To: CEO
From: Mr Rob Jackson, General Sales Manager
Date: 28 May, 2011
Subject: Response to Vickers Industrial Supplies request for distributorship
With reference to the Vickers Industrial Supplies request for a distributorship and associated pricing discount, I have prepared a decision report to assist you in taking a decision. The report contains the analysis of the situation, the options available, my recommendation and an action plan. The recommendation has been arrived at by evaluating the options based on criteria which are aligned with the company’s objectives.
Please find attached the report.
Enclosure: Report

EXECUTIVE SUMMARY
Vickers Industrial Supplies has requested for a distributorship and a pricing discount as it fulfils the Bolster’s criteria of a distributor. This dealer is important for Bolster so as to maintain a strong hold in the northern Alberta region. While this idea of giving a distributorship to Vickers might not be acceptable to the two national distributors of Bolster. Bolster is faced with two options of either granting a territorial distributorship of northern Alberta to Vickers with a restriction on the region covered or maintaining a status quo and not granting the distributorship to Vickers. The choice has to be evaluated on the basis of financial impact, impact on the relationship with existing distributors and the impact on the relationship with Vickers. Upon evaluation with respect to these criteria, it is recommended that the Vickers is granted a distributorship in northern Alberta. (Word Count: 142)

Contents Executive Summary iii Situation Analysis 1 Problem Statement 2 Options 2 Criteria for Evaluation 3 Evaluation of Options 3 Recommendation 4 Action Plan 4 Exhibit 5

SITUATION ANALYSIS
Vickers Industrial Supplies (Vickers) has approached Bolster requesting for pricing discount associated with distributorship. It is a fast growing, ambitious dealer of Bolster’s products in northern Alberta. Its performance in northern Alberta has been the key factor behind Bolster’s products registering a ten times growth in sales volume over the past five years. This has resulted in northern Alberta being Bolster’s highest market share region. It is also a very unique dealer of Bolster as it directly obtains the supply from the company. It has a highly trained sales team which Bolster helped them develop. It is maintaining a stock of inventory comparable to distributor’s operations and has a sales force to sell to local dealers as well as end-users. All this has resulted in exceptional customer service and excellent customer relationship, which are the crucial determinants of sales in harsh environment electronic surveillance market.
The market in the oil sands area of Fort McMurray is developing fast and it is imperative for Bolster to have an increasing presence there, to tap the market potential. Vickers has a sales experience of 20 years in the Northern Alberta region which is essential for increasing Bolster’s market share in this region. Bolster’s national distributors Albright Industries (Albright) and National Electronic (National) are unlikely to expand in this region in the near future because the former has no presence in western Canada whereas the latter has not shown any keen interest despite repeated requests. The warehouse of National is located in southern Alberta which makes it further difficult to source their products in northern part of the province. As a result, Bolster had to bring in Vickers to cater to sales in this region.
The equipment needs to be operated in a harsh environment which demands good reliability and high serviceability on an on-going basis whenever required. Thus, customers value the design team’s capabilities and service support as much as the equipment itself. If a situation so arises which is not favourable to Vickers, it can readily move to another competitor with the same customer base providing similar service support. The competition in the market has been rising and it is becoming increasingly difficult to maintain a 40% margin. Losing the business to a competitor in the current scenario would be highly detrimental to the current market positioning and future prospects in the region.
Introduction of a new distributor in the past had attracted a backlash from National due to the perceived increase in competition in the sale of Bolster products. The concerns were subsequently allayed when it turned out that there wasn’t any direct conflict between the two distributors. A similar tense situation is likely as National handles sales in southern Alberta region and there could be a perceived threat of Vickers capturing market in Alberta. Thus, it is important that National’s interests are kept in mind as they handle most of the sales and brand building activity of our products across the country. Both the firms have been enjoying a symbiotic relation from the beginning. Being a major player in their respective domains, the association is very important for their sustenance. There is also a possibility that National might relegate Bolster to second position and reduce involvement in pushing sales of their product. So, it is important that National is taken into confidence before any decision is arrived upon. Besides, resentment from Albright is unlikely because it does not operate in this region.
Granting privileges of distributorship to a dealer can also set a precedent for other dealers to ask for similar favours. This can result in a problematic situation in future. However, the possibility of other dealers having the warehouses and service support capability is less likely as they source products from distributor and currently, Bolster is not supporting any of them with video system engineering expertise.
There will be a reduction in Bolster’s margins if it supplies to Vickers at a lower price. However, in return, Vickers can be directed to provide discounts to end users and further increase the market share. This will offset the temporary loss in margins, resulting in increased net income over the long run. The net income will likely increase when the market share rises to an estimated 90% from current 75%.(refer exhibit) The increased market dominance will give Bolster near monopoly and increased pricing power in the region.
PROBLEM STATEMENT
Vickers has approached Bolster requesting for a distributor pricing discount but the potential conflict of interests with the national distributors is leading to a problem in arriving at a decision.
OPTIONS
* Grant territorial distributorship of northern Alberta to Vickers with a restriction on the region covered. * Maintain status quo and do not grant distributorship to Vickers.
CRITERIA FOR EVALUATION
The criteria, in decreasing order of priority, are: * Impact on the profitability of the firm - generating positive returns is the most important factor in evaluating any business proposition. * Impact on relationship with national distributors. * Impact on relationship with Vickers.
EVALUATION OF OPTIONS * Grant territorial distributorship of northern Alberta to Vickers with a restriction on the region covered.
The option will result in decreased profitability initially but the increased market share and dominance over the pricing power will eventually result in increased profitability in the long run.
The option will mostly attract a backlash from National Electronic as Albright does not operate in this region. The possible downgrade in priority of Bolster’s line of product or an eventual drop out will be highly detrimental to the business of Bolster. However, in the past, Bolster was able to provide assurance to National on this issue and the situation didn’t escalate much. It will be able to reach a consensus as Vickers will be directed to restrict sales to only north Alberta. Bolster and National enjoy a symbiotic relationship and both benefit highly with the association so the possibility of a fall out is highly unlikely. The concerns of national distributors about setting a precedent will be satiated by the fact that Vickers is a very unique dealer in terms of video system engineering expertise and sourcing products directly from Bolster. No other dealer enjoys such benefits and it is unlikely that their capability will improve to such levels in the near future.
The option will encourage Vickers to further increase sales in the region and build the brand equity of Bolster. This will promote a stronger lasting relationship with Vickers and Bolster will benefit from the 20 years sales experience that Vickers has in this region. It will be able to tap the fast developing oil sands market and reduce competition by the increased pricing power and the high level of customer loyalty that Vickers enjoys.

* Maintain status quo and do not grant distributorship to Vickers.
The financial benefits won’t be accrued on refusal of the proposal. It will put further pressure on maintaining margins in a competitive market. Further, other players in the market would be employing aggressive techniques to further capture the fast growing market in oil sands region of Fort McMurray, Alberta.
The national distributors will continue to function as it is and there won’t be any impact on the relationship.
Vickers is a fast growing ambitious company who wants to move into distributorship. A denial would not solve the problem as it will come back with the same proposal for distributorship some time in future as well. It could instead result in Bolster losing a dealer in a strategically important region. Since the role of the dealer is as important as the manufacturer itself, snapping ties with a well-performing dealer like Vickers could result in significant drop in sales and Vickers taking the business to the competitors.
RECOMMENDATION
It is recommended that the company grant territorial distributorship of northern Alberta to Vickers.
ACTION PLAN
Do a clear demarcation of the southern & northern Alberta region in next two days. 1. Prepare a distributor contract for Vickers with the clause that it is a territorial distributorship and Vickers is forbidden from selling Bolster’s products outside of northern Alberta and any infringement will attract strict penalty. 2. Convene a meeting with both the national distributors next week. Clearly state that the company is going to grant distributorship to Vickers to expand business in northern Alberta. 3. Explain the terms of contract and division of region which specifically states that Vickers cannot interfere with National’s region of operation. 4. Firmly put forth the decision and argue based on average performance & reluctance of National to increase presence in this region and bring both the distributors on board with the decision. 5. Convene a meeting with Vickers in ten days explaining the terms of contract. Discuss the new pricing strategy of reducing the price for end user and communicate the expectation that he must ensure that the revenue increases which will be taken up for review in six months’ time.

EXHIBIT
Revenue Calculations Price Paid By | Example | End-Users | Suggested List Price | $100 | OEMs | List Price Less 35% | $65 | Dealers | List Price Less 38% | $62 | Distributors | List Price Less 48% | $52 |

Current Sales Volume of Vickers = $3.7 million
Number of units sold by Vickers = 3.7*106/62 = 5.96*104 units
Current Market Share (by volume) = 75%
Estimated increase in market share = 15%
Estimated sales volume = 5.96*104*(0.75+0.15)/0.75 = 7.16*104 units
Estimated increase in revenues = $(7.16*104*52 – 3.7*106) ~ $23,870
Assuming electronic surveillance system is constant over time which is a conservative estimate market is increasing rapidly in the oil sands of Fort McMurray. (Word Count:1580)