Stihl's independent dealer network and quality-based distribution strategy

Stihl Incorporated Case

Marketing and Distribution Objectives

Channel Situation Analysis

Alternative Plans and Plan Evaluations

Marketing and Distribution Objectives

The Stihl distribution network is composed three tiers; manufacturing, distribution centers, and independent owner/operators. The marketing and distribution strategies must be interlinked because of the incredible amount of overlap inherent in delivering the value message and product to the end user. For example, in regards to Stihl, the bulk of the marketing messages are delivered almost exclusively by independent dealers who are also representing the final point and third tier in the distribution channel. This in turn allows for greater opportunities for product differentiation as opposed to the various forms of mass merchandisers who generally are more dependent upon pricing conditions and the competitive landscape.

Stihl's objectives are clearly laid out in the case study and are best summarized by the statement that to sell Stihl products you must also be able to service them. Consequently this eliminates all of the big box and home store organizations from potential channels for Stihl's products because they do not offer service in-house. The niche that Stihl has carved out for itself in the market is based heavily on producing quality items that are made to last for many years. Furthermore the cost constraints that the mass retailers impose upon there supply chain would be inconsistent with the quality market positioning.

The low cost route associated with the mass merchants would require that Stihl drastically lower costs to compete in this market segment. Typically, products sold in the big box and home improvement stores are produced and sold so inexpensively that once the product breaks then it is usually just discarded or trashed by the consumer as opposed to seeking to find service for the item. This route stands in direct opposition to the strategy that Stihl has developed and thus any attempts to utilize this distribution strategy runs the risk of degrading the brand image.

Stihl has developed a distribution strategy that utilizes a network of over eight thousand independent dealers who own and operate their operation as well as service the products they sell. This allows Stihl to maintain the quality controls necessary to differentiate them from lower cost alternatives. The case notes that the bulk of the target market is composed of either professionals or homeowners that are seeking a higher end product. Furthermore, it is also common for the customer to become aware of quality after becoming frustrated with an inferior product and look to trade up to a quality product.

Alternative Plans and Plan Evaluations

There are basically three distribution and marketing strategies available to Stihl given the competitive landscape. The first option is to stick with their current strategy of the three tier distribution of independently owned specialty retailers. The next option is abandon the current strategy and begin negotiations for a contract with the mass retailers. The third option is to develop some form of hybrid strategy using all of the available channels to try to gain deeper market penetration.

The first option, the one currently in use, is to continue developing the independent dealership network. Stihl can continue adding new dealers as well as target the current ones, who have not already done so, to become exclusive Stihl dealers. With over eight thousand dealers servicing fifty states, it seems as if the market penetration for new dealerships has reached maturity. Adding new dealerships would run the risk of shrinking the local markets even further for their dealership network. This could cause the individual dealerships to compete against other dealers on price for Stihl products and reduce the margin to the dealers thus weakening the strength of the distribution network.

Another option would be to try to grow the market within the already established network by further strengthening the incentives to become exclusive dealerships or at least increase the Stihl product offerings in non-exclusive dealerships. However, the incentives program is already fairly well established with fifty five percent of them already enlisting in the exclusive dealership program. Thus it is reasonable to suspect that there is little opportunity for anything other than marginal improvements in penetration.

If Stihl decides to abandon its current strategy and begin pursuing negotiations with the mass merchandisers then an entirely new business model will be necessary. It will be very difficult to market the Stihl brand through these channels while maintaining the vitality of the dealership network that it painstakingly created. Additionally, Stihl would be at the mercy of the giant Goliath retailers who are known for exercising their enormous buyers' power. In many cases, organizations who could not meet the challenges imposed upon them by the retail giants went out of business.

There also is a potential for a hybrid strategy that utilizes all available distribution channels. The optimal way to address this would be to differentiate the brand in way that would not tie the lower quality products to be distributed through the mass merchant channels to the higher quality products that are sold through the dealer network. Either the Stihl brand could develop an entry level brand such as "Stihl Home Series" or they could abandon the Stihl logo all together and begin developing a new brand name through a subsidiary. Such a strategy could be similar to what the organization MTD does with brands such as Cub Cadet and Yard Man, among others.

Recommendations

The growth that Stihl has experienced has been quite remarkable. However, like with most products, there is a product lifecycle that reaches a point in which the growth curve stagnates significantly and it seems as if Stihl is at least nearing that point. There are undoubtedly changes that the organization can make to further develop its market penetration but if maintaining growth is a priority for the private company then a new strategy is inevitable. At the same time, there will be new obstacles that Stihl will face with changes in demographics as the baby boomers age and the younger generations enter into the target market mix. It will take a level of creativity in terms of new media avenues to reach the fluctuating demographics just to maintain the current marketing and distribution networks.

Since Stihl is privately owned is does have considerably more options than a publicly traded company. For example, it does not have the pressures faced with a constant short-term growth that is found in public companies. Therefore, it could ultimately decide that the revenue stream that it generates through its current strategy is sufficient even though it is running out of room to grow in the market. Even if revenues growth peaks as the organization reaches the end of its product life cycle then this would still represent a steady stream of income.

It is not recommended that Stihl engage with the mass retailers because it is simply not a good fit with the current core competencies found in the present strategy. Any attempt to leverage the brand into these channels would ultimately degrade the existing distribution strategy and expose the organization to substantial levels of risk that are unnecessary in a privately held firm. The only possibility of entering these channels safely would be through the development of entirely different brand. Furthermore, since the Stihl model is geared toward producing high quality products, an entirely new production method would have to be created with new cost limitations. This would most likely dictate a market entry into these channels through an acquisition as opposed to trying to re-invent the wheel with its current manufacturing base.

Instead of trying to drastically change a model that has proven to be incredibly successful, when looking for future growth it may be more reasonable to take that model to new markets. The developing world, mainly Brazil, Russia, India, China, and South Africa, represent a treasure trove of opportunities that many multi-national companies have tapped into though the spread of globalization. Since the Brazilian market is same hemisphere, it would make sense to expand Stihl USA into Stihl Americas. This in turn would open up a new market with a proven business model which would carry less inherent risk than trying to appease the demands of the mass merchandisers.