CASE STUDY 1.

KNORR: Sales
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LIPTON: IT systems
Unilever & sales
At UnileverWorld we are well aware that the success of our products depends mostly on the choice of
appropriate distribution channels to enable us to reach our customers. An important factor influencing
sales results is the behaviour of our competitors – we strive to foresee their decisions and be a step
ahead of them.

Company and distribution channels

You work as an analyst in the Sales Department. Currently you are involved in the launch of a new
product – an instant Knorr soup with a new, innovative flavour. Knorr is one of our leading brands. Its
portfolio includes a wide range of food products: bouillons, soups, seasonings, sauces, soupy snacks,
noodles and ready-made meals. The concept and prototypes for the new product are ready and you
are now about to decide which distribution channel is the best to introduce the new product. Due to
agreements with commercial partners and limited marketing budget you must choose only one of the
following sales channels:

A large hypermarket chain – option A

A national supermarket chain – option B

General trade (traditional stores, local groceries, etc.) – option C

On the basis of previous experience with products, market analysis and talks with commercial partners
you have evaluated sales volume and profit for 1 piece of the product for the following distribution
channels:

Option A – anticipated sales volume is 40 000 pieces, with a unit profit of 2 uni per piece (uni –
the Unilever World currency)

Option B – you estimate that 30 000 pieces will be sold through the supermarket chain but the
profit per unit will be 50% higher that in Option A

Option C – according to your analysis this channel has the highest margin (profit per unit of 3,50
uni). Sales volume will be 45 000 pieces.

When preparing the above analysis you discovered that your biggest competitor is also working on a
similar product. It is not sure whether they will decide to launch their new product but if they do, the
situation in the market will change and achieving the anticipated sales volume and profit will no longer
be possible.

While gathering additional data and conducting further analysis you found that your competitor
considers introducing their product either to a large hypermarket chain (a competitor of the
hypermarket chain with which you cooperate) or through traditional distribution channels. Your
competitor does not cooperate with supermarkets.

You have reviewed the projected sales volume and profit, taking into account the new market situation.
Your findings are as follows:

If your competitor’s product is sold in the hypermarket chain, you will be able to achieve the following
results in different channels:

Option A – our partner will have to start a price war with the competing hypermarket chain and so
he will request the inclusion in our agreement a clause that, in such situation, we will considerably
reduce the list price (the price at which we sell the product to the chain) to a level where wewill
lose 0,5 uni per piece. In this situation we will sell 15 000 fewer products. Not agreeing with the
partner’s proposal would result in a larger loss.

Option B – we will have to cut half of the unit profit and sales volume will be 1/3 lower than in the
case with no competitors.

Option C – we have to reduce the price considerably (our unit profit falls by 1 uni) and we will be
able to reach a sales volume 3 times lower than in the case with no competitors

If our competitor introduces his product through the traditional channel, our results will be as follows:

Option A – while introducing new products our competitor always launches an intensive advertising
campaign, which significantly increases the demand for the given type of product. In this case, we
– in collaboration with our partner hypermarket chain – will also launch a sales campaign stating
that we have a similar product which is cheaper than the one found in traditional shops. The cost
of this operation will decrease our unit profit by 25% (in comparison with the profit achieved in
hypermarkets without any competitors) but, on the other hand, we will be able to sell 25% more
pieces.

Option B – we have to take 1/3 of our profit per unit and our sales volume will be 1/3 lower.

Option C– our competitor has a better developed sales force in General Trade and more stable
relations so our sales volume will reach only 5000 pieces, with a unit profit of 2 uni.

You will have to take the decision about the appropriate distribution channel without knowing what
your competitor’s final choice will be.

Your task
As a sales analyst you are taking part in meetings with decision makers, who have to make the final
decision about the choice of the distribution channel. Your task is to provide them with the information
about which distribution channel is best adapted to their specific criteria.

1 Sales Director

The variable of most interest to the Sales Director is sales volume. He/she would like to sell the
product through the channel giving the opportunity to sell the most, even if the risk related to sales in
this channel is high (and the sales volume turns out to be lower than expected because of, for
example, competitor’s activities). Recommend to the Sales Driector the distribution channel with the
highest possible sales volume in the most optimistic situation.

2 Financial Director

He/she is focused on the total profit and prefers to avoid risk – he/she is satisfied with a stable lower
profit rather than an uncertain high profit. Recommend the channel in which, in the most pessimistic
situation, you will be able to attain the highest profit.

3 Production Director

His/her responsibility is to ensure the availability of the product. He/she must produce and stock the
appropriate quantity of products to meet the maximum possible demand in the given distribution
channel. He/she would like the production volume to match sales volume and avoid the risk of creating
“obsoletes” –i.e. stocking too much product which will not be sold due to a short expiry date. Bearing
in mind that the Production Director’s main task is not to allow an out-of stock situation, recommend
the channel in which, in the most pessimistic situation, the obsoletes level will be the lowest.

4 The Board

After meeting all directors you will perform further analyses, which will enable you to assess the
probability of your competitor’s decision: you estimate that the probability of:

• not introducing the product is 15%,

• introducing through the hypermarket chain is 50%,

• introducing through the traditional distribution channel is 35%.

At the Board meeting recommend the channel in which the anticipated profit value will be the highest
(the average profit attained from the competitor’s different decisions taking into account their
probability).

HINT: Analyze all the possible scenarios (i.e. pairs of decisions “your company decision” vs. “your
competitor’s decision”) and compare the results with the decision criteria presented in points 1-4 (it
may be helpful to use theoretical criteria such as: ‘maximin’, ‘maximax’ or ‘minimax regret’).

Mark your answers in a sequence of 4 letters, each letter being associated to the distribution channel
recommended during the 4 meetings (for instance BCAA).

Score:
4 correct answers – 5 points

3 correct answers - 3 points

0-2 correct answers – 0 points