In mid-1980's, the PPCo's vice president studied how to deal with the ever-increasing "gray market" for their hard drives. He held a meeting with managers to evaluate and resolve the problem. This report documents a good case study of how gray market developed in the disk industry. It dwells on the pricing policies, management of sales force and strategies of distribution. The main issues PPCo disk drive manufacturing Company faced the impact of the reducing prices, revenues, complains emanating from the distributors, sales managers, and the large OEM accounts. The main agenda shows that PPCo's pricing policies needed to be re-evaluated in order to increase profits. The recommendations besides others require PPCo should clean its own house before charging the brokers, training distributors, and re-evaluating its rogue distributors.
Distributor complains arose from the pricing and implementation policies issues. This was characterized by price exceptions that were time-consuming and unresponsive to market conditions. In most cases, it took five days for a request to go through the organization's departments. The book prices became redundant as competition intensified and prices fell. It worsened when BMO organizations and their agents felt that Sales rep and OEM agents competed on price whenever it was unnecessary and undesirable. Double booking and price erosions were the problems brought about by gray market. These two problems were self-inflicted by the OEMs and pseudo-OEMs agents. These OEMs agents jeopardized the motivation and sales quota of PPCo managers because the rogue salespersons added the OEM reseller's disk for their significant quotas.
Another problem was realized when the demand un-stabilized. When demand became strong, the customers were concerned of supply and the delivery of product where pseudo-OEM sold at profitable premium. However, in 1984, the disk market faced a huge problem when demand weakened when customers became sensitive to prices. The pseudo-OEM, low overhead operations, and lack of credit offered low prices than PPCo distributor resulting in losses. PPCo experienced the "pendulum effect" where they were at pains in balancing and putting customer allocations due to upsurge demands and excess inventory. This was brought about when PPCo and Pseudo-OEM sold its products to the same customer. When PPCo lost its sales to competitors, the distributors lost the drive to push the product to the market.
The gray market was characterized by situations where PPCo customers bought drives at large volume and resold them to major computer dealers, end users, or OEMs without adding the technical value required by law. These resellers called OEM purchased under OEM agreement although they operated below the gross profit margins. The OEMs sold mid-range accounts from $100,000 to one million. They did not concentrate on the major accounts, which had initially received big discounts and high priority during allocations. In 1985, the demand weakened thus prices weakened too. As a result, competition intensified forcing organizations cut prices to keep up the volume.
Finally, an order with less than 1000 units allowed the distributor a fifteen percent resale margin while sales of over 1000 units fluctuating rates. Direct OEM accounts decreased as order increase thus distributors were edged out of business. Although the initial goal of pricing was to enable OEM purchase more and that OEM requested a clear direct relationship for purposes of technical service and extra information and assurance of continuity of supply, it ended up creating an uneven playing field for the customers and competitors.
The opportunity realized from the gray market stems from the emergence of small customers in the micro-business and personal computer market segments. The new customers purchased specialized products in small quantities of the hard disks. The vendors thus began selling to these customers through industrial distributions. The distributors could sell and identify emerging companies as they could leverage their current sales calls. Besides, the PPCo could take advantage of their distributors in reaching out to the new untapped customers and expanding markets.
The major change to be implemented suggests that sales representative should be included in the big sales of the company: they maintain relationships with accounts and penetrate a decentralized complex decision-making. The sales representative should be allowed to negotiate the buying via the people at OEM and technical specialists. The organizations should have distributors stock PPCo's products solely to enable them have maximum sales-attention to their products. Earlier distributors sold diverse products that were less complex than the hard drive: their struggle to develop customer-retailer relationships was minimal.
The market pricing should be regulated as one PPCo Manager found an invoice from a competitor of $1,000 less than PPCo's price. Thinking that it was a typographical error, he had to consult and later offer the customer an apology and subsequently had to offer the customer a reduced price. On the other hand, PPCo had to invest in research and strategies that would enable them reduce their pricing to be with at par with the competitors and still make quality products and ensure that they still make some profit. The PPCo has to take inventory on its employees conduct. This is because the western offices booking sales to OEMs were unofficial: this compromised the sales quotas for officers on the east due to the stiff competitions.
I recommend that the PPCo's distributors had to undergo training to cultivate and maintain customer relationship. This could also serve to motivate distributors and salespeople to concentrate solely on PPCo products. An OEM salesperson stressed on the importance of product pricing and account relationship as the driving force to the competition the put on PPCo. The sales people must be motivated to educate their customers informing them that the gray market is unreliable. Besides, warrant agreements do not cover them in such products because OEM cannot afford.
Rationale and analysis
By providing customers on the importance of warranty agreements, they would be able to identify the genuine hard disks and invest on them. Using the slogan that "cheap is expensive ," the customers would be able to understand the implications of buying the OEMs hard disk; in case of loss or damage, they lose their money and the HDD. The after sales services offered to the PPCo customers would encourage them have the disks maintenance and their customer services be offered in humble atmosphere. Performing inventory assessment of employers will be able to identify the "double booking" agents, reduce the sales lost through double-crossing agents. The assessment will help make the employs the watchdog of every other employee.
PPCo should identify the pseudo-OEMs and deny them their products. They should take inventory of serial numbers of PPCo drives bought in gray market. The OEM purchase contract should be shut to OEM legal. If the OEM is cut, PPCo will lose self for a short time: long-term effects will be felt when PPCo will sell more through its distributors. The cut-off will curb the price proliferation and increase profitability. However, this action will not be effective because the brokers will get their supplies from other sources another than OEM. Subsequently, the price will increase without any volume discounts alternatively the pseudo-OEMs will find other vendor drives to sell, and PPCo eventually will not recoup it lost sales. The last drawback of this action is that the tracking cost and times incurred will weigh heavily on the company profits.
The current contracts with legal pseudo-OEMs are past expiry date hence they should be reclassified as independent selling organizations rather than OEMs. The volume discounts allow pseudo-OEMs compete with other marketer hence higher prices from OEMs will scare customers driving them back to PPCo. Therefore, PPCo should sell according to customer type and not purchase size. The resultant of this is that the competition will be lessened because the broker will sell same price as PPCo. Besides the customer type, the purchase quantity should be the only…