Case studies*

Case study 1 The larger you are the harder you fall!

Authors: Alexandru Bucoi,

Lecturer Romanian-Canadian MBA Luminiţa Nicolescu Associate Professor,

Academy of Economic Studies 1.1 Introduction

December 14th, 1998. The activity is at its peak at S.C. ASTESE Production S.R.L. Due to the nature of its products, well known on the Romanian market under the name of Angelli, both the production and the commercial activity are carried out at maximum parameters.

The end of the year means for Angelli products not only a raise in sales, but a genuine explosion, generating practical difficulties in satisfying the high demand. The results of this year appear to be unexpected, the sales raised with over 40% as compared to last year’s sales, surpassing all management expectations. Appendix no. 1 presents the evolution of the sales for Angelli products between 1995-1998.

* These case studies have been ellaborated with the support of Leonardo da Vinci Program BG//00/B/F/PP-132022.

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The work carried out for more than one year, day and night, by AB and EP for the organisation of a new modern sales system and of a performing distribution network (meant to replace the old out-dated sales system), started to show its results now.

Sitting in his Office at 4 Splaiul Unirii, AB, Commercial Manager, was about to analyse the orders arrived that morning from the territory in order to see if he needs to modify the orders of quantities and types of products for the production section. The phone rings and the pleasure to hear an old friend, SN, Promotion Manager at a well-known cigarette company, is great, but the news he brings are not as good… “Have you heard about the new ordinance issued by the Ministry of Finance?”, the question came directly. “No!…What ordinance?” “The one with the excises and…” “Do they increase the excises again?”, “Yes… I don’t know….maybe….but this is not important, they intervene heavily in the selling activity.”, “…..”.

“I have unofficially received a copy, I’ll send it to you by e-mail”, “OK, thank you! Talk to you later. Bye!”

What draws AB’s attention in the following minutes in the received message is: Emergency Ordinance no. 50 (Extracts from the ordinance are presented in Appendix no. 5) …………………………………………………………………………

“One economic agent, internal producer or importer of alcoholic beverages and tobacco products may have contractual relations with a maximum of 15 economic agents that carry wholesale trading activity.” ……………………………………………………………..…………

“The provisions of this emergency ordinance come into force on January 1st 1999”

“It is not possible”, exclaimed AB. ”Does the Ministry of Finance impose these things? This is not possible! It is a joke…”

1.2 Company description and history

Astese Production S.R.L. is one of the largest producers of alcoholic beverages in the Romanian market, being the holder of the Angelli brand and leader in the field of sparkling wines. It is a Romanian company with 100% private capital, the majority of the capital being Italian. The firm has 74 employees, its organisational structure being presented in Appendix no. 2.

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The first Angelli products emerged in the Romanian market in the second half of the year 1994. These products were the two products that later became representative for the Angelli brand: Gran Moscato – sweet sparkling wine and Cuveé Imperial – demi-dry sparkling wine. Immediately after the launching of the Angelli products, there were obtained very good results and a high volume of sales. This determined the company to diversify its product portofolio in order to satisfy the tastes of all consumers. Thus in 1995 they started the production of vermouths and appetisers, the first products of this kind being the classical vermouths Bianco – white vermouth, Rosso – red vermouth and Cherry – cherry-flavoured appetiser. In 1996 the first products in the liqueur range were introduced: Café Café with coffee flavour, Elexir di Pesca with peach flavour and Elixir di Nocciola with hazelnut flavour. The product range diversified continuously, for each production line: sparkling wines, vermouths, appetisers and liqueurs, so that in 1998 the firm was producing and commercialising 16 products. Appendix no. 3 presents the entire Angelli products range in 1998.

In 1998, as it can be seen in figure no. 1.1, 68% of the company’s activity (as the volume of sales) was given by sparkling wines, 27% by vermouths and appetisers (out of which 23% is given by the Cherry appetiser and 4% by other appetisers and vermouths) and 5% by liqueurs.

Figure no. 1.1 The structure of the sales volume according to the product types

68%

23%

4% 5%

vschlive

vs = sparkling wine; ch = cherry; li = liqueurs; ve = vermouths

In 1996, sales started to slow down after the initial increase. This led to the decision to organise a new distribution system based on the modern concepts of the market economy. At the very beginning of the company’s operations, the selling activity was performed by approaching various present or potential customers, in order to convince them to acquire the Angelli products. The customers were contacted randomly, there was no customer selection. After the products were sold,

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they were not tracked down to the final consumers: it was not known to whom the products were further sold, in what quantities and under what conditions. The objective of the company was to replace the existing chaotic distribution system, with a well-organised and co-ordinated system. For this purpose, at the beginning of 1997 an Italian adviser with a vast experience (acquired in the Italian market) in sales, was hired by the company. He had the mission to conceive and to put into practice a sales system and a modern distribution network for the Angelli products, based on a thorough observation of the real conditions in Romania. Practically, in the field of the alcoholic beverages, Astese was the first company to put into practice a new modern distribution system adapted to the Romanian market conditions. The first changes took place in the second half of the year 1997, more precisely in August when AB was hired as Commercial Manager at Astese. He and the Italian adviser formed a team and together designed a specific sales structure at national level. These new structures were conceived so that to achieve a direct relation with the market, and to allow monitoring the evolution of the products in the market. Through the new system a set of support services was offered to the direct clients (distributors, wholesalers, retailers). The results were seen immediately, as the year 1997 concluded with an unpredicted sales rise of 35% as compared to the previous year. In 1998, the production was carried out in a space rented from the vine and winemaking station Banu Mărăcine next to Craiova, where, besides the production line, there was also a final products warehouse. Moreover, the company had two large warehouses in Bucharest that were supplied with goods as the production was carried out. Practically, the delivery of products was performed from all three warehouses. An important investment was done, and a modern factory was under construction in Bucharest. The factory envisaged the increase in the production capacity three times and the warehousing capacity twice. Through the coming into use of the new factory, the new warehouse and the new headquarters, the factory in Craiova and the three warehouses were to be gradually dissolved.

1.3 The position on the market of the Angelli products

The market for the Angelli products has some specific features:

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/ with respect to the sparkling wines, the competition was hardly present in 1998/1999. There were no other brands that could represent a powerful competition at the time. Other products (such as the Faber sparkling wines) appeared lately, and this could affect the sales of the Angelli products.

/ it is a very highly seasonable market, over 60% of the sales being performed between October 15th – January 15th of each year. For all the other types of products (vermouths, liqueurs, appetisers) the demand is relatively stable all year long, with small fluctuations and slight increases at the end of the year period. Appendix no. 4 presents the evolution of the sales for different types of Angelli products during a year.

The Angelli products are mass products, designated to all the consumers and they may be bought both from the kiosks at the corners of the streets and in the shops, restaurants and luxurious bars. The prevalent market segment for the Angelli products, namely women aged between 18-45, from towns with a population over 50 000 inhabitants, is targeted for promotion reasons.

The market shares for the three types of Angelli products are presented in table no. 1.

Table no. 1 The market shares of Angelli products in 1998

Type of products

Sparkling wines

Cherry Vermouths and

appetisers

Liqueurs

Market share 60% 85% 20% - Angelli wished to go on consolidating its market leader position for the sparkling wines by initiating an aggressive sales strategy (intense distribution and sustained promotion of the sales towards all the links of the distribution channel and towards the final consumer), and investing in advertising activities.

The Angelli products were present in over 50% of the selling points, existent at national level (kioks, shops, supermarkets, restaurants, bars). Over 70% of the total sales of the Angelli products is achieved in the key-selling points (the most prosperous commercial points, with a great flow of visitors and consumers), all of them being

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commercial points in which the base assortment of Angelli products (Cuvee Imperial, Cocktail Pesca and Cherry) are present in proportion of over 85%.

The medium price for sparkling wines is 1,47$, for vermouths, and 1,53$ for appetisers and 1.57$ for liqueurs. The prices in lei (local currency) of the Angelli products, as well as of the competing products are up-dated at the same time with the evolution of the price for the raw materials and of the inflation in the Romanian market.

The main competing products for the Angelli products were in 1998/1999:

Garrone, the leader in the field of the vermouth products, with a market share of 75%. The firm diversified its production, offering also a range of frizzante wines, competing with the Angelli sparkling wines. Due to the advantage obtained through its vermouths, Garrone managed to promote to the level of intermediaries and of retail sellers its other types of products. It is a potential powerful rival for the Angelli sparkling wines.

Garrone invests in publicity as well as in promotion activities (advertisements, sales promotion, participation in exhibitions). It tries to follow closely the Astese politics both from the point of view of the promotion – publicity, and from the point of view of the distribution and sales organisation. This firm started as well to organise its own sales structure and a distribution network at national level.

Faber is a competitor for the sparkling wines, but it just entered the market. Venezia is a local brand in the field of the sparkling wines, produced in Timişoara by SC Veliero S.R.L. that through the low prices (30-35% cheaper than the Angelli products) managed to extend gradually in other areas.

The Angelli products enjoy a high notoriety (the performed studies show that over 87% of Romania’s mature population knows the Angelli brand) and a very good image in the market. The products are seen as having an excellent price/quality ratio that made Angelli products to be preferred by consumers.

The good product image is due to their look, completely different from other similar products from the Romanian market. Everything that represents its look: labels, caps, necklaces are designed and manufactured in Italy by experienced companies in the field.

The image campaign is done through TV advertising and annually are invested in this activity around 800.000 $. The logo: “Angelli, the prelude to an adventure” is a very famous logo in Romania, at the level of the whole country.

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The entire video spots’ creation and production is done in Italy ensuring an image of quality and distinction. The main promotional campaign of each year is carried out during September – December 31st, the emphasis being on the Angelli sparkling wines that actually become the central point for the entire activity of the company in this period.

1.4 The organisation of the distribution

The distribution system through which the Angelli products are sold is based on its own selling force and on intermediaries.

The own sales force is composed of nine Area Sales Managers, some of them having subordinated a sales agent. Each Area Sales Manager operating area includes a number of a few counties.. For the areas where there are a large number of distributors and where there are large cities, the Area Sales Managers have subordinated a sales agent.

The sales agents receive the orders for products from the intermediaries and transmit them to the Sales Department in Bucharest. The Sales Department, based on the orders received from the country, sells the products to the intermediaries, the price including also the transportation of the products from the Astese warehouses to the intermediaries’ locations in the country. The company uses independent transportation companies and the sales managers and agents ensure the relationships with the intermediaries, merchandise at the retailers and have the task of solving any issues arising at the retailers or end consumers level (such as orders, transportation or quality issues).

The main types of intermediaries with whom the sales agents are in contact and by whom the Angelli products are distributed are:

Distributors. These represent companies that carry out a dynamic sales activity, having their own sales agents who visit each retailer of the allocated sales area. In general they sell a product package that also contains the Angelli products.

Wholesalers. These represent companies that carry out a static sales activity, displaying the goods in huge commercial centres that are visited by retailers. The retailers are buying from wholesalers and the quantity of products is decided by themselves based on the sales experience they had with the respective product.

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The company does not have a direct sale to retailers or end consumers. The only direct commercial relationship is with Metro cash and carry the first store of this kind in Romania.

Figure no. 12 presents the members of the distribution channel for the Angelli products.

Figure no. 1.2 The distribution system of the Angelli products

ProducerAstese SRL

Area Sales Managers (9)

Distributors

Wholesalers Wholesalers Metro Cash &Carry

Retailers

End consumers

Bucharest Sales Department

The company has trading relations with 186 intermediaries (distributors or wholesalers) covering the whole country. The distribution of Angelli products at national level depends on the potential of every intermediary. Exclusive relations with intermediaries from a certain geographic area are not agreed to, in the sense that for the same area there may operate two, three or more distributors for Angelli products, depending on market demand.

A standard procedure for selecting the intermediaries was used, which together with the company’s motivating system, resulted in Angelli products being

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distributed by the most serious, and performing distributors at the time. The main criteria for the selection of Angelli products’ intermediaries include: the sales volume, the average inventory levels, the delivery time, the treatment of damaged and lost goods, the co-operation in promotional and training programs, the middlemen services owed to the customer.

The distributors may operate: & only for one county area (distributors like: Mach, Boema, San Land,

Sorla etc.), & for the area of several counties: Net Group Distribution (Sibiu, Alba,

Arad, Teleorman, Bucharest, Suceava, Vrancea, Mureş, Brăila), ERNA (Iaşi, Suceava, Vaslui, Bacău), BDM (Baia Mare, Satu Mare, Bistriţa, Cluj), Valentiana (Vâlcea, Olt, Gorj) etc.

There is no direct client (including Metro) that has more than 4% of the turnover of Astese Production S.R.L. Consequently the company’s activity at the level of intermediaries is atomised, there are no clients with a determining share in the company’s activity.

In spite of this, due to the intermediaries’ motivating system, 90% of them have accepted to work in exclusive purchasing conditions with Astese. They do not distribute brands considered competitors for Angelli products. The intermediaries are motivated through the system of relations Angelli-client and through the awarding system. In the relationships with the distributors the stimulation and price system used is:

& 7% discount off the invoice direct price list, as an operational discount1.

& a 6% award, based on the achievement of the sales targets established for a period of three months. This 6% discount is divided between the most four important product groups: sparkling wines, liqueurs and Cherry, vermouths and appetisers (others than Cherry). The share for each product group vary from one period to another (the objectives are set for a three-month period), according to the interest the company has in promoting a certain product group through distribution systems.

1 The 7% off functional discount from the price list is granted to the distributors to offer them a margin that allows

them to operate by supporting their distribution expenditures. In rare cases in which the retailers asked for products directly from Angelli, these are sold at the price list.

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The company suggests to the distributors a minimum selling price to retailers at the level of the price list +2% and to wholesalers at a minimum of the price list of +1%.

For wholesalers, that either have direct contact with Astese either with Astese’s distributors, the stimulation represents:

3% operational discount, granted directly on the invoice.

2% award for the achievement of the sales targets established for a three-month period, similarly as for the distributors.

As a selling price of the wholesalers to retailers, the company suggests a minimum selling price at the level of the price list.

The orders received from the distributors through the Area Sales Managers are honoured in maximum 48 hours. The transport is done through specialised transportation companies. For this activity there are used lorries with a capacity between 5 and 20 tons, according to the structure and importance of the order. The transportation activity is co-ordinated, organised and paid for by Astese Company.

The commercial relations with the clients, regardless the role they have within the distribution chain (wholesalers, distributors, retailers) are done without any formal commercial sale-purchase contracts. They have mostly an informal character. The only formal contractual agreement is the one with Metro Romania, because of the specific conditions that this intermediary requires.

The number of direct clients is not in any way limited or fixed, there is the possibility for co-operation with any trader that is in compliance with the company’s criteria. The actual traders (intermediaries and retailers) carry out their activity based on a trading authorisation that is valid for different types of products (foodstuffs, consumer goods etc.), there is no requirement for a special authorisation for alcoholic products.

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1.5 What has to be done?

Reading the mail took AB just a few minutes because the problem seems very clear.

Beginning with January 1st 1999, the whole distribution system had to be changed being necessary the shift from a distribution network made up of 186 intermediaries to a system according to which there were not allowed more than 15 intermediaries. The effects of this situation were terrible and hardly to evaluate on the spot. Thus, for the afternoon of the same day at 18.30 has been convoked a meeting with all those responsible for the sales activity in order to make a first analysis and appreciation of the situation.

Because of the quick way the meeting has been convoked at 18.30 everybody was present (as it rarely happened before) and was waiting with interest to find out the reason for which the meeting has been convoked. The news have been a real surprise for everyone. After a noisy period when everyone was trying to expound his opinion, one has tried to understand the situation and its future implications. It has not been easy and although at 23.00 o’clock the discussion has not been over yet, the effective formulation of a coherent and logical solution could not be done. It was certain that the emotional factor was influencing all discussions. Consequently, there was decided that it is necessary a time of reflection for everybody and next day, at 17.00 o’clock tomorrow a new meeting was scheduled at which the General Manager of the company was going to be invited in order to make decisions.

It is vital for the company’s Commercial Department to analyse the situation the company faces and to make proposals for coping with the problems envisaged to occur beginning January 1999. The way the first meeting has been taking place has not helped in finding some alternatives with a viable finality. You are employed as an adviser who has been hired from outside the company and who is not part of the company employees’ actual subjective way of thinking to analyse the situation and to search possible solutions that could reduce the impact of this emergency ordinance.

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For the next meeting that will take place 17.00 o’clock you have to prepare a material through which you express your point of view concerning the following aspects:

Assignment questions: 1. Study carefully Appendix no. 5, referring the Emergency Ordinance

no. 50 of 14.12.1998. What are the main problems that appear once the provisions of this ordinance come into force?

2. Propose immediate actions that can be put into practice by SC Astese Production in order to face the new situation created, starting January 1st, 1999.

3. Describe a plan of measures that could be elaborated in 1999 by SC Astese so that to ensure a high sales volume for its products.

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Appendix no. 1 Angelli sales evolution for 1995-1998 The graph represents the volume of sales.

Sales - quantity

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Appendix no. 2

Organisational Chart of S.C. Astese Production SRL

Production Director

Commercial Director

Chief Accountant

Laboratory Responsible

2 persons

Products Preparation Coordinator

4 persons

Bottling Section Manager

24 persons

Marketing Coordinator

3 Delivery Responsibles(one for each wearhouse) 9 persons

Logistic Coordinator

9 Area Sales Manager

7 Sales Agent

Treasurer 1 person

Accounting Responsible

3 persons

Financial Responsible

1 person

Company's driver

Purchassing Coordinator

Telephon Operator

General Director Assistant

General Director

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Appendix no. 3 The assortment of the Angelli products in 1998 Sparkling wines:

• Gran Moscato – sweet since 1994 • Cuvee Imperial – semidry since 1994 • Cocktail Pesca – sweet with peach flavor since 1995 • Cocktail Fragola – sweet with strawberry flavor since 1995 • Kir Royal – sweet with gooseberry flavor since 1998 • Cuvee Imperial Magnum (1,5 l) – semidry since 1998

Vermouths and Aperitifs:

• Bianco – white since 1995 • Cherry – with cherry flavor since 1995 • Rosso – red since 1995 • Amerikano – cocktail with orange flavor since 1996 • Manhattan – cocktail with whisky flavor since 1996 • Bellini – cocktail with peach flavor since 1996 • Fragola – with strawberry flavor since 1998

Liqueurs:

• Café – Café - with coffee flavor since 1996 • Elixir di Pesca - with peach flavor since 1996 • Elixir di Nocciola – with peanuts flavor since 1996

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Appendix no. 4 The evolution of sales for Angelli products for a year A. Sales evolution for Angelli vermouths (value)

0

20000

40000

60000

80000

100000

1 2 3 4 5 6 7 8 9 10 11 12

Series1Series2

B. Sales evolution for Angelli sparkling wines (value)

0

500000

1000000

1500000

2000000

1 2 3 4 5 6 7 8 9 10 11 12

Series1Series2

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Appendix no. 5

Emergency Ordinance no. 50 of December 14th 1998 (excerpt) Art. 23 (5) Annex no. 16 of the present emergency ordinance presents the types of relationships that can be developed between the supplying and buying economic agents as far as the goods subject to authorization are concerned. Annex no. 16 to the emergency ordinance no. 50 /December 14th 1998 The Commercial relations between suppliers and buyers of the products subject to authorisation. ………………………… II. for the commercialisation of the alcoholic beverages Provider Buyer 1. Alcoholic beverages producer Wholesale trader 2. Alcoholic beverages producer Retail trader 3. Alcoholic beverages producer Alcoholic beverages producer 4. Alcoholic beverages importer Wholesale trader 5. Alcoholic beverages importer Retail system trader 6. Alcoholic beverages importer Alcoholic beverages producer 7. Whole sale system trader Retail trader ………………………………. (6)… “One economic agent, internal producer or importer of alcoholic beverages … may have contractual relations with a maximum of 15 economic agents that carry out a commercial activity in wholesale system2.” Art. IV. The provisions of this emergency ordinance come into force starting with January 1st 1999… Annex no. 17 to the emergency ordinance no. 50/December 14th 1998 Taxes of authorisation for the commercialisation ……, of the alcoholic beverages…… ………………………. 2 The law defines by economic agents that carry out a wholesale activity, all the economic agents that,

buy and sell products in large quantities. The intermediaries of the Angelli products, both distributors and whole sale traders, are included in “commercial agents that carry out their commercial activity in the wholesale system”.

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3. Alcoholic beverages a) for the commercialisation of each type of alcoholic beverage

from its own production or from import 10,000,000 lei b) for the commercialisation of the following product groups in wholesale and

retail system: - spirits 10,000,000 lei - wines and wine-based products 10,000,000 lei - beer 10,000,000 lei - imported alcoholic beverages 10,000,000 lei

c) for the commercialisation of the alcoholic beverages in public alimentation system; - catering units with 40 seated places or bar places 5,000,000 lei - catering units with 41-100 seated places or bar places 10,000,000 lei - catering units with over 100 seated places or bar places 10,000,000 lei - catering units with seasonal activity: 1/3 of the authorisation tax collected by

the units with permanent activity, according to the number of seated places or bar places - for canteens and canteen - restaurants that organise festive dinners; 5% of the minimal tax collected for the catering units. d) for the alcoholic beverages commercialisation in the shops selling at retail

prices, the tax is collected for each sale unit, according to the following product groups, as follows:

- spirits 1,000,000 lei - wines and wine-based products 1,000,000 lei - beer 1,000,000 lei - imported alcoholic beverages 1,000,000 lei

………….. All organizations involved in the commercialisation of these products have to have written contracts. …………. …….. there will be used special invoices and shipping documents enscripted with “alcohol beverage” …….. The average exchange rate leu /$ was in 1999 of 8904 lei / $ (source http: www//bnro.ro).

Case study 2 Global Spirits Company - how to enter the Alcohol market∗

Author: Luminiţa Nicolescu Associate Professor

Academy of Economic Studies 2.1 Introduction The new alcohol factory, located at the outskirts of Ploieşti, a town situated 60 km North from Bucharest, the Romanian capital, is almost finished. When the new equipment will be installed, the production capacity will increase four times. The owner, Gheorghe Iaciu (called Gigi) looks proudly at the large building and reflects over the activity of his companies over the last seven years (1994-2001) while planning for the future: “My companies were local companies run in a centralized way based solely on my feelings. I have transformed them in profit centers where specific work is done by specialists in the field. I am going to be successful internationally, now that my companies became “proper” market driven companies that function based on market economy principles such as the performance and efficiency, as I have learned and seen while living in U.S.!”

∗ The author thanks Gheorghe Iaciu, the owner of the Global Spirits Company for his contribution to the

ellaboration of this case study.

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2.2.1 History and presentation of the Gheorghe Iaciu companies Gheorghe Iaciu graduated the faculty of Agricultural Equipment at the Polytechnic Institute from Bucharest, the most prestigious technical educational establishment in Romania, in the year 1987. He worked for four years at the Station for Agricultural Mechanization, Ştefăneşti, Ilfov district, as head of section. In 1990 after the changes that took place in Romania Gheorghe Iaciu became involved in trading activities by buying and selling different goods such as clothes, cigarettes, cosmetics and others. He remembers the beginning of his entrepreneurial activities as follows: “I knew that I have entrepreneurial spirit and I wanted to do business. The problem was the lack of capital. I started with trade as it was the fastest way to change my financial state. I was involved in trading activities for one year and in one year, by starting from zero I reached the 11th place at the country level in terms of turnover. In 1992 I had a turnover of 25 mill. $, but I realized that I am not done for trade. I wanted to invest. So what have I done? I’ve done something related to my previous activity: I built spaces for commerciants.” After he accumulated significant capital he sett up in 1994 the company Expo Market Doraly, that is 100% in his ownership. Other companies were sett up with a similar activity profile in order to benefit of financial facilities granted by the law at the time1. Table no. 1 presents the companies owned by Gheorghe Iaciu. The “Doraly” companies built commercial spaces at the outskirts of Bucharest on the road towards Constanţa and rented them to wholesale companies. The “commercial space” renting business was chosen as a start-up business for a number of reasons:

& in 1994 trade was a booming activity in Romania. Final consumers were still buying the products they were missing for many years during the communist shortage period. At the same time state companies started to be restructured and employees were given “bonus packages” in order to voluntarily leave companies, actions that brought large amounts of disposable cash in the market,

& in 1994 the distribution system for consumer goods in Romania was completely fragmented: there was a large number of small retail shops

1 Such as tax exemptions for the first 5 years of activity.

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that were buying from wholesale companies, companies that were under-developed at the time,

& the entrepreneur Gheorghe Iaciu worked in the trade sector previously and he knew the market of wholesale companies. He also had good relations with trading and importing companies, as he said:

“I had a good name among commerciants and wholesalers. They trusted me and they paid me in advance the rent for commercial spaces. In this way I was able to make the first investments.”

Table no. 1 Legal status of Gheorghe Iaciu companies in the period 1994-2001

Companies Year of setting up Year of

dismantling Observations

Expo Market Doraly 1994 - Expo Market G&D 1994 1996 Merger with Expo

Market Doraly Expo Market Doraly III

1994 2001 Merger with Expo Market Doraly

Expo Market Doraly Group

1995 1999 Merger with Expo Market Doraly

Five Group 1995 1999 Merger with Expo Market Doraly

Doraly Mall Constanţa 2001 - Separation from Expo Market Doraly

Global Spirits Company

2001 - Separation from Expo Market Doraly

The two main services the company offers are: renting display spaces and renting warehousing spaces to en-gross trading companies with all the logistics to support the activity of the companies that rent the commercial space. The physical facilities of the company developed over time by increasing the commercial space from 5500 square meters at the beginning of 1997 to around 25.000 square meters in 2001, as Expo Market Doraly became market leader in renting commercial spaces in Bucharest. Bucharest is the largest market for trade, as 65% of the merchandise sold en-gross in Romania is commercialized in Bucharest. There are 37 en-gross centers in Bucharest with surfaces comprised between 1000-30.000 square meters and Doraly is the market leader measured as the percentage of visitors. See appendix no. 1.

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The competitive advantage of the Doraly companies in the space renting business, was the large range of connected services2 related to the renting service and the high degree of seriousness and promptness in doing business. When setting up the Doraly companies, Gheorghe Iaciu had as objective to serve the clients and to offer them the services they need at high quality standards. He looked for adapting to the client’s need permanently and for the best way to do this by reinvesting continously for the improvement of the supplied services. He finally succeeded to create a business sustainble on its own as he mentioned:

“I organized the system and now it works on its own. It brings us money without being necessary to be there all the time.”

The turnover of the Doraly companies increased continously between 1994 and 2000, as it is presented in table no. 2. 2.2.2 Towards the diversification of activities

Given the positive evolution of the “en-gross” business in Romania, the owner accumulated more capital and he decided to invest further. He had two strategic options:

1. to expand the renting commercial spaces business further at national level or,

2. to invest in a completely different business. 1. Initially he wanted to extend the “en-gross spaces” business at national level as he had successful experience in the field, but he could not obtain the best situated places in the large towns of Romania. He managed only in 2001 to set up a commercial center in Constanţa. The center was sett up as another company in Gheorghe Iaciu’s ownership, the company Doraly Mall Constanţa. This company rents commercial spaces to retailing companies, not to en-gross companies as the company in Bucharest. Constanţa is the largest harbour at Black Sea in Romania and a large commercial center. The Doraly commercial center was sett up based on the good relationships the owner had with local business people in Constanţa. For the other towns, the competition to get the best places (the ones with high commercial flow) was too strong and he could not afford to compete for them.

2 Such as flexibility in the renting period, access to parking and cars security, security of goods and clients,

maintenance of rented space and settlement of any complaints in maximum 8 hours, availability of local and international telephone services, availability of cooling spaces, heating during winter etc.

Table no. 2 The evolution of the turnover of the Gheorghe Iaciu companies in the period 1994-2000

Million lei/$1

Turnover/Year 1994 1995 1996 1997 1998 1999 2000 Expo Market Doraly (lei) 1.525 1.904 5.267 14.930 43.799 87.224 169.578 $ 921450 753164 1682210 2077072 4919025 5669786 7821863 Expo Market G&D (lei) 1.337 2.095 1.338 - - - - $ 807854 828718 427339 - - - - Expo Market Doraly III (lei) 300 1.426 1.731 2.766 5.248 6394 5.225 $ 181268 564082 552858 384808 589398 415626 241005 Expo Market Doraly Group (lei) - 1.527 2.786 4.035 6.557 - - $ 604034 889811 561352 736410 - - Five Group (lei) - 1.401 3.584 8.337 6.773 - - $ 554193 1144682 1159849 760669 - - Doraly Mall Constanta (lei) - - - - - - - $ - - - - - - 120.000 Global Spirits Company (lei/$) - - - - - - -

1 The exchange rates leu/$ in the period 1994-200 were: www.bnro.ro

Years 1994 1995 1996 1997 1998 1999 2000 July 2001 Exchange rate 1655 2528 3131 7188 8904 15384 21680 27855

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The consumer goods distribution system started to change in Romania. Independent supermarkets, chains of Romanian supermarkets (Mega Image, La Fourmi) and large international chains of supermarkets (Billa, Carrefour) developed in Romania in the last years. The Romanian consumer buying habits started to change, as large supermarkets became available. Consequently, small retailers, convenience stores, independent shops, boutiques and kiosks were loosing their clients and started to disappear or diminish their activities. As these retailers were the main clients of the en-gross trading companies, the demand for commercial space for en-gross trade started to decline too. The en-gross market in Bucharest became a mature market that began to decline with 5-7% yearly. The competition became harder and in the last years, the tool to compete remained the price and size of the business. Consequently prices for commercial space renting decreased dramatically (from 60$/square meter in 1994 to 25$/square meter in 2001). Therefore, the tendency is that the large companies will swallow the small companies. 2. Given the declining market of the en-gross industry and the difficulty to get the appropriate places (a critical success factor in this business), Gheorghe Iaciu decided to diversify its activity by entering the production sector as he said:

“I knew that trade is going to decline, the en-gross industry is not very developed anywhere in the developed countries. The trend is of diminishing this en-gross sector everywhere. Therefore, I decided to invest in production. The question was: in what production sector? I have chosen the alcohol industry for a couple of reasons: I had some experience in the cereal market, the main raw material for alcohol and I heard that the margins are high in this industry. I realized that I can exploit the long-term advantages offered by the Romanian strong agricultural potential. I wanted to obtain a mass non-perishable product. In this way I got to the alcohol. I did not know anything about alcohol production and selling, but I knew where from to take the raw material. I did not understand the black market and its implications over this industry”.

In the period July 1997 - August 1998 the first alcohol factory was built from scratch in Ploieşti with an initial investment of 2.4 mill. $. The factory was equipped with modern equipment: a German distillery with continuous production flow that has a capacity of 10.000 litres/day. The alcohol factory was part of the Expo Market Doraly company, but it functioned as a separate profit centre. At the very beginning the company even though very well equipped was

Case study not successful in the alcohol business, as the owner explains:

“In 1998 I had an alcohol factory that was producing alcohol that I couldn’t sell. The entry barriers in the industry were very high. The market was closed, producers of alcohol beverages were buying only from already known suppliers and I was a new-comer. Besides this, the black market of alcohol was very strong. The alcohol accise was 2$/litre”. I was obtaining alcohol at 50 cents a litre, but nobody cared about my 50 cents, when they could obtain goods with 2$ cheaper from the black market producers. I have always functioned legally and paid my taxes, so I could not compete with the black market.” When Gheorghe Iaciu realized that he has a product (the alcohol) that he can not sell, he decided to integrate and to use the alcohol to further produce alcoholic beverages as he details: “I ended up producing alcohol beverages because I had the alcohol and I had nothing to do with it. I bought the necessary equipment to produce beverages, I created a product and I entered the alcoholic beverages market. Now I know that I was not ready to manufacture products. The people I hired have not make alcohol ever in their life”. He acquired an Italian bottling installation that has a 3.000 bottles/hour capacity and he started to produce both raw alcohol and alcoholic beverages. He looked in the Romanian market, by searching the products existing on the shelves of shops, identified a gap in the gin offer and decided to produce gin. The process of producing alcoholic beverages started based on the owner’s intuition. He has chosen the name of the product, designed the bottle and the label himself and the company launched the product in the Romanian market in November 1998. In 1999, Gheorghe Iaciu started to restructure his companies, by merging all space renting activities in one company and separating from the existing companies businesses in other fields of activity (alcohol) or situated outside Bucharest (renting space in Constanţa) as it can be seen in table no. 1. In 2001 Gheorghe Iaciu had three legal companies that were all in his ownership and over which he had the entire control and decision power. He gave up part of his ownership to family members, mainly to his wife Dorina Iaciu, who is Gigi’s adviser in business as he confessed:

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“I am in charge with the business and its strategic and financial side, but when it comes to design and aesthetics, I always ask Dorina before making a decision. She has a good flair: what she likes is successful in the market, what she doesn’t like has no success in the market”. The three companies employ a total of 278 employees in 2001 as it is presented in table no. 3. The alcohol factory was initially part of Expo Market Doraly company and it was legally transformed in a completely new company (by separation) in 2001, when it became the Global Spirits Company (GSC). However the factory functioned as an independent entity since its beginning in 1998. Table no. 3 Evolution of employee number of Gheorghe Iaciu companies

in the period 1998-2001

Company/Year 1998 1999 2000 2001

ExpoMarket Doraly 160 150 148 141 Global Spirits Company 102 100 95 106 Doraly Mall Constanta - - 23 23 TOTAL 262 250 266 270

2.2.3 The alcohol business becomes the main business for Gheroghe Iaciu

The alcohol company enlarged the product lines by introducing in production besides gin, products such as vodka, cherry, rum and liqueur as different brands and sub-brands, so that in 2001, it had 11 brands and sub-brands. Appendix no. 2 presents the whole range of alcoholic products of the company. Among the products, the vodka brands account for the highest percentage of the production volume (62% in 2001) and for 50% of the sales volume of 120.000 l/month of the company, while the gin brands account for 28% production volume and for 40% of the sales volume of 60.000 l./ month. Appendix no. 3 presents the whole range of the company’s products and their percentages in the production volume and in the sales volume.

Case study

The GSC’s products address two major general market segments in the Romanian market: the medium consumer segment and the low consumer segment. The medium consumer segment comprises: persons with a medium towards high degree of culture, persons preoccupied of an increase in their social status, persons with ages between 20-60 years old as a large segment and between 25-40 years old as a central segment, with net monthly incomes between 1.5 mill. lei - 3 mill. lei (54$- 108$3). The company addresses both women (Bartender’s gin, Bartender’s Peach /Lemon Vodka) and men (Black Label Vodka, Baternder’s Fine Vodka) in this segment. Prices for these products range between 2$ and 4 $. The low consumer segment comprises persons with a low towards medium degree of culture, with no major preoccupation for an increase in their social status, persons who buy the products mainly for a very good price/quality relation, persons with the age comprised between 20-60 years as a large segment and between 30-50 years old as a central segment, with net monthly incomes of maximum 1.5 mill. lei (54$). The company addresses both women (Bartender’s Sour Cherry, Vulturul Regal Vodka, Club 26 Vodka) and men (Bartender’s Rum, Vulturul Regal Vodka, Club 26 Vodka). For the main two product types of GSC gin and vodka, the market position differs. The Bartender’s gin is the market leader with 51% market share at the beginning of 2001 (see appendix no. 4) while for the vodka’s the market shares are still low (see appendix no. 5). In May 2001 the gin market share increased to 53% and vodka’s market share increased to 4%. After the initial failure with the alcohol business in 1998 Gheorghe Iaciu realized that he has to make some changes in the way he runs his business, as he confessed:

“The fact that I started to chose what product to manufacture at inspiration was a bad start. Later I understood that I had to find my way and initially I tried to do this through my employees. But I realized that I can not get anywhere with them. At that moment I understood that something has to be changed. I had my entrepreneurial spirit, I had my orientation towards quality, but this was not enough, I was doing everything after my feelings. I realized that first of all I should start to transform myself …. I knew that I have to get more knowledge. So, I decided to do an MBA. I searched the Romanian market for such an educational service, I decided that what was available in the Romanian market is not what I

3 The average exchange rate leu/$ in the period January-July 2001 was 27.855 lei/$.

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want, so I applied at universities in United States. I have been accepted and I attended the MBA program of Florida University in USA, for two years, in the period June 1998 – June 2000. In the meantime I was managing my business from distance via email. This was a turning point for me. I learned a lot. I learned that a person cannot do everything right on his own, a person cannot know everything,………..” Consequently, when he returned from USA he started to make changes in the company. Everything started with a change in strategy.

2.3 The transformation of the companies’ activities

after June 2000

Gheorghe Iaciu followed an MBA in USA, period in which he managed his business from distance. At the same time he accumulated knowledge, friends and relations at international level. The effects of the study period on his managerial activity started to be seen after a while as he explains:

“I entered this program, I accumulated knowledge, but I really felt the accumulations only after one year and a half. These accumulations helped me to find my direction in business. At the end of last year (2000) I personally knew what I want in business and I took some strategic decisions:

1. I concluded that I have to separate my businesses and to stop moving funds from one business to another. I decided to let each business to function on its own. I finally managed to legally separate the businesses in 2001.

2. My time is limited. Where do I use it preponderantly? In the business I think it is the future, where the potential is higher. And this is the Global Spirits Company.

3. My resources are also limited. So where do I use them? I concluded that in the alcohol business. I decided to focus on the alcohol business. What does this mean? That I have to make a strategy in this field.”

The strategy chosen by Gigi Iaciu for the alcohol business, was to restrain the number of brands, to create new brands, to recreate some brands and to re-launch them in the Romanian market and to launch them internationally, too.

Case study

2 3.1 Changes in quality

Global Spirits Company decided to focus on the quality of the product as a competitive advantage. Consequently he decided to improve the quality of its products: the alcohol (50% of the total turnover in 2000) and the alcoholic beverages (50% of the total turnover in 2000). As the alcohol is a basic component for the alcoholic beverages, its quality was decisive. Therefore, the quality of the alcohol became the key element in ensuring the quality for alcohol buyers and for the alcoholic beverages buyers. In order to ensure a high quality of the alcohol Global Spirits Company needed to answer the following questions:

/ how to control and monitor quality? And they changed the technological process and made investments in new equipment,

/ how to obtain quality? And they set up a research laboratory and hired the best specialists in the field,

/ how to measure quality? And they created a continuous quality control system part of the technological process with established parameters for the final products.

The company acquired highly modern testing equipment in order to verify the quality of the alcohol and of the alcoholic beverages. Than the company changed the technological process and the equipment twice until they managed to obtain the quality of alcohol desired. Part of the technological process is sample testing: every two hours the quality and the concentration of the alcohol is measured and when it does not correspond to the quality standards established the alcohol is reintroduced in the distillation process. After the changes made, in September 2000 Global Spirits Company managed to obtain the standards of quality desired for the alcohol. Consequently the number of clients for alcohol increased from zero to 33 in one year time, in the conditions in which (according to Gigi Iaciu) 80% of the alcohol in Romania is sold in the black market. In the first half of 2001, the company ranked the second in the country as sales volume (measured as contributor to the state budget4), while as production capacity it ranked the 22nd. The high number of clients attracted in one year time, was based on an organized direct selling process and a thorough market research

4 The ranking refers to the alcohol sales declared and for which taxes are paid to the state budget. The black

market sales are excluded.

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and gathering of information prior to the negotiation process. Gigi Iaciu describes the process:

“We personally went to every potential client, as many times as it was necessary. It is not so easy to convince someone to buy from you. You have the first contact, it takes some time to find out who is the right person to talk to, than you have to know what is he interested in. To do this you have to know his products, to know what problems have his products. We decomposed their products, we know their recipees, we analysed their products in detail, we had their products checked by our tasters, so we know what problems they have and how to approach them at negotiations. This is how we managed to attract 33 clients in one year, by identifying their problems and proposing solutions for them. We still have clients for alcohol on our waiting list, whom we cannot honour due to the lack of production capacity.” In order to obtain high quality alcoholic beverages, besides a good quality alcohol, there is necessary a good quality water, as in a litre of vodka, 40% is alcohol and the rest is water. This was the second element for which the company ensured a high quality: the composition of water before entering the technological process. After one year since the new high quality standards have been introduced, in the October 2001 the Global Spirits Company received the ISO certificate.

2.3.2 Changes in the product range

In October 2000 the company started to implement the new strategy as far as the alcoholic beverages are concerned. Contracts were signed with American and English companies for the development of new products, a team of researchers was hired, the best tasters in Romania were brought in the company in order to develop high quality products. The company worked simultaneously to develop few products. The company decided to focus on a few product lines for which to develop a number of new brands and to reposition the existing brands. Table no. 4 presents the product lines and the new and repositioned brands.

Case study Table no. 4 The new product lines and brands at GSC

Product line Brand Position* Image Luma NB Ultra

premium Goldessa NB Premium

Vodka

Dakk NB Medium Bartender’s Premier

R Premium Gin

branding in progress

NB Ultra premium

Liqueur Epriz NB Premium Brandy branding in

progress NB Ultra

premium

*NB = New brand; R = Repositioned

The company has chosen to focus on these products based on: the sales estimations, by focusing on products with high volume sales

potential, the existence of markets at global level, where the GSC products can

be competitive. The new/repositioned brands are completely different from the previous GSC products: their composition is based on newly improved recipees, their image and market position is changed. The owner appreciates that the creation of the new brands is ”revolution as compared to what we have done the first time”.

Appendices no. 6 and no. 7 present by comparison the old Bartender’s gin bottle and the new Bartender’s gin bottle, respectively the old vodka brand and the new vodka brand. The new products will be launched gradually, while they are ready to enter the market, while the old products will be withdrawn also gradually. The first two new/repositioned brands that are already ready (Bartender’s gin and Dakk vodka) will be launched in March 2002. By the end of 2001 another two brands will be ready (Luma Vodka and Goldessa Vodka), in summer 2002 the liqueur brand (Epriz) will be ready and in October-November 2002, the other two brands will be finished: the brandy and the ultra premium gin. By the end of 2002 it is envisaged

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that five brands Bartender's Premier, Dakk, Goldessa, Luma, Epriz will be launched in the Romanian market and probably in some foreign markets, too. In the creation of the new products, GSC’s contribution focused on the composition and the quality of the products themselves, while the image creation and all marketing activities were subcontracted to professional organizations, as the owner mentioned:

“My opinion is that if a company tries to do everything on its own, ends up as a poor company. Our company focused on what it knows to do better: products. We have a research-testing laboratory and we focus on the development of the physical product. For the image creation and for the marketing activities we hired specialized companies. We don’t want to do the work of Saatchi & Saatchi, or Ogilvy or A.C. Nielsen. They give me the information and I use it to make the decisions.”

The marketing research activity became a priority activity at GSC, as “no decision can be made without a thorough search of the market”. Gheorghe Iaciu intensified the marketing research activities at his companies by subscribing to specialty publications, by participating at exhibitions and fairs (both as an exposant but, researching the competition, too) by getting acquinted with the personalities in the field at world level, by continuously searching the internet for information about the alcoholic producers and their products at world level, by buying market studies at global level and by continuously analysing competition and consumers. GSC is aware that the most important thing for the success of the business is to get high sales volumes, by obtaining a high market share. In 1998 when it first started to launch the alcoholic beverages in the Romanian market, Bartender’s gin was the only product that was sustained with marketing activities and this was the only product that got a 53% market share in spring 2001. For all new/repositioned brands, the company designs at the moment marketing programs, meant to obtain a certain market share from the targeted segment, based on the following steps:

create awareness through advertising, stimulate trial through sales promotion, get market coverage through distribution, sustain the brand in the market (reminding advertising and sales

promotions).

Case study The company has as objectives to reach in Romania a 60% market share in the gin market and 60% market share in the vodka market in 2002 with the new/repositioned brands. 2.3.3 Approaching external markets

In the summer of 2000, when Gigi Iaciu decided to revise the strategy of its companies, he re-analysed the Romanian market with different eyes (in the light of the knowledge accumulated in USA) and he noticed that the Romanian market has not a very high potential from the point of view of the potential sales volumes and of the type of products that can be sold here, as he explains:

“At national level we have a weak market. The market potential is low from quantitative point of view, as well as from qualitative point of view. In the Romanian market there are few consumers with pretentious tastes and we cannot design premium brands for the Romanian market as the volume is low and there cannot be obtain profits for specially designed high quality products. At that moment I realized that if I want to create premium products I have to relate myself to foreign markets. However, the company has to be the first in its domestic market in order to accumulate enough capital to be able to internationalise.”

Consequently when the new brands have been conceived, they were designed as global brands. The company registered its property rights over the new brands in a number of over 100 countries (15 countries from European Union, USA, Canada and another 70 countries partners at the Madrid Protocol), investing in this over 500.000$ with the plan to go international with these brands. The company already started to negotiate with a number of partners from different countries for the distribution of its newly designed brands. However, the strategies for different countries will be different as the owner mentioned:

“We cannot go in the same way in all countries. We have one approach for the neighbouring countries and a different approach for countries such as UK, USA, France, Germany and Japan. There are products that can be sold in all countries and there are products that can be sold only in a few countries.”

The company has negotiated and found partners for distributing its products in USA, in the Scandinavian countries and in some of the neighboring countries: Bulgaria and Yugoslavia. It also made offers in U.K, Italy and Canada.

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GSC considers that it has no potential to address the medium USA market that is stable and very competitive, but considers that it has chances to penetrate the premium and the ultra premium markets that have a 17% yearly growth rate and are not so competitive (from the point of view of the number of competitors). In Canada and in the Scandinavian countries GSC intends to enter both in the premium market (where to compete on quality) and in the medium market (where to compete on price). In the neighbouring Eastern European countries the company will enter especially with the medium products. 2.3.4 The need for overall change

In April 2001 the company started an investment in a new factory for alcoholic beverages, factory that will increase the production capacity four times from 10.000 litres/month to 40.000 litres/month and that will be finished in February 2002. The increase in the production capacity took place based on three reasons: to satisfy the demand for alcohol that was higher than the production capacity, to ensure a competitive price for alcohol (and further for Global Spirits Company beverages) by producing high volumes and obtaining economies of scale and to obtain highest quality possible. The total investment of the company after June 2000, was of over 6 mill. $, of which 4.8 mill. $ in equipment, 1 mill. in the creation of brands and 500.000 for the protection of brand names in foreign markets. In order to be able to reach these objectives of 60% market share in Romania for two product lines in 2002 and to internationalise in the medium and in the long term, the GSC also made some changes in the human resource activity and in the financial-accounting activity. The initial failure with the alcohol in 1998, determined subsequently the reorientation of GSC towards quality. The owner realized that he has to change the way he was selecting employees: from hiring whoever was available, he shifted towards hiring professionals and specialists in the alcohol production and the best tasters in the country for the conception of the new products. The training activity became part of the human resource policy at GSC, even though still not very focused, as the owner explains:

“I invested money in training employees because human resource is the most important in a business and it is the most difficult to develop. One rather is able to retechnologize sooner than forming a good working team. It is a very long process. The most I invested in myself, as with the others I did not know in whom to invest and in what direction. I did not know who will be suitable and who will stay. It is a long process, it takes one at least a few months to know an employees, his

Case study capabilities and suitability for the needs of the company. Now all employees are trained in computing, foreign languages, marketing etc. Some of them improved, some others did not. The process is very slow. These are people who lived with a certain mentality for many years. We want them to transform themselves in capitalists over night. This not simply possible. It takes time and I am supporting them in this process.”

Also for certain activities (such as market research and advertising) that the company’s employees cannot do it at a high level, GSC subcontracts the tasks to professional organizations. The company also changed the financial and accounting system by replacing the overall evidence kept for alcohol separate and for alcoholic beverages (in total) separate with an evidence for each brand. The new financial-accounting system based on the introduction of the new software allows to know the costs and the profits for each product separately.

The company has well established objectives as far as the Romanian market is concerned (to increase its market shares for gin and for vodka up to 60% with the new/repositioned brands) and the end of 2002 will be decisive to see if the company is successful or not. The structure of GSC will change by reducing the percentage of the alcohol selling activity to 25% in the favour of producing alcoholic beverages. Results on a large scale that will include international markets are expected to be obtained in five years time. The final thoughts of Gigi Iaciu reflect the aspects he wants to focus on in developing the strategy for his business:

“The basic of our business is: emphasizing on brands and consumers, executing highly qualitative products in an efficient way, developing an exceptional marketing activity.”

2.4 Assignment questions:

1. How did the strategy change at the Gheorghe Iaciu companies and at Global Spirits Company in the period 1994-2001?

2. What were the concrete actions that reflected the change in the general strategy and in the strategy of Global Spirits Company?

3. What were the factors that contributed to the change in strategy?

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Appendix no. 1

The first 16 en-gross companies in Bucharest in 2000 as number of visitors

No. Name of the

company No. of stands

No of stands as a % of the total number of stands in all en-gross companies

Degree of visiting as a % of total

1 Doraly 625 6.62 13.47 2 Niro2 952 10.09 13.30 3 Flora 686 7.27 13.15 4 Prisma1 576 6.11 5.74 5 Europa 2000 21.20 4.59 6 Metro Otopeni 0 0.00 3.95 7 Chirigii 147 1.56 3.79 8 Metro Militari 0 0.00 3.67 9 Sam Expo 175 1.85 3.49 10 Apromat-co 243 2.58 3.30 11 Percy 193 2.05 3.07 12 Massa 327 3.47 2.75 13 Mate Vila 164 1.74 2.64 14 Herastrau 230 2.44 2.23 15 Manor 74 0.78 2.18 16 Doraly lll 99 1.05 2.11

Case study

Appendix no. 2

The assortment of alcoholic beverages at Global Spirits Company

No. Products Alcohol

concentration Bottle sizes Market∗

segment 1. BARTENDER’S

DRY GIN 40% 750ml.

500ml. 1000 ml.

M

2. BARTENDER’S BLACK LABEL VODKA

40% 700ml. 500ml. 375ml.

8000 ml.

M

3. BARTENDER’S FINE VODKA (RED)

40% 700ml. 500ml. 8000 ml.

M

4. BARTENDER’S PRINCESS VODKA

30% 700ml. 500ml.

8000 ml.

M

5. BARTENDER’S PEACH/LEMON VODKA

37.5% 500 ml. M

6. BARTENDER’S VISINATA (SOUR CHERRY)

25% 500 ml. L

7. BARTENDER’S RUM

40% 500 ml. L

8. VULTURUL REGAL (VODKA)

33% 500 ml. L

9. CLUB 26 VODKA 26% 700 ml. L 10. NOBLESS (SOUR

CHERRY LIQUEUR) 25% 700 ml. M

11. NOBLESS RASBERRY LIQUEUR)

25% 700 ml. M

∗ M represents the medium consumer segment. L represents the low consumer segment.

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Appendix no. 3

The percentage of every product in the total volume of production and in the total volume of sales (2000)

PERCENTAGE OF PRODUCT IN

THE PRODUCT QUANTITY

PRODUCED SALES

DRY GIN 375 ML 40% 2.97% 2.81% DRY GIN 500 ML 40% 11.33% 13.60% DRY GIN 750 ML 40% 13.88% 23.68% Liqueur Sour Cherry 0.20% 0.45% Liqueur Rasberry 0.14% 0.33% RUM 500 ML 40% 4.77% 4.43% VISINATA 500 ML 18% 4.66% 4.58% VODKA BARTENDER’S 750 ML 40% 7.36% 8.73% VODKA Club 26 5.97% 2.92% VODKA LEMON 500 ML 30% 3.00% 2.86% VODKA N 375 0.99% 0.66% VODKA N 500 4.64% 4.35% VODKA N 700 3.56% 4.22% VODKA PEACH 500 ML 30 % 1.62% 1.55% VODKA PRINCES 500 ML 30% 18.49% 12.34% VODKA PRINCESS 700 ML 30% 6.55% 5.64% VODKA R 500 3.81% 3.59% VODKA VULTURUL-REGAL 6.08% 3.24% TOTAL BOTTLES 100.00% 100.00%

RUM 40% 8 L 0.68% 0.79% VODKA BLACK 8 LP 40% 36.05% 37.52% VODKA BLACK 8 LS 40% 15.82% 17.91% VODKA PRINCESS 8 LP 40% 24.98% 20.20% VODKA RED 8 LP 40% 22.47% 23.58% TOTAL BOTTLES 100.00% 100.00%

Case study

Appendix no. 4

The market share of the Bartender’s dry gin against the competition in the period August 1999-January 2001

Brand Market ShareAug. - Sept.

1999

Market ShareApr. – May

2000

Market ShareAug. - Sept.

2000

Market Share Dec. 2000 – Jan.

2001

Bartender's 34.5% 49.0% 45.1% 51.1% Gilmans 16.8% 17.7% 24.4% 13.4% Sankt Petersburg

8.2% 9.7% 10.1% 3.6%

Russeika 4.7% 4.2% Big Ben 7.8% Skanderberg 6.5% Sanburgen 4.8% Beefeater 6.0% 4.2%

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Appendix no. 5

The market share of the GSC vodka’s brands against the competition in the period August 1999-January 2001

Brand

Market share

Aug. - Sept. 1999

Market share

Apr. – May 2000

Market share

Aug. - Sept.2000

Market share

Dec. 2000 – Jan. 2001

Bartender's Vodka 0.6% 1.8% 2.3% 2.5% Vulturul Regal 0.8% 1.0% Club 26 Vodka 0.7% 0.8% Scandic Pop 10.7% 17.2% 20.4% 20.3% Polar 5.2% 6.6% 8.6% 7.9% Voltamar 4.7% 4.3% 2.4% Imperial Gold 4.5% Stalinskaya 4.4% 4.9% 5.7% 5.4% Regal 3.9% 2.8% Vorona 3.6% 7.5% 7.9% 9.4% Uncle Sam 3.6% Alexander 3.3% 3.8% 3.5% 3.0% Perfect 3.4% 3.3% 2.8% Vinalco 2.5% 2.7% 2.6% Sankt Petersburg 2.3% 2.7% Monopol 2.6%

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Appendix no. 6

The old Bartender’s gin and the new repositioned Bartender’s gin

A. The old Bartender’s bottle B. The new Bartender’s bottle

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Appendix no. 7

The old and the new vodka brands and bottles

A. The old vodka brand B. The new vodka brand and bottle and bottle

Case study 3 Danmixer

Author: Madsen, Aalborg Business College,

Denmark About the case

Danmixer is a real company and the employees are all real characters. The name of the company has been changed. When you have finished your work with the case you will know why!

Only some of the events and statements given in interviews are constructed for this case. Some of the problems that the case makes topical are real, and some are fiction, but the are all realistic. The information about the company, its products and competitors are authentic.

Some of the employees have been interviewed and some informational material of the company has been used for presenting the company and some of the facts about it.

No contact should be made to any of the companies mentioned in the case!

3.1 Introduction

”We have to rethink the situation of the company in order to make the right decisions. I want you to take into consideration that we obviously are facing some major threats. But the future will bring some very interesting opportunities. Our markets are becoming more and more competitive and our customers are becoming more and more competent when it comes to product specification, supplier search and performance review. And we must never forget the strategic role of marketing. I am not a hundred percent sure that it is wise of us to aim too much at using the Internet-solution for all sales and marketing tasks. We have to be carefully about “nursing” our customers realising the importance of relationship marketing”

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The Managing Director Holger Colding found himself doubtful about the use of E-Business in Danmixer. He had the feeling, that he had to get a better background to make the right decisions. He felt that the use of Informational Technology and E-Business should be treated as a more integrated part of the Marketing Strategy.

However, Informational Technology was not his only concern. Recently speaking with his best friend, who is a marketing manager in an company producing equipment for hospitals and laboratories he said:

“Until now we have been satisfied with our core-competence within Product Development and our marketing activities have been secondary as long as our products have been excellent. Still our engineers have been doing a good work when it comes to the sales processes and building relationships, but I believe we may not yet have the ability and time for market monitoring” (Colding)

3.2 November 2001

It was a cold day in November 2001. Project Manager Jens Nygaard Andersen looked out of the window. A truck was loading a big mixer for Tetra Pak in Sweden. Tomorrow Mr. Andersen was leaving for Ireland for a sales meeting, last week he was in Germany, and the week before he was in England. Actually he was now wondering if there might be any other solution than all these sales meeting all around the world. He turned around and looked at the computer screen. Another product-inquiry had arrived via the homepage. He had been quite sceptical, but now he realised that the homepage generates some new customers. At the time they made the homepage it had only cost about 10.000 Danish kr. which is approximately 1000 USD. What if we invest 10 times that amount of money? And what if the number of travels abroad could be reduced? He did not really know, but one thing was for sure. The new homepage would have to offer more facilities than the old one. Something like customer-support, and maybe use some famous companies as references.

Case study For the time being Danmixer was registered in some search engine1 databases:

WWW.Jubii.dkWWW.1klik.dkWWW.Albot.dkWWW.Altavista.dkWWW.Arriba.dkWWW.Berta.dkWWW.Excite.comWWW.Directhit.comWWW.Google.comWWW.Hotbot.comWWW.Lycos.com

Mr. Andersen went recently to a seminar at the University in Aalborg, Denmark. The professor spoke about Internet Marketing-strategies. One of the theoretical approaches, that made an impression on Mr. Andersen was the Net-activities organised as Public Internet, intranet and extranet. Mr. Andersen remembered something about the Internet being characterised as the public area for current and potential customers, competitors, research community and media. The Intranet deals with proprietary information with a focus on employee communication. The intranet is more process oriented and useful for development tasks as well as the Internet is more sales and marketing oriented. He did not remember a lot about the extranet – he only had a vague memory about it being a kind of blend. Luckily Mr. Andersen still has the handouts from the Power Point presentation. Until now Danmixer has not been using either intranet nor extranet.

Once Mr. Andersen was discussing the company’s actual and future use of the Internet, Mr. Andersen found Mr. Colding very doubtful about the effect and measuring the effect of the Internet Marketing activities. According to Mr. Andersen Mr. Colding was not really aware of the opportunities of the Internet.

“Isn’t unrealistic to believe that we can become a virtual company doing electronic commerce as long as we are producing turbo mixers for food manufactures? I don’t think you find any company that is more into conventional, physical business than Danmixer. And what is Internet marketing after all?” (Colding) 1 Search engines use special automatic tools known as spiders or robots to index web pages of registered sites.

Users can search this index by typing in keywords to specify their interest. Pages containing these keywords will be listed, and clicking on a hyperlink will take the user to the site.

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Mr. Andersen showed Mr. Colding a theoretical model in order to understand the concept of Electronic Commerce (Appendix no. 1).

“Of course we are not a 100% into electronic commerce as long as our product are physical, but think about a lot of our services. These services may be delivered in a digital way. In this sense you may define Internet Marketing as the application of the Internet and related technologies to achieve marketing objectives2 ” 3.3 Who is Danmixer? Danmixer is a limited company with its registered head office in Aalborg, Denmark.

Holger Colding, who is now the managing director of Danmixer, founded the company in 1989. Colding had at that time all ready gained much experience within this industry due to the fact, that he had founded another company in 1972, which developed and produced Plants for slaughterhouses. All productions are based on stainless steel, and the production is done In-house.

Danmixer employs approximately 80 people in Denmark and specialises in the manufacture and development of Turbo Process Mixing Systems, High Shear Mixing Plants, Blending Vessels, Cooling Vessels and In-Line Mixing – supplying the world market. Agents in e.g. Ireland, Japan and United Kingdom represent Danmixer.

Danmixer’s different departments are: • Senior Management (Mr. Colding and Mr. Krog), • Sales Department (9 employees), • Design and R&D Department (4 employees), • Project Management Department (10 employees) • After Sales Department (2 employees), • Purchasing Department (1 employee), • Quality Department (1 employee), • Finance Department (2 employees).

2 Definition according to Dave Chaffey, E-Business and E-Commerce Management, Prentice Hall, 2002.

Case study As to career opportunities Danmixer says:

“At Danmixer we work in an open environment, which encourages teamwork, we respect each other’s personalities, creativity and expertise, we are continuously developing our knowledge and competencies, we offer dedicated training and challenging project opportunities”

Today Danmixer is a leading partner for both small and large enterprises in the world of high quality mixing systems. The mission statement says:

“It is our mission to produce high quality products and systems that improve and compliment the customers’ current manufacturing systems. Our technology adds value to productions plants all over the world.”

Danmixer can meet all national standards and regulations when supplying equipment. The Danmixer Systems are used for producing Dairy Products, Prepared Food, Baby Food, Convenience Food, Health Care, Cosmetic, Dental and Pharmaceutical Products.

Some of the customers are famous companies: • Arla Food • Astra • Campells • Heinz • Nestlé • Northern Food Group • Tetra Hayer • Tetra Pak • Unilever

During the years Danmixer has been able to make money, and the financial situation is at the time very good. And still growth goals are essential to the management.

In spring 2001 Danmixer was certified to conform to the quality management system standard DS/EN ISO 9001:2000. Danmixer’s systems are manufactured to the European standards and legislation.

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3.4 Product - The Turbo Mixing System

The Turbo Mixing System gives optimal powder / liquid or liquid / liquid mixing with / without high shear mixing. Products / ingredients homogenise, emulsify and disperse in a few seconds. Particles can be blended gently into the products. Powders and additives will be sucked into the system by vacuum. Danmixer calls this the ”All in one Process”.

The All in one process reduces producing time, handling time, down time for cleaning and down time for maintenance.

This process results from years of on-going research and development. All systems will reduce processing time, handling time, down time for cleaning and down time for maintenance in comparison to conventional mixing technology.

3.5 Internationalisation

In order to understand the process of internationalisation we have to go back to 1972, more than 17 years before Danmixer was founded. From the very beginning Danmixer served the German market, while colleagues and competitors in Denmark had a clear focus on the slaughterhouses and food producing companies in Denmark. Meanwhile Danmixer made analysis that concluded that the German market was more attractive. The domestic market was also considered important because of Colding’s philosophy saying “If you are not competitive in your domestic market, it will be difficult to become competitive in foreign markets”.

Today, most of the companies producing ham in Poland, Hungary, The Czech Republic, Germany and France are using Scanio equipment. Colding brought this international orientation with him when he sold Scanio and founded Danmixer. In other words, Danmixer has had an international orientation and competence from the first day.

In 2000 the export share of Danmixer was about 90%. Danmixer uses both indirect and direct export modes, depending on country and product. In many cases Danmixer benefits from using Agents abroad.

Case study 3.7 The market and the customers

In 1999 a survey was made to explore, which marketing efforts were the most important for exporting companies in the Northern Part of Denmark when interacting with foreign customers. The most important dimensions turned out to be long term personal relations and personal contacts in the export market for Danmixer. Marked with an X. The percent numbers covers the whole survey. More than 50 companies were asked. See table.

3.8 Tetra Pak – A key customer -

Tetra Pak in Sweden is the one of the biggest clients and best relations for Danmixer for the mixer-product. Tetra Pak is an internationally oriented company and the company has about 50% of the world market for machines for packaging milk-products, juice, chocolate-milk, ice cream and other products made by mixing powder and liquid. The attitude in Danmixer was that it is not always an advantage to have one such big customer.

Danmixer is in this way a production company for Tetra Pak, and Tetra Pak will provide Danmixer with information about different markets. The bargaining power of the two companies is in a way quite balanced since they are mutually dependent on one another and Danmixer does not feel being the weak part: “We invented the mixer. We invented a good machine, which is able to combine both thick-and thin fluid ingredients. Tetra Pak is machines for packaging and cardboard-materials. To Tetra Pak it is not so important to make money on the mixers, but the next step in the production and packaging-process. If they sell a mixer to a customer, they all ready know that the customer will face a need for packaging the product.” (Holger Colding, Managing Director)

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Danmixer’s interaction with the market:

To which extend do you agree in…:

Completely Agree

Agree

Disagree

Completely Disagree

No Ans.

64%

25%X

7%

2%

2% Most of all we try to build long term relation to important players in the market When we need knowledge about a market, we use our contact person

41% 48%X 5% 2% 4%

When new opportunities occur we try to benefit from them immediately

34% 41% 20%X 2% 2%

We attach importance on visiting foreign markets to be updated

50% 20% 20% 7%X 2%

When we need more information about a market or think of increasing our activities, we make a market research

9%

57%

16%

11%X

7%

Collecting and analysing data is a core activity in our company

11% 55% 18% 11%X 5%

Case study This mutual dependence was due to the fact that the operation speed of the Danmixer Mixers was higher than any competitors, which made Tetra Pak’s customers more efficiency and that would call for a demand for more packaging-machines supplied by Tetra Pak. So it was attractive for Tetra Pak to incorporate Danmixer´s products in Tetra Pak’s customers’ production process.

At Danmixer the management were very much aware of the consequences and requirements for Danmixer.

“It’s an advantage that we can concentrate on product and process-development and production. For small and medium sized companies I believe this is a general tendency. They have to define themselves as subcontractors. We have to be trustworthy and our financial situation must be alright, and finally our image must be a professional company being capable of product development, and sales support” (Colding)

3.9 Ingredients producing companies

It was important for Danmixer to sell their mixers to the ingredient producing companies. The faster the ingredient company was able to produce ingredients, the more it could lower its cost and the more competitive the ingredient company would appear in an industry extremely focused on low costs and with difficulties differentiating their products since they were only an anonymous part of a product in the next step of the value-chain.

3.10 Competitors

This great focus on the benefits of Danmixers Turbo-mixer has caused that the company has not paid any specific attention on monitoring the competitors.

“We have to admit that we don’t know for sure a lot about our competitors. We always believed that staying competitive ourselves by our innovative product and additional services would be of greater importance than anything else. Besides we have to realise that we don’t have enormous resources for market analysis. Still we do know some competitors from the WWW”. (Jens Nygard Andersen)

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Danmixer’s competitors according to Danmixer are:

• APV Crepace, • Fryma, • EMI Incorporated, • APV Limited, • Silverson, • LIGTHNIN,

Some of these companies have Web sites.

3.11 Selling directly – supported by the agents

Danmixer also put strong emphasis to selling directly to some companies in order to get out in these companies and be inspired. Danmixer became almost an international brand within food producing companies and Danmixer positioned itself as the supplier of effective mixing.

“Well, taking at quick look at our list of references, it is impressing. Enormous companies like Heinz, Nestlé, Coca-Cola and McDonald’s are just some of the names on it. Today Danmixer is a synonym for a mixer. They say we can make it on The Danmixer.” (Colding)

Because all these companies have become international having departments in many different countries this helped Danmixer becoming international.

The role of the agents is to provide the customers with information and advice when it comes to assembling. The agents are also supporting Danmixer with legal assistance according to local law and they help Danmixer with the contracts. There have been some rumours about a few agent feeling left too much on their own when the needed some product documentation. Mr. Colding neglected these rumours when Mr. Andersen told him about his experiences.

There is no marketing department in Danmixer as such. At Danmixer they did not make formal sales forecast for the company split on countries, they just make the budget in a way that satisfied the accountant, nor did they estimate future total demand.

Case study The sales effort was based on the benefits and quality of the products in itself. The sales process could last several years from the time of the initial contact till the placement of the order. A lot of different employees are involved at Danmixer and at the customer’s company as well in connection with every order. The personality of the sales man is important and a professional promotion material is required. It is of great importance that the technical back up people in Denmark are well skilled and willing to participate in cross functional teams thinking of themselves as part time marketers. Sometimes the sales people had to convince the technical back up people that some tailored specific adjustments were needed to get the order.

Danmixer offers all the customers a service agreement incorporating 6-monthly or 12-monthly service visits by its own service engineers. The service engineers, who are well skilled, are also available outside normal business hours.

Danmixer consider its stock as a vital part of its core business. Spare parts for customers service and parts for production are produced in-house and always in stock. Component standardisation and keeping a large spare parts stock ensures efficient servicing. E.G. it ensures that approx. 95% of all spare parts are available ex stock, which can be delivered anywhere in Europe within 24 hours.

Furthermore Danmixer often use test mixers at the customers’ companies concerning offering the potential customer a possibility to study the efficiency of the mixer. It was a well-defined part of the sales policy at Danmixer. Usually Danmixer has at least 4 or 5 test machines around the World and a test-person, whose only job is to support the tests of the mixers. Very often he stays at one place for a week. In Danmixer’s promotional material it says:

“Pilot Plants – Test before you Invest

We have pilot plants with all functionality of our production size systems. Pilot plant testing can be carried out at your site or in our Test Facility in Denmark”

The sales people have to know a lot about the customer’s products and production-process. Otherwise it would be impossible to bring the message about the Mixer. The ideally educational background of a sales representative is food technologist. Producing ice cream for instance calls for insight in the amount of air required.

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“It is very important that you make the right mix, and in the mix stabililsators are used. The expensive part is to make the ice cream stabile. If we tell the customer that they can reduce the amount of stabilizer by 10% by using our mixer, they get very interested. Take as an example Glasbolaget in Sweden, that we sold three mixers. They used to buy stabilizers for about 17 millions d.kr, and today they only use stabilizer for about 10 million d-kr.” (Colding)

3.12 Gaining knowledge of the markets

Danmixer has no marketing department as mentioned. Gaining knowledge of a certain market therefore focused on finding companies that might find the mixer useful. In that way the marketing research and promotional effort became fused:

“Like we’re doing in Ireland. Here we visit supermarkets and food exhibitions. Facing for instance a yoghurt producing company, we’ll call them, and ask how the make yoghurt. And they will answer. So we will ask if they would like to try our test mixer for a period, and they very often become surprised that it is possible to lend a machine” (Colding)

The information about the market, that Danmixer get from Tetra Pak is of great importance, too. The close relationship to Tetra Pak was the reason that potential customers’ relationship to Tetra Pak was carefully examined. In other word one could say that the marketing strategy was very relational oriented – and less based on long term planning on the one hand or intuitive solutions on the other hand. It was very often from personal relations contacts to the customers were initiated.

3.13 Pricing

“Pricing the products is not easy. First of all you have to decide the boundaries of the offer for which you will charge money. Of course we will like to see ourselves as using Value-Based Pricing but then again we have to make sure which element of the offering are creating value for the customer. We tend to make our pricing only on the core product and some foreseen needed service. Very often the need for after-sales services exceeds our imagination before selling. Actually, I mean that we don’t charge enough for the products in these cases. In a way we sometimes gives a lot of services for free, while customers needing less after-sales service

Case study in reality are being charged too much. I also this that we should carefully study how subtle variations in the core product’s characteristics provide incremental value for certain customers” (Jens Nygaard Andersen)

In Colding’s point of view Danmixer is doing the right thing about pricing. He claims that the company is to small for a more differentiated way of pricing, and he also says, that he wants Danmixer to be profiled as a service-minded company and a trustworthy business partner.

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Appendix no. 1 Model for Electronic Commerce

Digital Product

Physical

ProductPhysical process

Digital process

Virtual delivery agent

Virtual product

Virtual process

Electronic commerce areas

The core of electronic commerce

Traditional commerce

Physical Digital agent agent

Source: Turban, King, Lee, Warkentin and Chung, Electronic Commerce, Prentice

Hall, 2002

Case study 4

“Selecta washes best”* or The Craft Of Making Yogurt

Author: Diana Antonova

University of Russe, Bulgaria 4.1 Introduction Making her way to the newly opened dairy factory called Pristis, Daniella thought to herself “There is no reason for not thinking of “Selecta” like of Marilyn Monroe or of “Ariel” like of Hollywood”. Daniella was going to her first meeting with the owner of the factory to discuss the new image of the company products.

“Hollywood is dead! – Somebody would say. Only the senile old men could be delighted with the movie stars. Alas, this is the reality, and our dreams and expectations disappear together with Hollywood. Realistic movies having no mysticism flood the cinema screens. And overwhelm them. The glitter of jewels is gone – they are replaced by the stress. There is no need to look for the decline of the cinema far back in the past. The Roman Empire collapsed because they preferred the stadium games to the church ceremonies. The Catholicism lost its magic influence at that moment the priests gave up the gold and the purple mantles. The person of today needs bread and dreams.”

Dannie stopped her Fiat Uno in from of the widely open gate of the new Mecca of yogurt in Rousse. “It is quite a façade! I wander what is it in the inside?” Led by curiousity, she paced hurriedly along the flower alley leading to the administrative building. * With thanks to Jacque Segela and his book “Hollywood washes best” which explains the strategy of giving birth to the “star” market products.

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“It is about time the tired sellers of dreams from Beverly Hills passed the baton to the advertising. Our trademarks will be the new stars so that the consumption becomes a cultural act. The advertising should gain its right of citizenship refused by its enemies. The advertising will replace the dreams machine and it will become an everyday Hollywood. Let’s leave the ditch Styx** of the announcements with no regret or shame in order to step on the lively beaches of the advertising. Let’s stop being King Trade’s buffoons! Let’s create the eighth art and congratulate among the Olympians of the nowadays civilization its parent – the cinema. In a nutshell, the advertising as well as the cinema wants just one thing – to be the industry of the spirit. So, let’s get our right of immortality…”

Daniella knocked at door with the “Manager” sign on and flatly crossed the threshold of the office. There was no secretary. Daniella was met by the manager himself.

“Let’s go back to the beginning”, Daniella started without an introduction, “I want to know everything if we are to work together”. 4.2 About the producer of the star

(in the place of introduction) “ Even the good business education has its imperfection. It does not equip you with techniques and technologies for creating new products and services. This turns into a public problem when a person decides to start up own business. People like me can either have a live and die life in the public services sector (if they have any such job) or constantly experience difficulties in their attempts to link realities with somebody’s bookish understandings.” This was the concept of Vassil Stefanov, a young man who dived into the depths of the dairy industry of yogurt production. Vassil was well educated with a degree in engineering, important certificates with honours as well as a master degree in Business Administration from the Sofia University. Vassil’s entrepreneur odyssey dates back from his higher degree in Computer Technologies and Systems obtained at the University of Ruse. The first period was connected with the department of Computer Systems at the University of Rousse which had a history of over 45 years.

** The underground river in the ancient Greek mythology, where the souls of the dead float carried by the ferryman

called Sharon and where the gods take their most solemn oaths.

Case study “During my study for a bachelor’s degree the University delivered different international projects under TEMPUS and PHARE, and I was included in some of them. This gave me the opportunity to do some research on the possibilities of industrial cooperation between the EU member countries. Doing the research as a side activity, not directly connected with my permanent job, contributed to a great degree to my self-confidence.

My second period, when I studied for my master’s degree in Business Administration at the Sofia University, contributed to my closer view to the programs in the scientific-and-research sector and the research areas set by a Bulgarian export company. Till then I did not know anything about the business. It happened that my research job was related to the European food markets and I came to the conclusion that there was a chance for the development of a narrow specialist in the production of foodstuffs. All this helped me a lot later. But the more important was that it lit the flare of the entrepreneur inside me and inspired me to start an independent production business.”

Looking for a topic for his master’s thesis Vassil was already determined not be anybody’s employee. He accepted his master’s programme as a chance to develop his business idea and to do the necessary research and planning. The topic of his thesis was “Entrepreneur success or failure – the significance of the foresight”. His aim was to accomplish a research in its completeness in order for him to be able to implement his business ambitions.

“When finally I was able to arrange the pile of my conscious experience, I realized I wanted to take my own strategic decisions. I was conscious of the fact I could fail but I knew that before giving it a try I would not be satisfied being somebody’s clerk”. 4.3 Heavenly because naturally (the development of the idea) “I would like to be able to say that the idea came as a result of the deep analysis of the market needs. But actually, it came from my parents. The most important fact for me was that I was able to recognize the opportunity the moment I saw it”.

The idea that influenced Vassil Stefanov was connected with the production of a new type of yogurt combining the advantages of the homemade yogurt with the quality provided by the industrial technologies. His idea was to distribute the

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product among the mass consumers at reasonable prices. The idea was not marked with originality. At that time, there were more than 60 brands of dairy products and the Danon Company held 30% of the market in that sector. There were a number of small dairy farms that made yogurt and produced 7 tons of yogurt daily using non-pasteurized milk produced in own farms especially for the purpose.

On the other hand, apart from the products developed on the basis of Bulgarian recipes, Danon was the ruler of the market with its continental style yogurts in many different variatins. All the yogurts had trade names like Fibella, Geranium, Elena, LB Bulgaricum, Danon Classic, Danon Magic. Only the latter was successfully trying to contribute to its trademark among the consumers. Danon Activia had attractive packaging and got on the right side of the media.

The next, but not the last, the traditions of the Bulgarians had turned the homemade yogurt into a fetish. Preparing homemade yogurt was something done in every second household.

Stefanov felt that if the ordinary dairy farms did not undertake some risky and determined steps towards their survival, they would hardly reach to a real and stable market for their production. 4.4 Much ado about…Yogurt! (the dairy market in Bulgaria) Milk has been having a major place in the food of the Bulgarians for ages now. According to the Bulgarian standards for adequate nourishment the milk and the dairy products should take minimum 35% of the needed proteins in the food. To put it in figures, this means that only the consumption of milk and yogurt should be between 300-500 grams daily which is equal to about 90-129 kg of milk and dairy products yearly. On a national scale, 1 200 000 tons of milk would be necessary in order to guarantee this production. Considering the production of milk and dairy products for export, then the figure will be 1 600 000 tons.

Attention to the Bulgarian yogurt and its nourishing and dietetic characteristics has been paid since the beginning of the XX century. The prominent Russian biologist Ilya Metchnikov discovered that the micro flora of the Bulgarian yogurt through the products of its life cycle could neutralize the putrefactive intestinal microorganisms and especially their harmful products. The numerous tests on the yogurt only proved its dietetic and healing properties. These qualities are believed to be a result of the metabolism of Lactobacillus Bulgaricus and Streptococcus

Case study Thermopilus – microorganisms that the yogurt contains and that cause favourable changes in the gastro-intestinal microenvironment. The Bulgarian yogurt is an excellent food for people suffering of lactic insufficiency. The scientific tests show that the consumption of yogurt decreases the cholesterol content in the body. Dairy products have anti-tumor qualities, too. Scientists have proved that a diet with yogurt including live lacto-acidic bacteria can increase the power of the cells responsible for the immunity.

It is told that once a Japanese tried the Bulgarian yogurt and went into such ecstasies over it that he got soiled. He asked for a handkerchief to clean the dirty spot and then took it to Japan. That was how the famous Lactobacillus Bulgaricus was taken to the Country of the Rising Sun. Today, Japan produces over 200 000 tons of yogurt yearly through Bulgarian license.

Till 1989 the Bulgarian patent for the yogurt leaven and the technology of yogurt production was bought by 21 countries.

Over 20 kinds of yogurts are produced all over the world according to the bacteria used, and not connected with the use of flavours or fruit. The Bulgarian yogurt is made with the famous Lactobacillus Bulgaricus and Streptococcus Thermophillus. The natural yogurt in Bulgaria comprises 97% of the total production. The second position is taken by the so-called flavoured yogurts and the fruit yogurts (with pieces of fruit). The third niche is for the dairy drinks like whipped diluted yogurt (containing no water). The fourth segment of the yogurt market is taken by the so-called green cheese – not very popular in Bulgaria but traditional for the West European countries. The green cheese is a mixture of cream and fine curd. The desserts come to complete the range of yogurts. LB Bulgaricum, the only association in the dairy branch, developed a group of healthy foodstuffs with several variations on the basis of Lactobacillus Bulgaricus. The products are clinically tested and sold at the chemist’s as additives.

The yogurt is a primordial product for the Bulgarians. Regardless of this fact, the biggest problem for the dairy branch is the low purchasing power of the population. A special inquiry made in 2000 shows that 35% of the population restricted the consumption of milk and dairy products for financial reasons. In this respect, the producers of dairy products face a number of problems:

Permanently low purchasing price of the cow milk and not satisfactory for the dairy-farmers but only for the dairy manufacturers. The producers delay the payments to the farmers. The price is fixed

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after a research in the whole region and the neigbouring dairy-farmers are paid nearly the same for the milk. Sometimes, the farmers give a little lower price than the one of the neighbour in order to attract producers’ attention.

Most of the dairy-farmers prefer to sell their milk directly in the cities. They make their own stations and permanent customers who prefer dairy-farmers’ milk to the expensive and skimmed one from the supermarkets.

Most of the dairy business is “in a shadow”. 1 656 million litres of milk were produced in 2000, and the statistic figures show that only ¼ of this quantity was processed. This means than only 25% of the dairy production was officially registered.

The export issue – restrictions and requirements is another problem faced by the dairy producers due to the restricted home market. Special General Instructions issued by the European Union identify who and under what conditions can supply the Common Market with dairy products. In 2000 three Bulgarian companies (BG Enterprise 12 – Belovo, Philipopolis – Plovdiv, Kondov Ecoproduct – Staro Selo) obtained a license to export to the EU. “The quota for Bulgaria will not be accomplishes for certain”, the experts predict, “because these companies do not have the capacity…..Our dairy products from cow milk are not very suitable for export. They are out of fashion both as products and as packaging and also difficult to be measured. The inconsistent quality of the milk can not guarantee constant characteristics of the product.”

The dairy producers have an unexpected competitor in the face of the households. In 1998 the yearly consumption of yogurt in Bulgaria was 180 000 tons 55% of which – homemade. In 2000 the consumption was 190 000 tons, and 35% of it was homemade yogurt.

The traditional make and consumption of yogurt in Bulgaria is connected with the production of national dairy products. Among these are: yogurt, Bulgarian white brined cheese and yellow cheese. This tradition is strongly violated today, which in turn, gives reasons to question the adequate nourishment of the population.

Case study All the above said leads to the conclusion that “Everybody loses from the chaos on the dairy market”:

The end users They are made to buy milk from unlicensed producers only because it is cheaper. But this milk does not undergo though veterinary control and may appear dangerous for the health.

The unlicensed producers

The purchasing prices of the milk are too low and the dairy-farmers cannot cover their expenses for medical treatment and breeding of the animals. The farmers look for direct buyers of their production.

The licensed producers They face difficulties in finding market for their production due to obvious reasons (higher prices connected with the increased expenses).

4.5 Yogurt for the advanced

(the idea in its course of development) Following the above analysis, Vassil Stefanov developed his business idea taking into consideration the good sides of each sector and eliminating the bad ones. He organized his own seasonal buying of “fresh milk” directly from the dairy-farmers and made preservatives that allowed keeping of same quality throughout the year. Vassil assigned a task to a Dairying Institute to develop his own strain of Lactus Bulgaricum bearing the specific taste of the natural yogurt – granular composition and slightly tart taste. Regular supply of raw material throughout the year allowed production of quality and natural yogurt with three levels of butter content (1,2%; 2% and 3,6%) according to the European standards. The yogurt production was made fully by hand with the implementation of production and management techniques for obtaining high productivity. Stefanov equipped a laboratory for permanent control over the quality of the incoming raw material and over the end product.

According to the consumers’ classification of the main trademarks of dairy products organized by Bacchus Magazine, the basic place was given to Danon-Serdica.

The leading principle for the production of the Danon yogurts is the exclusion of preservatives. As a result, the yogurts are fresh and natural. The yogurts made

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by Danon-Serdica are characteristic with their thickness and butter content. Also, only tested leaven is used for their make. One of the insufficiencies of these yogurts is the powdered milk added to them which hardens the yogurts and makes then homogenous. But the consumers think that this makes the yogurts lose their natural base.

The initial marketing research made by Stefanov showed that the target consumers of his future product are A, B, and C1 socio-economic groups – well-educated, travelled a lot, responsible to their health, nice food lovers and liking go eat at home. This picture underwent through a certain differentiation as a result of a further research.

The yogurt that complied with the demands of the above consumer groups was a series of three variations of a traditional Bulgarian recipe – an environment friendly product made from selected cow milks from the Danube Valley. 4.6 Yogurt – The backbone of the fast summer

(the way to self-perfection) The first step Vassil Stefanov made towards the development of his initiative was to gain the approval of the Business Incubator in Rousse as since 1995 they were providing funding under a programme called “Start-up Your Own Business”. The programme manager was Katya Ganeva. She started an individual investigation as part of the research for obtaining a precise idea of the expected consumer target group. This was based mainly on their habit of consuming yogurt. The research was needed to add to Vassil’s information in order to provide steady basis for future strategic market decisions.

“The feeling to be in a direct contact with the customers was unfamiliar to me. Doing the research myself gave me the chance to gather information in depth and in such details which I would not have obtained through reading book researches no matter how good and expensive they might have been.”

The final picture was of consumers purchasing at the small shops in the neighbourhoods or at the big supermarket chances like Metro, Fantastico and Billa, their attitude being standard for the average European customer:

positive to the innovations, ready to try new kinds of the constantly expanding range of dairy products,

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the level of yogurt consumption exceeded the consumption of the other dairy products – white cheese, yellow cheese, curd, creams,

the consumption of natural yogurt compared to the other yogurts was 20:80 unlike the average European figures.

At that stage, Vassil started to work out the profile of the yogurt he would produce. He made a network analysis of 9 of the mostly sold yogurts at the market and his conclusions were made in the form a bipolar scale: “sweet-salty”, “homogenous-granular”, “white-yellow”, “thick-thin”, tart-natural” (presented with numbers from 0÷5). The highest average figures were for yogurt similar to the one called Elena – produce of the Dairy Company in the town of Elena. The Dairy company of Elena supplied the Bulgarian market with several thousand tons of yogurt yearly and with a constant growth. 4.7 Neither snails nor fish can move backwards

(initial business planning)

The “Start-up Your Own Business” Programme, where Vassil Stefanov participated, included also a preparation of a financial plan which together with the market research and the marketing plan formed the complete business plan for a period of three years.

The initial investment for the implementation of his business idea amounted to USD 70 000 and circulating assets of USD 10 000. This appeared to be a profitable initiative with generated growth at sales of USD 0,2 mil. in its third year.

“I brought to the fore a project based on a product that I had not yet developed and even not yet created. The only favourable fact to be mentioned about my business plan at that time was that I needed only 0,1% of the Bulgarian market in order to finish without a loss. The kind of yogurt, which I was supposed to make on the basis of my research, would reach to sales equal to 1÷30 of the sales foreseen by me.”

Following the recommendations of Dimitar Kotzev from the Management and Business Development Centre (MBDC), Vassil Stefanov started to seek for a partner with the necessary technical background. Vassil considered the role of his future partner as an impartial director of the company who would observe the production process, control the quality and develop the new product.

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“First, you need a whole united team of balanced and skilful people in order for you to be able to impress everybody. Having such a team, you will get on the right side of the Business Incubator and they will agree to provide you with funding, being certain that the money will not be lost. Finally, you should use the agreement for funding and the energy of our team to convince the banks to give you money for the equipment you need”.

Through the RMBDC Vassil was introduced to a well-known experienced manager at one of the biggest local cooperatives who suited best for the position of the Technical director. That person was not willing to leave his current job but offered to provide private consultations.

4.8 The leopard cannot change its spots

(problems with the partnership and a new beginning) The first problems between Vassil Stefanov and his new “partner” appeared nearly right after the approval of the possible funding for research. This was proved by the increasing uneasiness of the technical director which was later transformed into indifference.

“This person was a top manager in the dairy industry sector. He had a very strong personality. His idea was to use me as a “façade” because he would never take the risk directly and leave his job without somebody’s help. I was happy to use his services because of his prestige and I was certain he would leave me to manage the business without him to interfere. This was a partnership of mutual interest. But I needed technical advice and he was not prepared to give me any. I quickly broke the relationship as the mutual interest did not exist.”

The project, regardless of the recommendation to receive funding, was at a standstill due to the impossibility of starting the real production. In his attempts to find a new person for the position of the technical director Vassil went to the Dairy Company of Elena where the competitive yogurt of his potential future product was produced. There, Vassil managed to convince Mehmed Etemov, the production manager, to become his consultant at the start of his production. In his turn, Mehmed introduced somebody to Vassil. This was Asen, a young person who was a graduate of the Dairy Industry Department at the Institute of Food, Beverages and Tobacco Industries in Plovdiv. At that time, Asen was having his practical training at the Dairy Company of Elena. Vassil and the young specialist

Case study set their partnership very quickly and rushed into the new initiative together. With his skills the new partner suited perfectly to the necessity of a manager for the tests and for the product development.

The technological development being started, Vassil concentrated on the main problem that had remained – the funding and his own contribution to it.

“My wife and I lived on her salary since the beginning the business initiative. Our savings were spent for the building and maintenance of our home so, it was not easy to find cash and at the same time to keep the management interest to the production. I could point my father a guarantor of a loan but independence was a significant element of my understandings for starting a business”.

The decision consisted of two parts. The first part – to start a job as an associate lecturer at MBDC to go parallel with some small jobs in market research and consultancy, and to invest all he got from these jobs. The second part of the decision was to arrange a contract for rent of secondhand equipment from the Dairy Company of Elena. This agreement gave Vassil the chance to make the first quantities of the products planned for the starting year of production. During the second year Vassil considered to move the yogurt production modern premises that were the property of the local state company for dairy production called Sirma-Prista.

“This strategy appeared to be successful. The most important was that the expenses for obtaining basic capital were postponed for the second year and this made the risk of failure smaller. Initially, only the circulating assets had to be funded. Meanwhile the production increased and needed bigger own production chambers. The production proved itself and at that stage I did not want to have difficulties or side problems connected with equipment. Nearly all of the loans I had planned were related to the main capital, so in the first year there were no loans. The situation then showed that I would be able to support the start of the production with my own sources alone.”

When the development of the problem showed good results and led promisingly to a successful end during the following two months, Vassil planned for the first time the details of his strategy for the launch of the product.

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4.9 The milkman should be the boss (planning the promotion of the product)

In order to increase their market share Danon-Serdica PLC undertook an active advertising campaign. The Company’s concept all over the world was HEALTH. Vassis Stefanov decided to follow their example. The subject of the promotion was to put forward a new trademark of yogurt with regional importance for the home market.

Stefanov’s company was of regional significance which was the reason for him to choose a regional advertising company for the promotion of his yogurt. Than company was aware of the market situation in the Ruse Region. The advertisers formulated the main characteristics of the new product as follows: health, quality, tradition and promotion of the most characteristic strengths of the region to a wider range of customers.

The specific message of the yogurt became The millennial tradition of health. The budget for the campaign was the money for the initial marketing research; the identification of the leading consumer motives; the place of Vassil’s company on the Ruse market; the graphic design of the package and the formulation of the original name of the new yogurt. The amount was USD 1000.

The suggestion for regionalism was achieved through the emphasis on the fact that the yogurt was made of Selected Fresh Milks from the Danube Valley. The attempts of the team to find a name of the product led them far into the depths of history. In ancient times (during the Thracian and Roman periods) Bulgaria spread on a territory of 4 autonomous regions – Serdica, Astica, Getica, Seletica, the latter being the land of the Danube Valley. As the name of the product should include traditional elements, the team started from the name of the region – Seletica, and after certain modifications they reached to the name of Selecta. On one hand, this was the old name of the region and on the other, it meant something selected, i.e. the product had a local mark and meant quality. The team thought of a way to describe the gustatory characteristics of the 3 yogurt variations – 1,6%, 2% and 3,6% butter content. In order to avoid the names with technical connotation like skimmed, normal and rich yogurt, they decided to use the suffixes light, prim, luxury as to reach to a bigger emotional influence.

Case study The suggestion of succession was obtained through the design of the package. The earthenware pot covered with a piece of cloth was related to the “Grandma’s earthenware pot” (in the past, and even nowadays, people in the villages make yogurt in earthenware pots). The garden geranium drawn on the package was a flower one could find in every Bulgarian house. The garden geranium gave the feeling of home coziness. The idea of quality, which according to the consumers could be achieved only by the homemade yogurt, was suggested through the line drawing of an earthenware pot. The use of certain colours – blue, yellow and green added to the impression of something natural and fresh. The white whirl around the pot increased the suggestion for the magic power of the product.

The test production of the new product started in January 2000. The first batch was a fact at the end of April. Selecta was yogurt with high quality and low cost price, which made it attractive to the customers. The yogurt satisfied consumers’ demands for a healthy product.

Vassil Stefanov began to distribute his product himself, certain that the other distributors would not be fully devoted on the grounds of their 20% discount for promoting Selecta in the supermarkets. For a couple of weeks he managed to sell the yogurt in more than 30 supermarkets in Ruse region and in Sofia receiving cash payments for the product. The supermarkets sold Selecta-light with 1,6% butter content in blue package; Selecta-prim with 2% butter content in green package and in yellow package Selecta-luxury with 3,6% butter content. The product was accepted very well with regards to its quantity and at a price within the range of USD 0,25÷0,40 for a 0,400 gr. jar. The blue packaged Selecta-light appeared to become the most popular. Vassil Stefanov felt that if he offered the yogurt at lower price he would sell bigger quantities but he would have losses and it would take time to cover them.

“I already knew that the low profit was the basic mistake of the dairy companies. I felt that if my product did not have good price it would not have a market and respectively I would lose the business”.

After the initial period Vassil realized he had kept to the retail sales for too long. The access to the mass market would not have been possible without distributors. Vassil signed contracts with three distributors – the distribution chain of the Dairy Company of Elena, the supermarket chains Billa and Metro.

He did not undertake any promotion but he managed to get on the right side of the media. Small quantities of the test production were kept in store.

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4.10 Market has the last word (marketing research) Towards the end of 2000 it became obvious that the direction of growth planned by Vassil would not be accomplished. The growth for a 7 months period remained 7 tons daily apposed to the expected 10 tons.

The sales at the mass market were disappointing except for Selecta-light which exceeded the sales of Danon-Classic and Elena-2% but only because the price was 5% lower than the one of the competitors.

“I was absolutely certain at that stage – being on the market for 7 months I considered this a good exercise towards the big business. I learned a lot and I lost during the first year. The money I lost was not that much as the overheads kept relatively low. I think, my biggest loss was my naivety, but this is not harmful to the business. I realized I had an excellent product and I worked not in the food industry but in the free industry. At the beginning, the product sells its interest to the customer, not its quality. But quality is the basis of the rate of return in business. Finally, I realized that my product competed not with the best products of the competitors but with the low purchasing power of the mass consumers. The future were the small niches of the delicacy dairies”. 4.11 Pleasure does not fade (epilogue) Vassil Stefanov’s efforts to create a distinguished remarkable product were rewarded in May 2001 when his new product was awarded gold medal at the Plovdiv Fair and a month later he got another - the Golden Lion Prize at the “Made in Bulgaria” Exhibition. The prize was awarded for innovations in the dairy production. A new star was born – Selecta – buffalo cow yogurt with 6,5% butter content.

This prize gave him new support to continue with his ideas for business development and to get new contacts directed to the foreign producers through the media. The Japanese Concern “Medji” paid an interest in Selecta and the Japanese Ambassador in Bulgaria was a mediator in the deal for selling the license for the production of the yogurts in Japan. Now at the beginning of 2002 it is quite possible to find more jars of yogurt labelled SELECTA from Bulgaria in the supermarkets of that distant country than in the Bulgarian ones.

Case study Stefanov finished his story. Daniella had a sip the coffee that got cold long time ago. She thought:

“Is this the beginning of the success or its end? Everything seems both simple and unfinished. How many “starlets” are necessary to bring up a celebrity, how many celebrities are necessary for a star to be born and how many stars – to create a myth! This is the incredible challenge of our job. We have been chasing the Holy Graal all though our lives to finally make an advertising campaign that will remain in the eternity. Then a first magnitude star will be born from the cosmic dust – and only Heaven and us will know who its parents are…”

“We will work together!”, Danialla pressed Vassil’s hand.

“We have to conquer this hard Bulgarian market. This is the truth!”, he took her hand. “The road ahead has to be travelled and everybody faces it alone! There isn’t a method that could release you from the responsibility of thinking with your own brains, as your favourite Segela says.” The advertiser and the engineer turned sights at the same time to the glass screen separating the manager’s office from the production chamber with the flow line. The jars of Selecta-buffalo cow yogurt moved steadfastly along the line.