SAD RESULTS OF AGGRESSIVE MARKETING

SAD RESULTS OF AGGRESSIVE MARKETING

I refer to my previous article THE MOMENT OF TRUTH about some experiences during my 2 years employment by INTERNATIONAL HARVESTER COMPANY (USA), Regional HQ for Scandinavia based in Copenhagen Denmark. We are back to the years 1960 – 1962. This is the period where the golden years started for I-H as it was called. In order to get the whole picture let us just look at the overall situation in Europe after the end of WW II. Following the long war of 5 years Europe was in need of almost anything opening an endless variety of markets. One important one was the markets for agricultural equipment, construction machines, vans, pickups and trucks and I-H decided to move in on the new possibilities. In the USA a major part the whole production apparatus shifted from producing materials for the war to new products for businesses and private consumption. Accordingly there was a change of management style. The new CEOs were more concentrated on marketing replacing the focus on maximum production paid for by the government regardless of the costs. Marketing equaled profitable sales and the powers of the free market economy started to show some muscles. In the early years after the war ended almost everything produced could be sold, but slowly the picture changed and more attention was paid to the possibilities of capturing markets in Europe.

In my article I will then concentrate on one market only, the Danish one for agricultural machines. The war had left many open wounds one being a weak economy especially for the farmers including the many in Denmark. USA had the products needed badly by the agrarians in shortage of cash. Then the USA Secretary of State Marshall came up with a brilliant idea that was presented at the Harvard University on September 22^nd. 1947. It was a plan to offer favorable loans to some selected European countries in order to get back on their feet by investments in new production facilities. I do know of course that the real idea behind the plan was to ensure that the Soviet would not take over some strategic well situated European countries, but leave that aside. The final outcome was the MARSHALL PLAN and it was determined that a major part of the financial injections was to be given as a gift, amounts not be paid back and the gifts to focus on agriculture in order to speed up the supplies of food.  Consequently the USA producers of farm equipment queued up and as far as I recall FERGUSON TRACTOR was one of the first ones seeing the opportunities to “sell” its tractors model TE 20 that were made in England. 80 % of the Marshall loans were a gift, so why not use this opportunity to overflow the market with the grey tractors (see picture) and within a short time most of the progressive Danish farmers had a grey FERGUSON and we look at the years 1949 – and up to 1960. The landscape was almost grey.

When the first tractors arrived in Denmark, farmers had beforehand queued up at the window at the Farmers Association Office. And on the window you could read this: “Hand over your application here please” and once approved and convinced that the farmer could pay back his 20 % he got his tractor. It was not selling it was 100 % distribution of gifts from the USA. I have no idea how many tractors were supplied to the market but it was a lot and the USA factories had reason to celebrate.

Thus in the sales scenario 1 everything was easy, sweet and many involved in the supply chain made a bunch of money, including the farm equipment dealers, who also made profits on services and sales of spare parts. Taken as a whole the dealers of agricultural equipment had golden days from 1949 to 1960. The needs were enormous and the big players were eager to supply.

But now to scenario number 2: Tractors get old and worn out and at a certain point in time replacement had to take place and now my story will now focus on the financial effects of rapid alterations of the market conditions. So let me explain it in this way:

We are now in the year 1960. A farmer has a FERGUSON tractor may 8 years old and he needs a new one. He will go to some dealers of tractors (many brands available now) and buy a new tractor, not entirely based on all the USPs of the new model, but more importantly how much he can get for his old tractor and the game starts.

The dealer is up against the wall. In order to sell a new tractor he needs to offer the highest price to the farmer for the old tractor even if he knows he moves into a difficult world. He used to sell new tractors only, but now when he sells a new model, he has to buy an old one from the farmer. The financial effects could look like this. (Please bear with me that I cannot remember the price structures from that time, so I use some figures just to illustrate my example). New tractor sells for 2.000 $, profit 20 %. He now buys an old tractor from the farmer as a partial payment for 1.000 $. Before he can sell that it needs an overhaul. Subsequently his repair shop will do the job and the bill for working hours and spare parts amounts to 300 $ so the stock value of the old tractor is now 1.300 $. He puts it up for sale, gets his 1.300 $ and must take another older tractor as partial payment maybe at 600 $. It requires repair in order to be sold and he needs to give a guarantee for maybe 6 months otherwise nobody will buy it. The bill from the work shop is 250 $ only so his stock price is 850 $. Now the game could continue, but let us assume that he sells for 700 $ net without having to “buy” another old tractor. The P/L picture looks like this: Total income (2.000+1.300+700) is 4.000 $. Expenses (1.600+1.000+300+600+250) are 3.750 so the total profit is then 250 $ on the total sale or just 6.25 %. OK he will make some profit on the spare parts, but ne needs to give guarantees on the sales of old tractors and service the new models and on top he must find financing. This dealer ends up with a slim profit and in general terms the industry only survived thanks to sales of additional farm equipment.

Let us now move to the next scenario 3; In 1960 I-H introduced a new series of tractors and since the production of tractors was the lifeblood of the company all sales and marketing tools were essential and new and very aggressive methods were implemented. Very sadly both first succeeded and then failed. I will concentrate on the sales/marketing issues. I-H subsidiaries including our Denmark Office got instructions from the HQ; “Increase sales we do not care how, just do it”. In order to start the new and forceful marketing strategy I-H invited dealers from all over the world to come to the USA to see the new models (6 cylinder engine) and they looked great and all the USPs were on top of the strong competition. As I recall more than 10.000 were invited from more than 20 countries. The show was a big success and the dealers were over the moon by getting the possibility to get “over there”.

However everything comes at a price and soon the dealers felt the pressure as I-H told them that in order to keep the I-H dealership they needed to buy a specific minimum of tractors and the figures per dealer were based on last year’s sales and to this 25 % was added. In a market that was about to be saturated and under a pressure due to the change from an agricultural country to be industrialized,  that was in no way possible for most of the dealers. I-H put a lot of thumbs on them and used new sales methods very unacceptable to Danes. The most significant was this; I-H asked the dealers to approach the farmers, who had bought tractors from them the years before and offer them a very good price for their old tractor provided they would buy the new 600 series. But the aggressive sales policies dictated the dealers approaching almost all farmers, using other brands, within a dealer’s district in order to maximize sales. On top to make all efforts to persuade trendsetting and very large farm estates that used tractors of competitive brands like FORD and MASSEY FERGUSON to shift to I-H. That was a very expensive PR stunt.

The dealers, who accepted the new strategy soon found themselves in financial problems. Now the supply was larger than the demand resulting in the situation where the dealers were forced to invest in the “purchase” of used tractors bought at prices exceeding the actual market value and very difficult to sell because of a decreasing demand. I-H was hard-pressed to assist with the financing of the “over sales”, and within a few years a major part of the assets on the Balance Sheets for many dealerships consisted of hundreds of used tractors not saleable at the “purchase price”. On top the new series of 660 tractors suffered tremendous technical problems involving extra costs and a blow to the I-H image making it even more difficult to sell. The result, for many dealers with whom I worked, was record high sales but a negative profit. The Americans were fast to introduce a new policy; increase the prices for spare parts and ensure that almost all parts of a tractor cannot be replaced by non-original parts. Fortunately for I-H they were not the only ones using this policy, the competition followed suit.

I have used the I-H product group tractors for this example. You may now add the other I-H products like many sorts of agricultural equipment, construction machines, vans, pickups and trucks. Some dealers were involved in more than one product group and based on the same sales policy the negative financial effects were higher than Mount Everest. The price level for construction equipment and trucks were more than 10 times higher than for a tractor. In the end due to the negative effects from all the obstacles I have described, many dealers went bankrupt and I-H’s problems grew by the speed of the light and later the company had to give up.

Indeed a depressing example of aggressive marketing not properly planned and executed. Old style management and a non professional board of directors in the USA Company added to the increasing problems. My 2 years in I-H were marked by a lot of personal development and gave me a deep insight in the American way of thinking, an experience that later became useful when I worked in Asia with highly qualified experts from Harvard University and Michigan State University from whom I picked up a lot.

However I-H did learn a few lessons in Europe and changed the top executives for its subsidiaries to be Europeans with local insight and knowhow. Sadly for many this strategy came too late.

CHONBURI THAILAND

July 2009

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