van Mameren
M.A. Simisi Wa Simoun’hi
Supervisors University of Groningen;
Dr. B.J.W. Pennink Prof. Dr. L. Karsten
The author is responsible for the contents of the thesis: all rights regarding this thesis are reserved for the author.
PREFACE
PREFACE
This research is conducted under supervision of Bralima S.A.R.L., based in Kinshasa, the Democratic Republic Congo. It is established in cooperation with the University of Groningen.
Direct sales channels can offer firms a competitive advantage in all markets where buying power is not centralised. This research offers insights in the advantages of a direct sales channel and provides knowledge of how it works in practice. The research objective is to recommend Bralima management in what way performance-based pay of direct sales drivers will assist in improving the performance of the brewery’s direct sales channel.
During the establishment of this research an intensive and enjoyable cooperation with in particular Hans van Mameren, Muhindo Apolinair Simisi, Christian Ensa Nsabaka, Jean-Yves Portaus and Djef Nobels has taken place. Also the collaboration of all those to whom I have addressed myself with on, the process of getting familiar with a new environment and the open and hospitable attitude of the Congolean people have made the previous 6 months a pleasant and unforgettable experience.
Natonai bino mingi po eleki malamu!
Groningen, The Netherlands
April 2004
SOMMAIRE DE GESTION
5
SOMMAIRE DE GESTION
Les ventes directes ont une influence accrue sur le comportement du client, sur l’augmentation des commandes concernant l’assortiment et sur l‘indépendance des distributeurs. Ces facteurs peuvent constituer une source de croissance, en volume et en marges bénéficiaires. L'objectif de cette recherche est de recommander que la gestion de Bralima de quelle manière le salaire exécution-basé aux chauffeurs-vendeurs aidera à l’amélioration du réseau de ventes directe de la brasserie.
Les défenseurs et les adversaires du salaire exécution-basé emploient différents arguments.
Dans les biens de consommation mobiles rapides, chaque vente compte. Le salaire exécution- basé est, dans des circonstances, applicables en vendant les biens de consommation mobiles rapides.
La situation de début du réseau de ventes directes a été étudiée. Elle a montré que plusieurs chauffeurs livrent simplement, au lieu de vendre des produits. Le contrôle excessif des liquidités par des chauffeurs-vendeurs et un manque de communication entre les conducteurs et les convoyeurs mènent aux retardes évitables.
Un certain nombre de clients inexistants apparaissent toujours sur les feuilles de route. Le ralentissement en assignant à de nouveaux clients un propre compte, force ces clients à acheter sous un autre compte.
Quand un client n'a pas ses bouteilles de retour et l’argent prêt quand le chauffeur-vendeur arrive, un retard considérable peut se produire.
Les critères de bon fonctionnement d’un réseau de ventes directes sont variables. La coopération de la part des clients a une influence de l’efficacité ; les chauffeurs-vendeurs tireront avantage de réunions régulières entre leurs supérieurs et les clients non coopératifs.
À Bralima, l'installation d'une quantité minimum de la livraison améliore le niveau d'efficacité.
Pour des clients, la livraison régulière et le paiement de remise mensuelle sont très important.
Les chauffeurs-vendeurs sont capables d'améliorer l'exécution du canal de ventes directes. Un bon vendeur, qui communique sa heure d'arrivée et qui est conscient de l’importance de la coopération mutuelle, pourra vendre plus que les vendeurs qui prennent leur travail moins sérieux. Les chauffeurs-vendeurs ne sont pas entièrement responsables de la bonne marche du réseau de ventes directes. Les ventes quotidiennes sont fortement influencées par les distributeurs, par le système de remise progressif, par l'absence des feuilles de route à jour, le manque de collaboration par des clients et par les retards pendant le chargement.
Un équilibre sain entre employées et employeur, et bien que-dehors la mesure d'opération influencent des actions entreprises par différents employés. Dans le réseau des ventes directes, les chauffeurs-vendeurs sont les employés réguliers et les entrepreneurs sous contrat sont appelés ‘les indépendants’. Pour la brasserie et pour la majorité des chauffeurs-vendeurs l’équilibre entre employées et employeur est plus favorable que le système des indépendants.
Les indépendants sont tenté à chercher des nouveaux clients qui de leur proposer des produits
de remplacements si un produit n’est pas disponible, simplement parce que la relation entre
les avantages d'organisation et le gain individuel est fort. Ceci correspond à une meilleure
marche du réseau de ventes directes.
SOMMAIRE DE GESTION
6
Optimiser les ventes directes exige des feuilles de route à jour.
Il est recommandable pour louer le personnel supplémentaire qui sera exclusivement consacré à structurer et contrôler les routes, à traduire l'information en ventes manquées aux employés appropriés et à avoir des entretiens avec les clients qui ne sont pas coopératifs.
Parce que un système rémunération progressive les chauffeurs-vendeurs peut être difficile à communiquer, une fonction linéaire est recommandable. Les avantages d'une fonction linéaire sont sa compréhensibilité et le manque d'un plafond ; il y a toujours la possibilité de l'amélioration. Des caisses libres peuvent être utilisées pour récompenser un certain nombre de deuxièmes voyages par semaine, ou travailler le dimanche. Des revenus potentiels doivent attirer les meilleurs vendeurs.
Il est à conseille pour avoir le procédé de choix de nouveaux chauffeurs équipés des essais
mathématiques et commerciaux. Ces tests augmentent les renforcements fortuits sont bien
adaptés pour le travail.
MANAGEMENT SUMMARY
7
MANAGEMENT SUMMARY
Selling directly leads to an increased influence on customer behaviour, an increased control over the product portfolio and a diminished dependency on distributors. These factors can lead to a source of growth, both in volume and in profit margins. The objective of this research is to recommend Bralima management in what way performance-based pay of direct sales drivers will assist in improving the performance of the brewery’s direct sales channel.
Supporters and opponents of performance-based pay use a different argumentation. In fast moving consumer goods, every sale counts. Performance-based pay is, under circumstances, applicable in selling fast moving consumer goods.
The starting performance of the direct sales channel has been measured. It showed that some drivers are merely delivering, instead of selling products. Excessive control by drivers leads to over-checking and a lack of communication between drivers and deloaders leads to preventable delay and errors.
Some non-existing customers still appear on the road maps. Hindrance in assigning new customers a separate account forces these customers to buy under another account.
When a customer does not have his return bottles and working capital ready when the direct sales driver arrives, considerable delays can occur.
The criteria that the direct sales channel has to gratify are disputed among the most relevant stakeholders. As cooperation with customers is influential in achieving efficiency, the drivers will benefit from their superiors having regular meetings with non-collaborating customers.
To Bralima, the installation of a minimum delivery quantity improves efficiency levels.
To customers, consistency in deliveries and in the pay of the monthly remise is most important.
Direct sales drivers are capable of improving the performance of the direct sales channel.
A good salesman, who communicates his time of arrival and the importance of mutual cooperation, will be able to sell more than salesmen who take their job less serious. The drivers are however not entirely responsible for the current performance of the direct sales channel. Several interdependencies have manifested themselves while the research took shape. The daily sales are heavily influenced by distributors, the progressive remise system, the absence of up-to-date road maps, the lack of collaboration by customers and inefficiencies during reloading.
A healthy power balance between employer and employees and thought-out performance measurement can influence the actions undertaken by individuals. Among the direct sales drivers are regular employees as well as entrepreneurial contractees called ‘indépendants’.
The power balance is most appealing to both the brewery and the majority of the direct sales
drivers with the current indépendant system. Indépendants are more likely to bring in new
customers and to mention the availability of substitute products if a requested product is not
available, simply because the relation between organisational benefits and individual gain is
strong. This corresponds with an increased performance of the direct sales channel.
MANAGEMENT SUMMARY
8
Optimising sales through the direct sales system requires up-to-date road maps.
It is recommendable to hire or relocate extra staff that will be exclusively devoted to structuring and controlling routes, translating information on missed sales to the appropriate employees and having talks with non-cooperating customers.
As a progressive remuneration system for direct sales drivers may be hard to communicate; a linear function is recommendable. The benefits of a linear function are its comprehensibility and the lack of a ceiling; there is always room for improvement.
Free crates of soft drinks can be used to reward a certain number of second trips a week, or working on Sundays. The earnings potential has to be appealing enough to attract the best salesmen.
Besides the implementation of a linear remuneration system for all direct sales drivers, it is
recommendable to have the selection process of new drivers, or salesmen, equipped with
mathematical and commercial tests. These tests increase the chance reinforcements are well
suited for the job.
TABLE OF CONTENTS
SOMMAIRE DE GESTION ...5
MANAGEMENT SUMMARY...7
1 INTRODUCTION ...10
1.1 Heineken Democratic Republic of Congo ...10
1.2 The Congolean market...10
1.3 Opportunities ...11
1.4 The relevance of this research ...11
2 RESEARCH APPROACH...12
2.1 Problem formulation...12
2.2 Research objective ...12
2.3 Main question ...13
2.4 Questions and research model ...13
2.5 Methods of data collection...15
2.6 Type of research ...17
2.7 Demarcation ...17
2.8 Structure ...17
3 THEORETICAL FRAMEWORK ...18
3.1 Introduction ...18
3.2 The advantages of performance-based pay...19
3.3 The disadvantages of performance-based pay ...20
3.4 Pay in the Democratic Republic of Congo ...21
3.5 When is performance-based pay applicable?...22
3.6 Why is performance-based pay applicable in direct sales?...22
4 THE STARTING SITUATION ...23
4.1 What is doing business in Kinshasa like? ...23
4.2 How can the brewery’s distribution strategy be described? ...23
4.3 How does the brewery’s direct sales system work in practice? ...25
4.4 What do current payment structures look like? ...27
4.5 Sub conclusion...28
5 THE PREFERRED SITUATION ...29
5.1 Who is involved in the brewery’s direct sales channel? ... 29
5.2 What are Bralima’s objectives? ...29
5.3 What are customers’ preferences? ...30
5.4 What are SRD drivers’ preferences? ...31
5.5 What are fiscal and legal restrictions? ...32
5.6 Sub conclusion...33
6 THE IMPACT OF DRIVERS ON THE BREWERY’S DIRECT SALES CHANNEL ...34
6.1 What is the difference between the current performance and the desired performance of the brewery’s direct sales channel? ...34
6.2 Which other factors influence the performance of the brewery’s direct sales channel? ...35
6.3 What is the estimated impact of these factors? ...35
6.4 What influence do SRD drivers have on the performance of the brewery’s direct sales channel?...37
6.5 Sub conclusion...38
7 IMPROVING THE PERFORMANCE OF THE BREWERY’S DIRECT SALES CHANNEL WITH PERFORMANCE-BASED PAY ...39
7.1 How is a shift in performance measurement influencing overall performance?...39
7.2 What about differences in sales opportunities in the future? ...41
7.3 In what way is performance-based pay applicable in the brewery’s direct sales channel?...42
7.4 Sub conclusion...44
CONCLUSION AND RECOMMENDATIONS ...45
REFLECTION AND RECOMMENDATIONS FOR FUTHER RESEARCH ...47
REFERENCES ...48
GLOSSARY ...52
INTRODUCTION
10
1 INTRODUCTION
This introduction will give a brief overview of the firm and its market. The relevance of this research will be discussed in the last paragraph of this introduction.
1.1 Heineken Democratic Republic of Congo
With more than 110 breweries and operations in over 170 countries worldwide, H e in e k e n is the most international brewery group in the world. 1
The worldwide success of the H e in e k e n brand has been built on three key principles: product quality, understanding the markets and relevant communication. 2
The operating company of H e in e k e n in the Democratic Republic of Congo is Bralima S.A.R.L. 3 , located in Kinshasa. Founded in 1923, the brewery is one of Africa’s oldest. 4
Bralima is a manufacturer of a wide variety of soft drinks, mineral water and beers, including Africa’s favourite ‘Primus’ and the vitamin rich ‘Maltina’.
Recently Bralima invested heavily in its production facilities and nowadays the Kinshasa subsidiary is equipped with the newest machinery. Other subsidiaries are located in 5 other Congolean cities; Boma, Bukavu, Kisangani, Lubumbashi and Mbandaka.
Bralima employs over 950 people. 5 In appendix I more detailed information on H e in e k e n and its daughter Bralima can be found.
Figure 1.1, Assortment in August 2003. Source: Misha Sales
1.2 The Congolean market
The Democratic Republic of Congo is, despite of its vast natural resources, one of the poorest countries in the world. The economic downfalls in the nineties led to an oligopoly in which two competitors dominate the market of soft drinks and beers in Kinshasa.
The declined purchasing power (of $ 600, - per capita 6 ) has also left its characteristics on consumer behaviour. Instead of keeping stock, food and beverages are often bought on impulse and only when the money is available. Prepaid phone cards and little bags of mineral water are believed to be substitute products of soft drinks and beers.
In order to serve its end-users, over eight million people, Bralima S.A.R.L. Kinshasa (from now on ‘Bralima’) has set up a vast network of small partly independent bars and depots.
These customers are served via distributors as well as by a system of direct sales.
1 Heineken organisation profile, derived from http://www.dmi.org/dmi/html/conference/europe04/sp_heijmink_org.htm, April 7, 2004 2 http://www.heineken.co.za/world/history.htm, October 2, 2003
3 Brasseries, limonaderies et malteries (Bralima), Société par Actions à Responsibilité Limitée (SARL): The SARL is a joint stock company that is a corporation, usually a large private business. Shareholders are liable only for the amount of their equity subscription. Public shares may be issued. The board of directors is responsible to the shareholders for management. The SARL has been the typical form of foreign-owned business in Congo. Final enactment of a SARL is technically subject to approval by the office of the president.
4 Heineken NV Corporate communication, http://www.heinekeninternational.com, October 2, 2003 5 Detailed organisation charts will not be included in the appendix due to competitive reasons.
6 Estimation 2002; CIA World fact book. Derived from http://www.cia.gov/cia/publications/factbook/geos/cg.html, December 30, 2003
INTRODUCTION
11
Over 55 percent of all Bralima products are sold via independent, exclusive distributors.
Many bars and depots in turn buy their Bralima products from these distributors.
Only 38 percent is sold to the on-premise sector directly, via direct sales channel ‘SRD’
(Service Rendu Domicile). 7
Working with only distributors has lead to problems in the past. Clients complain about the lack of service, the unavailability of products and the limited office hours of the distributors.
As raising and maintaining capital in Kinshasa is difficult due to environmental issues, the number of potential distributors is limited. By expanding its direct sales efforts, Bralima reduces its overall dependency on the distributors, while simultaneously enabling itself to have more direct influence on the buying behaviour of the client.
1.3 Opportunities
Selling directly to the on-premise sector may offer Bralima several advantages of which:
1. It may open up a new source of growth.
2. It may increase profit margins, once Bralima is more efficient in its distribution than the wholesalers.
3. The opportunity to influence customer behaviour increases.
4. It may be possible to obtain synergy effects in marketing, as the driver may function as a marketeer.
5. It will offer easy access to market intelligence. Since communication lines are shortened the brewery can start collecting real time market information.
6. It will reduce the dependency on the wholesalers, and therefore strengthen (re)negotiating positions.
7. It will increase control of the product portfolio.
8. It will reduce financial risks, as the working capital is spread among more clients.
9. It may diminish the need for return bottles; as production and consumption are more closely linked the production cycle may be speeded up.
10. New products can be introduced directly at the target customer.
1.4 The relevance of this research
Bralima’s direct sales channel may offer the organisation a competitive advantage because the opportunity to influence customer behaviour increases, control over the product portfolio increases, dependencies on the wholesalers are diminished and profit margins may grow as the control over cost structures increases.
The brewery’s aim is thus to optimise sales run through the SRD system. Bralima management believes this is done most effective once the interests of both employees and employer are combined. There should be an optimal fit in the goals of both the firm and its employees.
This research aims at introducing that fit, when applicable and desirable. The execution of this research works two ways:
1. The research may lead to new insights of the current SRD system and its limitations.
2. The research focuses on an increased effectiveness of a potentially highly profitable distribution channel.
Chapter 2 will provide insight into the way the research is structured and conducted.
7 The missing 7 percent can be subscribed to sales ‘outside Kinshasa’ (by boat or train) and sales to special events, VIP customers and
promotional actions.
RESEARCH APPROACH
12
2 RESEARCH APPROACH
The research approach consists of a formulation of the problem (‘why’), the research objective (‘what’) and appropriate research methods (‘how’).
8In paragraph 2.1 a problem formulation is given, in paragraphs 2.2, 2.3 and 2.4 the research objective, main question, research questions and research model are discussed. Research methods, the structure of this thesis and demarcation are discussed in the remaining paragraphs.
2.1 Problem formulation
A problem is a scientific problem when there is a gap between an actual and a desired situation, the knowledge to solve this problem is not directly available and solving this problem is desirable and theoretically feasible. 9
In the previous chapter the potential of the brewery’s direct sales channel has been stressed.
Direct sales lead to an increased influence on consumer behaviour, increased control of the product portfolio and a diminished dependency on distributors. These, as well as other related factors could lead to an increased organisational profitability.
Bralima management believes goal congruence, by both the organisation and its employees, is a key factor in realizing the full potential of the direct sales channel. In case there is a misfit in goals, both employees and the management may conceive this as a problem and a solution would be desirable.
The problem formulation which lead to this research was the following question: ‘In what way should the goals of Bralima and its employees be linked in order to improve the performance of the brewery’s direct sales channel continuously?’
2.2 Research objective
The performance of the brewery’s direct sales channel is measured in terms of its contribution to total sales. The objective is to have 60 percent of the total sales run through the SRD channel in May 2004. The 1 st of October 2003, the starting date of this research, 38 % of the soft drinks and beers were sold via the direct sales channel.
The problem formulation focuses on a merge in goals of both Bralima and its employees.
The drivers of the brewery’s direct sales channel visit clients every day to sell the products and therefore they possess market intelligence on sales, missed sales and other customer preferences. The drivers’ behaviour is likely to have a great deal of influence on the actual sales and thus on the performance of the direct sales channel. Also the visibility of the drivers in Kinshasa is high. Therefore it is important that Bralima and its drivers are on the same level, share the same goals. The objective of this research will be: Recommend Bralima management in what way performance-based pay of SRD Drivers will assist in improving the performance of the brewery’s direct sales channel.
Business is all about creating value. 10 Bralima’s most important objective is to create value for both its shareholder H e in e k e n and its customers. 11
As the performance of the direct sales channel is measured in its contribution to total sales, with ‘improving’ is meant: ‘realize a growth in the percentage of sales through the direct sales channel, compared to the total sales of the brewery as long as long as this still increases company value’.
8 Oppelland, H.J., hoe schrijf ik een scriptie, Vakgroep ACAB, Erasmus Universiteit, 1988 9 Oppelland, H.J., hoe schrijf ik een scriptie, Vakgroep ACAB, Erasmus Universiteit, 1988
10 Ameels, A., et Al. Value-based management control processes to create value through integration, a literature review, Vlerick Leuven Gent Management School, 2002
11 Based on Benson-Armer, R.J., et. Al., Putting value back in value-based management, McKinsey on Finance 16, Spring 2004
RESEARCH APPROACH
13
2.3 Main question
The research objective is ‘Recommend Bralima management in what way performance-based pay of SRD Drivers will assist in improving the performance of the brewery’s direct sales channel.’ Now the research objective is clarified, it is possible to formulate a main question.
The main question is:
In what way will performance-based pay of SRD Drivers assist in improving the performance of the brewery’s direct sales channel?
2.4 Questions and research model
Conducting research can be seen as the execution of a program. Even though programs are diverse, they all share common elements. Programs are a response to a situation. Programs have INPUTS; these inputs lead to OUTPUTS, which lead to OUTCOMES and ultimate IMPACTS. A logic model is a display of these elements and the underlying assumptions set within the program's environment.
12Figure 2.1 The logic model. Source: Taylor-Powell, E., University of Wisconsin, 1998
In order to obtain a well-founded answer to the main question; inputs, outputs and short, medium and long-term objectives need to be clarified. Therefore the main question is divided into 5 sub questions.
This research aims at improving the operational excellence of the direct sales channel of the brewery by linking individual performance to pay, when applicable and desirable. The capturing of definitions, advantages and disadvantages of performance-based pay, in the theoretical framework, will give a univocal picture of the relevant subjects.
The numbers in front of the questions refer to the chapters and paragraphs in this thesis.
3. Why is performance-based pay applicable in direct sales?
3.1 What is performance-based pay?
3.2 What are the advantages of performance-based pay?
3.3 What are disadvantages of performance-based pay?
3.4 When is performance-based pay applicable?
3.5 Why is performance-based pay applicable in direct sales?
To determine the starting situation, an analysis of the procedures, working attitudes and payment structures has to be performed. The brewery’s distribution strategy will be described to provide insight into the way the direct sales channel fits in the bigger picture.
12 The Logic Model: A Program Performance Framework. The logic model can be criticised because dynamic interrelationships rarely follow sequential order and its dependency of assumptions leads to a lack of attention to other factors affecting observed (unintended or unexpected) outcomes.
The simple representation of the program "theory" or "action" which explains the program and what it is to accomplish does however bring back together planning, evaluation and action (Patton, 1997; Weiss, 1998). The logic model is a "plausible, sensible model of how a program is supposed to work" (Bickman, 1987). Using evaluation and the logic model results in effective programming and offers greater learning opportunities, better documentation of outcomes, and shared knowledge about what works and why (W.K. Kellogg Foundation, Logic Model Development Guide, 2001).
INPUTS OUTPUTS
ACTIVITIES PARTICIPATION
OUTCOMES – IMPACTS
SHORT→ MEDIUM→ LONG TERM
WHAT WE INVEST WHAT DO WE DO - WHOM DO WE REACH WHAT DIFFERENCE IT MAKES
RESEARCH APPROACH
14
4. What is the current performance of the brewery’s direct sales channel?
4.1 What is doing business in Kinshasa like?
4.2 How can the brewery’s distribution strategy be described?
4.3 How does the brewery’s direct sales system work in practice?
4.4 What do current payment structures look like?
Performance-based pay is automatically linked to performance measurement. To measure performance, first should be determined what performance is desired, by which stakeholder.
5. When is the brewery’s direct sales channel performing optimally?
5.1 Who is involved in the brewery’s direct sales channel?
5.2 What are Bralima’s preferences?
5.3 What are customers’ preferences?
5.4 What are direct sales drivers’ preferences?
5.5 What are fiscal and legal restrictions?
As Bralima’s objective is to optimise sales run through the direct sales channel, it is important to know what other organisational factors have a considerable influence on its performance.
6. What influence do SRD drivers have in improving the performance of the brewery’s direct sales channel?
6.1 What is the difference between the current performance and the desired performance of the brewery’s direct sales channel?
6.2 Which other factors influence the performance of the brewery’s direct sales channel?
6.3 What is the estimated impact of these factors?
6.4 What influence do SRD drivers have on the performance of the brewery’s direct sales channel?
Goals of both Bralima and its direct sales drivers are measured by now and differences in theory and practice are mapped. The last question will discuss to which extent performance- based pay is applicable in achieving operational excellence in the brewery’s direct sales channel.
7 In what way is performance-based pay of SRD drivers applicable in improving the performance of the brewery’s direct sales channel?
7.1 How is a shift in performance measurement influencing overall performance?
7.2 What about differences in sales opportunities in the future?
7.3 In what way is performance-based pay applicable in the brewery’s direct sales channel?
By now the answer on the main question should already been given. The final chapter summarizes the main aspects.
Each question will be answered in a separate chapter. Including the introduction and research
approach the thesis counts eight chapters. The sub questions can be seen as paragraphs.
RESEARCH APPROACH
15
The research is summarized in the research model:
‘In what way will performance-based pay of SRD Drivers assist in improving the performance of the brewery’s direct sales channel?’
Figure 2.2 Research model, based on Taylor-Powell, E., The logic model:
a program performance framework, University of Wisconsin, 1998
2.5 Methods of data collection
In order to come to a complete and valid answer to each question, data were obtained from both primary and secondary sources. Secondary data were obtained from various reports, documents and articles. Primary sources included conversations with consumers, customers, drivers, deloaders, distributors, Bralima management, staff of the financial, marketing and technical department, as well as some other knowledgeable persons involved.
The following research methods are distinguished: interviewing, observations, organising focus groups, benchmarking, data-analyses and literature studies.
Interviewing
A multistage sampling method was adopted in this study. Six parts of Kinshasa, were pre- selected; Gombe (business centre), the communes (districts) Barumbu, Kasa-Vubu and Kalamu (relatively old) and Masina, Ndjili, Kimbanseke (relatively new) 13 were chosen for data collection: in total 42 SRD drivers, 27 depot relais owners, 54 bar owners, 25 consumers and 7 distributors were interviewed for this study.
The main interview technique was semi-structured interviewing; searching for all available information concerning a specific topic during a conversation. 14 Populations were optimised in order to reduce communication interferences and information biases.
The main focus points during the interviews were customers’ preferences, customers’
profitability and the communication between customers and brewery staff members.
The interviews of final consumers and distributors were not based on a semi-structured questionnaire, but rather on personal discussions.
13 See Map in Appendix II.
14 Baarda, D.B., De Goede, M.P.M., Methoden en technieken, Stenfert Kroese, 2
edruk, 1999, p. 136
The brewery works with two distribution channels:
1) Direct sales 2) Sales run through
distributors
The direct sales channel may offer the brewery a competitive advantage.
The objective is to have 60 percent of the total sales run through the SRD channel The firm and its employees should share the same goals;
Bralima management wants to accomplish this with performance- based payments.
INPUTS
What to invest (1) Why is performance- based pay applicable in direct sales?
(2) What is the current performance of the breweries direct sales channel?
OUTPUTS
Activities Participation
What to do Assessing needs Measuring Managing Teaching Creating Steering
(3) When is the brewery’s direct sales channel performing optimally?
Who to reach Consumers Customers Direct sales drivers Bralima management (4) What influence do SRD drivers have in improving the performance of the brewery’s direct sales channel?
OUTCOMES
Short Medium Long-term
What the short-term results are LEARNING
Increased sales opportunity and sales skills
What the medium term results are ACTION
The direct sales channel is gaining market share
What the ultimate impact(s) is
CONDITIONS Market share and profitability are at the desired level by Bralima’s shareholder Heineken.
INDICATORS DATA SOURCE METHODS
How will we know that we were successful in achieving our outcomes?
Percentage of sales run through SRD compared to total sales in May 2004.
Where to get information?
Consumers Customers
SRD Drivers / SRD management Bralima management Marketeers Fiscal specialists Existant documents/data bases
How to collect data?
Interviews Observations Focus groups Benchmarking Data-analyses Literature studies
CONTEXT
(5) In what way is performance-based pay of SRD drivers applicable in improving the performance of the brewery’s direct sales channel?
RESEARCH APPROACH
16
Observation
In order to become familiar with working attitudes, procedures and restraints, the SRD trucks have been attended from start to end in 14 occasions, with 13 different drivers. The SRG truck has been attended delivering 3 cargos, 1 day has been spent to accompany a promoter and the director DMC 15 has been accompanied on several occasions. Furthermore, the ice department, which operates with specially equipped delivery trucks, has been joined for 3 days. During these trips, timing several procedures and having informal conversations with drivers, deloaders and customers, obtained data.
Focus groups
Functional conflict is common when channel members recognize each other’s contribution and understand that each party’s success depends on the other(s). In these channels parties are able to oppose each other without damaging their arrangement. 16 Their opposition leads them to: 17
1. Communicate more frequently and effectively 2. Establish outlets for expressing their grievances 3. Critically review their past actions
4. Device and implement a more balanced distribution of power in their relationship.
5. Develop standard ways to deal with future conflict and keep it within bounds
Functional conflict is evoked during 5 focus groups. In this research, focus groups are group discussions with 5 to 10 people intended to exchange ideas for the improvement of both quality as effectiveness of the work. These discussions are combined with a course in developing a sales orientated mentality, making use of instruction videos. All 42 SRD drivers attended these groups. During all groups, similar questions regarding the behaviour of the drivers and the organisation of the direct sales channel were discussed. This survey focused on some specific aspects: selling strategies, presenting oneself, organisation of transport and storage, communication with clients, sticking up to agreements, short comings in the organisation of the direct sales channel and changes in the market organisation.
Benchmarking
Benchmarking is a systematic comparison of organisational processes and performance to create new standards or to improve processes. 18 It is based on the idea that observation of the best practices of others leads to new insights. It may also improve the eagerness to introduce adjustments. The main benchmark used in this thesis is derived from W. Vogt, the distribution manager of Heineken Canarias. This report describes a new concept that already has proven to be a success: since its inception in the Canarias in the summer of 2002 sales increased by 20 percent in six months as compared to the corresponding period of 2001. 19
Also the benchmarking study report ‘Best practices in performance measurement’, written by the Performance-Based Management Special Interest Group of the Oak Ridge Institute for Science and Education in 1997, has been applied extensively.
Data-analyses
Comparing data flows derived from software packages MISHA Sales, MISHA manager, MISHA SRD and OSS as well as data derived from exit/entrance checks performed by security company ASCO.
15 Department ‘Distribution, Marketing et Commerciale’.
16 Coughlan, A.T. et Al., Marketing channels, 6
thedition, Prentice Hall, Upper Saddle River, 2001; p. 241 17 Dwyer, R.F. et Al., Developing buyer-seller relationships, Journal of marketing, 51 (April 1987), p. 11-27 18 http://www.valuebasedmanagement.net/methods_benchmarking.html, December 10, 2003
19 These numbers are derives from an article of the Heineken International website. The article is embedded in appendix II.
RESEARCH APPROACH
17
Literature study
An analysis of academic literature, textbooks, articles, reports, and online sources that may enrich the dept of the research or enhance the readability of this thesis. The references will provide an overview of the adapted literature.
Although overlap occurs, each research question is dominated by a particular research method. Table 2.3 summarizes this fact.
Table 2.3 Summary main research methods per question.
2.6 Type of research
This research may be described as an action research, as the objective is to introduce a fit in the goals of both Bralima and its employees, when applicable and desirable. 20
It is thus an emergent process, which takes shape as understanding increases; it is an iterative process that converges towards a better understanding of what happens.
2.7 Demarcation
The research will primarily focus on the chauffeurs-vendeurs (drivers) of Bralima’s SRD as they are the ones who are most frequently in touch with the customers. Other job categories may be mentioned in examples and in recommendations.
The timetable of this research starts in October 2003 and ends in April 2004. The results will be reported in a thesis that contains at least an analysis of current practices as well as ideas for improvements and an indication of the practical implementation of those ideas.
2.8 Structure
This thesis is divided into 5 chapters.
Chapter 3 gives a theoretical framework. It discusses the advantages and disadvantages of performance-based pay and shows that, under circumstances, performance-based pay is applicable in selling fast moving consumer goods.
Chapter 4 describes the distribution strategy of the brewery. The advantages of direct sales are emphasized and the current performance is explained after numerous observations and interviews.
Chapter 5 measures the criteria that the direct sales channel has to meet with, according to its most relevant stakeholders.
Chapter 6 describes to which extent direct sales drivers are capable of improving the direct sales channel and focuses on other organisational factors that have a significant influence.
Chapter 7 describes the applicability of performance-based pay according to several benchmarking reports and the findings derived from previous chapters.
In the conclusion and reflections, the main findings are summarized and the research is reviewed.
20 Based on Baarda, D.B., De Goede, M.P.M., Methoden en technieken, Stenfert Kroese, 2
edruk, 1999, p. 20
Question Key words Main research methods Chapter
1 (3) Performance-based pay Literature study 3
2 (4) Starting situation Observation / Interviews 4
3 (5) Preferred situation Interviews 5
4 (6) Influence SRD Drivers Focus groups 6
5 (7) Applicability performance-based pay
Benchmarking Data analyses
7
THEORETICAL FRAMEWORK
18
3 THEORETICAL FRAMEWORK
This research aims at improving the operational excellence of the direct sales channel of the brewery by linking individual performance to pay, when desirable and applicable. This chapter will give a definition (paragraph 3.1) and an overview of the benefits (3.2) and the disadvantages (3.3) of performance-based pay. The Congolean situation is described in paragraph 3.4 and the applicability of performance-based pay in general and in direct sales is discussed in the remaining paragraphs.
3.1 Introduction
A firm or department performs ‘well’ when it exceeds expectations and shows a growth in profitability, prestige, or market share. The organisational performance is the result of the interaction between the organisation and its environment. This process is heavily influenced by actions taken by its employees.
"We now pay workers not for output produced, nor even for labour input provided, but simply for time spent on the job." - Alan S. Blinder, ‘Paying for productivity: a look at the evidence’, The Brookings Institution, 1990
In practice it may be difficult to translate organisational targets to the desired individual performance. Targets of both the firm and its employees may be opposite, or employees may not be able to meet organisational demands due to a variety of reasons.
The need for management control systems is derived from the consequences: a ‘lack of direction’ (not knowing), a ‘lack of motivation’ (not wanting) or a ‘lack of ability’. 21
"People do work for money - but they work even more for meaning in their lives. In fact, they work to have fun.
Companies that ignore this fact are essentially bribing their employees and will pay the price in a lack of loyalty and commitment." - Jeffrey Pfeffer, ‘Six dangerous myths about pay’, Harvard Business Review, 1998
Although employees work for many reasons in addition to the pay they receive, pay can be seen as the one key element of communication with employees that can be managed to ensure that it carries the proper message. 22
Performance-based pay is often based on the notion that improving individual performance can enhance organisational performance. As well done is better than well-said, 23 performance- based pay is attempting to influence human behaviour by incentives. 24
Performance can be judged based on the extent to which predetermined targets are achieved, in either a short or a long time span. A financial compensation can be given to a team, individual or even to all involved in a certain chain of events.
Performance-based pay is defined as ‘influencing human behaviour in a certain time span by financially rewarding a predefined and measurable performance’. 25
There is a widespread disagreement over the use of performance-based pay. For this, the advantages and disadvantages need to be clarified. Paragraph 3.2 will discuss the advantages, whilst paragraph 3.3 deals with the disadvantages.
21 Hartmann, F.G.H., Bouwens, J., Beloningsregelingen & management control, Controllers Instituut - Congres, November 20, 2003 22 De Silva, Performance related and skill based pay, an introduction, Bureau for Employers, International Labour Office, Geneva, 1998 23 Benjamin Franklin, American statesman (b. 1706)
24 De Silva, Performance related and skill based pay, an introduction, Bureau for Employers, International Labour Office, Geneva, 1998 25 Based on: Milkovich, G. T., Wigdor, A. K., Pay for performance : evaluating performance appraisal and merit pay, National Academy
Press, Washington, D.C., 1991
THEORETICAL FRAMEWORK
19
3.2 The advantages of performance-based pay
Linking financial rewards to predetermined targets can lead to a better understanding of the expected performance of a firm or a department by its stakeholders and diminish the lack of direction (not knowing). 26
Agents (employees) are more likely to behave in the interests of the principal (the firm) when the contract (remuneration system) is outcome based and when the principal has information to verify agent behaviour. 27 28
The notion that organisational performance is directly influenced by actions taken by individuals may lead to an increased motivation among employees and may diminish the lack of motivation (not wanting). 29 30
Two-thirds of the employees know what their colleagues earn. People who work harder and have more experience but earn less compared to their colleagues, get frustrated. 31
Although there is little logic in it, people prefer to earn $ 50, - knowing the rest earns less, than earning $ 100, - while everyone else receives the same pay. 32
Performance-based pay can provide the means to focus employee attention on productivity rather than on seniority or experience.
Vroom argues that a certain amount of effort will lead to a certain level of performance that leads to desired outcomes or rewards. 33 Motivation is dependent on the expected value of the reward, the obtainability and instrumentality of this reward. Employees with little education tend to attach more value to salary compared to higher educated colleagues.
34Slade focuses on shaping (modifying) behaviour through rewards and punishments, or reinforcement. 35 Emphasis on rewards is usually more effective than emphasis on punishments. 36
If it is true that people often adapt their needs to match the rewards which are available to them, then this would explain why Goldthorpe has found so many Coventry car assembly workers motivated by the high wages they could earn in their boring, repetitive jobs rather than choosing more interesting work for lower pay which they could have found. 37
Besides clear communication of measurable targets and providing stimuli for higher achievements, performance-based pay can attract and bind qualified personnel to the firm.
It may be possible to reduce effective tax rates paid by both the organisation and its employees.
On a higher level, ‘golden parachutes’ can protect a firm from a hostile take-over and as the relation between pay and profitability is emphasized it may become easier to attract capital. 38
26 Hartmann, F.G.H., Bouwens, J., Beloningsregelingen & management control, Controllers Instituut - Congres, November 20, 2003 27 Jensen, M. C., Foundations of organizational strategy, Harvard University Press, 1998
28 Heinfeldt, J., Curcio, R., Employee management strategy, stakeholder-agency theory and the value of the firm, in ‘Journal Of Financial And Strategic Decisions’ Volume 10, Spring 1997
29 Kaplan, R.S., Atkinson, A.A., Advanced management accounting, third edition, Prentice Hall, Upper Saddle River, 1998 30 Edward E. Lawler III, Pay for performance: making it work, Personnel, October 1988
31 Peter Paul Kamerbeek, manager Nationaal Beloningsonderzoek bij Deloitte & Touche, derived from http://www.planet.nl, April 10, 2004 32 Rafael Di Tella, Associate Professor Graduate School of Business Administration, Harvard University in ‘Comments on labour market
behaviour by Truman Bewley’, June 2003. Derived from ‘Quote’, October 2003, p. 169 33 Vroom, V., Work and motivation, Wiley, 1964
34 'Onderzoek Arbeidsmarkt 2002’ M4 Marktonderzoek, under supervision of Nationale Regiopers (NRp).
35 Slade, P.D., & Owens, R.G., A dual process model of perfectionism based on reinforcement theory, Behaviour Modification, No 22, 1998 36 Benchmarking study report ‘Best practices in performance measurement’, written by the Performance-Based Management Special
Interest Group of the Oak Ridge Institute for Science and Education in 1997
37 Goldthorpe, J. H. et. Al., The affluent worker: industrial attitudes and behaviour, Cambridge University Press, Cambridge, 1968
38 Derived from: Jensen, M.C., A theory of the firm: governance, residual claims and organizational Forms, Harvard University Press, 2000
THEORETICAL FRAMEWORK
20
3.3 The disadvantages of performance-based pay
Performance-based pay is indisputably linked to pre-set targets and performance measurement. It is in the interest of the employees to keep these targets as feasible as possible and once the target is achieved, new targets have to be set in order to maintain a drive to excel.
Westphal concludes that executives are mainly interested in aspects that influence their salaries, while other factors, which determine organisational success, are ignored. 39 The short- term focus of many outcome-based contracts may discourage risk-taking aspects that do not immediately improve profitability rates. Among these factors are marketing expenses, investments in new methods or technologies and reinvestments as maintenance.
As merely the result is measured, causes may become irrelevant.
The organisational system and interaction between people are the most influential factors in determining individual processes. 40 Deming estimates the influence of the system and the environment at 94% and states ‘rewarding on incentives looks more like a lottery which is not wrong, as long as you call it a lottery.’ 41
When targets are not achieved, even when the employee could have made a difference, the lack of a reward may lead to frustration, anger and a defensive attitude. In some cases, colleagues may come to consider each other as competitors and internal cooperation and communication are severely disturbed. The success of a bowling team may be dependent on individual performance, when you ask the members of an orchestra or the Cambridge Boat Race team to optimise individual performance; chaos will be the result.
It is the manager, rather than the shareholder, who often determines the level of his stock holdings. 42 During times of economic growth, performance-based pay is often expensive and tone-at-the-top effects may lead to jealousy among other employees. 43 Also, variable salaries are rising more rapidly than fixed wages. 44 In always internationalising markets, pay increases often need to be more than matched by productivity increases if competitiveness is to be achieved or maintained.
Also the extent to which employees are motivated by pay is questionable. Herzberg identified money as a "hygiene factor." If we feel we're not fairly compensated, the lack of money can de-motivate. But once we feel we're treated fairly, the promise of more money doesn't sustain higher energy and mobilize inspired performance. 45
McGregor warned us against theory X (the view that people are reluctant to work) and offered us theory Y, with its emphasis on people's need for achievement and satisfaction from a job done well. 46 McClelland emphasized the importance of needs for achievement, power and affiliation. 47
Numerous studies over the last few decades have shown that when it comes to understanding what really energizes and mobilizes, there's a huge we/they gap between managers and frontline people. For instance, Throop cites a study of computer programmers who were asked
39 James Westphal and Edward Zajac, both connected to the University of Texas conducted a research to performance indicators of the salary of 103 executives of large firms. The main conclusion was that executives are mainly interested in their salary while other factors that determine organisational success are ignored or neglected. Derived from ‘Intermediair’ 25-09-1997
40 O'Reilly, C., Pfeffer, J., Hidden value, Harvard Business School Press, 2000.
41 Deming, W.E., Out of the crisis, MIT, Cambridge, MA, 1982
42 Jordan, J. S., Manager’s opportunistic trading of their firm’s shares: a case study of executives in the banking industry, Research Department Federal Reserve Bank of Boston
43 Solmon, L.C., Podgursky, M., The Pros and cons of performance-based compensation, The Milken Family foundation, 2000 44 Based on: ETUI Newsletter on recent trends in collective bargaining, October 2003
45 Herzberg, F., The motivation to work, 1959
46 McGregor, D. M., The human side of enterprise, McGraw-Hill, 1960
47 McClelland, D. C., The achieving society, Free Press, New York, 1967
THEORETICAL FRAMEWORK
21
to identify the top 10 factors that provided the highest degree of motivation in their jobs. 48 The programmers' top three were: full appreciation for work done; feeling that they were ‘in’
on things and sympathetic help with personal problems. The programmers' managers, when asked what these factors would be, predicted rather different priorities: wages, working conditions, and fair discipline.
Table 3.1 summarizes the most relevant (dis)advantages of performance-based pay mentioned in paragraphs 3.2 and 3.3.
Table 3.1 Several (dis)advantages performance-based pay.
3.4 Pay in the Democratic Republic of Congo
The Maslow pyramid is associated with the hierarchy of needs, which Maslow developed around 1943. 49 According to this theory the most basic need is related to physiological survival; air to breathe, water to drink, food to eat and sex to procreate.
Next in order of precedence comes a set of needs for such things as safety and security and once an individual has taken care of his or her basic physiological needs and feels safe and secure some degree of need for love and belonging may well rise to the forefront of their concerns.
Several things can be related to ‘self-actualisation’; being independently confident in meeting life's challenges, in choosing between that which is more and that which is less worthwhile and in feeling that one's time has been used creatively and inventively.
Figure 3.1 Maslow’s pyramid of needs. Source: A. H. Maslow, Personality and motivation, New York: Harper, 1954
As the most basic needs are less fulfilled in the Democratic Republic of Congo, compared to Western standards; cash can furnish these requirements and it can provide prestige as well.
Based on this assumption it is possible to say employees in poor countries are likely to welcome performance-based pay once their net income increases or rises more rapidly compared to a fixed wage.
48 Troop, J.R., Mastering the ABCs of organizations
49 Maslow, A. H., Personality and motivation. New York: Harper, 1954
Disadvantages Advantages
Setting and communicating clear targets diminishes the lack of direction
Avoidance of difficult targets Performance measurement and organisational
acknowledgements of individual performance increases motivation and stimulates learning
Devoiding risky investments and reinvestments
Attracting and binding qualified employees Causes are irrelevant
Emphasizing rewards in stead of punishments Colleagues become competitors
Possible tax benefits Increasingly more expensive
THEORETICAL FRAMEWORK
22
3.5 When is performance-based pay applicable?
There is a growing body of research findings that show motivation varies between individuals, between groups, and between cultures, and that this can affect the operation of a remuneration system. This could lead to a ‘contingency’ approach with reward systems tailored to each individual's needs. That would be a managers' nightmare and has never been seriously advocated. 50
Based on both advantages and disadvantages mentioned in paragraphs 3.2 and 3.3, performance-based payment is applicable under the following conditions:
1. Targets are clear.
2. Targets are seen as difficult, but obtainable by all stakeholders.
3. Performance measurement is objective and in time.
4. Employees have a significant influence in organisational performance.
5. Both the organisation and its employees share a positive attribution towards the remuneration package.
3.6 Why is performance-based pay applicable in direct sales?
In many fast moving consumer goods, modest margins makes ‘volume’ the most influential factor. In achieving volume, every sale counts. Transport costs and other selling costs are less relevant.
Linking pay to the amount of sales consistently emphasizes the relative importance of each sale and keeps employees focussed on organisational targets.
The registration of every sale is compulsory by law and the generated information can be used to create or adjust the company’s marketing policy, improve procedures and even products.
Measurements are meaningful, cheap and comprehensible.
Instead of strict guidelines, employees are financially dependent on the ability and the willingness of customers to buy. This will encourage flexibility in order to meet customer’s desires. Performance-based pay is, under circumstances, applicable in selling fast moving consumer goods.
Chapter 4 will discuss the starting situation of the brewery’s direct sales channel.
50 Except for fringe benefits (Thierry, The Cafeteria Plan, 1978). Source: Benchmarking study report ‘Best practices in performance
measurement’, written by the Performance-Based Management Special Interest Group of the Oak Ridge Institute for Science and
Education in 1997
THE STARTING SITUATION
23
4 THE STARTING SITUATION
This chapter will provide insights in the way the direct sales channel fits in the brewery’s distribution strategy (paragraphs 4.1 and 4.2). An analysis of working procedures and attitudes in paragraph 4.3 and of payment structures (4.4) will determine the starting situation of the direct sales channel.
4.1 What is doing business in Kinshasa like?
Since the 1980s, Congo's agricultural and mineral production have collapsed, as well as its manufacturing sector which processed raw materials or fabricated consumer goods for the local market. Commerce and consumer services are now the predominant areas of business activity. 51 52
Congo's distribution system is both modern and traditional, but this distinction has been blurred by the impact of the prolonged economic crisis and the shift of economic activity into the informal sector. 53
The principal local barriers in doing business in Kinshasa include the general administrative and judicial environment, a weak financial sector, poor physical and social infrastructure, the use of French, low purchasing power, and limited donor funding. 54 55 56 57 In appendix III more detailed information about the Democratic Republic of Congo is included.
4.2 How can the brewery’s distribution strategy be described?
Distribution channels are part of the organisational channel management. The design of the distribution structure and the selection of channel partners play a significant role in determining the distribution strategy.
CHANNEL MANAGEMENT
Bralima’s distribution system works with return bottles. When a customer or consumer wants to buy a crate of Coca-Cola, Fanta or Primus, he 58 first has to hand over an empty crate of the same product. Despite the problems customers and end-users encounter with incomplete crates (due to broken or stolen bottles) which results in the inability to buy new ones, using bottles is believed to be cheaper, less polluting and more appealing to consumers compared to using plastics or cans.
51 Worldbank, WDI, 2000 in PHNIP County Healthy report, Congo, D.R. (Kinshasa), 2002
52 Minten, B., Kyle, S., Retail margins, price transmission and price asymmetry in urban food markets: the case of Kinshasa (Zaire) Katholieke Universiteit Leuven (KUL), in Journal of African Economies, Vol. 9, No. 1, Pp. 1-23, March 2000
53 http://usembassy.state.gov/kinshasa/wwwhccg4.html, March 22, 2004 54 http://congofinance.com/congopages/investclimat.htm, December 10, 2003 55 http://congofinance.com/congopages/tradregulations.htm, December 10, 2003 56 http://www.fec.cd/presentation/rdc_bref.htm, the 1
stof November, 2003 57 http://www.africafocus.org/docs04/drc0401.php, April 16, 2004
58 In this thesis ‘he’, ‘his’ or ‘him’ can be seen as a reference to a substantive and this may apply to both women and men.
Figure 4.1 Channel management model Source: Kester, R. Channel management, ingrijpende aanpassingen van distributiekanalen op komst, Samsom, Alphen aan den Rijn, 2000 Design distribution structure
Management of distribution channels
Selection of channel partners
Assessment channel performance
THE STARTING SITUATION
24
Due to the limited purchasing power most drinks are consumed right after they have been bought, while they are still cold. However, this doesn’t mean the in-house segment is irrelevant to the brewery. The ‘nganda’ is often led by a woman who sells cold drinks to people passing by her house; this category is believed to take up to 14 % of the market and is rapidly growing due to the current economic developments.
Relative volume per type of client
11%
14%
3%8%
7%3%
14% 11%
11%
17% 1%
Bar Dancing bar Disco night Fixed iceboxes Home use Hotel Kiosk Nganda None Restaurant Hairdresser
