Palladium Door Richard Hawly Needs to Determine

Palladium Door

Richard Hawly needs to determine what distribution system he needs to utilize in order to reach the sales goal that he has set for Palladium for next year. The company should also consider if there are changes to price, promotion or even product that it should make in order to boost sales.

Marketing Decision to be made: Palladium needs to make a decision with respect to the distribution channels that it wants to utilize. One objective is to achieve the aggressive sales increase objectives that it has for next year. A secondary objective is to redesign its distribution channels for the coming several years. Whatever solution it devises needs to not only succeed next year but in the years following. The objective needs to set the company up for long-run expansion plans, as management realizes that it needs to achieve economies of scale. Its current status as a small regional producer puts it at risk, so the distribution channel problem must be solved in such a way as to facilitate not only growth next year but for the long-run.

Statement of Alternatives. There are four alternatives that have been proposed to address the problem. The first alternative is to increase the number of dealers in the company's existing markets where there is no exclusive dealer. The second alternative is to develop a formal franchise program, beginning with the exclusive dealers but signing up new dealers in other markets as well. The third option is to reduce the total number of dealerships and instead focus on developing high volume dealerships, perhaps by having informal "focus" dealerships. The fourth option is to undertake other strategies to maximize the existing channels. Steps here could be to address the other aspects of the marketing mix, such as price and promotion. There are a number of tactics that could be utilized to improve sales at existing dealers through better marketing.

Analysis of Alternatives. The first alternative, to increase the number of alternatives, has some appeal. Consumers do not have any particular brand awareness in the industry, so a Palladium door can reasonably compete with any other door when they are offered side-by-side. Dealers have their preferred doors, but Palladium can undertake steps to overcome that. A key success factor, therefore, is that Palladium can increase the number of points of sale. If it can get in front of more consumers, it is more likely to win more sales. At present, there is significant room for growth in these markets that lack exclusive dealers. Outlets like Home Depot, Lowe's and other major hardware chains are untapped for Palladium, but would offer significant potential if they can make inroads into these high-volume, low-margin dealers. The problem with relying on more points of sale to drive sales higher is that with most dealers, 90% of sales come from the top two companies. Even if Palladium adds 100 new dealers, it is only going to be fighting for that last 10% of sales at these new dealers. This strategy, therefore, is unlikely to help Palladium meet its short-term needs, or its long-term needs. Additionally, many markets are small, so adding a second or third dealer in these markets could simply result in cannibalizing existing business rather than creating new business, especially since consumers are apt to shop around to at least 2 dealers before making a decision. Palladium would need to invest in other areas of the marketing mix in order for this strategy to be successful.

The second alternative is to develop a franchise dealer program. There is already an informal dealer program with the exclusive dealers, and 27 of them have expressed interest in the franchise option. This option would allow Palladium to develop its 300 markets with non-exclusive dealers in the same way it has developed the 50 markets with exclusive dealers. For Palladium, this approach would formalize its existing relationships with the existing dealers, and provide a foundation on which to build growth for the future. It is also likely to increase sales in the non-exclusive markets, since exclusive dealers sell much more than non-exclusive ones. While this alternative has some appeal for long-run growth, the company is likely going to have trouble adding a significant amount of franchise dealers from its current non-exclusive dealer base, given that Palladium is not the dominant seller at too many of those companies. In addition, many dealers and many within Palladium management are not in favor of building rigidity into the distribution system when it may need flexibility as the company expands in the years to come.

The third alternative is that the company may choose to build out its network of exclusive dealers in a non-franchised way. This option reflects the fact that 70% of the company's sales come from its top 50 accounts. By building out the number of top accounts, the company will be able to increase its penetration in the markets in which it already has a presence. This option retains flexibility, as compared with alternative number two, but it has some of the same risks. The company will still need to identify dealers that it can convert to being exclusive dealers and that might not work well. However, by consolidating larger markets into a single dealer, the sales staff can dedicate more time to these dealers, providing some motivation for those dealers to become exclusive. Again, this option is not likely to show improvements in the short run, at least not to increase sales by 36%, but it is a good strategy for long run growth and by retaining flexibility it is arguably a better strategy than the second alternative.

The fourth option is to leave the present distribution strategy intact. Changes would be made to other areas of marketing in order to enhance sales. One possible option is to work with price. Consumers take price into consideration more than they take brand into consideration. Thus, lowering prices might allow Palladium to increase its share. As a cost leader, it might become a first or second option for more dealers. The drawback to price competition is that Palladium does not have economies of scale. This strategy might increase revenue but it will cut into the net margin. In addition, successfully executing a cost leadership strategy is going to be difficult if the company does not sell in Home Depot, Lowe's or other large stores with a low cost format. Palladium will have trouble overcoming this disadvantage and using price as a strategy as long as it remains a small regional player. If it is sufficiently capitalized to enter into price competition and sustain losses for a few years to build market share, then it can give this strategy greater consideration. At present, however, lowering prices to increase sales does not align with Palladium's strengths -- and it would have the unintended side effect of slashing margins at its exclusive dealers. In these smaller Western markets, the increase in sales might not offset the decrease in margins.